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Please be advised that this conference call is being recorded. Good day. Welcome to The North West Company Inc. fourth 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, and good morning. It should have been good afternoon yesterday. So I'll start by apologizing for the newswire, GlobeNewswire crash or glitch that stopped us from getting the results out. That's why we rescheduled to this morning because I don't think it even was out before 1:00 or 1:30 Winnipeg scheduled time. So here we are.And before we start, I'll just let you know on the call with me are John King, our CFO; and Amanda Sutton, our VP Legal. Amanda will now read 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. Edward?
Thanks, Amanda. So I'm going to get right into the misses in the quarter because they deserve an explanation. Before that, I'll just say, top line, we're very pleased. All of our banners, ex GT, I'm going to come back to Giant Tiger at the end, were up mid-single digits on the comp side. We talked about this before that this is all about getting sales right now at North West. There's a few other things we have to button down, but we think that this is our niche. The markets that we serve, they're not countercyclical, but they're quite different. And the spending and income profile that we have in front of us is quite favorable so we've got our pedal to the metal on getting sales and building the business that way.Having said that, we had some big misses, and I'm going to talk about what those were. They come in roughly $1 million-plus clumps so they're the ones worth missing. In Northern Canada, we're putting in a new price management system as part of our merchandise management system. Although we're a very decentralized company and we want to be that way to compete locally and win, there are certain aspects that benefit from central control, and one of them is price management.We don't have that system in place yet, but we've tried to put processes in place that allow us to more carefully and effectively manage price promotion activity, track our markdowns and really understand where we are on the margin side. We converted to that sort of in a manual way. Going into the second half of this year, we were very reliant on what we consider to be solid information in terms of our COGS or cost of goods sold, the other cost inputs like freight. And then the information that we track centrally on scanning, we scan our shrink, any product loss, damage, et cetera, is scanned by stores, promotional activity, store-based markdowns, for a variety of different reasons, are all tracked.And then I'm talking now about the most sensitive price volatility categories, which would be fuel and food, much less so on general merchandise which is zone priced. All of our other -- food and fuel are priced by store. Every store has a unique pricing profile geared to its cost inputs and local competitive situation. So that those are just the parameters.As we then book our margins based on that information, we rely on the information we have and we plan against that, and we expect certain rates to result. That didn't happen. And when we trued-up our inventory at year-end, we had, in fact, we were higher on what we had thought we had than what we achieved by about $3 million in Northern Canada. So that was a true-up and a real eye opener for us on that we're not quite ready for prime time on central price management. There are some store disciplines. I could go on, on this a bit longer, but I think the key for us and for, I think, our investors to understand is, we count on ourselves as being very good at execution on a relative basis in very hard to execute markets given the remoteness and other logistical factors of getting the right people in the role with the right standard operating procedures.This approach that I'm describing is another level of discipline in the company. We've had an initiative called Pure Retail that has stripped several hundred thousand hours of extraneous, low value-added work, and we felt that set the table for a more buttoned-down approach on some of the things that really mattered, including price management. And we clearly weren't there yet. So that caught us by surprise. I mean, what I'm describing right now is actually the only plausible reason why we could be in front of you in December and then talking in March about a margin miss. And as we get into it, we see that the breakdown in a couple dozen stores where we didn't have that price discipline. Our inventory count procedures are not as tight as they should be as well. All these things can kind of slide by the side when you allow for a wide range of variability in what you book as a margin, but we are getting much more precise and in some ways, just catching up to what other retailers do, albeit in a more sometimes difficult to operate environment.There's no excuse for this and it's pushed itself up quite a way as we thought we were in the rollout phase of our IT system. We still are going to turn it on, but we have some real lessons to learn here on pricing discipline and inventory control discipline. The net effect of this financially, and when you step back and look, and we're still trying to unpack it is that there's probably, of that $3 million I just mentioned, simply saying, well, you should just have had higher prices or not. No, half of that realistically should go back into margin. Half, we should assume should never have been there in the first place. These are legitimate pricing activities that should have taken place in the stores. So that's kind of where it ends up. In a way, it's onetime in nature. And in another way, we expected to have $3 million more than we did. So we think half of that should easily come back. In our budget for this year, it is there already. Bigger picture for us is to focus harder on our execution in pricing and in inventory control. So that's $3 million. And that's in Northern Canada Retail, by the way.It's interesting for me that in Alaska, we have a much stronger cohort of stability in our stores. And this is another recurrent theme that you've heard from me perhaps ad nauseam that store stability is really important for North West. Relatively, it's good. Absolutely, it needs to be higher in Northern Canada. In Alaska, we don't have this issue. And they're, in some ways, more ready to take on the new merchandise system that we're about to put in place. So we don't see as much variability, but they also have a more stable, tenured cohort of store managers, which we're trying to get to in Northern Canada. We've just parenthetically opened a training center here in Winnipeg last week, and I think that's a big step forward. It's a $1.5 million annual investment to bring all of our store managers, pre-hire or pre-going to their stores, both department and store managers, through the training center for a minimum of 30 days to ensure we've got the right core operating practices instilled before they get out to the field.The next miss in NCR were $1 million freight overage compared to LY. And this was the second year in a row. In the Mackenzie region of Northern Canada, the government pulled out a lot of their icebreaking services that would help us continue to use the barge as the Mackenzie River froze up. And until, in fact, the ice was thick enough to then switch over to winter road. So it really minimized the usage of helicopter and more expensive airlift. That was cut back last year. What we do with our pricing in the Mackenzie region is we don't -- I mentioned how every store has individual priced items tied to their cost inputs. We don't adjust that for the shoulder seasons that I'm describing where you have to use airlift. We average it. So we take a markup that would accommodate that in our planning so the customer kind of pays for it through the course of the whole year, and we don't get a big spike just because it's being helicoptered or flown in for a month or more. In this case, we underestimated what that bump had to be. We got caught off guard last year when the government changed their service level. This year we thought we had it covered. We didn't. So that's almost another $1 million of freight loss or pardon me, margin loss tied to higher freight that we were not going to put into our prices. This year, we will recalibrate and make sure that we cover that off. So if you're following this, that's $4 million out of NCR.Moving to the Caribbean. This is all in the context of comp sales that are mid-single digits, robust sales in the Caribbean. This is bad, I'd say, planning and maybe even guidance, but it certainly was in our plan that we would do better margin-wise. Specifically, and I'll start with BVI. So BVI has had great sales. We've got reconstruction economy, tourism coming back. But last year, we underappreciated that post-hurricane recovery. Immediately post-hurricane, there was a massive resupply by consumers for what they needed and to resupply their homes in every shape and form. Right now, sales are great, but we're back in the normal cadence of promotional activity. We are doing more wholesale business now with the yachts and the other retailers that are opening. And our Cash and Carry business is a bigger blend of sales. It's all good news, except the blend of everything I just mentioned is way lower margin than what we had coming out of our main store post-hurricane. It was just the fact of nature, so to speak, that we had this unusual spike. We should have picked that up in our quarterly planning that we were going to have a pullback in our margins because of this. So that was a big one. And it's a hit in the quarter, but it's part of a much stronger picture of where we sit today in RTW in our BVI business going forward. The other one, to a smaller degree, Barbados and St. Maarten, we've got very strong results in St. Croix, and we expect to see that when we finally get our St. Thomas store opened next November. But in Barbados, competitive activity there and the general economy is still not as strong so our margin eroded.And St. Maarten, although we're up and running and sales are building, when you look at the macro factors in St. Maarten, it's really kind of a tale of 2 islands. As a direct contrast to BVI and to a lesser degree, USVI, their GDP is still down. They haven't figured out what their reconstruction financing arrangement will be with Netherlands. So it's a slower go. We're getting the sales back slowly, but it wasn't as profitable in the quarter. It was more like a relaunch of the store, still with some start-up costs, and it didn't deliver a bottom line that we would have expected. So that was a margin hit as well. We had to write off some refrigeration issues there coming out of the gate. Even when that store opened in September, some of these problems lingered into Q4. So it was an underperformer on the margin side. What I've just mentioned is about CAD 1.8 million as far as the hit in the quarter.And I'm going to get to NSA. So NSA, disappointingly to us, we didn't have our plane flying. And it's a $16 million investment sitting on the ground. And when I was talking to you in December, we expected that plane to be up and operational. We've had an ongoing glitch with the fuel gauge that goes back to the manufacturers. It turns out that we now have a workaround for that allows us to fly the plane. So it's been flying for the last 10 days every day.The 2 ATRs that we run and to put in perspective, NSA was over plan on revenue. And it should never have a revenue problem because the planes I'm talking about fly 90% North West freight. The problem is on the cost side. With that plane sitting idle, we're using very expensive chartered aircraft. And there's no profit. Nothing goes to NSA. It's all cost. The freight rates are okay to North West, but NSA is getting no return on the investment that's stranded on the ground.Compounded with that is the maintenance ramp up that I described earlier. And this is very much a switch on, switch off. Until you've got your tools, your parts and your mechanics trained and all your operating procedures in place, the space leased or accommodated, you're not doing your maintenance yet. So that hasn't been fully operational. It has now started as of February where we're doing all of our ATR line maintenance in our Thompson hangar. We've pulled it all away from the third party.And I don't know if I gave enough color on this. I probably wasn't aware of it as much myself in December. But our assessment of the fall choice to use a particular third-party maintenance provider can only be described as a very poor decision. This provider was not capitalized efficiently to have the parts on hand to do the work on a timely basis. There was never a safety factor with this, but the quality, eventually, was something that came to be a concern prospectively. So we pulled out and had to make this move. We had some temporary relationships established, but we're now free and clear from that maintenance provider, and it was nothing but problems in the fall.So when we think about NSA and how could things possibly be tougher than they were. And we've had this looked at many different ways. And people who are fully objective -- I'd say the NSA management team because they're very, in a way, proud of what they can accomplish and they feel bad about what's happened and the mistakes that were made, but the people who looked at it independently say, these planes, there's nothing wrong with these planes. These planes should fly 220 hours a month. And you will get your results, but anything that could have happened against you happened in this year. And once you bought those planes, it's something that you should consider to be recurring.So what does nonrecurring look like? Well, nonrecurring means the normal state in the sense of, we don't have these problems. And there'll always be some in any business. But financially for us, and I'll just tie this kind of back to the dividend because the delta on NSA is $2.5 million in the quarter. And if we felt we were going to continue to drag our business like that, well, first, we'd cycle through it in 2019. That would be a different tone altogether, but we don't see that at all. And it's not -- flying the plane for 10 days isn't just green shoots, like we've looked at this hard. And again, there's no magic as to why the plane shouldn't fly once we've got it mechanically where it needs to be.When that happens, just to tell you, our plan is that we've got $8 million to $10 million of free cash flow out of this business of NSA. And that's after a significant -- well, normally, a normal high level of CapEx goes back in, in terms of your engine overhauls. So the EBITDA is about twice that, but part of it goes back to the airplanes. What's considered to be legitimately free cash flow would be the $8 million range for sure. And that's our goal for the year.So it's a big swing. And it's one that we expected for the last 2 quarters to start to transpire. And it didn't in the fourth. There are some things there that we have to look in the mirror both in terms of, did we learn quickly enough? I'm talking at the North West side in terms of our governance of NSA, but I'm not going to make a bigger deal of it because it's bad enough, but it's also not the way we see it anywhere close to the end of the world. I mean, these are things that we've picked up a lot of insight about over the last 2 years now, 18 months since we've owned the airline and are getting a very high level of comfort of what we're facing and strategically are completely comfortable and aligned, I'm talking about myself, through NSA, up to the board with what we're accomplishing here.This is a fundamental capacity. I'm not going to say game changer, part of it is defensive. If you think of where we started, protecting ourselves against monopolistic carriers with high freight cargo increases pending, to not just controlling our own destiny, but creating something -- I could go on longer on the synergies that we're putting together with North West, they've been kind of overshadowed by these operational challenges. But the vision inside the company and the energy around what we're creating with the cargo airline is very compelling for us. So that's the NSA story. Not a positive one in the quarter, but still very bright for us, we believe, in the future, beginning in 2019.In the quarter, we also had $3 million in utilities and insurance. It was a cold winter. We know that. That was a big number. We had a lot of work to do. We've done a lot of good work in energy reduction. We just signed actually a solar conversion deal for Inuvik. There's a lot of federal dollars now in the market to encourage solar conversion, which is needed. You can't do it on a normal business ROI. Even with $0.70 kilowatt power cost in the North, you still need government assistance to convert to solar or wind. But there's an emerging industry that we're going to want to be part of in one shape or form in terms of local partnerships to convert.In the meantime, we did feel this pressure tied to utilities a little bit in the Caribbean as well. That's a different ball game. That's diesel prices and what the utilities decide to charge. Our St. Thomas store, as an example, we hope to get at least 2/3 solar. But we probably won't get 100% because WAPA, the utility, will want to keep some of the revenue for themselves off the grid. That's the kind of thing that goes on in the islands. Right now, in the quarter, it was a negative.The other one is insurance. I'm not going to tell you what the insurance delta is going to be next year. It's going to be a few million dollars and it started to hit us in Q4. Obviously, with the impact of fires and hurricanes, it's not a pretty picture to go visit your insurance company. And the renegotiations have been tough. Unexpectedly, we're going to pay more. We'll look at different options, not in 2019, but going forward on how we can structure our insurance perhaps more cost effectively. The simple answer is here, we believe we've got more than enough growth to cover insurance and a few other costs. But that's the biggest inflationary cost that's facing us, and we've got a growth profile that should more than offset that. But it is a cost pressure. And we can't mitigate it any further. It is what it is for 2019 and it started to hit us in the Q4 period.One more I'll mention, we had $1 million roughly closure cost to our Fur Marketing main office in Toronto. We shut that down and bought out the lease and took the charge in the quarter.Before I open for questions, I'm just going to finish with -- I started with Giant Tiger, finish with Giant Tiger. So I mentioned that almost all of our banners had mid-single-digit comp increases in the quarter. GT wasn't one of those. They dragged us down in the Canadian sales. What we're recognizing is, and I've talked before, our preference is new stores that are more rural and northern. The urban stores are taking up to 4 years to make money. I think that's GT's guidance to us out of the East as that's what they experience. That's a long time. Whether the urban stores are in the right locations could be another issue. But we have a strong preference for rural and what I call rural northern. So Northern BC, for example, all the way from Fort St. John to Kitimat and Terrace would be a more desirable place for us to go next than going into what we consider to be much more competitive, more expensive real estate in urban markets.And then rural centers like, for example, we just approved Meadow Lake, Saskatchewan, a fantastic regional trade center in a very strong comparison to other great Giant Tiger stores we have in The Pas, La Ronge and Thompson. So we know where we need to be, but we have in the pipeline 10 stores, not all like this, not all urban, that are in that 0 to 3-year stage. So they're definitely a drag on bottom line. On top line, we were out of the meat business, the fresh meat business last year. We're finally back into it. That's dragged down sales. And then the construction around the Winnipeg stores, we're just starting to comp that now.So Q4, not as big a surprise to us, but it was just when I know the top line when you see Canada, the Northern Canada business is closer to the 4%, 5% range, continues to run at that range, 5% into Q1. We had the benefit of the carbon tax, of course, credits that are being paid out. So our income tax service is recycling that cash to our customers and back into our stores so we've had a good start to Q1 that way. I think that's enough for now. Operator, I'll open the call for questions.
[Operator Instructions] The first question is from James Allison with Barclays.
Just looking, obviously, lots of moving parts here with the -- what some might be onetime expenses in the quarter, some going to drag on to 2019. What's your sense on and from a high level kind of re-establishing EBITDA growth as we progress through 2019? Obviously, insurance premiums going up, going to be a bit of a headwind. Just wanted to kind of get your thoughts around that.
Yes. Well, the torque that we didn't get, some of that goes away. I'll start with NSA. If we're now in the EBIT and EBITDA frame that we start we thought we were at last year, that covers a lot. The Caribbean business, I talked about a couple of items that were challenged, but the overall Cost-U-Less business combined with RiteWay is a growth business for us with no significant margin pressure that we see. So it should grow. And then when we look at the bottom line, it's growing beyond the insurance rate of increase. So that looking at the insurance rate by itself, that's one cost line, but we've got more than enough offsets, mostly at the gross profit dollar line. So that's where that is. Giant Tiger, it's not a big factor either way, except that we are uptrending. I mean, when I said that it was the poorest performer, it was still an improving poor performer. And we see that continuing in Q1. So on a relative basis, Giant Tiger, in our plan, is going to give us a lift because we're coming off some very poor numbers in 2019. And our optimism is, I think, grounded because of the cycle-through effect and no additional pricing pressure that we see in the market anyways. When I get to Northern Canada, it's all about growth, and there's an insurance part to that. But over a much larger business, it's not as impactful in terms of what we need to offset. And there's really no area of the business that doesn't have growth potential in Northern Canada in terms of the categories we sell. We've got our convenience stores that are opening, the 5 we open in the fall. We've got 5 to 6 opening this year. So there's a bit of lift there as well in terms of EBITDA growth. And then in Alaska, it's kind of a steady state, but there's growth. The expected -- we don't know how big, but a PFD increase coming this fall and just a very good lockdown approach to that business. Bethel, our main market, has got very robust growth going on. We're looking at adding 1 or 2 stores there, perhaps getting back in the liquor business. So those are some of the things. We just bought a pharmacy in Rankin Inlet and it's helping as well. We've got maybe 1 or 2 that more we can do this year. So there's a number of factors that give us confidence in EBITDA growth that offset insurance. And I guess the other way to look at this is, when we look at where are the pressures that would drive down EBITDA, the big one we had last year, the big one that stood out anyways was NSA. And we think that's controlled and not recurring. The other ones I mentioned on price management. It's now behind us. So that issue with NSA -- pardon, with NCR, you can look at it 2 ways, you can see you're currently impaired, your margins aren't that high. We're saying, well, no, they're not that high, but now as we dig in, about half of that should be that high and maybe the other half shouldn't, but that's a onetime thing. So from this point on, the good news is that we will manage our margins better. This pricing system will give us that ability. We have to be careful now in the stores that aren't as perhaps stable operationally that they're watched more closely. But the other 85% of the Northern stores and all of the AC stores in Alaska will benefit from this. So there is, in our payback for that pricing system, we had expected that there'll be price optimization benefits, and that's built into our EBITDA growth as well.
Okay. Great. And so I mean it sounds to me like there might be some adjustment in Q1, but kind of after that, you feel like there's some good tailwinds to push you through the year. Does that seem a fair characterization?
Yes. And there's something I should have mentioned. We have referred to it in our report to shareholders. I'm just going to stick it up here because it's important. Structurally, you know that we set up the 2 presidents -- we actually have 3, one on the airline. But we set up the structure, and I think it's really working. It needs to be managed. But we have a President of International and one of Canada retail. And the President of International has dug in and completely aligned with his decision to close our office in Bellevue and to move our office for Cost-U-Less to South Florida and to move back to Alaska -- when we bought Cost-U-Less 11 years ago, we consolidated buyers into Bellevue. We're going to move the buyers back to Anchorage and put leadership back into Alaska to drive that business and do the same for Cost-U-Less. South Florida, we have more upside, we feel, across the Caribbean and the Pacific. So that's the closest place and the most important place to be to serve that market. There's going to be costs incurred in Q1 for that relocation because we're closing an office and people are going to leave our organization. They'll have stay-on bonuses until September, the ones who don't relocate for different reasons either up to Anchorage or down to South Florida. And then we're going to hire new people. And there's going to be moving costs, et cetera. And it's going to -- well, we'll disclose it in Q1, but I'm just telling you that's going to be a charge in the quarter.
Okay. Great.
I just thought of that because it's in the outlook. And when you started asking me what could happen, that's one thing that's going to happen.
And the next question is from Matt Bank with CIBC.
I guess, first, there's a mention of the early SNAP payments. And I'm just wondering if you could quantify that and if that leads to a lower comp store sales number in Q1.
It will lead to a lower comp store sale. It's tough to quantify because now we've got -- the SNAP is back in for March. It looks like it had a bigger impact in Alaska, but there's another pause that's going on there. So suffice to say, it will be a factor. I don't know how big it will be. It's hard to say right now.
Okay. So as I look at how the comp was almost 10% just in that one international subsegment, was SNAP a big part of that or it was all of the things you talked about?
It was a factor. So it's a good question. I don't have the number. If I was ballparking, it could have been worth a couple of points.
Okay. And there's a lot of moving parts here. But I guess in terms of the gross margin in 2019, could you just share sort of how you're thinking about that between the 2 geographies or segments, I should say?
Yes. So we still see, and as I said earlier because we think that those margin hits in Q4 and the year-end adjustments as we did our physical counts for Northern Canada, we're going to get at least half of that back. So there would be a pickup in margin in Northern Canada on that alone. Blend-wise, it's a little bit different. Because when I shift to general merchandise, part of the thing that happens when you got good spending is you're going to sell more big ticket at a lower margin. So our modeling would show that there's some potential margin erosion, but gross profit dollar growth in our general merchandise business, when you net it out, we're probably flattish on the gross profit side in Northern Canada. In the Caribbean, we expect margin gain. We think we bottomed out in Barbados. And with St. Maarten now open for a full year, we expect to get a good control of that operation, basically normalize it and get a margin recovery there. So there is some margin recovery expected in Cost-U-Less, AC is stable, flat in Northern Canada and same thing with Giant Tiger. So it's really, again back, it's about growth, about top line growth and good OpEx control and no surprises on the gross profit.
Okay. And I'm just going to squeeze in one on North Star. So I mean, you talked about getting to this $8 million to $10 million free cash flow. The ATR is flying. The maintenance is running. Is it fair to say that you're at that run rate right now?
Today?
Yes.
This instant, yes. But the plane, it's been 10 days. So if you had asked me that a month ago, I'd say no. So it's kind of, okay, we're here. Anyhow, I'm not saying it's [ not ] facetious because it's -- and it's almost a joke now at the present days the planes are still flying [ but not a problem ]. And not to bug him, but that's the thing. That plane has to fly. The maintenance has to be in-house and it is. So we are steady state today. That's the answer.
The next question is from Michael Van Aelst with TD Securities.
So thanks for the rundown on the misses, but given how fast it was and given how important it is, I just want to kind of go through them quickly and just make sure that I've captured it properly. So in Northern Canada, you talked about a $3 million hit from the NCR side, the pricing systems. And half of that you expect back next year, the other half you don't?
At this point, yes.
Okay. And then the $1 million freight overage, you expect that to come back as you'll adjust prices for it?
Yes. We already have.
Okay. The Caribbean, the $1.8 million, is that considered onetime in nature then?
Yes.
Okay. And that's already out of the numbers?
Yes.
Okay. And then the NSA, you said as of the last 10 days, you're kind of at a run rate where you had that -- I think you said $2.5 million hit in Q4 and that was to EBITDA?
Yes. And that's against plan, of course.
Yes. Okay.
A lot of what I'm describing is against plan, but...
Yes. So you'll have -- so for the first -- well, for most of Q1, you probably aren't running at that rate, but starting in Q2, you expect to be back?
Right. Q1 will be a 50-50.
Yes. Okay. And then the utilities and insurance, you said $3 million impact in Q4 for utilities and insurance or was that just utilities?
It's both. And they would be -- the majority would be utilities, but there's also -- I mean, we lumped it together, where it's kind of the segue into we are going to have a large insurance increase in 2019.
Okay. So the utilities is tied mostly to the cold wet winter, which continued in Q1?
Right.
So you should -- so utility costs are still higher. So you're not expecting, say, to get that back in Q1, but maybe by Q2, Q3, you're going to normalize?
Yes. Well, it's a different season. It's a different situation. It's not comparable. I mean, the challenge for us, and we've escalated the [ gamut with the ] covered money available, and also, just because it's a big number, is, what else can we do with energy efficiency? But that will be next Q3, Q4 in case we get cold weather again.
All right. And the insurance cost, when you say your growth will cover this, are you talking about that -- the growth in EBITDA is just going to be offset by the insurance or like partially offset, not fully offset, I'm assuming?
Well, gross profit dollars. So like our -- when we look in our plan in the delta on -- like a waterfall, so you've got a gross profit rate, and you've got a gross profit that are sales-driven. And if you look at -- I'm not going to show you the number, but it's a big bar for next year that's gross profit sales-driven, all right? So relatively constant rate but strong sales. And then you've got also the cost below that, everything from the $1.5 million in the training center to at the X million on insurance. But the GT dollar delta is big. We have to achieve it, of course, but that's where the growth is next year, all driven off of sales.
Okay. And sorry, I think I might have missed the $1.5 million on the training center. Can you just clarify when that kicked in and when we're going to see that teed up?
It's in now. It opened a week -- 2 weeks ago.
And that's the cost -- that's an annual cost run rate?
Yes, it is.
So that's new cost in 2019 that needs to...
Right. Now you're -- we're getting into -- I've got other -- we've got other costs -- streamlining cost management offsets as well. I can't just go through everything that's going up in cost. That's obviously very intentional investment in our people. Whether we look at our entire [ admins spend ] and I look at where something might not be as important, well, we trim that. So I'll just kind of walk back what I said. It's not all driven by gross profit dollars. We're also looking at our other costs in our system, so to speak. And sometimes, they incur costs upfront, like the fair marketing lease in Toronto, we have to buy it out, but it's got payback. We just bought out our -- we just bought our store in [ Moosonee but a ] very attractive price. At least, that was the buyout there. So whether it's a CapEx or an OpEx, the move to South Florida, that's a onetime but very important in terms of driving our business closer to the customer. So there's things like that going on, puts and takes, but I think the training center, yes, it's $1.5 million, and we've got some offsets in our [ admin side ] actually to pay for that.
It seems like the insurance, that was going to be a significant number, and you're not able to give us any kind of range or how big is an impact?
I'm going to say it's a few million dollars, and it's $4 million, $5 million range.
All right. And then on the revenue side, I'm not sure if your explanation covered it all for me, but I noticed -- I found -- when I go through the map, it just seems like -- like if I take a look at the international side of it, you had same-store sales up 9%, total revenue is up in the local currency. So really, the only -- if you kind of just do the math on that, you got $2 million from revenues outside of the same-store sales, but last year, you called out, I think, $24 million of hurricane impact, and it was shrinking because you're down to only 1 store now. So there's probably $15 million or so that you should have been making up, at least, between last year's impact and this year's impact from the hurricane. So was it just not as big of an impact last year as you thought it was then? Is that what you're trying to say?
Okay. I'm trying to catch up. The store that's not open yet is a very large store. And it's -- for competitive reasons, I can't tell you, but it's the largest store we have order of magnitude of -- to any store in the Caribbean. What else can I say? Michael, I mean, okay, so trying to catch up to your thinking here. The -- so that's a big missing piece of -- I think, of your equation because you don't know how big store is in sales.
And I know you had 1 Cost-U-Less closed. You had a liquor -- the liquor store closed. But then it just seem like the -- my point was that you only had other than same-store sales, which wouldn't cover the hurricane impacted stores. Yes, I wouldn't capture that, right?
Right.
So if you take out the same-store sales, you probably only have $2 million of revenue growth?
Oh, about new revenue growth? Yes.
Revenue growth other than -- that didn't -- wasn't captured by same-store sales. But last year, you had the peak of the hurricane impact in a number of stores, and now would you quantify the USD 24 million impact on revenues last year?
Keep in mind, though, Mike, that we also closed the Cost-U-Less store in Q1, right?
Right.
So you've got that -- all those sales are out. So that's in your $2 million delta. I think that's a number you were trying to explain. Keep in mind that we've got a Cost-U-Less store that's out.
Yes. No, I know. I just -- and the point is, I guess, when I did the same math in Q3 and look like there's kind of $8 million missing from revenues, which I'd assume was because of the store closures, when I did the math in Q4, it looked like there's something like double that missing. So I don't know if it was just that you had so many extra sales right after as people restocked right after the hurricanes, and therefore, the hurricane impact maybe wasn't as big as you originally thought it was. Is that what you're trying to say earlier in the call?
That's part of it. Yes.
The next question is from Neil Linsdell with Industrial Alliance.
I just want to follow up a little bit on the insurance costs if we're looking at higher insurance premiums going forward. In the -- for the hurricane-impacted stores, you're rebuilding, but you're rebuilding to a much higher standard. And I think in Northern Canada, you've had a little bit of issue with fires lately. Is it really all about hurricane damage, which is boosting your insurance premiums? And do you not get any benefit from your new building code?
We will, but it's -- everything is looking backwards. And some of this, we're doing it because there's a strong business case, not just insurance, but business continuity to -- for other reasons. So getting the stores to [ Cat5 ] is a little bit of CapEx in there. The stores weren't in bad shape, but the ones, obviously, that did get destroyed were close to [ Cat5 ] already. But there's been some shoring up and then the new engineering standards for the St. Maarten rebuild and the St. Thomas rebuild and then a bit of work in St. Croix. So the insurance companies want to see that, too. So it's both us and it's them. But even when they see that, they -- this is the way they think right now, and then 1 percentage of this is a reality based on where we do business and just where the insurance market is today. Eventually, we're going to get a lot of credit for this: insurance, customer, community service and business continuity. Hopefully, not soon because that means another hurricane. But the point is we're ready. We will be. Now we shift into Northern Canada. That's actually a significant part of the insurance increase, and this is, I believe, on us. I mean, we've made the bet of where we choose to do business, and it's a very unique niche and it has upsides and it has downsides. Net positive. It wouldn't be there. But on the downside, one of them is the insurance and the arson risk. So there's some very practical mitigation steps that are, in some ways, long overdue, and we've gone out and we've put that into our capital plan, and we've got a program based on risk because not every store is the same to go in and look at what has to be done in terms of the garbage rooms. I think I've talked about this before behind the stores, the under [ writing ] of the stores, some fencing, this kind of thing. And as we do that and we address those stores, we expect that risk to go down appreciably. There's some wiring things we have to look at, too. We've had 1 -- 2 fires tied to wiring. So we've now gone into all of our stores and looked at that. The insurance companies will give credit for doing that, but they're still going to look at your loss experience. And we've seen this where it does come back. I mean -- but you have to show your loss experience to be what is more profitable for them. And that's just the way it is for 2019. I did say that we're looking at other options, and whether it's a captive or something else, we want to explore. But there was no time to do that, and again, I think we've been caught a bit behind on this because it's not the first year it's happened, but now we're totally on top of it. And we're going to try to turn what's been a cost increase into something that could mean a cost decrease. But it's not going to happen in 2019. It will be 2020 and beyond when we can come back and say we've got a different plan in place, and we've -- the mitigation plans there, but I'm talking now about how we restructure our insurance. And that will happen in 2020.
Okay. All right. That's fine. And just when you were talking about the miss in Norther Canada, you mentioned about the inventory accounts need improvement. Is that because you just aren't -- weren't tracking what was being sold properly? Or are you having any other kind of issues with shrinkage or something like that, those different types of mitigation?
Well, there is shrinkage. It's higher in our stores than it is in, say, our -- in the northern stores compared to Giant Tiger. And it's tied to the supply chain, the remoteness. But we think -- that we know -- if we're going to have a pricing system that's based on the scan shrink, so the simple point is you've got a sales on handheld unit and you scan everything that goes -- that you're throwing away or spoiled or damaged, you've got damaged codes and so forth. So we know what isn't available for sale. What's been -- or what's being marked down promotionally or permanently marked down. If those disciplines aren't followed, if you made a price adjustment because of competitive activity or just because you decided to change your price, all these things aren't tracked into our central cost to good system, which is not the final solution that we bought, but it's a proxy for what's going to happen down the road if we don't have good core fundamental disciplines. If your inventory count is wrong and you miss something and you over understate it, then it comes back to get you the next quarter -- the next calendar, though, usually by the next one. So there's a multitude of factors here that need to be in place. And we know what it looks like when it works well. We have a very tight tolerance of our gross profit. And given that we aren't -- like the promotional activity that we would have would be much lower, and the vacillations in price would be much lower in terms of competitive-driven reasons than in southern urban retail. So we're actually in a fairly controlled environment that way. Where we're not as controlled, and this is the more systemic challenge, is -- and I talked about a couple dozen stores, is where we have high turnover and not acceptable levels of operating stability. That is, for our President of Canada Retail, I don't know if I mentioned this in December, 100% of his incentive is on us and is to crack this and to really focus on where we need to be on recruiting the training center. So that's longer term, of course, pipeline of people and processes. But we do have processes and we can mitigate it now, but we've got to go in to each of these store situations. I'm sure there'll be some more changes but I can update you on in Q1. I regret that it had to come like this, that we had to have a surprise, but it's been on our radar. We've had this as an initiative going into 2019. It's been escalated now for obvious reasons. And those are -- again, that's kind of the all the things that happened that would affect an adjustment on your gross profit. I mentioned in our staff-wide meeting yesterday that it's also a cultural mentality where if we had a cash store, since we're in the cash business with financial services, it's a big deal. As it went on your -- overcharge on your registers every day, every lane has an overcharge report, we tend to have a different [ talk ] when it turns into the inventory, and we're short $3.5 million or $3 million. It's like, okay, let's just peg the new number. Well, no, why did you have that? And you got to think about like cash and you've got to be on it, and that's just a way of thinking you would say, well, why not? Well, I'm telling you, it hasn't been quite like that in North West. And I think the systems are dragging us that way but also the upside in price and margin management. There's just too many reasons why we need to do it. And as I say, I'll report back as we go through the year. Our midyear accounts start to take place in late spring through to July. So we'll probably have some indications in Q1 and how the midyear accounts went and whether our tolerances are improving and take it from there.
Okay. That makes sense. That explains the training center benefit in much more detail. And so let me just finish on that training center. Is that just to support or address problems that you're having in Northern Canada? Or does this also apply to managers for Alaska, the Caribbean and such, where you're going to have them training here? And will we be seeing any of the similar types of problems or things that you can address?
The solutions will be different, and I think the other -- I'm going to say that with the 2 [ president ] structure it's an evolving view that would put solutions, we've had best practice. Some of the curriculum will be standard across the company. We run the same point of sale system. So you can imagine the standard operating procedure, SOP, for the point of sale will be the same across all manners. But we actually want to go the other way in more localized and regionalized training and even recruiting as we get down the road further. So the solution that we're describing here in the training center in Winnipeg is geared specifically to the partner managers and store managers for our Northern Canada stores. Giant Tiger has its own training system. There's some crossover, and we can run some of our corporate staff through in terms of onboarding cultural awareness and those kind of things, basics of business. But it's really about the Northern Canada stores. I don't know what the Alaska solution will look like. They'll have something tailor-made for a much smaller store division in a much tighter geography, so they could have something down in Anchorage. But as I said earlier, they benefit from a much more stable cohort of over-experienced managers, and I think there's a lot of reasons for that. And one of them includes just the ability to -- in the U.S., we find that we can recruit people that will move to Alaska, and to rural Alaska easier than [indiscernible] Northern Canada. That's just part of it. The Cost-U-Less one will be different again. Those are very large stores. The directors of those stores are almost VP stratum. So the way we train and onboard will likely be within the islands themselves versus a central place. So we'll have more color on that. But right now, I think the big news for us because this is where the biggest opportunity is, is in Northern Canada, and the training center will be part of that solution.
The next question is from Keith Howlett with Desjardins Securities.
A question. You mentioned that future development of Giant Tiger will be focused in northern and rural regions. Of the -- I think you have 40-some stores now. What's the current composition of your stores in Western Canada?
50% would meet that criteria, and the other 50% would be urban. And there's a subset to that. The Winnipeg urban stores, we've got high brand recognition and a strong -- what we're finding, and I -- again, Giant Tiger stores would have a different -- slightly difference experience in the East, it's a different demographic, too, in some ways, that we do really well in Winnipeg with some of the new Canadian demographics and first Canadian. There's a large first Canadian business community in Winnipeg. That's a strong Giant Tiger shopper segment. [ Filipino-Canadian ] is a strong Giant Tiger shopper segment and then the fact we've got, I think, 10 stores in the city. Wherever -- we've just got beachheads, like a store in Calgary, a few in Edmonton. It's a function of can you get the real estate? Can you get all the cost factors in place and you establish enough of a brand presence? Do you have the right customer mix? The path at least resistance to making money sooner [ rather than ] on your new Giant Tiger store is because to be in rural areas, we find you're not in the shadow of Walmart, and you are the dominant fashion store, and your discount offer in food is dominant as well. That's what we've learned. So it's finding more of that and finding less of the other and just getting that weight heavier towards the types of locations that have now told us that they'll make money faster.
And that was the secondary question I had. When you reduce some of your store count, I think, maybe 4, 5 years ago in Calgary, is the big difference between Calgary and Winnipeg, you just maybe -- when you opened or your big presence in Winnipeg or you think it's a different competitive set? Or...
We're still not sure after all these years. No question the cost inputs are higher. These rates, $15 on our minimum labor and transportation cost wages that cascade through the road transport sector. Everyone else puts on their path the same way, so the competitors all face it, too. But to the extent they have national pricing strategies and average their freight and do other things that don't completely incur those regional costs, that's what would bother us a bit with Calgary. If we had a bunch of stores, there'd be some scale on the brand image side, but these cost inputs would still be there.
And just on your sourcing, with your [ diffuse ], you've got -- you're in the Caribbean, Northern Canada and Western, are you able to procure [indiscernible] American wholesalers? Or do you go direct to manufacturers? I'm thinking mostly of your food business.
Right. So we are largely regional there. And as we move to this more further regionalized structure, so just to give a little more background on the split of our Bellevue office and the closure of the office, we're moving to putting a Procurement and Marketing VP into the Alaska business only. The VP who is from Canada originally and was in Bellevue is now moving to South Florida with our President, and they'll be focused -- well, the President will cover Alaska and Cost-U-Less, but he'll be focused only on Cost-U-Less. We expect -- we structure that there'll be, as John called, a sharing sort of table of people. Our P&M VPs will sit down in Canada with the ones from the U.S., and they'll look at where they can do cross-border joint procurement. As between the international divisions, they will both -- they would deal right now with SuperValu as a wholesaler, and they would leverage that together, the 2 sort of regions, Alaska and Cost-U-Less. When it comes to things like meat, we have an international deal with a cargo. So sometimes, produce, you can also -- you go cross-border there on your procurement. And then it can get really regional, to the extent where you're procuring only on the island literally in terms of local manufacturers. So it's a combination, always looking to maximize, for example, on freight. The way it works with the statutes in the U.S. There's a small group of U.S. ocean carriers that are allowed to serve point-to-point within U.S. territories and U.S. mainland. So we're a big customer of those, and obviously, we combine our buying power with them in terms of our Alaska business, our Pacific business and our Florida business. So where we -- it makes sense, we go across the whole enterprise buying computer systems or meat. And where it doesn't make sense because the consumer wants local goods, we don't crossover.
I see. And then how many people are involved in your decision to move out of Bellevue?
55.
The next question is a follow-up question from James Allison with Barclays.
Just quickly, back on the IT systems upgrade, can you remind us what the implementation timing is for that? This is the price management system.
Yes. It's Q2 for Canada and deferred in Alaska because of the move to Boca Raton. It will be Q3 for international.
The next question is a follow-up question from Michael Van Aelst with TD Securities.
A few. First of all, when you bring your in-house or now that you have the NSA maintenance brought in-house, is this a cost reduction versus original plan or just where it was getting to in recent quarters?
I guess, original plan. It's -- there's a cost reduction against what we've incurred in the recent quarters. Original plan, we knew from, I want to say, pre [ after some ] due diligence and some of the experts that we brought in to just talk about airlines and so forth, that there was an order of magnitude savings to go to in-house maintenance, but it was -- we had it out probably 3 or 4 years, and we're going to try -- and right now, there's the cost -- it's not we've looked at building another hangar in Thunder Bay, and it would ROI just based on the maintenance. Now we're doing the maintenance with least hangar space, and it's going to be fine. Down the road, we still may look at that hangar to achieve even more cost savings. So am I being clear enough? The -- in a way, we have no choice because we don't think we can rely on third-party maintenance. They're too small. They're not reliable. And it's not just -- we've had some decent ones, but they're busy. And it's about getting service and priority service to turn our plans around. So there's a qualitative factor there, too. But as we scrub the numbers, yes, we expect it to save money compared to what we had before. Right now, I'd be satisfied to just do what an original plan was, which is to use third-party maintenance out of certain costs. That's kind of where we're at today. But as we look around the corner, we might have to put a little more investment in, but it looks like in ROIs, then we would be able to achieve cost savings over any third-party maintenance that's out there today. I know I'm being a little bit wishy-washy on this, but part of it is, as we've learned about the space of third-party maintenance for an in-between-sized airline like ours, is not very wide. There weren't a lot of choices. So we're not -- the good news is we're not incurring higher cost. It's going to be equal or lower than our original planning scenarios. It's just that we've had to tool up, literally tools and put more [ admin ] costs into the business to get there.
Okay. And the -- and is the in-house maintenance capability for all of your fleet or just the ATRs?
All of it. We also pulled out the Pilatus from our Pilatus maintenance supplier. What we don't have in-house are C checks of the major overhauls and many airlines don't. So that's left to the side for now.
Okay. And the relocation of the offices, the international offices, I know there's onetime cost in Q1, but beyond that, is it going to cost you more to operate 2 offices versus 1, be it a revenue opportunity strategy? Or is there a cost to it?
Okay. Good question. Now I just need to clarify. The timing of the office move and the incurrence of those onetime costs will be spread between Q1 and Q2 because we don't mention [ staff ] bonuses and how -- whatever goes into the onetime cost components. We'll stretch into Q2 -- Q2, Q3, pardon me. We've done this on a net neutral basis. That was the challenge put out to our presidents international. The reason we did it in the first place, condense the offices was -- there was a cost efficiency, we felt, opportunity. And to your point, it's a very -- it's a good question. As we push the strategy of a more delegated, distributed regional approach of running the business, that's going to be one of our guideposts, is to have offsetting efficiencies so that we're not incurring higher cost. I don't see it being a cost efficiency measure. It's very hard to do that when you know retailers in Canada that centralized their buying until they go too far and then they lose touch of their customer. Our assessment, and when we leave this call, we've got a blue sky meeting on, we call it, T Store, Tomorrow Store, like what keeps you awake at night. Besides having people to stop for our stores, it's about the regional, locally owned competitor, and all they do is get up in the morning to feed their family and they come to battle against you in that island, in that community. So we do okay, but we would do better, we feel, by having the highest stratum executives that we can afford, and they pay for themselves if they're good, in that market, in that region, not in Winnipeg. So that's our approach to why we're doing it. But to get there, we also want to do it in a way that's cost-neutral, and that's what we've achieved so far in paper with the planning for the Bellevue closure and the 2 offices in Anchorage and South Florida. And that's going to be the [ model ] going forward. If we decide to go further and tether, I'd say, close to the customer activities, plan buying, move south, maybe some of the core HR, store HR activities like recruiting and training, we'll continue to look at the center and say, well -- and we've got to make this efficient and not in -- and be cost-neutral, at least.
Okay. And then on the higher incentive compensation in the international side, can you explain what the -- what that's based on, like what triggers a higher incentive given that the profit [ in the U.S. G&A ] and for the quarters [indiscernible] there's other factors involved?
Mike, it's -- the bulk of that increase was a share-based compensation component.
I thought in international, there wasn't -- it was mostly -- I thought it was mostly in Canada.
It was. It's substantially all, but there was a smaller portion that actually hit in the international operations in the quarter. And then there was -- in addition to that, there is -- when you look at our incentive plan, our short-term incentive plan, and you go across the different regions, there are people that -- within those regions that perform very well, and so there is bonus costs on that.
I'm just going to point that I don't think it will make a big difference, but you will see more between regions perhaps variability this way, like we are looking at the incentive being tied more to the region. The executives at the C level that are on to their PSU options have skin in the game across enterprise, but we actually want to keep going the other way that -- and incent more people on their -- the business units they actually manage or support and less about the cost enterprise because we are so dispersed. This -- it's an equity and a motivation and alignment thing. So I don't see that as a negative. As long as, in total, we're not driving up our comp costs, I don't think we will, actually, because there'll be variability between business units. So we've modeled that, and I just want to bring that out because you will see more potential variability between businesses.
Okay. And then final kind of topic is just on the Canadian revenues, similar to what I did before. Like the Iqaluit store was closed for upwards of 10 days, I believe. Was that a material impact at all in revenues?
It was. It's, again, a very large store, and it was an impact.
Okay. And so -- because when I look at it, your same-store sales and your total revenue growth, it was pretty comparable. But you had at least 3 new GT stores opened year-over-year and a bunch of smaller C stores and things like that as well. Was that -- were the new stores fully offset by the closure of the northern store and the Tim Hortons that you closed? Or...
That's basically [ the map ], yes. You've kind of backed into the pluses. Yes, that's all there is, really.
There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Kennedy.
Okay. Thanks, operator. Thanks, everyone, for being part of the call. I think we've answered everything. Whether we have any takeaways, John, we'll have to take a look at it after. There was obviously a lot more detailed questions in some of these variances. But I think the best thing here is just, as usual, to keep open communications. You know where to find John and I if you have any follow-on. And otherwise, we'll look forward to being on the call with you in June after Q1. Thanks very much.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.