On Wednesday, North West Co (TSX:NWC) discussed second-quarter financial results during its earnings call. The full transcript is provided below.

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Summary

North West Co reported a 5.4% increase in EBITDA and a 5% increase in adjusted net earnings driven by strong same-store sales gains in both Canadian and international operations.

The company faced challenges from higher fuel prices, which impacted gross profit and expenses, with a 6% increase in selling, operating, and administrative expenses.

Future outlook includes continued impact from First Nations Child and Care settlement payments in Canadian operations and strategic aircraft purchases for North Star Air to reduce leasing costs and enhance operational efficiency.

The Next 100 initiatives positively impacted gross profit, helping to offset higher fuel-related costs, with ongoing focus on staff productivity and expense management.

Management remains optimistic about sales performance and is focused on managing cost pressures and executing strategic initiatives to support growth.

Full Transcript

OPERATOR

Please be advised that this conference call is being recorded. Welcome to the North West Co second 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.

Dan McConnell — Chief Executive Officer

Okay, thank you, operator. And good morning everyone. Welcome to the North West Co second quarter conference call. I'm joined here by John King, our Chief Financial Officer, and Alexis Cloutier, our VP of Legal, General Counsel and Corporate Secretary. I'm going to start by asking Alexis to read our disclosure statement.

Alexis Cloutier — Vice-President, Legal, General Counsel and Corporate Secretary

Thank you, Dan. Before we begin today, I remind you that certain information presented may constitute forward-looking statements. Such statements reflect North West Co'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.

Any forward-looking statements are current only as of the date they're made and the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise other than what's required by law. For additional information on these risks, please see North West Co's annual information form and its MD&A under the heading Risk Factors.

Dan McConnell — Chief Executive Officer

Thank you, Alexis. I'm going to begin with our consolidated results for the quarter followed by some comments on our outlook and then I'm going to open the call up for some questions. Overall, we delivered solid results for the quarter driven by same-store sales gains across our business that contributed to a 5.4% increase in EBITDA and a 5% increase in adjusted net earnings. These results were delivered within a challenging inflationary cost environment and it was impacted really by higher fuel prices which contributed to sales gains but were also a headwind for our gross profit and expenses.

We also had a few factors below the gross profit line that largely offset each other with the exception of a non-comparable withholding tax expense which reduced the flow through to the net earnings in the quarter. With that overview, I will provide some more context on the key factors impacting our results in the quarter. Consolidated sales in the quarter were up 5.4% driven by strong same-store sales gains across our business with Canadian operations same-store sales up 7.4% and international same-store sales up 5.8%.

The impact of fuel-related freight cost inflation and retail prices contributed to higher sales in both Canadian and international operations. In Canadian operations, food and general merchandise same-store sales gains of 7.4% and 7.5% respectively were also impacted by the Government of Canada grocery and essential benefit payment to qualifying individuals which increased compared to the previous GST credit, and from lapping wildfire-related community evacuations in Northern Canada in the second quarter last year.

These factors were partially offset by the closure of our store in Fond du Lac, Saskatchewan in the first quarter. In our international operations, same-store sales were up in all of our business units driven by solid food sales gains and very strong general merchandise sales, driven particularly in big-ticket categories such as motorized. Sales were impacted by local economic conditions in the communities we serve. For example, higher oil prices have had a positive impact on regional corporate dividends in Alaska, and although the second quarter falls within a lower tourism season in the Caribbean, the economic environment does remain strong in most markets. In addition, we've also gained some market share in certain Alaska stores. These factors more than offset the sale of one of our Cost-U-Less stores earlier this year in advance of our new store in Guam, which opened on August 28th. With that overview of the key factors that contributed to our sales gains, I'm going to briefly comment now on consolidated gross profit and expenses. Consolidated gross profit increased 5.7% and improved by 8 basis points as a rate to sales.

This reflects the sustained positive impact from our Next 100 initiatives including refinements of our merchandise assortment and procurement, expanding our private label offering, as well as some changes in sales blend. These improvements were largely offset by the impact of higher fuel-related freight costs. Let me just expand on that point. As we discussed in our previous calls, the impact of fuel-related cost increases varies by market. In northern markets, fuel-related cost increases have a greater impact because of the longer, more complex logistics network required to move merchandise to northern communities in Canada and in Alaska.

On the other end of the spectrum, for certain Caribbean and Pacific markets, the impact of higher fuel prices has been less pronounced, allowing for a more direct pass-through of fuel-related cost increases. As a result, we took a balanced approach to pricing. Higher fuel-related freight costs were passed through without an additional markup and we made targeted price investments on certain food items to help reduce the impact of higher fuel costs for our customers.

While this created some near-term gross margin pressure, particularly in our Canadian operations, it is aligned with our customer value proposition as a leading retailer in the communities that we serve. Higher fuel costs were also a factor in expenses. Selling, operating and administrative expenses in the quarter increased 6% and were up 13 basis points as a rate to sales compared to last year. The increase was driven by a few factors. First, we experienced higher staff costs net of Next 100 productivity gains.

The increase in staff costs reflects a combination of wage inflation, resources required to support business growth, and operating requirements across our markets, particularly in the northern regions. Staff productivity measures improved from the first quarter, but there continue to be opportunities for improvement which will be a focus in the back half of the year. In this quarter we were also impacted by higher depreciation expense, mainly related to store renovations, an increase in fuel-related utility costs and other inflationary pressures.

In summary, even with the headwinds from these cost pressures, we were still able to deliver a 5.4% increase in EBITDA and a 4.7% increase in EBIT, and a 5% increase in adjusted net earnings when excluding the non-comparable withholding tax expense. Now I'm just going to wrap up on a few comments on the Next 100 program and then open the call up for questions. Looking ahead, there are a few key factors that we need to consider. First, we expect that our Canadian operations will continue to be impacted by increased consumer demand arising from the First Nations Child and Care settlement payments.

As we noted in our report to shareholders, the issuance of Child and Care settlement payments to customers in the communities we serve started to increase late in the second quarter compared to the trend over the last two quarters, but the impact was largely offset by a decrease in the First Nations drinking water settlement claim in the quarter compared to last year. The Child in Care Claims Administrator reported that approximately 124,000 claims have been submitted in the Removed Child class.

Based on the Child and Care settlement payment activity observed to date, individuals in 54 of the 63 impacted communities that we serve have received funds. However, the number of payments distributed remains low in many of the communities. Based on the activity to date, the sales capture and customer spending patterns observed are broadly in line with our expectations. Overall, we expect the distribution of the Child and Care settlement payments to continue to increase in the second half of 2026 compared to the first half and extend for a number of years in front, and this is based on requirements for the individuals in the Removed Child class to reach the age of majority before payments are issued, combined with the anticipated opening of the application process and distribution of settlement payments for the other classes. Excuse me. In addition, the approval of the Agreement on the Long-Term Reform of First Nations Child and Family Services between the Government of Canada, First Nations Chiefs in Ontario and Nishnawbe Aski Nation will benefit Indigenous peoples and communities that the company serves.

These benefits will come directly through programs and indirectly through investment in infrastructure and local employment. However, these benefits are not expected to begin until 2027. The headwinds from the impact of higher oil prices and fuel costs that we experienced in the second quarter are expected to continue in the near term and, as I mentioned earlier, we are managing these pressures through a balanced pricing approach and are focused on finding opportunities to help mitigate the impact of these costs on our customers and shareholders.

As noted in our report to shareholders, we purchased the Basler VT67 aircraft in the quarter and we expect to make some additional aircraft purchases as part of our cargo and passenger fleet renewal at North Star Air. The upgrade and renewal of our aircraft will reduce our utilization of lower-margin leased aircraft and are expected to provide lower operating costs and enable efficiencies in maintenance and parts from greater standardization in the fleet.

Obviously, and as the new aircraft are put into service, this will be a big benefit for us for sure. The fleet renewal is also expected to provide additional capacity to support future growth for the business. The purchase of these aircraft has been included in our revised capital expenditure outlook for the year. However, the timing of the purchases is depending on the availability and finding the right deals for the aircraft. Finally, with respect to the Next 100 work, we are pleased with the positive impacts on gross profit which have helped to reduce the headwinds of higher fuel-related freight costs I highlighted earlier, and we remain focused on driving further staff productivity gains and expense management to help offset inflationary cost impacts in the business. In summary, we're definitely pleased with the strong sales performance and delivering an increase in earnings within a challenging cost environment. Looking ahead, we remain focused on the factors within our control: serving our customers, managing cost pressures, executing Next 100, underpinned by discipline in capital allocation.

With that, I'm going to open the call up for some questions.

OPERATOR

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we queue the Q&A roster. Our first question comes from the line of Stephen McLeod with BMO Capital Markets. Your line is now open.

Stephen McLeod — Analyst at BMO Capital Markets

Thank you. Good morning. I just wanted to ask about the trend you're seeing in higher Child and Care settlement payments coming through late in the quarter. I know you gave a little bit of color on the call, but I'm just curious if you can give some color around how you're expecting that to ramp into Q3 and Q4 and then what sort of spending patterns are you seeing from claim recipients?

Dan McConnell — Chief Executive Officer

Can you repeat the end of your question? Sorry.

Stephen McLeod — Analyst at BMO Capital Markets

What kind of spending patterns are you seeing from your claims recipients and, I guess, capture rate as well?

Dan McConnell — Chief Executive Officer

Yeah, so, like I said, we are pleased with the capture rate for sure. It's in line with our expectations. As I mentioned, some of the ideal items that we typically see moving when people came—we anticipated when people came into the money—are definitely moving. We're getting our fair share for sure, Steve. And yeah, it was late July on into August it started to uptick a little bit and so definitely pleased, anticipating and hoping that it sustains at this rate or hopefully even better over the next number of quarters.

But it's—as you know we've been kind of trying to predict the trajectory and cadence of these payments over a number of quarters—probably better—without much success. But right now the good news is it definitely increased, particularly in August onwards, as it was prior.

Stephen McLeod — Analyst at BMO Capital Markets

Okay, that's great. I noticed you called out increased motorized sales, but I was just curious, did I understand—is that isolated to international, or do you see that in Canada as well?

Dan McConnell — Chief Executive Officer

No, Canada as well for sure. Yeah.

Stephen McLeod — Analyst at BMO Capital Markets

Okay, that's great. And then maybe just finally, on the increased capex. Sounds like it's mostly related to North Star Air and you made an interesting comment about it being positive to the margin profile—it reduces your utilization of leased aircraft. I'm just curious if you can quantify what that margin profile looks like. Just trying to get a sense of the returns on that incremental capex.

Dan McConnell — Chief Executive Officer

Why don't we do this? We'll tell you when they're in action, when they get into the flight plan. As far as giving you any kind of quantification at this point, we would stay away from that. Yeah. But we'll let you know when they're in action.

Stephen McLeod — Analyst at BMO Capital Markets

Okay, thanks Dan. Appreciate it.

Dan McConnell — Chief Executive Officer

All right, thanks, Steve.

OPERATOR

Thank you. Our next question comes from the line of Cheryl Zhang with TD Cowen. Your line is now open.

Cheryl Zhang — Analyst at TD Cowen

Hey, good morning Dan and John. Thanks for taking our questions. So my first one is on the SG&A. I think SG&A excluding share-based comp is up and you pointed to labor costs and fuel cost inflation. I'm wondering if you could help us get a sense of the magnitude of those cost inflation. And which one do you think was a bigger contributor?

Dan McConnell — Chief Executive Officer

Depreciation was up there. Labor is definitely something that we want to get a handle on. Utilities were up. I mean, we look around, but I'd say some of the factors that we're going to be paying close attention to—the ones we can control—certainly labor is an opportunity for us to get back in line, as there's a lot of events that occurred. We had some major renovations that we needed to make sure we were ready for, and so we had to increase our labor there.

I would say labor is the one that we want to make sure we get our arms around in the future quarters. Like I indicated, it was something we've been focused on prior quarters. It's better than the previous quarter, but we still know that there's opportunities for improvement there.

Cheryl Zhang — Analyst at TD Cowen

Okay, understood. And then how much pricing did you pass through in Q2 and how much more do you expect to do in Q3? Was the fuel cost entirely passed on or what's the consumer reaction thus far?

Dan McConnell — Chief Executive Officer

That's a great question. The consumer reaction is negative. People are certainly not pleased, as any Canadians are not pleased with the inflation that we've experienced recently. I would say we passed on a lot of the inflation, excluding some of the key categories, essential items that our customers obviously need and want, particularly in Canada. I would say a lot of it has been passed on, except for some of those key categories. I guess I wouldn't quantify it.

I mean, in the international division, I would say, yeah, pretty much—I'd probably say at the same rate with the same philosophy, same strategy in place.

OPERATOR

Thank you. As a reminder, to ask a question at this time, please press star 11 on your touchtone telephone. Our next question comes from the line of Ty Collin with CIBC. The line is now open.

Ty Collin — Analyst at CIBC

Hey, good morning, guys. Thanks for taking my questions. Maybe just to circle back on your comments around the settlement payments and the acceleration that you've seen since August. I mean, we know that these payments have tended to be kind of lumpy in the past. So I just want maybe a little more clarification on what gives you confidence that there's actually been sort of an inflection in the rate of those payments rather than maybe just seeing a bit of lumpiness over the last month or so?

Dan McConnell — Chief Executive Officer

Are you talking about in the future, or what gives us confidence that we have seen more payments over the last—like I indicated—last couple of months? Sorry, just to be clear. Yeah, we are very comfortable that the cadence of payments has increased, as I indicated, kind of late July and into August. Is that your question? Are we clear, and do we think it's going to be at that rate onward into the future? Is that—sorry, Ty—is that your question? Optimism. Yeah, I mean, I think now, just thinking about your question, I think it's because the large number of applications that have been in versus the few number of applications that we feel have been processed. As we've experienced—like, you know, I kind of gave you the numbers. As I indicated, a lot of the markets have been touched—not all of them, maybe 75% if you did the math—but in a lot of the communities we've only seen a small number of checks come in.

So now that the—and we know there's been a lot of submissions—so I'm just using logic and I would say, okay, so we've seen a few, we know that there's been a lot of them processed, but now maybe the program and the system is getting into an efficient state, and we expect there to be—hopefully—and again it's not busting the doors, but it's been a reasonable increase from previous quarters. So I'm just saying that I would hope that this is the new kind of baseline moving forward.

But again, I mean, you ask a question—I don't know, I can't say for certain that there's not going to be some more troughs in there—but I would think that they're learning. The applications have been made and I don't know what would hold them up. That's probably as good an answer as I can give you.

Ty Collin — Analyst at CIBC

Okay, great. No, that's very helpful color. Thanks for that, Dan. And then just looking at the same-store sales growth numbers this quarter—obviously quite strong—I'm just wondering at a high level, how much of that would you attribute to the fuel surcharges that you passed through versus sort of tonnage or some of the other growth drivers that you talked about?

Dan McConnell — Chief Executive Officer

No, I mean—it's still a healthy sales increase excluding the pass-through of the fuel. I would say, yeah, and it's higher than normal.

Ty Collin — Analyst at CIBC

Okay, great. And then just my final question, circling back to the capex piece—any of this $40 million increase in planned spend—would you characterize any of that as a pull-forward from future years? Or is this more of a recent decision to sort of buy versus lease your airline fleet?

Dan McConnell — Chief Executive Officer

It's opportunistic-driven. It's a finance discussion, really. It's better returns on some of the—like—we're very patient, just like we are with all of our capital investment or acquisitions, you could say. So if the right deal is there and it hits our hurdles and it has a financial accretion to buy these particular aircraft, which it does—because we get, again, more productivity, more reliability, less maintenance cost—the overall cost of ownership and the cost of operating these planes is accretive.

So this is where we have the capital, obviously. So this is what leads to the decision to purchase the aircraft. It's opportunistic, and we have some expensive leases with some aircraft that are kind of less desirable. And so we're able—we're constantly on the hunt for value deals, good value, and we found them and that's what's led to the capital expenditure.

Ty Collin — Analyst at CIBC

Okay, great, thanks. All the best. I'll pass the line.

Dan McConnell — Chief Executive Officer

All right, thanks.

OPERATOR

Thank you. Our next question is a follow-up from Cheryl Zhang with TD Cowen. Your line is now open.

Cheryl Zhang — Analyst at TD Cowen

I just wanted to follow up on the cost side and your Next 100 initiatives. I'm curious, how much do you think the fuel price and labor inflation pressures could be offset by Next 100?

Dan McConnell — Chief Executive Officer

Yeah, no, there's definitely an offset factor there—so further ahead than we would have been if we weren't in the Next 100 program. But it also gives us the tools to be able to offset some of these fuel-related pressures. So it's—yeah, there's definitely a connection there. As far as the net differential, it's not something we would disclose, but I can tell you we're very pleased that we had this, that we've executed, that we're in the program, if you will.

Cheryl Zhang — Analyst at TD Cowen

Okay. And then just one more on capex. Should we be expecting additional fleet upgrades and purchases in the upcoming years, or is this year an exception?

Dan McConnell — Chief Executive Officer

This year I think we would follow the same methodical discipline that I mentioned. It's not going to be excessive. This is definitely a high watermark and it's opportunity-driven. But no, I would say this is definitely not the new norm level of capex moving forward.

Cheryl Zhang — Analyst at TD Cowen

Okay, understood. And maybe just one more from me. So your international segment—the tourism strength is still pretty strong this quarter. Curious if you're seeing any changes going into Q3 on the demand trajectory?

Dan McConnell — Chief Executive Officer

Not currently. We're optimistic because we're coming into the holiday season—maybe more for some of the western climate in Winnipeg and the like. But no, definitely coming into the holiday season, going into Q3. So, no, we remain optimistic.

Cheryl Zhang — Analyst at TD Cowen

Okay, that's helpful. Thank you.

Dan McConnell — Chief Executive Officer

All right. Thanks, Cheryl.

OPERATOR

Thank you. And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Mr. McConnell for closing remarks.

Dan McConnell — Chief Executive Officer

Thanks, operator, and appreciate the comments and questions, and we'll look forward to chatting with everybody in December.

OPERATOR

This concludes today's conference. Thank you for your participation. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.