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Edited Transcript of NWC.TO earnings conference call or presentation 12-Sep-19 12:30pm GMT

Q2 2019 North West Company Inc Earnings Call

Winnipeg Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of North West Company Inc earnings conference call or presentation Thursday, September 12, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amanda E. Sutton

The North West Company Inc. - VP of Legal & Corporate Secretary

* Edward S. Kennedy

The North West Company Inc. - President, CEO & Director

* John D. King

The North West Company Inc. - Executive VP & CFO

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Conference Call Participants

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* Matt Bank

CIBC Capital Markets, Research Division - Associate

* Michael Van Aelst

TD Securities Equity Research - Research Analyst

* Stephen MacLeod

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the North West Company Inc. Second 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.

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [2]

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Good morning, and welcome to our second quarter conference call. Joining me, this morning, are John King, our Chief Financial Officer; and Amanda Sutton, who is our VP of Legal and Corporate Secretary.

Before I get into the call, I'll ask Amanda to read our disclaimer transcript.

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Amanda E. Sutton, The North West Company Inc. - VP of Legal & Corporate Secretary [3]

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Thank you, Edward. Before we begin, I remind you that certain information presented today may constitute forward-looking statements. Such statements reflect North West's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements.

For additional information on these risks, please see North West's Annual Information Form and its MD&A under the heading, Risk Factors. Edward?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [4]

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Thanks, Amanda. I'll go through the key points in the quarter and then, as usual, open the call for questions.

A lot of what happened in the second quarter was similar to the first in the sense that we've got 2 very distinct stories in our business on the better performance side. Our core Northern businesses had another strong quarter. Our comps were in the -- between the 3.5%, 5% range across -- through general merchandise in the North. And as we've -- as we said before, I've commented on the -- general economic conditions are favorable for us and that includes Alaska, which had a strong fishing season. And as we head into the PFD, which is expected to be equal to last year's, we're certainly optimistic that whether it's Northern Canada with infrastructure spending, mining activity, we should be going for sales, managing the business on the margin side with the expenses controlled, but really in a get-sales mode. And that's where we look at things. And with the work that we're doing in different areas, it seems to be paying off. And then longer term, we continue to build our business in other ways.

If I skip down to the Caribbean, there's a really market-by-market story there, because of distinct nature of the economies, but also the competitive situations. Overall, our, we call our CUL or Cost-U-Less competitive strategy, which focuses on signature categories, everything from fresh, produce and meat all the way into baby and actually liquor. These have all been strong drivers for us. And although, CUL came a little short of plan, they were up nicely to last year, as was our business in the British Virgin Islands. If there is a soft spot in Cost-U-Less, it was on the Pacific side, a little bit in Fiji and in American Samoa.

So when we step back and look at the business and our remote retailing strength and how it's been brought to market, we're generally pleased. There's always room for improvement, but we like where the trend is going.

Before talking about Giant Tiger, I just want to about costs, what I -- what we refer to as non- costs, the margin, operating margin gains above LY for all of our banners ex-Giant Tiger, are before admin. We have talked about -- I'm not sure what the right term is anymore, whether they're unusual or onetime or restructuring, but as we, behind the scenes, change our business so that we can run it more localized and put more authority closer to the regions that we do business in, there has been a cost attached to that. And we've disclosed and talked about the relocation of our office, store support office in Seattle, actually back up to Anchorage and then creating an office in Florida. That's being going along fine from the pacing of it and the staffing. There's a few key roles we still need to fill. But it's also involved the relocation and some people not in the business that were in the business before, so between relocation and termination. Some of those costs are still back into Canada. There have been some changes in Canada as well. But -- and perhaps, we should have been cleared on that at the last quarter that where those costs had been incurred and a little higher than we might have thought, and in June as well, they're not out of control, but there is a timing factor there.

So certainly, that was a -- I think, we had talked -- we talked about it in the MD&A and the press release, $3.5 million is the range of those kinds of costs that were incurred. So some of that will carry forward. We're going to have some more of that costs cleaned up in Q3, and then we'll be stable as far as it goes with our regional approach to the business and the office relocations to Anchorage and Florida.

So now to Giant Tiger. Giant Tiger clearly underperformed, again. It was a drag for us. If I break it down, I'd say that weak seasonal performance hurt us and that's, kind of, the stir that mixes the drink in the sense it is, you need to have seasonal sales driving margin dollars. We have some very strong comps against us in May, which were tough to beat. June was very, very poor. But otherwise, that's our -- that would be our prime selling season. And then July, we had great weather and there was markdown season.

But behind the -- beneath the surface there, we've had to take a hard luck at how we're running the stores. We actually have made a management change this week on the leadership side of Giant Tiger and the operationalization of, call it, the Giant Tiger system, and how we can be better at that and also lean into Giant Tiger to support us. You've heard some of these things before, allowed us block and tackle at store level. We don't fundamentally believe that the Giant Tiger is a store concept, it's fatally flawed. It doesn't mean it's the only way those stores can be run as Giant Tiger's, but it is something that we're not giving up on at all that way. We just know that whatever we do, whatever the stores are, they have to be well executed, and we think we dropped the ball there and the change we've made at the leadership level isn't the be-all and the end-all. We all own this and have to come up with better execution.

So specifically to seasonal, a lot of it has to do with our markdown management, our ordering. There's somethings that back up a bit before I go on, indirect effects of China shipping rates with the tariff crunch avoidance and some delays there. But back at our, what we can control, it's the day-to-day work, we had -- we take on with our fashion managers on the floor, our store managers and the field support to make sure we're ordering the right mix, we're getting behind the key items that will drive the business. We're not shy on that. Some times when you're not a franchise, you can be shy. There's no excuse, though. We've done very, very well with this model in the past and can get back to some of the basics on how that can work for us now and in the future.

And that carries forward to the other parts of the hard goods and soft goods part of the business. It's not just seasonal window coverage, it's a huge business at Giant Tiger across Canada, and we need to get our share. There is no reason we can't, but we have to commit to the space and the quantification that will drive that business. So these are all things that's sometimes easier said than done. The individual that's coming into run the division for us did run the division for over 10 years during a much more profitable growing phase. And we have -- we believe, he is the right fit for getting back at some of these disciplines that will drive our bottom line -- or protect our bottom line, but also protect our market share.

On the food side, so the other half of the business, much lower margin, it's been at risk for a while. I think at this point that we've overmanaged the business by trying a lot of different things that impacted margin and didn't -- have not driven the traffic to the extent that they were expected to. In this case, food has to be stabilized in terms of shrink, some of the things, again, that we tried, have costed us. Our fresh meat has -- we overinvested in that program, put it into all of the stores and we've paid a price in the first half. Some of our promotional strategies were are also costly. So we're pulling back on that and, again, trying to just realizing that food still has a very important traffic-driving role, but not trying to get more out of it than it deserves and making sure that our focus on the hard goods and soft goods side of the business is where it needs to be.

From a timing standpoint, although you've heard me say this in June and I am disappointed that I got it wrong, of course, that I couldn't -- I would have -- I would not have forecasted this topic or -- that we just had, and I'm not forecasting that for Q3, as we model this out and we look at our comps from last year, which were very bad. We don't see that kind of a drag, the magnitude of the drag on the performance that we had. And just to remind investors, I mean, Giant Tiger, there's a number of things with North West. I commented at our Annual Meeting that it wasn't core in terms of our competencies. And you can draw all kinds of conclusions from that except that it puts it in a tougher situation in terms of focus, and we have to delegate that focus, we have to lean into GT and their expertise and not assume that we have it, because there's enough going on in the life of North West to build up proprietary expertise there vis-à-vis what we're paying Giant Tiger for. But it still is something that in the totality, and I'll talk about that, the back end of the business, the buying volume it creates for us, the distribution efficiencies that is material in terms of being a benefit.

So we like the volume. We obviously wanted to be more profitable. The delta on that, decline in profitability has been painful for us in terms of overall results, but we also take a long-term view. We hope our investors do as well. We know we have a very solid business. We've got a fantastic, we think, locations with our stores. We've built them out very thoughtfully in Western Canada. We've got good store teams, and we think it's -- that collection of stores, locations is still very, very valuable. And then, again, it drives efficiencies in the rest of our business, which are sometimes hard to attain given the wide breadth of how we operate. So we certainly don't take that for granted. We've put the right amount of value against that in terms of protecting it.

So that's where Giant Tiger sits. It's a focus and without being a total distraction from the other very attractive upsides we have in our business. And I think we have the right balance in place, and we're going to keep our foot down on performance improvements. And I -- when I look at Q3, Q4, I see us with much more upside vis-à-vis the first 2 quarters of the year in terms of Giant Tiger performance.

So that's the comment on -- that I'll make right now on GT and, of course, we're fully prepared to answer any questions you have. There weren't a lot of other focus highlights. We opened our 45th Giant Tiger store in North Battleford. I'll just point out that we are continuing to be optimistic and positive about our more northern and rural Giant Tiger locations and this would be one of those. We have another one opening in Meadow Lake, Saskatchewan, which, we think, will be very successful as a hub for North and Central Saskatchewan, coming up in Q4. I think with that, with those comments, operator, I'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll hear from your first caller.

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Matt Bank, CIBC Capital Markets, Research Division - Associate [2]

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It's Matt Bank with CIBC. Can you hear me? I guess, I want to start talking about the insurance commentary you had in your outlook. So we already knew that it costs $4 million more this year, but you suggested that, maybe, costs could rise further. Could you just talk a bit more about how you see insurance cost playing out in future years? And is there a chance that you could lose insurance on certain assets that are currently insured? And how all that would look?

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John D. King, The North West Company Inc. - Executive VP & CFO [3]

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Sure. I'll take that, Matt. Yes, as I've put in the -- or as we've put in the outlook there, we are seeing increasing pressures on insurance, both from a premium perspective and a reduction in capacity and writing insurance. And if you look at what's happened with -- just recently, with Hurricane Dorian, for example, and the devastation that has happened, insurance companies are cutting back on how much insurance they're going to be writing in those regions, particularly, the Caribbean. So that in and of itself, I think, is going to put more pressure on premiums, as well the losses coming out of, not only Hurricane Dorian, but go back to Irma and Maria, et cetera.

So I do see continued pressure on insurance premiums. How much that will be going forward, is not known yet. We've locked in most of our insurance premiums for the year. We do have some policies that renewed late Q2 and some that will renew in Q3. So we'll get a little bit more visibility in Q3 on that piece of it. But I do see premiums. They're not going down, that's for sure. It's a question of how much they go up? And so that's point one.

Point two, I think, it's important to focus on or mention what we can control in our business, and we're very focused on loss control. We have talked about, in the report, increasing the resiliency of our stores in the Caribbean to a Category 5 hurricane level. In Northern Canada, we've conducted loss mitigation audits from the fire risk perspective and making changes there. So everything that we can do to control and reduce the risk of loss. That's what we're doing. But there's some global conditions here in insurance that are continuing to be at play.

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Matt Bank, CIBC Capital Markets, Research Division - Associate [4]

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Okay. And then in terms of the capital investment on your end, is there an estimate you could provide in terms of annual CapEx or anything like that in terms of weatherproofing your assets?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [5]

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The amount of the program -- maybe, John, you can comment how much we spent this year, and what we're forecasting next year for that. It's not significant, but it's a few million dollars.

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John D. King, The North West Company Inc. - Executive VP & CFO [6]

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Yes. It would be -- like, the hurricane resiliency piece is this year and that once we do that then that will be behind us. It's about CAD 3 million on that piece of it. Ongoing in Canada, we would expect that CapEx to run around $2 million to $3 million in terms of Northern Canada. And I think that work will continue on certainly through this year and into next year as well.

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Matt Bank, CIBC Capital Markets, Research Division - Associate [7]

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Okay. And then I want to shift to Giant Tiger. I guess, first is, are you still playing with the strategy in the store model in Giant tiger? Or with the new leader, are you getting towards a point where you're looking to execute on the plan?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [8]

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The plan is being focused on for quite -- for about 2 quarters already and is simple. The main parts of it is gap closing with like type stores and Giant Tiger East that we think are -- should be the ones that we chase in terms of the performance and execution. So we break down where there is a gap, it could be by a class, department, the category. It could do with margin rate or sales per store. And we -- then we get further into details of why we're falling short on what should be a comparable performance. That's been going on.

What we're not happy with is the focus on execution at store level. And the way we're structured on this, we have a President of Canadian Retail with 2 divisions, Northern Canada Retail and Giant Tiger, essentially. And his time has been pulled more into GT and then, of course, working with the Giant Tiger team. The leadership change we've made is at the VP of the Giant Tiger team level, and that individual, again, as I've mentioned, has a lot of familiarity with the Giant Tiger division, hasn't been directly engaged in it for some time. So we've given him the accountability to get this plan fully executed, but also to step back a little bit. We don't want to do a complete step back, because we think we know what we're supposed to be doing here. But he is the first and that's walking the stores all the time or will be. And through his eyes, we want to make sure that we haven't missed anything.

So I think, inevitably, there are going to be a few small tweaks to where we focus, but it's not like a -- take 3 months and figure this out. We have targets to hit on a daily basis in somethings and he understands that. So I think, it'll be 80% we're doing already better, and 20% if we find some new ideas, we're going to be open to those.

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Matt Bank, CIBC Capital Markets, Research Division - Associate [9]

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Okay. And when you think about the improvement in Q3 and Q4, is that more about just lopping the easier comparables? Or do you expect the execution to improve in the near term?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [10]

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Yes. I think it -- I'll expect it to improve. The factor is what's our confidence level near term, all right, medium and long. I know these store assets, I'm going to call them that, or the Giant Tiger part for a second are -- have lots of potential, financial potential. And short term, quarter-by-quarter, I can't ignore the lapping part. It's very defensive, but it's just downside mitigation that it's just the financial fact, I guess, that we're -- you start to balance along the bottom more or less. So that's behind us. That's there on the forecast side, but we've learnt and everybody has gotten more tuned in and experienced on how to manage this, who are directly involved.

And putting the President of Canada Retail, who is -- he's lapped one year in his role and although there's a lots of upside in Northern Canada, he knows that the GT has as well. So he's had to learn to adjust our EVP of food, who plays a key role in all this. She was new to the business and there's been some learning adjustment there. And I think that's part of our situation is that we've had some new people enrolled and they are very, very capable, but they're still new to the situation. So that -- I think that learning gets accelerated and we -- mistakes get fixed quicker, and we get dialed in faster.

So that gives me more confidence on execution improvement in Q3, but based on what's just happened in Q2, I'm cautious and -- so there's -- the shock absorbers, just the weak comps that we're cycling through in terms of downside protection. The upside, I'm still waiting to see this cash flow over. We build a momentum on our start execution, and we start to see this turnaround and pickup improve store-by-store. So I won't say that yet. I haven't seen enough of it.

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Operator [11]

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(Operator Instructions) We'll move to the next caller in the queue.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [12]

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I just want to start by following up on a few initial things. So just to clarify, for Q3 and Q4, in Giant Tiger, you're saying that, yes, the comps are so easy that you should at least be able to do as well as last year, but you're just not sure how well -- how much improvement you can get at this stage?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [13]

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That would be our going in position on Q3 and Q4, yes.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [14]

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And, sorry, the management change. Who is running Giant Tiger now? And what was he...?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [15]

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His name is Scott McKay. And he was -- he joined us last -- or early 2000s. He's been away from North West for 2 or 3 years, moved to our International division. He was -- after -- he ran Giant Tiger for about 10 years and was also VP of Merchandising in Canada and in our International division.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [16]

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He was outside the company for the last few years and is coming back in?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [17]

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Yes.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [18]

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All right. And you talked about markdown management issues at Giant Tiger. Can you explain a little bit more about exactly what your -- what the issues were?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [19]

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Yes. I mean, it's more aggressive markdowns coming out of June with the weather and having slow traction. We -- I think, we've sized that up as being an overcorrection. And I think there is -- part of this led to our change on the team. I think the team has -- was getting skittish on being long on merchandise coming out of the winter and not wanting to be long again going into fall. They certainly aren't and then overcorrecting.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [20]

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Okay. So I guess, with the management, is it the management change that you think is going to help correct that? Or is it other initiatives being implemented?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [21]

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Well, beneath the management change are the initiatives, and it's -- and we think are the right ones. So we had, as an example, for the better part of a day with Giant Tiger executive team that's accountable for buying and merchandising. So we sat down with them 2 weeks ago and planned -- and looked at where those gaps are. Many -- most of them were known to us, but just being very, very dialed in on that. So that plan has been worked.

Part of it is prioritization too and that was my earlier comment about focusing on soft goods and hard goods and not, I'd say, overmanaging food, not trying to be too aggressive with food promotionally and putting too much emphasis on categories that are riskier, like, fresh meat; shifting the manager's attention, making sure that it's on soft goods and hard goods on the floor of the store and just totally buying into that. So that's a softer thing, of course.

But then within the soft goods and hard goods, has been very, very focused, on which areas of the business we want to make a difference on. Sometimes I feel like we could swing a cat and it could hit something that we could improve, and you can actually, but it's something that's bigger than others. So it's that kind of focus. And I think when you have the negative comps and it hurts the business overall, people can start -- careful they're not running around with their heads chopped off and try to do 10 different things half well. So, of course, that's on everyone, including myself, just to make sure that's a steady hand approach. And again, I mean, in the translation of what I'm saying now to one of our stores in Winnipeg this morning, there's a lot of people between that and the key -- one of the key drivers or translators is the VP role that actually runs the division. So we want to make sure we have total confidence in that person's ability to put the plans in place, and we weren't there for different reasons until this week, actually.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [22]

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So when you talk about poor assortment management, that's what you're talking about in terms of your mix between food and GM and the hard and soft goods categories.

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [23]

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Yes. It's where you -- what you put your display face into, it's where you put your dollars for inventory, it's your commitment to programs that when you track GT's success and it's not that they have success everywhere, you -- but you got to take advantage of the information that goes with the franchise model and really, really work that hard and it's a discipline. There's also -- you got to be thinking like an owner. I mean that's another thing that -- from day one, we know these stores are corporate stores, that GT has a strong franchise and a lot of them also run corporate stores. So we got to make sure that we have the enterprising mentality in our stores. And we're not -- again, we're not just directing people to do things. We have strong suggestions, but we also want them to be free to do what they need to do. So part of it is also checking into make sure that we've got -- I think we have very, very strong people, but have we kept their education, their -- sort of, their training upped on these different areas of the business. So the next week, they will be in Ottawa, for a mangers/owners meetings. And again, it's a chance to catch up on better practices. But we have to do a deeper dive to make sure that our managers understand what the drivers are. And, again, that's the part of Scott's job beginning this week.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [24]

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Okay. And, kind of, outside of Giant Tiger, in your strategy commentary, you talked about moving more authority in the business to -- closer to the different banners or regions, communities. But in the past, you've also had trouble attracting and keeping strong local management in some of these remote regions.

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [25]

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Right.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [26]

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Now what -- are you not concerned that moving too much authority into these areas is going to -- if you don't have the right people in place, or are you just comfortable now that you have the right people?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [27]

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Well, if you were a fly on the wall, John and I would be (inaudible) have heard that discussion and John may want to simplify the business further and not give us much authority, not to put him on the spot. But I come from the other side and -- but absolutely, no, I would not put the authority in where the capabilities doesn't exist yet. So it's a walk and chew gum kind of thing where we know we've got stores that have that capability and stability, so let's double down on their, I use that word, authority, but let them drive more of their -- pull more of the merchandise into the store instead of us trying to push it from the Central. Where the store doesn't have the capability yet, because of turnover and maybe even fit for role, then we're looking to push that authority down to the regional level so empower the Sales Manager for that region or that group of stores to make some of those calls for the stores. The way we see it, at least, they're closer to the action than the buyer who is -- I still haven't seen yet the software template that localizes the way we want to. So we know we have to get you in the incentive just to keep -- we look at these stores that have the capability and that's our #1 priority. You have heard me say that for the Northern business, anyways. And I think we're fine with Dan McConnell, who is the President of International. He's recognizing -- it wasn't his first priority, but he's trying to operationalize his competitive strategy in CUL and really push that localization into Alaska. It's becoming his -- he's finding the right individuals that will come into Alaska that will be part of our team, super-entrepreneurial. And what we're finding is the retail background is increasingly less important than the enterprising mindset. And the -- just the driver that would say, I'm really happy being in this kind of a setting, a little bit -- it's -- obviously, we're off the beaten track for some people, even when we look that way, but certainly Anchorage and where we do business.

So we're really finding those folks that like that, kind of work and can thrive in it. And we have many, many that do so and we know what it looks like. But no, we're not going to squish out, we're not going to localize buying decisions or quantification decisions where we don't have the people yet in place to do it well. So it's going to be a hybrid approach.

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Operator [28]

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(Operator Instructions) We'll move to the next caller. Please state your name and the company.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [29]

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It's Stephen MacLeod from BMO. I just wanted to follow up on the Giant Tiger. And I'm sorry if you've already -- I'm sorry if you've covered this in the last, sort of, questions. But can you just talk a little bit -- one thing I was always interested in is, in your prepared remarks, you talked about overmanaging the food side of the business and it hasn't really driven traffic. Can you just talk a little bit about how you are approaching the food side of the Giant Tiger business to drive traffic higher and potentially move away from it?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [30]

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Well, I think, we're recognizing that half the basket don't have food in them at all and the crossover is there. But it's -- in terms of who puts soft goods in a basket as well as picks up a produce or a cereal, it's not -- it's a meaningful percentage, but it's not enough that you should just be completely fixated by that. So our -- my point here is that when you tweak something, when you just say that -- we have -- we took all the fresh meat out of the stores. In fact, the decision was made for us 2 years ago by the supplier, because they decided to supply China, maybe not the best move now. But the -- so now we're scrambling. We have no supplier -- because we have no supplier for case-ready meat, so then we find one a year later. Meanwhile, we've lived with resetting those 12-foot cases, 8-foot cases with a different offering. And now we're feeling gee, we want to have our -- shoppers needs meat in their baskets.

We need -- but we're not a full shop. I think that's the other aspect we got to keep reminding ourselves. Obviously, we have limited space that we've dedicated to food, means that we're not the only place they're going to go for food. Can we be the first place they go? Aspirationally, yes. But realistically, we're -- people are going to come means we've got great food deals and we're reliably in-stock, it was used to being in Stockton in North to the Giant Tiger stores (inaudible) where they're located. And our prices are right at a discount level vis-à-vis the other discounters in the market.

When you get past that, so, for example, in the meat, you put the meat all -- now you go back to meat, because you've got a supplier and you remember why meat wasn't so great. It's the ordering, the shrink both the -- shrinking out from a staff standpoint and the waste and spoilage. These kinds of items in our stores are just going to go slight (inaudible). Given where our stores are located are highly problematic from the staff standpoint. And we've had a number -- a very large spike. We've had to invest in different safety and security measures, not just because of the fresh meat, it just -- part of it is because of the meth usage in cities like Winnipeg and Saskatoon (inaudible) some of our downtown stores.

But -- I mean, said all that, my point to this is trying to do too much in a very small space for food, trying to replicate too much of a full supermarket and not playing to your strengths. Again, the strengths would be great prices, convenient locations, consistently in-stock, solid promotions, but not too cute in terms of couponing and multi-buys and then move to the rest of your store and do that really well. Because there's a lot of gold to mine on the hard goods and soft goods sides of the store.

So by overmanaging, that's what I mean. I don't want to say much more about that, because you just can't leave it alone. It won't run itself. But I think we're recognizing that we want to be able to protect our food margin, be price competitive in the market, but spend our time on the selling floor. And if you put more fraction to your store by the way, then, of course, that brings more management.

So we had a produce initiative. It was okay. We drove some good produce comps, but we weren't seeing the basket fill up on this side of the store, where there's more money being made in the produce, is not the -- a margin play that it would be in a supermarket, because we only have the best sellers. So it helped against the lower base. But, I think, again, it took a lot of management time to make that produce work well. And we have to be very, very honest about whether it was a limited time on the managers day or they should be getting their sales. So without -- I could go on with a few more examples, as this is pretty granular, I know, but you -- just to give you a flavor of how that shift might look going forward.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [31]

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Okay. That's really helpful. So would you expect then that you would be moving away from fresh meat and more to not...

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [32]

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We're looking at de-skewing the stores that are -- some stores will get out of it, but some will be de-skewed in terms of higher shrink items and certain cuts that just aren't carrying their weight. So simplifying it further, making that call store-by-store. On the produce side, it's about saying, "Okay, are we -- how much labor can we put into this department? Can we make it simpler? And maybe, we are being too -- or the bargain side is too high given the labor we have to put into it and the attention it requires from the store manager." So it's -- some of these things, you just don't -- you don't go to the other side of the ditch, but it's -- it literally comes down to how many hours of the manager's time is involved in this and then looking to take a hard, hard look at shrink, because that's another point that's been really disappointing as the shrink that we've taken in food. We should not have done that. I mean, there's some risk you've got to take. But if I look at it cumulatively, at our year-to-date shrink, it's just unacceptable. So if I go and find where the culprits are, they were all walking around in the produce and the meat department.

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Operator [33]

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We'll move to the next caller in the queue.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [34]

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It's Van Aelst, again. A few more questions. So are you going to quantify at all, like, how much of an impact the markdowns at Giant Tiger had on EBITDA?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [35]

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I don't think I want to break out the variances inside of the Giant Tiger. I mean it's -- we don't do it in totality, never mind within, but we've highlighted the key factors that affected performance at Giant Tiger. And then it's -- in aggregate, it affected our overall performance, but I won't -- I don't want to get into each of these.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [36]

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All right. St. Thomas, is that store still on scheduled to open in Q4?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [37]

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Yes. I think it's November -- I'm not really sure whether we've announced it in the market. I don't think we have, but it's opening in Q4. Opening in early Q4, put it that way.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [38]

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And then you talk about, also in the strategy section, about optimizing your air cargo capabilities. So what's left to do now that you've got a lot of the stuff going to Harriston here and you guys have capacity up?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [39]

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Sure. I'll just take a couple of minutes on that. I think, the -- there's a lot to do as it turns out. We've -- we keep tuning over ideas and one is the, I've talked before, it's more seamless integration where plane-ready pallets go right on the plane, right off the plane. We're looking at -- I would just say, without -- because some of the stuff is quite innovative and we don't want to talk about it that way specifically, but a big factor for us is optimizing the weight on the plane. And it's just -- the point we'd say is that when it's a third-party carrier, the weight is not their problem, it's your problem, they charge by it. And the collaboration to optimize is not -- there is no unnatural incentive for that because you pay and the -- but they charge you and you're figuring out stuff from a different lens. So we've just had this hammered home through the airline actually, and they've got very strong people letting us know how this works.

And we've got some ideas that we're working on, that I think are innovative. They could have a major impact. I'd like to talk more about them, as we roll them out. I think that what we're doing is completely lined up with building a superior air cargo capability. And I'll just stay on this point that no one is doing this in Northern Canada, while Cargojet, of course, is a pretty successful cargo airline in the South. In Alaska, you do see dedicated cargo carriers, some are multimodal, like Lynden Transport, it's air, road and water. And it's just the power of focus that we're starting to take advantage of. So I apologize for being general, but I don't want to be more specific for almost competitive reasons.

The other point I want to make, it was not your question, but I think, I better -- I want to bring it up and that is that as we look at air cargo and the size of our business, so we've moved over to North West 100% of the cargo in North West, Ontario, Manitoba and regions of Nunavut with the exception of just some communities in Baffin Island. We used a Cargojet plane to fly freight from Winnipeg to Iqaluit as well, which is a big road for us.

So now, here we are, and now we're -- your question was about optimization. Scale is another factor on our minds, and it was always there. And we talked about further phasing and what I'm describing about cargo growth is now third-party cargo growth, but there's another point to this. We had a plane and we didn't -- it wasn't material. But I'm going to -- so last year, we had some account situation with the ATRs and trying to figure out how to move from a third-party maintenance to an in-house capacity, dealing with all that disruption. This year, we had a plane that had an emergency landing in a lake, not an ATR, one of the Baslers. That plane is actually out of the lake, toed back to the airport and down in Wisconsin at the Basler factory, getting retrofitted. It should be back in the air within 30 days. But it is out of the air. It was in the water for a few weeks, for 4 months. So what, well, we've covered off the fleet, covered that off, the quarter was pretty good, but it's tenuous in the sense that if we had another plane issue, it's not a big fleet. So bigger is better for efficiency or redundancy risk mitigation and for growth, because we see the north is very, very active for cargo needs, both sealift cargo and air. So we're exploring different ways to grow the cargo business for all of those reasons.

It's not a dire situation in terms of, are we just upside down on our fleet size, but seeing how this plays out, and I -- and by the way, the efficiency improvements that I've -- didn't get into detail on, are really important, because if you think about weight and the number of -- likes it cuts in -- it improves the efficiency of the planes, so you can use fundamentally less aircraft. But if an aircraft is down, that's just a risk that we've got to be able to model out and make sure that we've got capacity to cover it off.

And again, and that -- against that backdrop is that there aren't a lot of planes just hanging around that you can call up. But it used to be like that according to the very experienced folks who run an airline, but it's not as easy today. So you better have some of your own equipment then you can reposition and make sure it's there to carry the North West freight or wherever your customers are to live up to your standards of performance. So that's also something that we're looking at in the airline.

Now, you can say, what is that from a forecast standpoint? It may have some capital investment implications, but it would be for the right reasons to grow the business. This is not defensive, like, what I'm talking about is to grow profitably, but also in a way that reduces the risk of your current size. And we're having those discussions. We're planning that with the team. It's all part of the long-range plan anyways that we would go to third-party customers and add capacity, but having seen now just over a year of some risk that did us, some that could've, I am more convinced than ever that we need to be bigger for all those reasons.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [40]

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Okay. And as far as the Amazon made an investment in Cargojet, so does this -- do you see this getting Amazon into Northern Canada in a more efficient way? And will they become a competitor, again, in some of these markets?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [41]

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I don't think so. I think the Iqaluit road today where money is being lost by someone in buckets through the Amazon prime membership, there's probably millions of freight dollars being absorbed by someone, I mean, Amazon (inaudible), I don't know, who exactly. That model won't be replicated across the rest of the Northern Canada. The Iqaluit is a bit exceptional, because it has frequency that is justified by the size of the market. When you get in the smaller markets, frequency does drop off, but we're doing twice-a-week service. We think that's sufficient -- sorry sufficient and efficient. And you can overservice the community and it will be tough economically, and doesn't really -- and isn't sustainable. So when you get into the size of communities we serve, and you move to an e-com model and, believe me, as you would expect, we're always modeling this. If we don't -- it's not like we have dealers who don't want e-com, we'll do whatever the customers' need that works for them, but the frequency part comes up again and again. There's only so much you can do on a frequency basis, and then there's the perishability of the product when it gets to the community, where is it going to go next, et cetera. So there is challenges to the model and then it bucks up against the way our customers actually shop.

And psycho-graphically, when you look at that who shops e-com, it's not our customer. So our goal is to drive down costs. And we don't want to -- it's not that we're not tied to legacy bricks and mortar, we want to lean out our bricks and mortar as much as possible and get our cost continually down still with the margins that we need to get a return, but grow our share in the North. And keep testing and modeling with the customer, like, will they forward-buy, will they pantry load, if their homes are tight, overcrowded actually, where does the food going to go? And if you don't have the economic capacity to forward-buy it, then our job is to get you the best deal through the bricks and mortar or some combination of it.

So I think the -- we are watching what's going on with Amazon and never take them for granted. But you can overreact to this, too. So we want to be the best. And I think the other way is to look at this, if you look at the value chain of North West, and I tried to get into a bit of the AGM and so your plan, buy, move and sell, the retail value chain, we have been increasingly breaking it down within plan, buy, move and sell. The sell, we feel we have to continue to own, although we could model different compensation and quasi-ownership franchise models with our stores I talked about decentralization, localization, but we -- that's, that's IT, that's competitive advantage for North West. On the move, the outbound move, you've heard that before, that is the vertical investment in United States, that's a very important differentiator. There's a lot of spend in that part of the value chain that you can scale relative to anybody else, actually. When you get to the inbound in the distribution, that's scalable that we -- that's a scale that we can achieve to get to an efficient DC, the amount of volume you need to get to automation, robotics and in the inbound side containers from China. That's not where we're going to -- that's very outsourceable for us with the right partner.

So you go through it. Then you go to the plan and buy. On the plan side, obviously, we should know what people are buying and want to live with in the North. That's unique lifestyle needs. But broad trend, i.e. bicycles, we've got to buy it from someone else. So our goal on the, what I call, broad trend buying is to get together with somebody, whether it's Giant Tiger, Canadian Tire, Home Hardware. Today, we use some distributors. Our goal is to talk to essentially noncompeting retailers and try to strike the right arrangement on the pure buy side, because we'll never match the scale. We could localize it into the right communities in the right quantities. So we take apart each of those parts of our value chain. We're looking at what do we do ourselves, what's down the road do we partner with others on, and certainly, the air cargo was one that we want to do ourselves.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [42]

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And just one last, hopefully, short question. The -- I think in the last quarter conference call, you hinted that you're looking to get a better deal with Giant Tiger East. I'm not sure if I misunderstood you or not. But can -- if that's the case, can you give us any update on that?

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [43]

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Yes. I don't -- I'm sure I didn't say better deal just like that. But I -- the point there is to have good discussions with Giant Tiger that lead to something or go a different direction. And I alluded to, Giant Tiger's got some very good assortments that could work in the North. There were other retailers that we could -- we can take their mix into the North, including -- and the Caribbean actually. So it's trying to actually lean into GT in the way that we're paying the royalties for, as they support our business, that they want us to win, not just collecting the royalties, of course. But they have a very strong stake, I think, in the brand and what's being developed in Western Canada and what can still be developed. So it's just having a very good connection with them. They've -- and it's been okay, I mean, we now have a new President at Giant Tiger, as of August 1, and we've had some good discussions. So I'm hoping that we can get more action plans in place. We're not the only thing they do, of course, they've got other markets in Canada, but it's more optimizing the relationship for both sides. And we both have scale that we can share potentially. These are the things that we're exploring and we will see where that goes. But it's -- that's, kind of, the waterfront of our discussions right now.

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Operator [44]

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At this time, there are no additional callers in the queue. I'd like to turn the conference back over to Mr. Kennedy for any additional or closing comments.

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Edward S. Kennedy, The North West Company Inc. - President, CEO & Director [45]

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I don't have any additional comments. I appreciate all the questions, and if there's follow-up, of course, as usual, please contact either myself or John, directly. And we'll do our best to answer your follow-on questions. Thanks very much, and we'll look forward to being on the call with you in December for Q3. Thanks.

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Operator [46]

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That does conclude today's teleconference. We thank you all for your participation.