Q3 2024 The North West Company Inc Earnings Call
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Welcome to the North West Company, Inc. Third quarter results Conference call.
I would like to turn the meeting over to Mr. Dan Mcconnell, President and Chief Executive Officer.
Mr. Mcdonald. Please go ahead.
Thanks, Paul Good afternoon, and welcome everybody to the North West Company third quarter Conference call I'm joined here today by John King, Our Chief Financial Officer, and Amanda Sutton, our VP legal and corporate Secretary.
I'm going to start things off with asking Amanda to please read our disclosure statement. Thank you Dan before.
Before we begin I remind you that certain information presented today may constitute forward looking statements.
Such statements reflect north west current expectations estimates projections and assumptions.
These forward looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward looking statements for additional information on these risks please see north West's annual information form and its MD&A under the heading risk factors Dan back to you.
Thanks Amanda.
Starting today with by providing an overview of our search results and then transition to talk about our company's outlook journey ahead.
We're very pleased with this quarter's strong performance consolidated sales were up five 1% and net earnings increased by 26%.
Similar to last quarter Canadian operations continue to spearhead the results driven by strong same store sales and another good quarter from Australia.
These results offset softer performances in our international operations, which face more challenging economic conditions related to lower supplemental nutrition assistance program.
The Alaska permanent fund dividend payments compared to last year.
These factors combined with inflationary cost pressures affected demand and shopping patterns.
Patterns as customers continue to prioritize their spending on food and had less disposable income for discretionary general merchandise.
Overall, we are happy with the tour, we are getting from the translation of sales and the gross profit, which increased 10% in dollars and a one.
Third 48 basis points as a rate to sales.
The increase in gross profit was largely due to a combination of changes in sales wins, including a lower blended cost U less sales at a higher blend of airline revenue.
The decrease in markdowns and a higher pass through of cost inflation in retail prices compared to last year were also factors.
We are also maintaining consistent retail pricing philosophy, we continue to monitor and adjust prices using a balanced approach always with our customers top of mind, while striving to maintain margins and volumes.
Overall expenses were well controlled in the quarter with a 10 basis point increase as a rate to sales in spite of the inflationary headwinds that we continue to see in such areas as labor costs.
Okay.
The impact of these factors resulted in strong results in the quarter with EBIT and EBITDA up 24% and 18, 8% respectfully.
Net earnings increasing seven 9% or 26, 1% compared to last year.
Alright.
These results and provide some additional context and I'll start off with Canadian operations.
Sales in Canada were up nine 5% in total and increased 10, 1% on a same store basis, driven by a 9% increase in same store sales and a 16% increase in same store sales in general merchandise.
These strong same store sales results at our results are mainly attributed to three factors.
Number one being food inflation germane any upper to mid single digits in line with the Canadian purchase from stores Index.
Ongoing inflation relief payments to individuals.
And <unk> are strong are good in stock position.
Similar to last quarter sales were positively impacted by government inflation relief and support payments to individuals through the indigenous services, Canada to help mitigate higher cost of living in the north.
Our in stock position was also a key factor in enabling us to capture additional sales. We have continued to focus on maximizing our transport mix by leveraging lower transportation costs to help ensure our stores are in stock on our site.
Essential products to meet our customers demand.
In addition to the strong results in our retail business North Star Air had another solid quarter with both top and bottom line growth and this will be driven by there was driven really by increases in the third party cargo contracts and higher charter passenger volumes.
It's also worth noting the higher earnings for our investment in transport and a nuc and Artic shipping company in Canada was another factor in the quarter.
Overall shipping volumes to the north were up compared to previous years, which may be an indication of the positive future economic unemployment trends in northern Canada.
These is obviously existing in sectors, such as construction mining and other such items.
These factors combined with an increase in gross profit rate and well controlled expenses contributed to the strong results in your Canadian operations for the quarter.
On the flip side it was a tough quarter for international operations.
Total sales decreased two 6% and were down two 7% on a same on same store sales basis.
Mainly due to the economic headwinds that I mentioned earlier related to lower supplemental nutrition assistance program benefits being snap and the Alaska permanent fund dividend, our PFT payments that were compared to last year.
That benefit payments in the U S are down compared to last year as we lap COVID-19 top ups, but we expect to compare to more normalized snap payments in Q4.
On top of that there was a 60% reduction in the Alaska permanent fund dividend payment. This year from around 3300 to <unk> hundred per restaurant.
In general the combination of lower snap in PMT and higher inflation continue to negatively impact customer purchasing power during the quarter.
Additionally, there were specific local circumstances, the compounded the macro economic headwinds.
For example, in Alaska deficiencies and encountered are low wholesale demand and price for salmon globally, which has affected local fishing economies and the southern regions and in Guam, the lingering effect of Milwaukee typhoon, including ongoing power outages declining tourism and a lack of disaster relief and income support has definitely hurt the customers and their coffee.
Yes.
All of these factors contributed to a decrease in same store sales of a one 1% and a 17, 1% decrease in general merchandise same store sales.
On a positive note our gross profit rate increased compared to last year and expenses were well controlled which helped offset some of the impact of lower sales and resulted in a modest increase in earnings from operations in the quarter.
Now, let me just transition and I'll expand on our gross profit results.
Overall, we are seeing more torque and our gross profit rate was 148 basis point increase largely driven by the changes in sales lift that I previously mentioned lower markdowns and a higher pass through inflation costs.
Increases in retail prices compared to last year.
The modernization are there.
The moderation sorry of inflation continues inflation is still present, but the pace at which vendor and freight costs are escalating has decreased.
Of course, not all inflationary pressures have subsided.
We continue to closely monitor certain parts of the supply chain, where cost increases occur on a vendor or carrier level.
Our teams continue to prioritize operational excellence to help mitigate the impact of inflation as we work with the suppliers and transportation partners to help minimize costumes escalation affecting our gross profit rate.
Similar to the retail business North Star Air also had an increase in the gross profit ratio from changes in sales mix driven by higher third party cargo and passenger sales and improved aircraft utilization rates.
No I'm going to make are going to give you a little bit of an overview or make some comments on the inventory.
As mentioned previously in order to maintain in stock.
We have intentionally increased she lived inventory and Canadian operations to leverage lower freight costs as we refine our transport mix and find better ways to make our logistics cost more productive.
At the same time inflation continues to affect inventory levels, which is a more pronounced effect this quarter with the resupply of she lived inventory.
As I previously noted we do have higher general merchant merchandise inventories in Canada compared to last year, mainly concentrated in Motorsports show no machines Atvs boats and motors.
Given the durability of these items the relevance they have in the communities we serve and the strong sales we had in Q2 and Q3, we expect good sell through this inventory.
On the expense side of the business cost control has definitely been one of our top priorities. This year inflationary pressures have been felt throughout the year on the expense side and our teams are focusing on controllable as much as possible and this is without compromising customer and employee experience.
We are making progress through our operational excellence focus where we aim to be as productive and efficient within our cost structure and setting specific ambitious goals in areas like labor cost with promising results during.
During the year and in spite of inflationary headwinds and labor and utilities expenses as a rate to sales have continued to trend lower from the first quarter and were up 10 basis points year over year in the third quarter.
Now I'm going to talk to you a little bit about our strategic initiatives and the journey ahead.
The organization as a whole is highly focused on reinforcing policies and procedures at both store and corporate level to control expenses and drive meaningful productivity and efficiency gains.
These savings will be reinvested for sustainable growth, while optimizing margins and delivering meaningful ESG outcomes.
As mentioned during previous quarters, our teams continue to identify opportunities to unlock value and drive bottom line performance with an operational excellence focus.
This includes initiatives to enhance store labor planning supply chain optimization across different transport modes, reducing shrink and finding operating expense savings.
Additionally, our merchandising teams are refining our assortment, which is expected to help drive sales of items our customers want it.
I'm going to wrap up by providing some brief comments on our outlook.
Overall, as we prepare to wrap up the fiscal year. The results of the upcoming fourth quarter are expected to be below the very strong results this quarter, but in the range of the results from the fourth quarter last year.
Normally we don't give this level of guidance and our outlook how are given however, given our strong results in the third quarter and some factors that may impact our results in the fourth quarter, we wanted to provide some additional context.
A few headwinds in tailwind underpower underpin our fourth quarter outlook in terms of headwinds three factors are uncertain and can affect our results next year next quarter.
First there is uncertainty about the continuation of government inflation relief payments to individuals' positively impacted our results in the second and third quarter in our Canadian operations.
Second we are coming off a very strong quarter in NSA driven by increased third party cargo charter revenue that is not expected to fully continue into the fourth quarter.
And in.
In our Canadian operations are strong in stock position will help us meet the expected increase in consumer demand arising from the first nation shrinking water settlement payments to individuals to individuals that are anticipated to begin in the fourth quarter and extend into 2024. However, it is very important to note that there is uncertainty regarding the timing of these payments is the period for <unk>.
James has been extended to March of 2024.
So I was just gonna close and indicate that the northwest we have an unwavering commitment of making a positive impact on the communities, we serve and to help them the better our strategic initiatives and goals are a reflection of this intention and vision and our teams and leaders are motivated but this commitment day in day out.
With that I'd like to open it up for any questions and thank you.
Thank you.
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The first question is from Mark Petrie. Please go ahead your line is open.
Yeah. Good afternoon. Thanks.
I guess first maybe helpful to hear the comments on on inflation, but then maybe you could just follow up on that and specifically around food inflation.
How quickly is that decelerating for you is it is it relatively stable now or or is it still falling off.
Pretty pretty quickly.
I would say, it's relatively stable right now mark.
Yeah, Okay, and how about in in general merchandise, obviously, the purchasing cycles different but what's your general sense of of how inflation is affecting costs on general merchandise.
I would say that it's also probably it's been stabilized at this point and obviously demand and particularly around urban Canada has gone down so as a result that puts downward pressure on pricing. So I would say that it's stabilized.
To say the least at this point.
Yeah, Okay and in the general merchandise business in Canada, specifically and in the same store sales number what were the key categories of growth was it the big ticket product that you were talking about where you're investing in inventory like you know still machines in and that type of thing or or what was it smaller ticket or what was it.
No no. It was a it was absolutely exactly like you said it was in our it's where we put our bets. It was in the year. It was in the big ticket motorized and so a factor of just being in stock really helped us over the last two quarters really.
Kind of realize some of those sales and as one of the biggest the success factors. There are contributors to our success was just being in stock with those items.
Yeah understood Okay.
With regards to the airline I just wanted to follow up I mean, you touched on it in your outlook comment there, but but could you talk just about sort of the demand levels that you've seen so far in Q4 and what your outlook is for that business into 2024.
Well, that's a great questions. It's so volatile I mean, if you.
Follow up some of the instigators behind the business.
Obviously in Q3 Q2 with some of the unfortunate forest fires and all the other <unk>.
They went up they were going on in the area.
We definitely see.
We don't see as much demand.
Going on into the fourth quarter, but.
You know there is a.
That's not to say that it's not going to fall off considerably, but it's definitely going to not be at the same level as it was during the third quarter.
Okay, and when you're talking about sort of encouraging freight volumes into the north with regards to just you know development and ANAC and economic activity you were talking about in the other parts of your of your of your freight business. Yes, that's right that was on our and yet there was on the barge the barge business yeah. Okay. Okay and then just.
Last question, I guess or maybe two more.
Store labor.
Is that a new I T platform or what is that exactly and then what are you seeing with regards to labor availability and also wage growth.
A great question I would say, it's more practice, we've employed we already employed the the labor technology, a couple of years ago. Its more just.
Leaning into it and getting a lot more disciplined on how we utilize all the functionality of it but it was a major focus obviously our Q1.
It was a great indicator that it needed it's something that we needed to kind of a barrel down on and it's kind of zinc and it's kind of a theme that we've been working on with their task cost control is trying to increase productivity as you can see from our the torque that we've got enough or productivity or expense control from Q1 over Q3.
So I would say no not new technology more more disciplined more concentration and its.
Secondly, integrating within our culture of how we're looking to operate moving forward.
Okay, so nothing to call out with regards to availability or or wage rate escalation.
I mean.
Wage wage rates, we've had wage rates over the last number of quarters actually depending on the different regions and as far as availability it is tough but.
But we have we think good mitigating.
<unk> in place in order to try and offset some of those issues.
So it's a it's something that we're cognizant of its always been tough in our markets Mark as you know, but we are we feel that.
We're not any worse off than we were last quarter.
See some of the effort that we're putting in benefit benefit us over the next number of quarters. Yeah. Okay. Okay. And then just my last question just with regards to the outlook.
What are you referring to when you say the results in the fourth quarter I expect it to be below very strong results in third quarter, but in the range of fourth quarter last year. What results are you speaking to exactly I mean, you talked about tax rate. So are you, referring specifically to EPS or what are you referring to.
I think the market has gone where globally. The overall results if you looked at our third quarter.
The results from top to bottom was.
Overall quite strong as you look into Q4, it's not.
Replicating a lot of that for the reasons that Dan talked about and there is there is.
There is a headwind and tailwind so it.
Difficult to judge how thats, all going to shake out but.
The overall trend would be lower than than the kind of run rate that we had in Q3, but more in the range of what we were last year in Q4.
Okay, but you said you were talking about that like for earnings like for EBITDA and earnings Yeah. Yeah, Yeah, Yeah, yeah. Okay. Okay. Thanks, very much guys I'll pass the line, yes, Mark Thats, why we mentioned the tax rate yeah.
Yes, perfect perfect. Okay. Thanks.
Thank you.
Next question is.
I'm sorry. The next question is from Stephen Macleod. Please go ahead. Your line is open.
Great. Thank you good afternoon guys.
Good afternoon.
Just a couple of questions just on the on the water settlement payments that you called out for.
Yeah, essentially it back in Q4 and extended into Q1 just curious.
What kind of visibility or leeway do you have into those payments being extended and.
And how do you expect it to sort of fall out between Q4 and Q1 of next year.
So we really don't have a lot of insight there I mean, it's.
It's it's difficult to say like I said when they have extended it out which tells me that they didn't get the number of applicants that they had.
Forecast. It I guess you could say are they had escalations that people that had some difficulties and needed. Some extra time, however, it's really tough for us to understand.
We're betting on it this year, obviously, we've we.
We anticipate to see some in Q4, but we're not anticipating a waterfall.
More of a trickle.
And again, its and anticipates a hypothetically a hypothesis.
I guess, it's it's really tough to say.
Okay. Okay no that's.
That's fair and I get that.
Okay, and then and then just just following back on our North Star Air.
In terms of total passenger demand.
Were you, saying that Q3 was unusually strong because of the forest fires that we saw and things like that or just want to make sure I understand I'm understanding that relative difference correctly, yeah, and I would say, but its not scheduled rate it's a chartered passenger.
So charter planes. So that's why it's incremental so it's not like it's not a scheduled flight times. It was people coming in doing charters and and needing to access.
Communities on a more of an emergent basis or just not a more sporadic basis.
That's what that's why we called out right. So it's not it's not if it were scheduled I'd say, okay. We have a good.
Good.
They are good occupancy rates and we expect expect it to carry on but that's not the case. These were one offs and a lot of them because of the demand was high for access to the number of different northern communities that we have are that are out there, saying yeah. Okay, great. Thanks for clarifying that.
And then maybe just finally, turning to the international business and the outlook.
You know what.
Q3 was definitely.
Weekend than we were when we were forecasting and.
Just curious how many of the drivers that negatively impacted Q3.
I expect it to continue into Q4 or have not abated I guess, so to speak I mean, I assume lower snap payments and the lower PFD will probably probably linger a little bit but is that a fair way to think about it sort of lingering into Q4, and then potentially tailing off into Q1.
I would say a PFD.
PFD Theres, probably a little trickle over Q3 Q4, I think it was a little later this year. So it would have trickled into Q4, a little bit snap benefits are going to continue.
Obviously coming into.
Call it the Caribbean and the more tourist winter destinations. This is typically a stronger.
Time of year for them in that regard, but we do think that just given the economic factors or macro economy in the U S that.
Tourism is not going to be is as vibrant as it has been in the past.
I would say.
Aggregating those factors.
Uh huh.
I don't expect it to have a significant increase.
The increase to the trajectory it's on right now for fourth quarter, Yeah right. Okay. Okay. That's great. That's all I had thanks, Dan. Thanks I appreciate it thank you.
Thank you.
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Next question is from Michael Van <unk>. Please go ahead your line is open.
Hi, guys, it's Evan in for Mike Congrats on the good quarter.
Most of my questions have been answered, but maybe you could just touch a bit on.
In Canada same store sales growth you posted very strong growth in both.
Food and general merchandise.
I'm wondering if you could just tease that out a little bit I know you mentioned inflation relief payments.
And I believe the.
The grocery rebate was paid in July and I think some of that trickled in Q.
Into this quarter as well, but was there anything out there anything incremental.
In Q3.
In terms of government relief.
Yeah, Evan as John There was a.
Youre right on in terms of the grocery rebate, but theres also been in Q2 and Q3.
Other inflation.
Inflation relief payments from the government digital Saturday indigenous services, Canada to be a <unk>.
Specific that were.
Both Q2 Q3.
Okay. So there was nothing incremental than in Q3 versus Q2.
Yeah, I would say.
Maybe the capture was I don't know specifically that there was a real increase in the payments, but somebody of.
I don't think it was uniform through Q2 more in Q3.
Okay.
Individuals I don't think there was an increase there and thats what im clarify.
Clarify okay.
That's good.
And was there any.
Maybe either income from like say increased hunting tourism or or fishing tourism or anything like that that would have helped in the quarter.
No.
Okay, and then yes.
Do you think you've gained share in the quarter and if so is there any categories that you can point to that you did well or that maybe your competitors who are struggling with.
I think our in stock position definitely helped us.
We've been a lot more deliberate as you know just moving a transporting goods through different means to be able to optimize our freight lanes.
So we like to think that we're just given the operational excellence that we've been doubling down on.
We do know that there is some markets, particularly that we did gain share in.
But it's.
Hard to quantify when that pulse of money comes into the market, but we can tell you that we are we feel we're getting our fair share.
Okay, great. Thank you very much.
Sure.
Thank you there are no further questions registered at this time I will turn the call back to Mr. Mcconnell.
Okay, well, thanks, Paul and thank you everybody for.
Coming back and joining us today and look forward to speaking with you next quarter and I wish you and all your family the best of the holiday season.
Look forward to speaking to you next year.
Thank you.
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