Q3 2019 Earnings Call
[noise] all participants please stand by your conference is ready to begin.
Please be advised that this conference call is being recorded welcome to the Northwest Company Inc. third 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 welcome to our Q3 conference call. Joining me today are not a sudden RVP legal counsel.
John King, our Chief Financial Officer at El Cubo, Who's our president of Canadian retail operations are <unk> retail business.
Before I start all have a matter read or.
Disclaimer statement.
Thank you Andrea.
Where we began I remind you that certain information presented today may constitute forward looking statements.
Such statements reflect northwest current expectations estimates projections that assumption.
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.
Very materially from those contemplated in the fourth anything.
For additional information on these risks please request.
Farm and it'd be any under the heading risk factors.
Thank you Matt.
I'll go through the highlights for the quarter at some of the challenges we faced and a then open the call for questions.
I started the positive side, we were pleased overall with or EBITDA growth in Canada.
Driven largely by our northern <unk> retail business.
A slight uptick in our north North Star Air, which I'll come back to and not a bottom line improvement in China Tiger, Although a much stronger October and a much stronger in November so.
These are very important trend indicators for us.
We have we're up over a wide and a ballpark Cobra in November but not enough.
Quarter too.
Turning to a net positive so looking at that way to team was was a small but smaller on that drag compared to other quarters and.
And we expect to be a positive in Q4 over a wide.
Within northern Canadian business, we had to.
Decent margin performance.
Pretty healthy sales, even though your copying some large big ticket increases last year.
Which actually helper cells or margin this year, because we there were some payouts.
In northern Saskatchewan Treeline settlement payouts that typically drive big ticket sales, you're getting some top line numbers. Some gross margin dollars, a we always try to take that business or get it if we can but.
In the margin mix in Q2 apartment Q3 was much more favorable this year and the a and the mix of higher margin products, including everything from food service the convenience to our financial service business. So overall, a very positive lunch shift and.
The outlook here is also we think quite positive based on our quarter to date sales trends, Oh, we feel that NCR and or the counter retails, we callable deliver.
A pretty pretty strong quarter for us.
On the airline fronts are the results were mixed up overall why are trending well into Q4.
Also.
Still dealing with some.
Our maintenance cost per hour flight hour or higher and the other you'd hear as and we'd like.
We're getting close to a C checks on our two or two planes and Oh, we feel that the cost per hour leading to those C checks is higher than it normally would be and we're also continuing to assess how we optimize our.
Our parts.
Utilization so that we Oh, we have the right just in time at the right costs for our fleet size. Just currently only two planes that we'll be expanding into three wholly owned 80 ours.
In 2020.
Also in the quarter a permit on the quarter's a subsequent events we had a another plane accidents, which I was not good news and something that we're taking very seriously.
No no no loss of life and destruction other than the the plane itself or the other one from June is just coming onboard Ironically next week and now we have this these are all bosler planes that have been affected by it incidents in the last six months, they're not conducted as far as we can tell right now in any way that what would concern us except.
But we take safety very seriously and any any issues around that did we can help to mitigate and.
Prevent going forward for a business disruption or having to play that's out of service. Now is this one will be can be offset with our other equipment and a if needed and by third party charter as we head into the post Christmas period.
The the plane utilization demand start to fall off they are tied directly to the flow of goods as you would expect dinner Christmas selling as opposed to January selling seasons, and just a reminder, that the way this business is architect today.
380% of the business is captured business, serving a northwest company stores.
Yeah.
So I'll just leave for gain business for a minute we can of course come back to my questions.
The international business had some factors that.
Were explainable.
But also had an impact at the bottom line that that resulted in total total results being the than less than L. why.
NBV I, we were up against some tough comps the the reconstruction economy in Vbi has.
Starting to flatten out a we still like our performance overall year to date and VI, but as we were up against some of the major construction activity from 2018.
It was it was.
Kevin increasingly apparent as we've got to the quarter than we were going to have some headwind trying to grow against that so we were down slightly in our tw business.
And it had been a pretty consistent growth driver for us.
And cost you less we are I mean I'm going to.
This slide into some subsequent events as well when I'm speaking.
We did prep and since and spend the time and resources to get our largest are open.
Very successfully in November .
And since that time has been running at a very.
Very acceptable in a very positive.
Sales level considering out of that market for two years, we are right back with our customers.
And we really couldn't be pleased with the loyalty that's been shown to us and the brand equity we seem to have in that market. So now we're of course building on that but.
It has been overall, a very very successful opening.
Some of that expenses preopening and the size of business like cost to lessen even our over our international business is material. So that was a factor.
We've also noticed that.
China seems to have its own story and the cases seen Martin.
The reconstruction has been slow.
There's been a and impairments of the economy, that's that's larger than we would've expected in two years after the.
Hurricane Maria and ER and.
We are visibility on that is uncertain on when that's going to be reconstruction capital put against public infrastructure.
Things like the airport for example, everything seems to be more extenuated comparative to the USPI and to to be VI.
Postal's Hurricane so bottom line for US is that we were hoping that store a year ago, but we have not achieve the.
The numbers that we had pre hurricane and we'd expect to do we have to work harder to capture share because the pie has shrunk so.
The factor in our and our cost in this business that was.
The for us in the quarter.
General expense pressures.
Which were cycling through on in insurance and in some utility costs were a factor in the quarter.
Yeah.
But I think incurring expenses of a store that opened yet and he is the same Thomas San Martin.
After performance. We're also factors probably the biggest one that is it a timing situation and again was unfortunate was the the timing of permanent fund dividend checks and Alaska.
Typically would be triggered within a two or three day timeframe.
And the second week of October the latest.
This year, it didnt happen that way.
Maybe a third of the checks came out within a short period of time in October the rest have been dribbling, we're still getting PFT checks presented our stores for cash in and then of course customers hopefully spending their money with us and we're into mid December so the entire check disbursements event.
Didnt happen, it's never been like this before it was at administrative glitch and.
Once that was triggered than the if you think about PFT as being kind of a black Friday condensed selling period and you've got your promotions in place.
It's not as impactful when you when you spread it over two months.
Having said that we have transferred sales into November into Q4 from Q3.
Our outlook for AC is to get back.
Bottom line that we have lost and our general merchandise performance.
The next two weeks already tell the tail, but November was that was a strong month than.
The biggest driver was the PFD checks that we are still being presented in cash by consumers getting them up to six weeks later than normal.
So those were so the big factors in the quarter and international.
We opened a new store in barrel, a we exited a store in barrel, it's not a dollar for dollar trade we're in a smaller store now.
And that opening went really well so we're pleased with our position in the market.
Longer term.
We're going to be after getting after market share, we had an or other store.
And we'll see how that unfolds in 2020, but we're not going to have the same sales level and likely not the same bottom line.
In order of magnitude, it's it's not material fall of international but it will be to the business. So they are hard at work at that offsets in the sense of growing other parts of their business, whether it's so liquor business.
Their margin management and other parts of.
The the division.
I think that covers.
The main highlights in the quarter.
Just going through this.
Yes, there were couple of their store openings, but those are the major points I'd highlight.
And now.
We'll open the.
The conference call for questions operator, Thank you.
Thank you Mr. Kennedy melted questions from the telephone lines. If you have a question and just any speakerphone. Please lift your handset before making your selection.
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A brief pause while the participants register for questions. Thank you for your patience.
And the first question is from Michael Van <unk> from TD Securities. Your line is open.
Hi, good afternoon.
Can you start off by giving us some kind of an impact of the PFD on sales and EBITDA, if you're able to.
Well Directionally, we would have our EBITDA would have been.
Likely positive in the quarter.
Our sales impact.
In general merchandise.
Would have been were down eight five at the same store basis.
Our plan was it being to be up five so swing factor probably 13%.
Okay.
Pretty significant okay.
And then.
You talked about the 3.1 million dollar insurance gain last year.
But.
From what I look back and I don't see any mention of that last year, and you had to $17 million gain.
Never mentioned that 3.1 million.
I think when it was brought up it was only mentioned as a cash flow item not at PNM all items. So.
What am I missing.
Well you're right Michael this is John .
Last year in the quarter, we disclosed for the first time as as a non-GAAP measures the insurance gains that we had the large insurance gain in the international operation and we talked about that.
The 3.1 million, you're referring to was a was an insurance gain a fire gain insurance gain in the Canadian operations and that was that was actually comparable to a gain in 2017 and so we didnt, we didnt pick that up and then obviously this year, one where when were.
Looking at the results and explain the results you have that non comparable items in the Canadian operations.
And so that was.
That was noted.
So you're saying that without that gain.
If you want to when you when you mentioned that without that gain you would have been you're asked you would have been down 0.2% did you take the gain out of.
2017, as while 2018 as well sorry.
Yes.
On a comparable basis.
So with no insurance gain should be down point too.
Correct.
Can you talk about some other drivers that are allowing you to.
He asked DNA flat and how sustainable that is.
Well I think in the quarter I guess Theres Theres, certainly puts and takes.
I think we had.
Of course, a share based compensation the incentive plan costs were also down.
In the quarter, so again some.
Just some puts and takes there Mike.
Okay, but that's not a normal growth rate I'm guessing for the next few next that'll no no.
Okay and then your Capex you taught you gave us.
Number of 70 million for 2020.
But thats net of summer insurance recoveries, what kind of insurance coverage recoveries are you building into this.
Well, we're now I'm not going to disclose that number there was going to be much smaller than they have been in the past here as we work through the remainder of these claims.
But I think the key point there is that.
We do see our capital investments coming down.
Next year.
No. It's I'm looking at the numbers. The a range was higher than we are all look as I look at higher because we did take some spending into the the barrel store move was a very fast one this is the way that.
Lease expiry happens.
We bought another business and remodel the stores that it was not on the Capex outlook.
That's coming out next year spending so I just want to.
Went out probably should have at the outset that.
Todd, making the point that we we were modeling out our capex quite a bit lower.
Heading into next year, and then years after even an entre to lower than that but this year. We did accelerate we also bought a.
Liquor store until and Alaska, and a convenience store in Alaska and these are opportunistic but timing wise, it's happening this year, but it is going to be.
It will take down our Capex next year in terms of overall.
So there's a couple of things they just weren't planning as recently as August actually which is.
For our business that that.
That we wrote checks on.
Since you since we don't have an insurance number recovery number for 2020 can you give us an idea of what your Capex might look like in 2021 and beyond if you expected to be.
And lower even more.
Yeah, it would be.
Unless it's we're talking about really pristine growth I.
And you square footage somewhere or business.
It would be in the $60 million range.
Okay.
Alright, thank you.
Thank you once again, please press star one on your telephone keypad. If you have a question.
The next question is from Matt Thank from Saudi Sir Your line is open.
Thanks, I guess first first on giant Tiger on I guess could you share the drivers behind why giant Tiger improved sounds like a vote about halfway through the quarter was that was that execution was there any sort of weather impact and then also talk about the competition.
Called out in a in the release please.
Yeah well.
Looking back on that from the competition. We are we are cycling through competition that.
Things like area for road construction to new openings.
We've got more of those that were grandfathering.
And the rest with lay heavily on execution.
We've had to really.
Do a better job on that focus I think we mentioned that we we had taken a made a change in the leadership of the joint Tigers store group or the person who came back I thought they can really turn to switch, but they used to run those stores.
And.
Weve really put our effort against.
Our operating conditions in the stores.
Thats helped a lot shrink controls really important right now as well, we're trying to get to talk with all the controllables.
There are still are some markets, where we've got two in what I think we have not yet anniversary to.
And there might be one no frills still the mix.
But the external environment as more stable and our internal controls are higher and.
On shrinking operating standards.
The weather is helping I mean, we're getting into a earlier colder winter now and.
I just GT is really a month by month picture for us.
We've had a couple of false starts for sure on trend, but based on we've seen through October November they'd be two of our.
Two of our strongest bottom line months so.
For all the reasons I, just mentioned operating conditions better margin control shrink control.
Colder weather and.
Starting to lap some of the competitive openings that we had to phase and the construction activity going away that tied up roads away from our stores keeping people away from stores and when it big especially.
Okay, and then turning to international same store sales.
You put up quite strong.
Same store sales growth year to date.
Back to Q4 last year was was it was a strong comp can you called out.
Flaps and.
Even this quarter. So how do you think about the.
Sustainability of this strong growth in that in that geography.
Good question are there some of the food is helped by the PFT so having that in the market in November December will help.
Alaska sales.
Cost you less although it's as much comp.
I think the the work we're doing our competitive strategy and Costless tours were now well into it.
Loyalty program, our signature categories in fresh.
And some of the.
The general operating conditions, having moved that office down to Boca Raton.
Our our key people or end markets on a much more frequent basis.
So the trend topline and costly less Exane Martin.
Shouldn't be decent just based on her own.
Work.
So that leaves be VI and yeah, you're right.
Sure there for us to get to our plan the team they're still thinks they can hit their plan for the year.
They will make that up on a margin management sales will be tougher.
As we keep lapping, which we should have figured out I mean, some of those those costs and momentum last year, we're we're going to fight in a bit.
So lots of puts and takes but.
We.
We'd be very disappointed if you weren't up in sales.
Just on the PFT alone and that we're putting into our cost to less stores.
Despite the I'd MBNA, maybe a point up.
Thank you and then on North Star you called out earlier this year that you had to achieve run rate target earnings.
In that in that business I know you called out in your prepared remarks, some some noise on the maintenance side would you say that that run rate has been sustained.
No I can't say that and I I think is again quarter by quarter.
As we watch this.
Having to accidents and a year.
There is an impact.
Because they have to then charter planes.
And spend more money on that.
And I think were.
As we go here and we're sizing up the.
Our equipment.
Moving from two to three HCR as their scale.
Looking at the back their fleet itself those of the DC threes, both of which were in the two incidents.
I'm not so much because of that I mean, if you look at everything when something like this happens there's nothing defective both the planes.
But the consistency of of one type of equipment.
Something we're looking at because what we still have together we have to prove that we can get our our parts per hour.
And to what should be the industry standard for northern airline flight AC ours.
And every time, we have a setback.
Larger parts expense, it's always on a one off explainable, but if you get behind it all.
We think theres a pathway here too.
To get to the standard we need to.
We may need to parts airplanes.
A couple million or as an airplane for parts.
We may look at converting Justin HCR fleet.
These are all things down the road that would help.
The team is looking more normalized parts or they have to show parts per hour expenditure.
We have to show it to ourselves over consistent quarters.
So to answer your question to trend of what we need to be.
Right now.
Showing that for our plan for next year.
The team has signed off on that.
But I need to see more quarters.
Otherwise I would say it's too aggressive.
To have our EBIT running where we said it would run this year because of the Q3 setbacks, so even though you're up EBITDA overall cat, even though I'd say was up in EBIT.
For the year for the quarter pardon me.
They are still was about $800000 and parts expense tied to maintenance that we did not anticipate.
I'm, not saying times that by four that's our shortfall to our run rate but.
That event.
Plus the incident.
Having to charter plane to bridge.
Would be examples of why were falling in a couple million dollars short.
Thank you.
Thank you.
The next question is from a sub con from RBC capital. Your line is open.
All right. Thanks, and good afternoon, I am just maybe one more follow up on the airline question I guess with the two of these planes having issues I guess do you see potential need for maybe is it the plans might be a little old or they're just kind of maintenance related issues here I'm just thinking.
Is there a potential need over the next kind of six to 12 months to maybe put some capital into than if they business to get it going again, how are you thinking about that.
No no we're not thinking that way I mean, it's the.
The capital.
Yes.
Not so much more capital its.
Well I did mention turn into ours for a plane for parts. So it's not zero, but we've got the newest fleet of anyone flying planes in northern Canada, and where the only ones in cargo only.
The bathers aren't old planes their new planes there.
Region, where the recondition theyre turbocharged and.
Completely up to date avionics from a DC three frame.
They are made in Wisconsin, the only do two or three year.
But it's a very specialized aircraft as for short haul has more flexibility.
The Trs can carry a carefree to carry a little more weight.
And as a higher parts per hour utilization. So we're just waiting the pluses and minuses of that.
The.
When you have the two incidences I mean that you always do a deeper dive and making sure everything else is going well and from what we can tell again there is no dot disconnect between the two that would.
That would stand out.
But it's more about optimization here and the one that I didn't talk about that is still very very important is how we we continue to streamline the the hand off handshake between northwest logistics and then as say.
It has taken longer and it's breaking more new ground because other carriers don't do it we're doing in terms of plane ready cargoes and lighter pallets and so forth. So there there is some learning on both sides for that.
None of that its capital intensive.
It's more about execution and I come back to the growth side of it and.
Taking an airline from 32 over $100 million.
In just over two years and making sure the organization structure.
Can handle that.
We are definitely stopping at this and then looking carefully at how we grow or Theres third party cargo or elsewhere.
And I'd say right now we're still in that stabilization mode to to make sure that we're driving the service to the stores and the cash flow from the business.
Thats all part of the plan.
But it's not stuck with more capital is just getting utilization out of it that we expected.
And by the way on that point, if we did if we did exchange and it's just a.
Consideration right now.
Here for faster.
On a dollar for dollar basis, if anything about those are more expensive planes.
Okay, and then just a comment around stabilizing before growing is that and relevance to pursuing other business with additional planes because I remember I think around the time of the acquisition you mentioned potentially using this as a pod prone to maybe go out and acquire other similar businesses is that what you mean, but sort of putting that on older or just.
Generally not no obvious POSIDUR within the airline I mean, we we've got work to do on a and join Tiger.
We've got we've created a structure with.
Two presidents running our retail business units Alex's joining me today.
Down Mcconnell is in Boca on its way back down there after our board beans today yesterday.
We want to make sure that one of the others seem at northwest right now is a more decentralized sps structure, so that our.
Our businesses are really be driven and winning in their markets.
Driving free cash flow the airline is exactly like that yes, it's a vertical integration, but its a.
It's a cash generating business when its run the way we think it can be.
So call that all that's called stabilization I suppose but it's also for growth and we do want to see higher comp set of are certainly northern Canada business and our costs This business, which received the most hands on attention.
GTS a bit of defense make sure we get cash flow growing again.
And the North Star Air part of load growth with the third party cargo.
We have we are acquiring a another 80 our 72.
I will give us some more capacity for third party cargo, but we're still staying within our flight path. If you think of a big the front when a pig.
Starting is to northern Manitoba, Central Arctic and northwest, Ontario.
It's actually the more right adjusted we're not looking at going anywhere else geographically right now and.
Thats.
That's the focus so.
Any growth beyond what I, just described is going to happen at northwest but.
First we've got to get the the cash and the stability of the existing portfolio.
Okay, and then just one last one from me on the GT, because there's been a bit of variability there in the performance over the last few quarters. Do you think is just a matter of working that put banner through some of the difficult whether its.
Competitive environment or some of the issue than they can me or.
There is stuff that you think you need to address at a higher level would that banner, whether it's the scale or things that was how are you thinking about the performance of the banner going forward.
Well.
When I first.
I have described it from the top down and as it is strategic fit and it doesnt check off the core competencies of the other businesses I was talking about.
We haven't said, it's it's outside because it's still with us. So it's all about heads down.
Let's let's get the.
The best performance, we came out of the business.
But.
I can't anymore than that we this is an keep all your options open type of business for us because.
It had is sort of day in the sign under our ownership now it's a real grind and when we're rolling up versus in.
In doing our best.
But we're also considering options.
Thank you.
Thank you next question is from Michael them, both from TD Securities. Your line is open.
Hi.
Just wanted to clarify the 80, our third HDR that's in your $70 million for next year.
Yes, yes.
Okay.
And as you roll that out.
All that out next year.
And ramp up business is that.
Back did that help or hurt your profitability initially.
Crs specifically, yes.
Yeah.
Well it will come on stream in June .
What it does as we have.
I said to 80 ours, we actually have a third but it's an ATM I'd like a power by the hourly so.
There's a.
We can rely less on it starts to to replace capacity that was more expensive lead outsourced.
That outsource capacity can still be used if we want to develop third party business.
But the the core business is going to be owned fleet.
So it's it's accretive I mean, it was it with its a.
Business and investment that we would.
Apply our normal.
Risk adjusted return expectations and.
Fine and 80 are.
Makes sense for us it gives us that ROI.
So the short answer is after its online we will expect to see the.
The return kick in and.
On a a roughly $14 million K investment and we would expect 20% return.
Okay and then.
You mentioned that and I say was 2 million short.
Was that for Q3 or 2019, no I was I was a annualizing the issues.
That are happening there have happened.
No we're not out of the out of the woods yet for this year. We've had it we had a real strong quarter. We just had a child more challenged one against plan not up against ally.
But on the run rate question that was asked to be.
That would be more of a full year.
Shortfall that we're looking at right now.
And then.
You look at the scene Martin.
Cost us.
Relative to some of your are there like I know you mentioned Saint Thomas is your biggest but how big is it relative to some of your other caution listeners.
It's actually on the smaller and but it's.
Its margin structure is very well was.
A very attractive and the mix of merchandise as it had both b to b offline offline business.
In general merchandise, which is higher margin.
Gave it a.
A better bottom line.
That is store that maybe put up quite a bit larger so.
I missed that contribution.
The bottom line and a little bit little bit less of the topline and this goes back to my point about the economy and.
Especially as store like that were general merchandise as little more discretionary spending.
And the population and say Martin is still down I think about 20%.
Okay, and then just last question.
A lot of the higher costs like utilities insurance started in Q4 last year.
Have we now cycled all those are are we still expecting increases in utilities insurance and whatever else.
In Q4 and beyond.
I think the utilities, we should cycle.
But the insurance will be another quarter.
And how significant that in Q4.
I put in there in the outlook I think it's 5 million annualized so.
A quarter of that and then have also I think it's important to highlight in the outlook we talk about.
Insurance costs, not only increasing for this year, but also looking forward and.
The changes in the in the global insurance market, whether its property or aviation.
And how those play into the policy renewals for next year.
All right and you and your office relocation costs.
I think it wasn't another million or half a million, but about half million as what we what we're estimating were were substantially done.
A few little bits there to come through.
Thank you for in that albeit that will be the yen.
Yes.
Alright, thank you.
Thank you once again, please press star one at this time, if you have a question.
Yes.
There are no further questions registered at this time I would now like to turn the meeting back over to Mr. Edward Kennedy.
Okay. Thanks, operator, thanks, everyone for your.
Attendance on the call today any any questions follow up please.
Reach out to John or myself, and we'll be happy to try to answer them.
And look forward to a bit on our Q for conference call, which I guess, John has now moved out right.
Yes.
And I think it's important for everyone to windows in the report to shareholders. We did highlight that.
Fourth quarter earnings.
Earnings will be incorporated into our annual report so we're no longer than be issuing.
Separate fourth quarter report, which is a common place in the market so that.
Fourth quarter results will be released on April eight.
Okay. Thanks, very much for the call operator were wrapped up.
Thank you conference has now ended please disconnect your lines at this time and we thank you for your participation.
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