Q2 2021 North West Company Inc Earnings Call

No one else seemed to be honest, we lapped the Hilton.

This conference is being recorded so it goes to homes that don't have as you see.

All participants please standby your meeting is ready to begin.

Please be advised that this conference call is being recorded.

Welcome to the Northwest Company, Inc. Second quarter results Conference call.

I would like turn the meeting over to Mr. Dan Mcconnell, President and Chief Executive Officer.

Mr. Mcdonald. Please go ahead Sir.

Thank you very much and good morning, everyone and I just want to welcome everybody to our second quarter Conference call.

Joining me today from Northwest company as John King, Our Chief Financial Officer, and Amanda Sutton, our VP of legal and corporate Secretary.

I'm going to start the meeting actually by asking Amanda to read our disclosure statement.

Thank you got it.

Before we begin I remind you that certain information presented today may constitute forward looking statements.

Such statements reflect northwest 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 each Rep, who you see northwest annual information form and it's and under the heading risk factors.

Yeah.

Yeah.

Yes.

Yeah.

Thanks, Matt.

I'll begin with a brief.

I'll review, our second quarter results is provided in the press release and the report to shareholders and then I'll open up the call for questions.

Results in the quarter are better than they might have your first glass.

To highlight a couple of factors explain this.

First revenue against an extraordinary same store sales and earnings increase for the second quarter of last year.

And then thank you very much.

Thank you.

We had in noninterest income.

Resulting from the sale of most of our giant Tiger stores last year.

And finally, a lower foreign exchange rates between the Canadian and U S. Dollar this year had a negative impact on the translation of our international operations.

Ill go through some of the noise in the results.

We've also provided a comparison of sales and earnings.

Pandemic results in 2019, just to give a better indication of our financial performance.

With that let's dive into the second quarter results.

Sales were down 12, 9% compared to last year, largely due to the giant tiger transaction considering that on a same store sales basis sales were down eight.

8% also this performance.

Some perspective bear in mind that last year, we had a 25% increase in same store sales income.

During the second quarter of 2019 same store sales were up 21, 4%.

<unk>, which provides an indication of the amount of <unk>.

And then related to consumer spending there was actually a good team.

Now, let's talk about regional specific results.

<unk> Canadian operations same store sales were down eight 7% compared to the 30% increase last year.

No. Thank you finished 2019 sales were up a very strong 26%.

Continue to be positively impacted by COVID-19.

Lesser degree than last year.

Community spanning government income support being the main factors.

Other factors has contributed positively to include our strong supplier relationships and the advantage of ammonia cargo airlines, which has enabled us to maintain a solid in stock position and lead to continued demand of our customers.

One of the challenges in the quarter was the impact of forest fires in Manitoba, and Ontario, which resulted in evacuation of store closures in each of our communities.

As a result as a response to this crisis, though our team has partnered with the Red Cross to deliver same day supplies of food shoppers to the Evacuee Republic temporarily staying in Winnipeg.

Really speaks volumes about how our teams continue to inspire us by taking a hard rule in the communities.

Switching gears to international operations, we continue to experience tailwind, starting with increasing tourism or service some of our markets like the USPI, coupled with income support payments through the American rescue platform.

Oscar wholesale sales related to the USDA food box program, where success, she delivered 900000 pounds or produce dairy and meat talk to over 115 communities.

This was partially offset by the timing of the permanent fund dividend payment last year, a dividend payment of $992 position early and paid in the second quarter.

The PFD dividend. This year is expected to return to its regular calendar timing and be paid in the third quarter.

Therefore, our general merchandise comparative sales performance for this quarter was negatively impacted.

Overall international sales increased two 8% over last year on a same store basis sales remained strong and increased one 1% to last year. This is very pleasing, especially considering that in Q2, there was a 17, 2% increase.

Gross profit rate in the quarter was marginally with a mark.

When compared to last year, an increase in the gross profit rate and Canadian operations was driven by changes in the sales Glenn and lower markdowns. This was largely offset by lower rates in international operations due to the impact of lower gross profit rate as a result of the USDA food box program sales higher blend of course U S sales and a lot more promotional activity in certain markets.

Yes.

Our selling operating and admin expenses were down 40 basis points as a percentage of sales excluding non comparable factors mainly related to the $31.0 million pre tax gain on the giant Tiger transaction in 2021.

One of the factors contributing to lower expenses in the quarter was $8.0 million increase in Covid are $8.0 million decrease I apologize and COVID-19 related expenses compared to last year.

While earnings from operations and EBITDA were down compared to 2020, primarily due to the giant Tiger transaction gain last year, adjusted EBITDA was up 34% or $7.0 million or 56% compared to 2019.

Now I want to take a moment to briefly further performance of the airline.

North Star Air had another very strong quarter, driven by higher third party cargo revenues a gradual increase in passenger travel in the quarter also contributed to improved earnings, especially when compared to the negative impact on passenger related earnings in the second quarter last year due to the Covid travel restrictions.

In aggregate the impact of all these factors is that net earnings decreased $22.0 million to $46.0 million in a quarter, but were up $29.0 million or 136% compared to 2019, which represents a compound annual growth rate of 53, 7%.

Okay, now I want to transition and make a few brief comments on <unk>.

Capex is cash flows.

Capital expenditures in the quarter were $36.0 million.

Up $19.0 million versus last year. This does include the North Star Air purchase of an ATR 72, 500 series airplane.

This aircraft is being configured with Hawaii cargo door, which will give us a competitive advantage in northern Canada since only one other aircraft at this time, serving the region. Today. This aircraft is expected to be operational late in the fourth quarter and will provide efficiencies in loading and utilization.

In addition to <unk> also creates opportunities for specialty payloads and greater third party revenues.

Also speaking of share buybacks and of course, we purchased $11.0 million of common shares under our normal course issuer bid for a total of $19.0 million purchased year to date.

We also announced today, a two 8% increase in our quarterly dividend that's important to keep in mind. This is on top of the three cents per share or 9% increase last year and in line with our past track record record a pre COVID-19 on a pre COVID-19 basis.

Looking ahead, our near term outlook continues to be highly influenced by the uncertainties of COVID-19.

Would you anticipate our same store sales to be lower in the second half than they were.

And in the second half 2021, as we lap strong sales gains in 2020.

Likewise net earnings in the second half of 2021 are expected to be below 2020, a compare favorably to 2019.

However, there continues to be uncertainty related to the impact of COVID-19, and Delta variant as well as the timing of the economic recovery, which of course makes forecasting quite challenging.

To finalize let me just say that overall, we're very pleased with her final results in the second quarter, particularly as we were up against the exceptional pandemic driven results last year.

I also want to again acknowledge the efforts of our frontline employees, who continue to serve our customers within the challenges of this COVID-19 environment.

So I'm going to open up the call for questions here shortly but before I do I do want to give a brief comment on the executive team.

I'm pleased to announce the Kyle Hill has been appointed the president of the Alaska Commercial company call joined northwest in 2018, as Vice President of strategy and special projects and most recently he was the vice president of procurement and marketing for AC.

I'm also happy to announce that Jim Caldwell, who will be joining northwest as a private president Canadian retail and you'll be starting later this month.

She was an experienced retail executive having served in senior roles with Walmart Lowe's, the brick and actually most recently as the president of bouquets higher.

With that I'll ask the operator open up the cole and and for any questions you might have thank you.

Hey.

Thank you.

We will now take questions from the telephone lines. If you have a question and you are using a speaker phone.

Please lift the handset before making your selection.

You do have a question. Please press star 100 devices keypad you.

You may cancel your question at any time by pressing star two.

So please press star one at this time, if you have a question.

It would be a brief pause while the participants register.

We thank you for your patience.

Yeah.

The first question is from Michael that else.

TD Securities. Please go ahead your line is open.

Hi, good morning.

I just wanted to start off with the price investments.

Just started a little while back, but let's pause for a while so I.

Are you still planning on increasing your price investments and if so when could we expect to see those.

Well as you know we did hold that thanks for the question, Michael but we did hold that this last quarter. There's a lot of volatility in the market. Currently so we are working on a price investment and it's with the objective with the same objective to increase our sales our value to our customer our gross profit dollars, but given the volatility in the market right now we really thought that we have are we.

Our working on Recalibrating some of the the metrics and how we go to market with it. So yes, we will we're currently in.

In kind of a test stage, but we expect it will probably be fourth quarter or first quarter next year is when we would have it.

More surety as to when we could roll it out.

Okay.

Alright.

And then are you able to give us what the impact of fire related closures. We're on the same store sales.

I won't disclose.

Disclose the total but I can say that it was.

It was relatively light, but it but I wouldn't I actually not going to give the number out Michael at this point.

Got it.

Alright, and then COVID-19 costs were running.

Going into the quarter, you were talking about a million a quarter a million a box.

And you always had $3.0 million in the quarter is that a good gauge.

Going forward.

Yeah, I would say so Michael it's a it's a good sign so far like we've been focusing as you know on our safety and really keeping people safe the vaccination rates and a lot of our markets has been had been high. So that's helped out a lot and as well as the participation of all a lot of our store matters. Most of our store managers are vaccinated as we're encouraging them.

Heavily to do that and it's a it's definitely worked out in our favor.

Okay.

And then the ATV the fourth ACR that you picked up I think originally you had said late.

Late Q3.

I know youre, saying late Q or by the sounds of it. So is that just a delay in receiving the aircrafts.

Retrofitting it or.

It's the retrofit that's correct as the retrofit.

This receiving some of the parts in today's environment that has pushed it out but we're quite confident that it's going to come out in Q4.

Okay understood and then finally on the PFD.

The last I saw was it seem like there is a hold off or there is a.

I guess hold up and sign off on it and there was going to get pushed it beyond October or is that.

As I read in the other developments.

So.

I believe that's gonna be operated during the Q3.

No but are there our best guess right now for what we know is that we do believe it will be paid in Q3.

Okay, and what are you doing criticize.

We've heard a range we've we've gone from five back up to a 500 back up to 1000, so I would say, they're probably somewhere within that range.

Okay. Thank you thank.

Thank you.

Thank you. The next question is from Mark Petrie from CIBC. Please go ahead. Your line is open.

Okay.

Yes, good morning.

Wanted to just ask about inventory levels.

Pretty nicely.

Obviously, though a lot of different pieces in your business, including FX.

And I know you were trying to build.

Or at least at least selectively so can you just give us an update on sort of where you're at with regards to the inventory levels across your business and specifically non food.

Yeah, absolutely in fact, we've taken them like we saw that obviously early on there was a lot of escalation inflation. So we went out and we took we procured as much as we could on the front end, obviously with their Sealift program. That's something that we took full advantage of as well as our electronics throat are all banners actually getting ready for.

Third and fourth quarter selling events, so I would say that we're in.

Strong position as it relates as it relates to our inventory levels and were are absolutely ready to meet our customers' need coming here into the third and fourth quarter.

Okay, Perfect and you mentioned the farm box.

Farmers food box program in Alaska.

What's the status of that program and do you expect it to a to a to be a factor in your ability to grow that part of your business.

We've learned a lot from him Mark like it's not a we're not participating in the USDA food box program currently but what we have done is we've cascaded into a sales opportunity and we were still doing that type of service, but not.

It's not being paid for by the USDA. So it's something that we're just working with different communities and offering this service much of what we learned when we were providing the service with the USDA. So no it's not being compensated for by the USDA, but it has cascaded into a solid business opportunity for us to provide those types of products to.

Two the number of the communities that we're not in today as well as obviously the ones we are.

And how material was that like does that subsidy going away like is that a material impact on your business I mean, I understand you're saying it's.

You've learned learn things and now in some respects presents an incremental opportunity but.

It is not being subsidized does that does that matter to sales growth as you as you lap it I guess.

Yeah, Yeah, it's definitely impactful, it's a it's not going to be a it's not a program that they're offering currently.

There was 900000 pounds as I indicated that a they were put through this program. So.

So it's.

It's not.

It's not huge but it's not a it's not a visible either.

Okay, Mike I get that.

[laughter] Cole.

So you get a quantum.

So that's all good all good Okay, and then I guess my just my last question is as sort of a broader one and I just wanted to ask about your sort of various health initiatives in the north and I know this is a business that you guys have participated in for a long time.

But you've gone through various sort of evolutions of it and I know him.

It's somewhere that you've you've launched the businesses I think last quarter that the wellness health business.

Hum.

If I have that right. So can you just sort of in a in a broader context talk about where you're at kind of with regards to your offering and if you think that will.

Will will be a material opportunity in call. It the next 24 months.

While we are continuing to evolve it mark and as Youre aware, we just opened up a store Astro healing of Callaway. That's a healthy for you. So we are you know we're in optical our services there and that we've been I mean, it's still early on but it's been shown to be a valuable service to our consumers. So it's really just a.

<unk> it checks a lot of box is it a it's obviously a great service to our community and it's definitely avoid in our in northern Canada today, and we feel with our competitive advantages. We think we can continue to offer better service in that regard. So it's really a continue evolution is probably the best way I can put it.

Okay I appreciate all the Tomlinson.

Thanks.

Thanks Mark.

Thank you.

Once again, please press star one on the devices keypad. If you have a question. The next question is from Stephen Macleod from BMO Capital markets. Please go ahead. Your line is open.

Thank you good morning, good morning, Dan.

John.

I just wanted to ask a quick question about just what youre seeing in terms of your northern Canadian communities with respect to trends in and out shopping just with restrictions have been relaxed or are you beginning to see more.

<unk> of your community residents.

Increasing our proportion about shopping which obviously.

In shopping was a big big benefit to you through Covid.

You know what not as much in northern Canada very marginal.

AC or in Alaska, Alaska operations. There was a there was some more out shopping but really it's been in northern Canada. Its been very marginal I mean for the comparison, we say is that the higher the vaccination.

Rates are.

You know the murata people to stay at home currently and because of that because of the lower vaccination rates outside of the community. So it has kind of led to you know.

Stronger business results, obviously people staying in market.

So we haven't seen that open up that we might have anticipated earlier on but we expect that later on in the in the year. It will probably open up a little bit more as vaccinations start to match those of some of the communities and surrounding areas.

Right. Okay. Okay. That's that's helpful.

And then are you able to.

Last quarter I think you had mentioned that exiting COVID-19 or maybe once things normalize you sort of expect to return to kind of a mid single digit growth rate.

In terms of same store sales growth is there anything that would that would have changed your view or is that still kind of what you're expecting once once things settle out.

We're still on a we're still under that same expectation.

Yeah, Okay great.

And then the increased dividend was a surprise, obviously you announced the nice increase just two quarters ago. So can you talk a little bit about.

What your priorities are for <unk>.

For excess cash flow as you sort of move through the through the through the next 12 months to 24 months.

Well, it's a we're obviously we've announced our.

Our.

E. <unk> strategy believe it was two quarters ago now and so that's some of our priority. We have a we've got three new stores that we're going to be opening. This year. We just opened Astro Hill, we had a store earlier in the quarter in our sorry. It was last quarter in Rankin Inlet. So we are following suit with our with our ACO strategy we have.

Other opportunities kind of tuck in acquisitions that were actively pursuing in Alaska as well as Canada.

There's nothing major but that's really what we're looking at kind of continuing to pursue in the near term. There's also the e-commerce strategy that we're starting to rollout in Alaska. So that's another initiative that we're putting a lot of focus to.

But other than that it's really just sticking to the game plan I mean, obviously now I've been in I've been in the role for four weeks in.

Really starting to.

Take a look and see what the opportunities might be with the new leader coming in for Canada, I expect a lot more focus and we're gonna be looking even harder than we already are for new acquisitions and opportunities.

Further our footprint and our and continue to service the customers that we know we can bring a value too.

Right. Okay. That's great and then are you still sort of focused on when you think about acquisition opportunities or still focus largely on the health and other complementary businesses that would that would.

In nicely to the retail store base.

Yes, that's correct, yes, great. Okay, well. Thank you that's it for me Thanks Neal.

Thank you there are no further questions registered at this time I'll return the call back to Dan Mcconnell.

Okay, well. Thank you very much and I. Appreciate you joining me here for my first conference call and I look forward to speaking with you next quarter. Thank you.

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

Okay.

Okay.