Earnings Call: Q2 2022

Sep 9, 2021

Earnings release

Welcome to the NorthWest Company, Inc. 2nd Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead, sir. Thank you very much, and good morning, everyone. And I just want to welcome everybody to our Q2 conference call. Joining me today from NorthWest Company is 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. Before we begin, I remind you that certain information presented today may constitute forward looking statements. Such statements thus reflect certain expectations, As to miss, projections and assumptions. These forward looking statements are not guarantees of future performance and are subject to further risks, which could cause actual performance and financial results in a future period materially to those contemplated in the forward looking statements. For additional information on these risks, Please see North West's annual information form and its MD and A under the heading Risk Factors. Back to you. Thanks, Amanda. I'll begin with a brief overview of our 2nd quarter results as Provided in the press release and the report to shareholders, and then I'll open up the call for questions. Overall, results of the quarter are better than they might appear at first glance. I want to highlight a couple of factors to explain this. First, we were up against an extraordinary same store sales and earnings increase for the Q2 last year, Which was pandemic driven. 2nd, we had a non comparable gain resulting from the sale of most of our container stores last year. And finally, a lower foreign exchange rate between the Canadian U. S. Dollar this year had a negative impact on the translation of our international operations. And I'll sift through some of the noise and other results in the quarter as a context. We've also provided a comparison of sales and earnings measure the pre pandemic results in 2019 just to give a better indication of our financial performance. With that, let's dive into the 2nd quarter results. Sales in the quarter 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 only 4.8%. Also just to give this performance in perspective, verify that last year we had 25.4% increase in same store sales. When comparing to the Q2 of 2019, same store sales were up 21.4%, which provides an indication of the amount of Canadian operations same store sales were down 8.7% when compared to the 30% increase last year. That said, note that compared to 2019, Sales were up very strong 24.6 percent. We continue to be positively impacted by COVID-nineteen, but to a lesser degree than last year One of the challenges in the quarter was the impact of forest fires in Pensacola and Ontario, which resulted in evacuations and store closures in 8 of our communities. As a response to this crisis, our team is partnered with the Red Cross delivery, same day supplies Switching gears to international operations, we continue to experience tailwinds, starting with the increasing tourism from service in our markets like PMSBI, Coupled with income support payments through the American Rescue Plan. In Alaska, wholesale sales related to the USDA Food Box program were a success. We delivered £900,000 of produce to over 100 and shipping communities. This is partially offset by the timing of the permanent fund dividend payment. Last year, dividend payment of $9.92 was issued early and paid in the 2nd quarter. The GMV dividend this year is expected to return to its regular calendar timing and be paid in the 3rd quarter. Therefore, Our general merchandise comparative sales performance for this quarter was negatively impacted. Overall, international sales increased 2.8% over last year. On a same store basis, sales remained strong and increased 1.1% to last year. This is very pleasing, especially considering that in Q2, there was a 17.2 The gross profit rate in the quarter was marginally compared to last year. An increase in the gross profit rate in Canadian operations This was largely offset by lower rates in international operations due to the impact of lower gross profit rate As a result of USBA Food Box Program sales, a higher blend of cost of sales and a lot more promotional activity in certain markets. Our selling operating expenses were down 40 basis points as a percentage of sales, excluding non comparable factors mainly related to the 24,700,000 I appreciate you on the Giant Tiger transaction in 2020. One of the factors concerning the lower expenses in the quarter was a $5,300,000 decrease in COVID $1,300,000 decrease in Pulisette and COVID related expenses compared to last year. Oil earnings from operations and EBITDA were down are $30,400,000 or 56 percent compared to 2019. Now I want to take a moment to briefly further performance of the airline. North Star here had another very strong quarter driven by higher third party cargo revenues. A gradual increase in passenger travel And in the quarter also extremely difficult earnings, especially when compared to the negative impact on passenger related earnings in the Q2 last year due to the COVID and travel restrictions. In aggregate, the impact of all these factors, net earnings increased $20,200,000 to $42,400,000 in the quarter We're up $24,500,000 or 136 percent compared to 2019, which represents The compound annual growth rate was 53.7%. Okay. Now I want to transition and make a few brief comments on CapEx and cash flows. Our capital expenditures in the quarter were $29,700,000 or $16,300,000 versus last year. This does include the North Star air approaches of an ATR-seventeen-five hundred series airplane. This aircraft is being configured with a wide cargo door, It will give us a competitive advantage in Arctic Canada, since only one other aircraft in the space is serving the region today. This aircraft is expected to be operational late in the Q4 and will provide efficiencies in loading and utilization. In addition, the White Door also creates opportunities for specialty payloads and greater third party revenues. Also speaking to share buybacks, in the quarter, we purchased 8,300,000 of common shares under our normal course issuer bid for a total of $13,600,000 purchased year to date. We also announced a new 48% increase in our quarterly dividend. It's important to keep in mind that this is on top of the $0.03 per share or 9% The near term outlook continues to be highly influenced by the uncertainties of COVID-nineteen. We do anticipate our same store sales to be lower In the second half of twenty twenty one as we lap the strong sales gains in 2020. Likewise, net earnings in the second half of twenty twenty are expected to be below 2020 and compare favorably to 2019. However, there continues to be uncertainty related to the The impact of COVID-nineteen 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 are very pleased with our financial results in the Q2, particularly as we were up against the exceptional 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 that Kyle Hill has been appointed the President of the Alaskan Commercial Company. Kyle joined Northwest in 2018 as the Vice President of Strategy and Special Projects, and And most recently, he was the Vice President of Procurement and Marketing for AC. I'm also happy to announce that Jim Caldwell will be joining North West as the President of Canadian Retail, and He will be starting later this month. Jim is an experienced retail executive having served in senior roles with Walmart, Lowe's, And actually most recently is the President of Okay Tire. With that, I'll ask the operator to open the call for any questions you might have. Thank you. We will now take questions from the telephone lines. The first question is from Michael Van Aelst from TD Securities. Please go ahead. Your line is open. Hi, good morning. I just wanted to start off with the price investments that you started a little while back Pause for a while. So are you still planning on increasing your price investments and just how when will we expect to see this? 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 and gross profit dollars. Given the volatility in the market right now, we really thought that we have to or we are working on recalibrating some of the metrics on how we go to market with So yes, we will. We're currently in kind of a test stage, but we expect it will probably Q4 or Q1 next year is when we would have more surety as to when we could roll it out. Okay. All right. And then are you able to give us what the impact of the fire related closures were on Espeon same store sales? I won't disclose the total, but I could say that it was Relatively light, but I wouldn't I actually am not going to give a number out, Michael, at this point. Okay. Right. And then cost were running I think going into the quarter, you're talking about $1,000,000 a month, and Focusing, as you know, on our safety and really keeping people safe. Their vaccination rates in a lot of our markets has been high, so that's helped out a lot and as well as the participation. A lot of our store managers most of our store managers are vaccinated as we're encouraging them Heavily to do that, and it's definitely worked out in our favor. Okay. And then the 4th ATR that you picked up, originally you had said late Late Q3, and now you're saying late Q4 by the time of it. So is that just a delay in Receiving the aircraft and retrofitting it or It's the retrofit. That's correct. It's the retrofit. It's receiving some of the parts in today's environment. It 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 seemed like there was a hold up or there And I guess, hold up and signing off on it, and there is going to be a question beyond October. Is there any other developments that you believe that's going to get pretty churn in Q3? No. But 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 hearing for the price? We've heard a range. We've gone from $500,000 back up to $1,000 So I would say they're probably somewhere within that range. Okay. Thank you. Thank you. Thank you. The next question is from Mark Petrie from CIBC. Please go ahead. Your line is open. Yes. Good morning. I wanted to just ask about inventory levels. It was up pretty nicely. Obviously, though, a lot of different pieces in your business, including FX, and what you were trying to building which are at least selectively. So can you just give us an update on sort of where you're at in your inventory levels across your business and specifically non food? Yes, absolutely. In fact, we've taken like we saw that, obviously, early on, there was a lot of escalation inflation. So, we went out and we procured as much as we could on the front end, obviously, with our C Lift program. That's something that we took full advantage of, as well as our electronics throughout our banners actually getting ready for our 3rd and 4th quarters selling events. So, I would say that we're in a Strong position as it relates to our inventory levels, and we're absolutely ready to meet our customers' need Coming here into the 3rd Q4. Okay, perfect. And you mentioned the Farmbox, The Farmers Food Watch program in Alaska, what's the status of that program? And do you expect it to be a factor in your ability to grow that part of your business? We've learned a lot from it, Mark. Like it's not we're not participating in the USDA Food Plus program currently, but what we have done is we've into a sales opportunity and we're 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 for 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 the number of the communities that we're not in today as well as obviously the ones we are. And how material is that? Like is that subsidy going away? Like is that a material impact on your business? I mean, I understand you're saying it's you've Learn things and now in some respects presents an incremental opportunity, but it not being subsidized, does that matter to Yes. It's definitely impactful. It's not going to be It's not a program that they're offering currently. There was £900,000 as I indicated that we put through this program. So it's not huge, but it's not invisible either. Okay. Okay. And then I guess just my last question is 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 it's somewhere that You've launched new businesses, I think, last quarter, the wellness health business, if I have that right. Can you just sort of in a broader context talk about where you're at kind of with regards to your offering and if you think that Will be a material opportunity in the next 24 months. Well, we're continuing to evolve it, Mark. And as you're aware, we just opened our store Astro Hill in Ekaluit. It's a healthy for you. So we are we're in optical services there and that we've been I mean, it's still early on, but it's been shown to be valuable service to our consumers. So, it's really just to continue on. It checks a lot of boxes. It's obviously a great service to our community and it's Definitely a void 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 going to continue evolution is probably the best way I can put it. Okay. I appreciate all the comments and all the best. Thanks Mark. Thank you. The next question is from Stephen MacLeod from BMO Capital Markets. Please go ahead. Your line is open. Thank you. Good morning, Dan. Good morning, John. I just wanted to ask a quick question about just what you're seeing in terms of your Northern Canadian communities respect to trends in out shopping just with restrictions having been relaxed? Or are you beginning to see more of your community residents increasing the proportion of shopping, which obviously in shopping was a big benefit to you through COVID? You know what, not as much in Northern Canada, very marginal. AC, our Alaska operations, there is some more out shopping. But really it's been in Northern Canada it's been very marginal. I mean for the comparison we say is that the higher the vaccination Rates, the more people are to stay at home currently because of the lower vaccination rates Outside of the community. So it has kind of led to stronger business results, obviously, and 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 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 helpful. And then are you able to last quarter, I think you had mentioned that exiting COVID 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 have changed with you? Or is that still kind of what you're expecting once things settle out? No. We're still on to that same expectation. Yes. Okay. Great. And then the increased dividend It was a surprise. Obviously, you announced a nice increase just 2 quarters ago. So can you talk a little bit about what your priorities are for excess cash flow as you sort of move to the next 12 to 24 months. Well, it's we're obviously we've announced our AC strategy, I believe it was 2 quarters ago now. And so that's some of our priority. We've got 3 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 story was last quarter in Rankin Inlet. So we are following suit with our AC strategy. We have other opportunities, kind of tuck in acquisitions that we're actively pursuing in Alaska and as well as in Canada. So that's There's nothing major, but that's really what we're looking at kind of for continuing to pursue in the near term. There's also the e commerce strategy that we're starting to roll out 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 the role for 4 weeks and 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 going to be looking even harder than we already are for new acquisitions and opportunities just to Further our footprint and our and continue to service the customers that we know we can bring value to. Right. Okay. That's great. And then are you still sort of focused on when you think about acquisition opportunities, you're still focused largely on health and other complementary There are no further questions and registered at this time. I will return the call back to Dan McConnell. Okay. Well, thank you very much and I appreciate you joining 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 thank you for your participation.