North West Company Inc
TSX:NWC
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North West Company Inc
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Good day, and welcome to the North West Company Inc. Second Quarter results. I would now like to turn the meeting over to Mr. Edward Kennedy, President and Chief Executive Officer. Mr. Kennedy, please go ahead.
Thank you very much, operator. Welcome to our Second Quarter Conference Call. With me is Amanda Sutton, our VP, Legal and General Counsel; and John King, our EVP and CFO. Before I proceed with the call, Amanda will read our disclosure statement.
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 Annual Information Form and its MD&A under their heading, Risk Factors.
Thanks, Amanda. So welcome to our Second Quarter Call. We're in Road Town BVI, where we typically have our September board meetings in stores. And last year this time, we were in Cambridge Bay in NWT. And last year, this day was the -- Hurricane Irma hit the BVI, and it was quite devastating. So we're here a year later, and you're noticing the reconstruction that's underway and how the islands -- all the islands. We were in St. Maarten yesterday, and we had our store reopening on Saturday. And that island as well is on its path of reconstruction. Just from a financial standpoint, we are going to have some favorable numbers in the third quarter because as we're heads down working on the business, we [ certainly ] forget that -- what we're up against already a year ago or only a year ago. And obviously, our sales started to go south in these regions because of the store closures. Some of them are temporary, and unfortunately, we've got a few that are still closed. But just a quick update on that. The remaining 2 in BVI that was -- 3 still open in BVI, two will be open now and at the end of October, they're smaller stores, and the third one, that's also a smaller store, we've now put into next year. But we're pleased, overall, with the progress of our business in BVI. Our sales are comparing nicely even before we get into the noncomp, if you want to call it that, of last year. With the stores we do have open, we are capturing a significant part of the business that we had, and our wholesale business is also picking up nicely. So that's part of the story. In the Caribbean, we're noticing that the reconstruction economy is quite significant. We start our trip in St. Croix, where we've got a very well-run store and an interesting market dynamic where, besides reconstruction, there's an expansion and reopening of the refinery. So the economic prospects in St. Croix are quite positive after a number of years of flat to sort of a down-ish situation. I'm just going to keep skipping across the Caribbean because part of the performance in the quarter was mixed in that regard. I mean, I'd say the highlights would be places like St. Croix and BVI. Across the BVI, St. Thomas, of course, our stores had opened, so that was the lion's share of the hit to the EBITDA on a non-comp basis. Barbados was disappointing in the quarter. That economy is a mixed bag of -- there's some stress in the government's fiscal situation. There was a new store opened there earlier in the year, and I think it -- that's a sizable store opened by Massy of Trinidad. And it has to cycle through the market, and there's been a lot of price competition as a result. We had excellent growth in Barbados up till this year, and we're giving some of that back now, at least on the margin side. So the delta on a store of that size, in a business the size of Cost-U-Less was a negative in the quarter. And the other market that was challenging for us was Guam, nothing earth-shattering bad, but we were down slightly there. And again, we're looking for a bigger pickup in the economy as we continue to see the military presence and investments take place. But also, there's more competition, not new competition but just competitive intensity is fairly high right now with our mainstream supermarket competition. So we don't see that as something that's strategically flawed, why we're at Guam at all, but it certainly was a factor in the quarter. There were some margin compression on promotional items in the quarter in Guam. So overall, we've -- we see the Caribbean as having a lot of upside. There's a lot of near medium-term economic activity. Resiliency is a real important theme here when you talk about pricing and the risk of climate change and major hurricane events. Our store in St. Maarten is now built to a cat 6 level, which means they can withstand 170 mile an hour winds. When you walk through the store, and you see the extra riveting, the extra bracing and trust work, and you understand how that's so important. All of our stores in the Caribbean are going through that assessment. Of course, the ones being rebuilt are being built to those standards so that we're here come storms or not and that we're resilient to serve the community. Because we're learning that, post-hurricane, there is an economy, and it's actually an uptick in the economy through insurance proceeds and reconstruction. And you want to be one of those stores that's open, not like the situation in St. Thomas, where we're not. And I'm going to say that St. Thomas would be open today, would be a very successful contributor to our bottom line if we had structurally engineered that store to withstand the level of hurricane that -- the ones in St. Maarten now can and the other ones that we've rebuilt. I'm going to move past the Caribbean, of course, to open for questions once I've wrapped up. Going across our banners, we had another -- I mentioned the word carefully, some unique events in the quarter because my assessment starts with sales and comp sales in our core northern businesses. Alaska and Canada have been very good and continue to be strong. In Alaska, that was distorted by the closure of a very significant liquor operation in Bethel, Alaska. This is a unique event because we've never lost a liquor license. Sometimes you have community plebiscites and referendum that approve or disapprove whether the town allows liquor sales at all. In this case, we were the only liquor store in the community. It serves 53 villages, a trade area of about 20,000 people. And they decided the like -- the location. The City Council decide the location was detrimental to the community. We didn't have a chance to change that or appeal the loss of license. There is a plebiscite in the community this fall as to whether there should be any liquor stores at all, and we respect totally that these decisions can be made. And we'll, of course, live with the results and adjust to them. Depending on the results of that plebiscite, we -- if they approve liquor sales, then we'll apply for a license in a different location and likely tie it into a new convenience store, actually. If we don't, then it's going to be a business that'll be gone, at least for the foreseeable future. But it certainly had -- and [ I'm always ] talking about is they have material impact on loss of commercial sales and operating margin for the quarter. So that'll carry forward. We'll live with that until we cycle through it and keep adjusting and adapting, looking to find a few more stores in Alaska to not just to offset but just because that's what we do. But the more important theme for me is that we are seeing decent 3% type comp sales. We're seeing pretty good reconstruction in Alaska not tied to natural disasters just because there are monies through the various set of departments tied to capital projects, the most significant of which is a $350 million hospital being built in Bethel, Alaska, the same community that we lost the liquor license in. So we do see Alaska, overall, the [indiscernible] dividend being flat to last year, the state's fiscal situation being stable with higher oil prices, and generally speaking, it could be a stable retail market for us. The next market that we like right now a lot is, if you're going to say the core business, it would be the core of the core, would be our Northern Canada business. We're running very good comps there, and we see that continuing. There's being more investment in the north, government-driven investment and some resource investments, particularly in Nunavut. And we're able to take advantage of that with stores. Our store investments and top markets have certainly helped. We had 2 top market openings, both very successful in the quarter in Northern Manitoba, Garden Hill, Manitoba and Shamattawa, Manitoba. We also opened a store that had -- was destroyed by fire. And the flip side to the sales numbers is some hits to our operating margin. We had wildfires in Northern Manitoba. And with the warmer, drier seasons, we're seeing spring and fall forest fires. And some might recall that last Q3, we also had a -- major evacuations in Northern Manitoba and at the same time, in the month of September, that we had these hurricanes in the Caribbean. The wildfires I'm referring to were in Q2 in the spring, and they were, again, evacuations of 4 communities. What happened here that was different was that the hydro lines were burnt, so the power was gone. And that meant we lost a lot of products, perishable product as well as the sales of community members who are out of the community for several weeks depending on the community. So we had that hit to our bottom line. We also had a store that was destroyed by fire in the quarter that we rebuilt quickly. But for a period of 3 months, we were out of business. When I say rebuilt, I mean we took the store and put it back into a second site we had in the community at Portage La Loche. And I think they did an excellent job repositioning that store at a very affordable price, and we're now back in business and ready to roll. But between the wildfires and that fire, which was electrical fire, we had disruptions in Northern Manitoba, Saskatchewan that affected our Northern Canada business. The last point I mentioned in Northern Canada, that -- nothing to do with the sales momentum we have, is we decided to reclassify some positions in our stores from salary to hourly and doing an adjustment based on a workplace rule interpretation across all of our jurisdictions. We decided to take that approach and pay retroactively. That was a charge in the quarter as well. So those kind of -- and I'm calling them unique because I see them as nonrecurring, but they are things that happen in your business from time to time. And this was a quarter when we had a couple of those things affect our Northern business. And that combines the liquor store in Alaska, took the wind out of some of the sales -- the sale sales that we had going on in those jurisdiction. The final banner that I'll comment, of course, is Giant Tiger. Giant Tiger was a very -- an improved quarter for us. We had an improved bottom line. We had declining top line by design. We've taken a different stance. We have been extremely promotional last year, trying to drive food sales-related traffic. We've shifted gears or more, I say, strategic but more tactical of their promotional pricing, recognizing that the large percentage, 3/4 of our footsteps going through the door are going to buy fashion and hardgoods and not buy food anyways. And those customers were very successful for us. It helped to have warm weather, of course, but our seasonal sales were very strong in hard goods and soft goods. So we had a very good offset there to the food sales, which were down and which really dragged down the food comp for Canada. And we're okay with some of that happening into the second half, and we will keep recalibrating to make sure we maintain the price offer but not chase dollars that [ aren't ] going to convert into a sales basket that's got hardgoods and soft goods in any event. And these are all lessons learned as we continue to refine our Giant Tiger offer. We do expect to see a little more inflation and some margin relief, just looking at our price checking, what's going on more broadly in discount retail, at least in Western Canada. So there could be some margin expansion there. As those pass-throughs take place, we tend to be a price follower at the discount end. So we'll see that take place as well. So those are, overall, the big -- kind of the big events in the quarter. There was stock-based comp that affected the reported EBITDA, but I don't -- we don't really -- it's not controllable by management. I have mentioned, I think, before that we've adjusted our comp program on a go-forward basis so that the nature of those instruments will not be mark-to-market to the same degree, but these are now -- these are all legacy ones. So we're still going to have a carryforward of volatility, unfortunately, until these options and PSUs expire and run out over the next 2, 3 years. Comment on North Star Air. I mentioned as well, besides RTW down here in BVI, our NSA business had a mid-expectation in the quarter, ramping up very fast, putting our 2 ATRs in the air. Some glitches in Thompson. I had forecasted or projected or predicted that our Thompson base would be fully operational. It was not. We're still waiting for pavement to be completed, which has impaired our ability to fully use the base and not having to shut cargo from 2 different locations onto our planes. The timing for that is now, the end of next week at the latest, and then it'll be all about optimization. But we've fully moved the routing that we had planned to move to NSA from other carriers. We are improving frequency with the Thompson base fully operational. We expect all the elements to be in place in terms of consistency and predictability with our stores. But overall, the fundamental economics of NSA are coming true as we had planned, and we're looking forward to a much more normalized third and fourth quarter with the base operational and then just day-to-day optimization of our carrier operations through NSA. So that's where NSA sits. I'm just trying to skip through and see if I missed anything else. I think -- we usually start in Canada. But this time, I started in the Caribbean. I think I worked backwards through the highlights. I'm going to ask you, John, whether I've missed anything that you think should have -- going to be put into my comments. Okay. Thank you. I wasn't trying to miss that. We did not increase the dividend. We declared a dividend, but we did not -- and it's the same dividend as the prior quarters. Just a bit of color on that. I mean, I talked about the dividend as a potential increase in September. I hope I sound positive on sales momentum because I am, but it's still unchartered territory for us, the kind of the quarter that we come out of with these expense items in front -- behind us now but having incurred them. Certainly, we've -- we looked at it and thought it just doesn't feel like it should be a dividend increase quarter with that -- with the EBITDA down 1.9%. We outlook a much stronger EBITDA, but we also look at the path and it's -- and call it [indiscernible], call it what you want. When we put all those elements together, putting the dividend up $0.01 or $0.02 right now, for us, wasn't necessary. And we want to tie it to a little more proven performance. Of course, NSA is a full quarter that show us that. I mean, they didn't have a full quarter of it this quarter because of the timing, but they will next quarter. The fact we're going to have some easy comps against these other events from last year is not going to be part of the equation. It's going to be more bringing home the performance we expect from Northern Canada and ensuring that our Alaska performance is solid. Stability in Giant Tiger, one way or another, is a positive. It doesn't stir the pot as much as the northern stores do. So we want to see more of that, and then we'll assess it again, likely not as the change in terms of a movement in dividend until the end of the year now. Again, this is unusual for us to go this long, but the performance is what it is. I'm expecting that if we look at the dividend moving, it'll be after year-end. Okay. Operator, that's the end of my comments. And if you could open the call for questions, that would be great. Thanks.
[Operator Instructions] We will go ahead and take our first question. [Operator Instructions]
It's Stephen MacLeod from BMO Capital Markets. I just had a couple of questions here. I just wanted to 0 in a little bit on the NSA business. And obviously, that was a bit of a loss. In Q1, I think the ramp-up was sort of taking a bit more expensive than you thought or taking a bit longer than you thought. Can you just give an update as to where you are operationally in terms of the new planes and then the base that you put into place?
Yes. I don't know if you heard, Stephen, I mentioned the Thompson base path. There's -- the apron is not paved, so we have some -- we're below capacity in the use of that -- of the base right now. The planes are fully operational. We're incurring more labor. There's a bit of disruption on the way we bring -- Basically, these are trucks coming overnight from Thompson, and they're staged and brought over and being able to get those planes flying 24/7. With the base set up the way it is, there's been a bit of a backlog on freight. That's a store service level issue. I mean, some stores would be probably a little more upset that I'm down here right now. But from a revenue standpoint of NSA and its contribution to the quarter, it was about where we expected it to be. And now next quarter, we'll expect it to be exactly where it was planned. So there's 2 parts to that. One is, are they going to be financially contributing? Yes, it's there now. But b, is it at full operational effectiveness? I'm going to say no until the end of next week, and then there's probably some fine-tuning.
Okay. And then what's the process in terms of getting it fully operational? Is it just a matter of running freight through at 100%? And how long does that sort of take?
Yes. it's the -- so by next Friday, we have the base fully operational. After that, I mean, as far as optimization, and now I'm talking about store service levels and scheduling, like we do have our stores receiving freight all night. That's part of our plan. But the scheduling of that has to be seamless because we're talking about people's lives and their work schedules, and we've had more changes to schedules than we wanted to see. And I draw that back to the Thompson base. And I think there's, again, some growing pains, and we're taking the business that's going from $35 million to $90 million in sales almost overnight. And the ramp up there has been without [ our ] growing pains. So I know the NSA team's on top of all that, so it's a time thing. And to answer your question, I mean, we would have liked it to be in August, but it looks like September is our fully functioning month for operational effectiveness and financial contribution.
Yes, okay. And I guess in the period where it's ramping up, including this quarter, is there any disruption that you can attribute to any top line sales being missed?
I could say, it's the length of a store manager's working day. If we change arrival time several times, and the store manager has to come in at 3 in the morning and expect to come in at 11, perhaps the schedule in staff receive freight, reschedule them. That's the kind of thing we are getting from third-party carriers, so we don't want to do that to ourselves. That's getting better, but that's not -- I wouldn't say top line. There's a couple of markets where it would show up in the variance reports but not enough that you'll hear me talk about that being a factor.
Right. Okay. That's great. And then just secondly, just on the St. Maarten store, which I think's been operational or should be operational this month. Can you just give an update on how that is coming along?
Okay. I don't know if you heard my -- did you hear my opening remarks, dude? Sorry.
I missed a bit of it. Sorry, I dialed in...
Oh, you did? Okay. As I -- I did start with the Caribbean, and I mentioned that we had the opening on Saturday. So now we're up at freeze and chill and the entire storage, general merchandise and great opening. We're now 4 days in, and sales are trending 4 days retail, very [ welcome back ] in the community. I mean, this is a community that's still rebuilding, does not have all the resale square footage it had before. I think we're the first store, actually, to get back into operation. That was significantly damaged, so -- believe it or not, a year later. But now it's open, and we're off to the races.
[Operator Instructions] We'll go ahead with our next question. [Operator Instructions]
Sabahat Khan from RBC Capital Markets. Just I guess on the -- I guess the terminal opening up. I guess for you to not have to go to 2 different places to load up the plane, is there cost saving, I guess, you can give us or quantify what the savings there would be once you get that -- kind of the base open?
No. There's -- no. I think we're going to hit our targets and get the return on the investment that we laid out and through the service level to our stores as we planned. But I'll say that there's just a lot of different interesting developments and -- I think we've handled very well. So for example, I can say yes to that part of your question, but I can say, on the other side of the coin, we've incurred higher pilot costs, and we've driven off-site inefficiencies to plane-ready pallets and other innovations. But as you are probably aware, there's a shortage of pilots. And we've come with some very, I think, creative ways in the culture of the company as such, NSA I'm describing now, that they've done extremely well keeping and attracting and retaining pilots, so there's a higher cost. So there are some efficiencies with the Thompson base, but then there's some other costs in the business. So I think without getting too granular on these puts and takes, the -- I hope the more important message is that we're executing the overall plan operationally and financially, and we continue to uncover other opportunities. We have to be very disciplined because we're here, first and foremost, to serve the cargo needs of our northern stores. But you can imagine opening up the base in Thompson, having the fleet that we have, these ATR -500s are the only one of their type in the north. They've got thrust to do short takeoff landing, and they've got extra payload. So a lot of third-party customers interested in our services. So NSA is evolving, and our focus is on delivering just that we invested in and then see what happens after that. But I'm happy that for every cost we see that may be a little higher than we thought, we're finding other ways to generate revenue or find efficiencies, working more closely with The North West Company logistics team.
All right. And then just leading off from that. I guess as you've owned this business for some time now, and you look at the opportunities that are available, as you look out over the next year, 2 years, what is the thought process around adding new planes to bring more of your freight in-house and potentially serving some of these folks that might be interested in your services? Kind of what's the plan to grow that platform over time?
It's not written down in a way that we would communicate yet. We have to be -- I think you'd appreciate, given where we are now, the NSA team heads down, optimize what we're doing today. Yes, pick up some third-party business where it makes sense but stay focused. I think, after that, I think we do have to be way more precise than I just have been about longer term. It's going to wait for a couple of quarters because the other side of it is there's some very just interesting options on the way you could grow a business like this and still stay true to differentiating yourself with your retail value proposition, which means getting product through your stores to your customers better than anybody could. And when you add other elements to that business proposition, there's just more choices. And even though it's been years, it's [ like ] a long time, we're still learning what those opportunities are. And the other aspect is that it's a multiregional business. We appreciated that out of the gates. But Northern Ontario -- Northwestern Ontario is different than Northeastern Ontario. It's different than Northern Manitoba, which is different than Kivalliq, which is the central arctic, which is different than Qikiqtaaluk, which is the eastern arctic Baffin Island. So each one has its own sort of logistical ecosystem and presents their own opportunities and, some cases, risks. So we have to really get our head around those regional situations. And it's been obviously more than enough for us to stay focused on the Northern cargo aspect, going back to my comment about the revenue that, that implies. Like that revenue growth means flights, it means hours of airplane flying, it's personnel maintenance, another area, by the way, which has cost upside for us in terms of savings, which is the maintenance part of the business. So that could be an area that we move faster on just on our current base, how do we really optimize all of our cost inputs compared to what we have today.
Okay. And then just switching to, I guess, Northern Canada side of the business. You mentioned you are seeing some investment dollars being put into that market. Just based on the larger government infrastructure spend that's planned for that area, do you have a line of sight to more projects over the course of 2019 and onwards? Or is it just kind of some initial dollars being put into the ground there?
Well, our ships are having a very good season. Again, you've heard me say this before, that, that's a good proxy for ships are full. That's all construction material. All the information that we get from government tells us that we're net positive. There's growth in housing, and there's growth in infrastructure. So this would carry into 2019, for sure because the lead time is -- like last year was a good shipping season. So now we're seeing the results of that in the [indiscernible] communities in terms of their expenditures. Some of the programs that are announced on health, infrastructure and housing infrastructure are back-ended. So there's more dollars in 2020, 2021 with the federal government. Some of it is process-related. There's a call for proposals on how to create innovative housing for northern communities. We're not part of that right now. But there's -- there is capital coming from different ways. On the resource side, most of that is known. But there's a few new developments around Baker Lake. And the Agnico Eagle sites, there's a couple other companies looking around there, too. And then there's the -- the Baffinland is going to be building, looks like, a railway. So there's a lot of activity in different parts of Nunavik. It's hard to put that down into like what would that mean for top line. But generally speaking, we think about a couple of points of sales when the north is really clicking, which it seems to be moving towards this year and next year.
And then one last one on sort of your top categories in the C-store strategy. Is that something -- are you still making progress on there? And any update on that front?
Well, yes. I think one brief update. We shipped 5 stores up, modular stores. So they'll all be opening in the next 6 weeks or so in the arctic. We think there's -- we plan for about a dozen more of those over the next couple of years. Let's see, in the quarter, we acquired one C-store. I think that's it, or did we acquire 2? It's still front and center. I mean, top categories is going to morph into an overall gift sales, [indiscernible] northwest. We have an instrument called Pure Retail, which is very process-driven, but it's about liberating hours to get sales or reduce cost structurally in our stores and also talk about convenience because I'm going to emphasize that we grow that part of our business that we have. It's got a great CAGR, and it's very profitable. And we do expect to see margin expansion through that -- those category this year by year-end. So overall, yes, we're pleased. I mean, if you took a medium-term stance, you -- I think you rightly question us on, okay, what happens after that? I mean, if you split up all your convenience offer, it seems to be e-comm-proof. It's got other advantages that plays to your bricks-and-mortar strength, but what else? And that's where -- as we look at strategy at northwest, are we investing more in the Caribbean? Are we looking at complementary adjacent spaces in Northern Canada? Where does Giant Tiger fit for growth? Those are some of the fundamental questions that we'll talk more about over the next 2 quarters.
I'm sorry. If I could just sneak in one more on your last comment there. Historically, you're relatively protected from e-commerce. Are you seeing any creep up from some of the larger retailers, what they're offering to Northern Canada at all?
We're not seeing a creep up. What we saw was a lockstep. Like if -- okay, if Amazon is -- keeps using Prime and someone else pays for it, maybe the post office, like someone does and non-economically ships product into Iqaluit that we can't compete with, then that's Iqaluit. And that's what's happening today. That's not happening in other northern locations. A Walmart may pop up once in a while where they'll ship without proper freight for a while. So when we look at e-comm that way, we don't see it like it's this huge trajectory of business encroachment or market share encroachment on us. We are going to be testing grocery e-comm in the third quarter, should begin in the third quarter. But ours is a different solution. We're trying to reinvent the way it would work with lower income customers because as you would probably know that they're not e-comm leading-edge. They're maybe the folks least likely to buy on e-comm, at least in an urban setting. But for us, e-comm has to be a convenience -- pardon that convenience but a cost saving to the customer, not a convenience obviously because our store would be more convenient than waiting for an e-comm order. So we're still trying to get the leaned out cost structure that supports that. So clearly, one piece of the puzzle is the airline. Today, it's focused on our current business, which is the legacy in-store bricks-and-mortar assortment, but it's going to be an enabler of some form of e-comm, depending on frequency, requirements and whether our customer will meet us halfway. We know for nonfood, e-comm and just ordering direct, whatever it was before, even before e-comm was very prevalent, it was not a big space for us. And we will be looking at that starting this month, with the motorized parts, which is a natural and some other related motorized accessories, and then we'll look at other categories. And just keep [ tackling ] with our customer, how they think about e-comm from a pantry loading standpoint, credit, preplanning of purchases, those ingredients that are requisites, it may not always show up in the psychographic of our core shopper. If we create those enablers for them and keep it proprietary to us and our relationship with them, then maybe we can see something happen. So it's a very long answer, but I just kind of let you know that e-comm doesn't set up naturally for the North because of the consumers and the logistics, but it may set up under the right conditions where you start to go after and mitigate those barriers. Where it happens today in full force is on low cube, lightweight, high-value items. And I will -- and to the store, I'll see product coming from China on Alibaba. I don't sell that product in our stores, so it's -- it was going to the Sears catalog before. And then I see this arbitrage stuff going into Iqaluit through the post office and Amazon Prime. That would concern me if that went across the north, and I would get an Amazon Prime account for northwest or something. I don't know. But anyways, that's where e-comm is right now.
Okay, Sabahat, we're going to have to move on to the next caller.
We'll take our next question. [Operator Instructions]
It's Neil Linsdell from Industrial Alliance Securities. So guys, can you -- you sound very positive on all the potential going on in the Caribbean right now. Just -- but just so I understand it completely, you have the local economy, you have the reconstruction market, and you have the tourism industry, right? So can you explain a little bit more about where you're seeing the potential? Are you, say, the first store that's opened, then you're getting a lot of -- you'll get a lot of benefit? Or are you seeing the construction -- reconstruction market will take a couple of years? It'll supplement the missing tourism market? Or is everything going to be growing, say, in the near term?
The reconstruction market or economy will continue for a year or 2, just based on the pace of whether it's -- for example, so here in BVI, everyone is different because they're sponsoring territorial government that's different. It could be Dutch government. It could be French. St. Maarten, Saint Martin. It could be the U.S. FEMA and USVI. Here, it's the British government, so they put together a $400 million loan guarantee program. We had a dinner last night that we hosted for the Premier and the Governor and most of the key ministers, and the sense was that they're going to activate that, but it's a guaranteed loan, but they've got to think about how they're going to pay it back, and they're being cautious. I mean, they're being very cautious because it's a year now into it. And I look out my window here from the store, and I see some infrastructure that's public infrastructure that should be rebuilt. So that will get going. But that -- just look at the pace of that, and I'd say we're at least 2 more years of spending, maybe longer, and it's probably better that it's [ paced ] out. It's a serious inconvenience for people who have to use these facilities, but the strain on the economy for construction workers and supplies just to get our -- finally get the tender out on our St. Thomas store, now the construction is starting, in part because of a lack of contractors, can't find steel, that kind of thing. So this looks like it's going to be protracted. Will it -- will that overlap with tourism recovery? Yes. I mean, again, BVI looking out the window, I mean, the hardware with the yacht business, that should be in good shape for this season. There'll be some infrastructure impairment, but it's -- the 2 can coexist. And each market tells its own story. So that's the story there in St. Maarten. They have to make sure that there's transparency in the Dutch government before they release the funding that they're committing to. FEMA is still very active in the BVI. Schools and hospitals are being rebuilt, I think, in USVI. So I think, Neil, that the best projection would be that we're looking at 2 years, 3 years of reconstruction. Tourism recovery will take place as hotels are rebuilt and ports are operational. The cruise ship industry will come back, it already is. So if anything, there could be a bit of a stress on the labor market. [indiscernible] already, like rental rates are way up in these islands because there's temporary construction workers that are very well paid, more than retail employees. So that's kind of the scene that we're seeing right now. And I get -- I mentioned Barbados where we've got this -- it's a bigger market, 300,000 people, there's new competition, okay? It wasn't part of the hurricane, that would be a good thing, of course, but it doesn't have this -- and nobody would want a hurricane so they can get the reconstruction funds, that would be bizarre. But in the case of Barbados, structurally, that's a difficult economic situation. Their credit situation is poor. And the consumer, they've had -- they put on extra taxes on the consumers, they took some of them off. There's been a real dampening of consumer demand there. And nothing wrong with the market long term. It's not over-stored, but it is going through this situation now, fiscally, that is a factor and way different from the other markets that we're in.
So [indiscernible]
[indiscernible] Pardon me?
Sorry, continue.
Well, I was going to say, Cayman is an example where it's a robust economy in pre, post-hurricane, doesn't seem to matter. It's a high-end tourism market, and it's got great CAGRs on GDP and sales for us.
Okay. So if I just think about that as a summary, though, so you are expecting to see increased revenue growth beyond what you've initially anticipated when you purchased the Roadtown? And with -- potentially, you're going to get higher inflation in some of these areas as well, which will help further increase the top line. Any concerns about getting supply into any of these stores with this increasing demand?
Yes, I'm looking out the window, the offices are top of our store. The port is backlog, they're looking at containers right now. The capacity of these ports does not -- did not contemplate the amount of construction material coming in. We have had bottlenecks on that side of things. We had bottlenecks. The St. Maarten store should have opened 3 months ago. And the bottlenecks were in the port, besides getting steel, buying steel. The ports were crowded with construction containers. So we're working with the port authorities, and one of the ministers last night [indiscernible], and he's sympathetic, but there are those kind of strains on capacity in the supply chain.
Okay. But as far as the reconstruction, you're kind of ahead of the game or ahead of other players so that you can benefit to be up and running to benefit from that increased activity in the economy?
Well, sitting here in BVI, we certainly -- we are, and in St. Croix., St. Maarten, we got back. But St. Thomas is not a good situation because we were one of the unlucky ones. And I'll say unlucky only because now we know that, that store, when it's rebuilt, will be -- if there's any stores left standing, it will be our store. And this time, it wasn't. So I'd have to stress that because that store was a very big store sales-wise.
Okay. But still short-term [indiscernible]. Is there -- But over the long run as well, this won't be the last hurricane likely that hits the area. So in future years, as we look out for longer term, you're actually going to be able to benefit in...
I think, as we evolve our risk adjust -- our plans for the Caribbean, and everyone does for climate change, resiliency is the operative word, and then of course, that can help bring your insurance rates down, they've gone up a lot this year. So we can price that risk in, in terms of our expected returns. But I think the resiliency is the key. If we are able to operate through hurricane situations or have minimum downtime, then I want to call it a net positive. But it's never that. It just means that you can now sustain your business, and we couldn't say that before. Those hurricanes last year changed the game in terms of resiliency.
And just -- not in the Caribbean, but I think in the Northern communities or your Northern stores, you were putting in a new point-of-sale system, you had to roll out better work on the merchandising. Can you give us an update on how that's gone, if there's been any problems? Is that complete now?
It's not complete. The -- maybe I wasn't specific enough, but the -- we're actually -- just this week, our first store was installed in Canada. And then we're going to -- we don't [indiscernible] problems, so we'll continue to roll out through the fall and then Alaska next year. We're running -- if you look at the total system project, I'd say we're about a year behind as the cost hasn't been higher, it's been time. We've had some of the mods that we put into the business. We have a very sophisticated pricing system, and it was well-known to our vendor, and now it's -- without getting into all the technical aspects, the next release from the vendor is going to have these mods, and we're going to have to wait until January. That has to do with our merchandising system. And the merchandising system should have been up and live totally. The pricing system is not, and that's the category optimization piece. As a item file, it's live, it runs our core database now for the products. So that's the merchandise management module. The workforce management is fully installed. And then the last piece, which was still a ways away, is automatic replenishment. And although we like it a lot from a lean retail, pure retail standpoint, we're doing a double-check right now to make sure that it's going to deliver the results. It's a big, big process change in our stores. I personally think it's the right thing from a shrink, control, labor efficiency. But I do appreciate that it's a big change. We've done it in Giant Tiger and Cost-U-Less. So that was kind of the last phase of the project, and it's -- we'll decide whether to go forward with it on the cost benefit. The others are underway. They're delayed. They're all moving forward. These are insurmountable technical problems, but there is a bit of -- the vendors had other priorities. I'm not going to say we're overjoyed with that. And now we're in the queue to release some of the functionality we finally need for international and the rest of Canada in January. So that's the merchandise side, the point-of-sale is rolling out this fall, starting in Canada, and then we'll go to Alaska. Cost-U-Less has already rolled out, so we're now moving through the other banners.
We'll move on to our next question. [Operator Instructions]
It's Mike Van Aelst, TD Securities. Just looking at Giant Tiger, you talked about some price inflation coming through, can you give us a little bit more color on the recent kind of changes or status of the competitive environment and how that pricing is getting passed through now compared to how it was in past months or quarters?
Well, again, there's more inflation, and we're seeing it. And we're not -- the thing that made it different, I mean, it's -- we probably weren't paying as much attention to it because we were marching to our tune of very aggressive promotional pricing, and we had a different stance on how we thought we should be driving the business food-wise. So it's kind of a confluence of 2 things. We changed our pricing approach, so we're not as intensely promotional, and we've also noticed that the -- there's way more cost increases coming through that are sticky in the marketplace, probably more than we've seen in 5 years.
And like what level of inflation would you expect to get in the back half?
1.5 to 2.
And then...
Now, you know I'm going to say that we're -- tobacco's gone up. We had two big price increases in tobacco, I don't know if you care so much about that, but that's a significant part of our business in Giant Tiger in [ North ] Canada. So that's baked into that. It would probably be -- of that 2%, probably 0.5 would be tobacco driving it.
That's the tax side of it? Or the price increase?
Tax and price and cost.
Okay. And then the St. Thomas store, I think you said it's open in the next 15 months or so. Do you have a more specific time frame?
I wish I did. I wish I could say it would be September 5, 2019, but I'll stick with what you just said.
Okay. And then when -- at one point, it seemed like the hurricane -- the aggressive hurricane season last year was going to create some acquisition opportunities. And I'm wondering what the M&A environment looks like right now for Cost-U-Less?
Well, it's still there, but we've taken a deeper breath here. I started to allude to some of these, I'll call them strategic options. I can see the path, I mentioned resilience on mitigation of hurricane risk. But I think we've got to be laser sharp on understanding what that risk is. And we run our IRRs on our business units that we're -- we price the cost, the capital, the cost of the business properly. And the sellers have to, too. So I think we need a little bit of, I don't know, a shaking up here [ and here ], everyone takes a deep breath and [ sees ]. We're looking at this very objectively, I hope. It's -- the [ recent ] effect says we can have a hurricane tomorrow, but there's the other effect that says, knock on wood, that was -- we dodge that one, we'll know, they're going to happen, so you better have a higher cost of capital, higher return, even after your mitigation. All the vendors may not -- potential sellers may not see it that way yet. Maybe they never do, but we did park that. We keep relationships and conversations open. And one thing I can share as a discussion point is we are assessing whether the model should be deeper on an island, like RTW or to take Cost-U-Less as a format across more island or some combination. Our bias right now is to go deeper on fewer islands and then make sure we understand they're the right ones, of course and be more vertical, like we are here with distribution, wholesale and multi-format. We're still going to have great Cost-U-Less stores that may be the only stores we have on particular islands, but that's just another kind of update for, I guess, investors. I know what our thinking is. And then that will dictate how we enter. I think acquisition will be clearly part of that, but it will depend now on -- as we get a little more advanced in our thinking on how we screen these and filter where we want to be, we may exclude some islands and some potential acquisitions that we're looking at this time or shortly after this time last year. So it's evolving, but it's moving pretty fast, too, and we'll keep updating you as we get through our strategy work down here.
And I assume when you're talking about going deeper, you're not necessarily talking about trying to fit in another big, larger format store but maybe some more C stores or grocery stores?
Well, when you say larger format, the larger format store in terms of warehouse style is the Cost-U-Less format. The store that we're -- where we have our office here in Roadtown is above a, I'll call it, conventional supermarket. We have smaller C stores, super grocery -- groceteria-type stores on the island. We're the leading wholesaler on the island with a leading distributor here. And we -- what we don't do is [ fuel ], but we run the gamut of, I call it, everyday retail services. We don't do hardware. I'm not sure our business license allows us to. That's fine. And we're in a pretty big space already. So when you say large format, you've got to have a large supermarket. It doesn't have to be small like the one we're in -- our main store here in Roadtown. So you could conceivably have a large supermarket and a Cost-U-Less on the same island.
We'll go ahead and take our next question. [Operator Instructions]
Matt Bank, CIBC. On Giant Tiger, just trying to get a sense of how optimistic things are here. So sounds like you're turning a corner in soft and hard goods and also seeing some price inflation in food. You also mentioned last quarter that -- last quarter's conference call, this business has significant amount of torque to it. So how should we think about earnings growth in the near term for Giant Tiger?
Well, I would say, it'd be guarded because here we are heading into a hot dry fall. And what drove our spring sales may not drive our fall sales. The torque is in the soft goods and hard goods. And if you get some large expansion in food, then you're away to the races. If you're trading water and food, and you're getting the torque [indiscernible] that's good, but if you don't get either, that's bad. I'm going to tell you that the food is -- it's not catching a falling knife, it stabilized, and that's great, but there's no serious margin expansion going on. Soft goods, hard goods just came out of a great quarter, and I can't tell you because I'm a little nervous actually on how warm it is in September. So that's kind of the GT size-up. So I'm -- you'd tell from what I -- I'm guarded about the torque. It would take a little bit more. It's a low-margin, high-volume business, so it takes place but torque happens, you do get a nice jump up in EBITDA. But the materiality level compared to the Northern businesses, it's a very small piece of the puzzle. And just when you're modeling or thinking about upside at Northwest, we're happy that the downside seems to be covered right now, but I'll just say, I'm a little worried about the weather in the fall right now.
Okay. I mean, I just want to jump right on a couple quick detail questions. So on 2019 CapEx, you mentioned sustaining CapEx of [ $60 million ], include the airline. Would there be nonsustaining capital investments in the airline in 2019?
Well, that's a question, I -- I know there's a lot of lead time, too. So if we're going to answer it, it'll probably be the next quarter, no later because of lead time for aircraft, but that ties to our strategy and the factors that I mentioned earlier about the options we have, and we're not quite ready to pull the trigger on anything other than our core cargo service to Northern businesses -- our Northern stores and our legacy passenger business. So I'll put it this way, if -- like the more likely CapEx would be to drive efficiencies, like the Thompson base is eventually. And anything beyond that, like growth to drive revenue, third-party revenue, yes, we've got a bit more of analysis to do before we disclose that. Again, I would say, again, our bias is to optimize what we have. We still have a lot of capital [ into ] this business going the right way. If fantastic opportunities are presenting themselves, we have to look at them seriously, but I think we also have time on our side there. So we just want to manage that from an execution standpoint. So hard to say right now whether there'll be anything sizable next year.
Okay. And then my last question. Is it possible to quantify or just give some order of magnitude on the sum of these one-time events, the wildfires, the one-time payments and the better liquor store in the quarter?
We didn't do it. So I must say, they're material enough that I should mention it. And I don't know how much more to say, except that if they didn't happen, we'd [ be -- ] probably a dividend increase. We would be happy with the quarter and the bottom line. And I think our investors would be, too. But no, we decided not to quantify them.
We'll move on to our next question. [Operator Instructions]
Jim Durran from Barclays. Just on Giant Tiger, with the change in your food pricing strategy, how long has that been in place for now? And how many more quarters would you expect it to be a drain to your revenue line?
It started in mid-June, and so we're going to see -- depending on inflation in the market and what other retailers are doing with cost pass-throughs, this could be something that goes on for a couple more quarters. Now GT dollars -- I was just going to say that GT dollars should be fine if we're doing this right.
Yes, it's just top line, right? And from the perspective of your e-commerce conversation earlier, right now, does the majority of your customer base in Northern Canada have access to the Internet? And do you have a sense of how active they are in e-commerce with Walmart and/or Amazon at this juncture?
Our impression is that the bandwidth is fine for e-comm almost everywhere. It's not great for streaming anything. So there's -- when you think about Internet usage, in any rich platforms -- so I'll just walk that back a little bit, any content-rich websites are not good. But what we see, and we watch this very, very carefully, probably the biggest in terms of the quantity of product that's going to the North is coming out of China, and it's Alibaba or eBay or non -- they don't disclose who the seller is, you can't tell. That's where we see most of the growth. And again, they tend to be soft good items or small electronic items. Walmart, there's nothing significant than Amazon or Walmart that's more than it was 3, 4 years ago.
And what about credit card? Like, what's the penetration of credit card amongst your core customer group?
It would be -- amongst our core customers, which would be 3/4 of the shoppers in our markets, it would be quite low, I would say, less than 25%. Now we would have -- but the other 75% would have a We Financial card, which is a prepaid Visa card product that we sell, so they are financed. They can load those cards and shop online.
And so from a competitive threat standpoint, e-commerce is not necessarily taking a big chunk of your market opportunity at this juncture. So if you were to pursue e-commerce, you'd be doing it for preemptive reasons, am I right? And the market opportunity...
Yes, I think it's a very important insight. I think we have to preempt it like this is a long-term play, you could fundamentally lean out your cost structure enough to offer a price proposition that was compelling enough to do the forward buy, to pantry load, to planning your purchases and go against your normal consumer behavior to save all this money and could we deliver that savings through [indiscernible] bricks-and-mortar offer. We have to test that because you're right, we could be making our own sales. Every dollar of [ out ] shopping could be $2 or $3 of sales we have. Now what would the margin structure of that look like? Could you price it so that you're preselling it, you picked up receivables instead of inventory, you've got higher churns and receivables, you have inventory, your shrink is going down, could be a lot of other cost factors here that we're starting to model. But it's -- yes, it's a little bit different than just saying we want to expand in the market, like going after e-comm. It's about, is this a better -- just a better deal for everybody. Should we be doing it because we have the ability to do it. If it works for the customer, it will work for us long term.
Got it. I would assume that having NSA now kind of increases the desire to consider it, right? And you -- because you end up as you already did but now maybe a greater reach, you have the most sophisticated distribution capability in that market.
Yes. So it's [ both ] building -- can you build a gap there that the customer will give you credit for. And we -- as you layer on that, out of the gates, we're going to be more -- we use the post office for some of our e-comm out of the gates, and we're going to use NSA, compare the 2, and we're going to learn a lot, be very selective on where we offer it at the beginning and really watch the consumer, what trigger the ways they'd want to use e-comm.
Is there any rationale that would convince you to partner with an Amazon or Alibaba or anybody else?
Yes. I mean, it's -- I think it's how much of the value chain do you -- could you be capturing and sharing. I think if we say our expertise, as it is for our bricks-and-mortar business, is to move and to sell and knowing what to sell, not something you'd have to buy. If you know what to sell, you can find it from somebody, you don't have to be the guy that goes to China with the buyer. If you look at it that way, then yes, I mean, someone could plug into you at the beginning of the value chain. And if you focus on move and sell, it just depend on the economics of that. And we haven't dismissed the idea. But right now, out of the gates, we want a fully controlled vertical on this -- horizontal, I should say, and then we'll see. [indiscernible] the logistics piece really, really well and the order fulfillment piece really well. And then I think if we ever had something that was compelling, it would be -- like compelling to someone like Amazon, then we have something to talk about. Right now, Amazon is happy with the post office, I'm guessing, especially in [indiscernible].
Okay. Just one last question. Just going back to the Canadian business overall. Earlier, you mentioned that if there was disruption going on in Alaska, that the comps might have been like 3%, with all the initiative you've got in place in Canada, is it fair to say that the Canadian comps would have been in a similar range if it hadn't been for the disruptions that have been going on?
Yes, they would be. They'd be in that range.
And part of that strength because it's a good number in the context of the grocery business, obviously, is that a function of the C-store initiative and some of the other initiatives you've thrown at that business over the course of the last couple of years? And you would see that potentially strengthening if we do get this inflation bumped at to -- you're starting to see now and that the rest of the market's also anticipating?
Yes. I think the -- it would cross through the whole sort of grocery assortment channel or -- but in the C-store-type merchandise mix we sell, the pricing flexibility is the strongest and the pass-throughs and the value is still perceived and so forth. So yes, that mix swing, and it goes all the way from food service to the package convenience, is helping us right now. The other thing that's helping sales, and we -- as you know, over the -- as the cycle kicks in where there's more discretionary income, then our big ticket sales take off, and we're starting to see that. That's what happens when people have wage economy situations, and their paychecks can pay for down payments or outright cash of an ATV, a snow machine or boat and motor. We're actually scrambling to get enough units to get to the North [indiscernible] we couldn't get for the C lift, and our stores are crying for merchandise. And we'll get it there, but it's -- that's the other part of the coin. We've shown that, and sometimes we've explained it in more detail, but that could be the real icing on the cake if the sales keep chugging along here, that we'll see some nice general merchandise business, hard goods, big-ticket hard goods.
We have no further questions at this time. Mr. Kennedy, I'll like to turn it back to you.
Okay. Thanks, everyone, for dialing in and tuning into our conference call. We look forward to being back with you early in December with our Q3 results. Again, thanks very much.
This concludes today's call. Thank you for your participation. You may now disconnect.