North West Company Inc
TSX:NWC
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North West Company Inc
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Good day. Welcome to The North West Company, Inc. Third 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.
Thanks, operator. Welcome to our third quarter conference call. Joining me today is John King, our CFO; and Amanda Sutton, who's our VP of Legal. I'm going to start the conference call by asking Amanda to read our disclosure statement -- transcript.
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?
Thanks, Amanda. So I'll start with going over the highlights in the quarter, and then we'll open the conference for questions.Overall, it was a good quarter for us with a lot of positives as we took advantage of general upswing in the economic environment, we do business in, both in Alaska, Northern Canada, and some of the reconstruction economies going on in the Caribbean. We tend to do well as long as we're ready for business and that the -- what we showed up here was on the GM sales side, you saw some pretty decent comp store increases that we reported both in Canada and Alaska. And I think that's indicative of what we should be able to achieve when we have income in our markets. So we had big ticket sales growth both in Northern Canada and Alaska.And the other part that's come on quite strong for us is what I refer to as the reconstruction economies. St. Croix has got a refinery redevelopment, so it's also added to their sort of economic resurgence where we have stores in markets like this, specifically, St. Maarten, all of our BVI stores and St. Croix, we're doing really well. We don't have it in St. Thomas. I think when we open our store, it will be later next year, we're going to catch some of that because I see these reconstructions going on for some time just based on the infrastructure for construction, the availability of labor, skilled labor, materials and the payout of different funding sources, not just private insurance, but the government transfers that are starting to kick in on public infrastructure. So just to keep that in mind when you're looking at our forecast. And we sit down and look at our rolling 3-year financial forecast, we do see some robust selling opportunities in the Caribbean. It's bifurcated though because we also reported last quarter on Barbados. It's still a challenging market. I think that's another situation where there isn't the same kind of -- was, obviously, no reconstruction, but also the fiscal situation of the government is more strained.Guam, to a degree, is also in that situation. Guam is a mid-lean economy right now. I believe, perpetually, it seems -- look forward to more military investment that would stimulate the economy in Guam. It's coming, continues to feed into the incomes there, but much slower pace, and at sometimes, it seems to be a 2-step forwards and 1-step back.So I'd just stay on this theme of the economic drivers in our business. The Canadian North has been pretty strong and continues to be into next year. Again, a barometer for us is our shipping business, which is booking up, coming off a record season this year, is booking up nicely for next year. We've just landed the major government Nunavut contracts, and we're starting to see the construction that's behind that. We just saw in our own backyard here in Manitoba, Indigenous and Northern Affairs announced 4 schools at $250 million going into communities where we have stores. So it's very episodic. It tends to be community by community, whether it's a mining development or a capital works project, but we're able to tune into those situations, and there could be a concentration of sales during some period of time, it could be a few months or a few years, but it does add up. And I think we're going to get to a point where materially, we should be able to continue to drive our GM sales in our Northern Canadian business for the next year or 2 at least and then adjust to where the economy takes us next.Alaska is a bit like that as well. The other thing that we consider quite good news is on the PFD front. We did have an uptick in the PFD from $1,100 to $1,600. And with the election of a Republican governor, we're conservatively outlooking $2,000 per PFD next year, and we -- it could be even higher depending on how he carries through his mandate, which was to liberate the suspended PFD increases. For those who don't know, this is an investment account of, I think, it's in the $50 billion range now, that pays out on a weighted performance basis rolling. So out standing a market downturn in the last few months, if you look at the historical upswing in the market over the last 3, 5 years, then this fund is due to pay some pretty big dividends if the legislature will allow it. But I'd say, $2,000 is a good outlook for next year. So again, we're trying to align our selling programs along that and trying to capture a good chunk of the spending and get better and better at that knowing ahead of time what's coming. So between that and some construction projects in Alaska, we think the worst is behind us in that region. We know that the government is still -- fiscally is -- can be troubled by oil prices, but when we look at the rural spending, we think that we're stable to positive, and we're reflecting that in the way we see the business unfolding next year.Turning back to the rest of our business. Western Canada with Giant Tiger, it's a mixed bag. We have a concentration of stores in Manitoba. Our Manitoba stores and our rural stores tend to do the best. The only challenge we've had in Manitoba, we've opened 2 stores in Winnipeg. I think, it takes us up to 11 now, so we've had some cannibalization. A massive amount of road construction in the city that has taken 5 stores down in double digits for a long period of time, and we're really looking forward to cycling through that next year. And then, Saskatchewan and Alberta, we all know that Alberta's economy is challenged. That's not necessarily a bad thing for Giant Tiger. I think it can appeal to income-constrained shoppers and it can open up some real estate for us. So we're not bothered by that, but we feel much more comfortable, I'll call it, closer to home with our brand concentration in Manitoba and also on new store openings next year in more rural areas as opposed to urban.I'll highlight as well on a mix standpoint, in our biggest business in Canada, in Northern Canada, specifically, we've been focused on convenience, assortments, convenience margins that come with that for a number of years now. I don't think we've maxed it, but we're certainly getting to realizing the benefits of our product mix swing into more consumable foods, whether prepared or packaged. The formats that we announced in the quarter, and we had, I think, given an outlook on that, that we're opening a number of modular C-stores this year, next year and the year after. So we've targeted 5 a year and we've -- 4 of those opened in the quarter, the fifth is in the fourth. We also opened a modular pharmacy in the fourth -- in the third quarter. This is a -- is taking our construction cost, landed and delivered down by up to 50%. So enables us to get into smaller market situations, clear our hurdle rates and generate to us, which is a pretty, by our standards, a real proven performance deliverer in terms of setting up a second store in communities and going for extended hours and delivering that need without having to encumber the whole store costs after say 7:00 at night.Other highlights for us, mixed results, I'd say, at NSA. And I'd say if there's something in the quarter that I'm not as pleased about, it would be that I would have wanted better results from NSA in the quarter. We expected that. And I think we're finding that everything on strategy, it's all adding up in a positive way. But there is always a wrinkle, and in this case, it's maintenance. So as we did our sort of acquisition thesis with NSA, we realized at some point, we would need to be vertical on maintenance that both from a parts, labor, total costs and service standpoint, it makes a lot of sense. That was the best advice we got and we had it in the plan.In the quarter, we decided to accelerate that and it was kind of an early quarter decision, and also, as a result of experiences in the quarter. With the 2 ATRs in our total fleet now, we're a bigger customer. We stand out as, given our size and is not being vertical in maintenance. The shops that support us in maintenance are smaller. So they get constrained by capacity and expertise. And so we've got a -- not a safety, quality issue, but just the time it takes to get worked on back out and get equipment flying again, and in the cost that goes along with that was a bit of a wakeup call for us in the quarter. So we decided and we started in the quarter to accelerate and it helps maintenance capacity. That requires some ramping up of cost to set up the people we need, not talking about mechanics yet, there's a few of those on board, but is the admin and the management side of it. So we have that going on in NSA. We had more downtime in one of the ATRs than we expected. Is it behind us? I'm going to say it's largely behind us; a big lesson learned there. And I'd say that it's something that we knew we're going to have to address, but timing wise, we didn't expect we'd be into it now.So as we look at this quarter, and I would have said the same thing in Q3, that we're going to be stable, a stable state, drive the returns that we've anticipated. I'm now going to say that's a Q4 opportunity and certainly into next year, as we look at our planning, we are getting stabler and stabler. The part that's going to be new is the acceleration of our maintenance and what that means for a facility. There is an ROI on that because the value capture is significant in terms of just the financial savings of taking your maintenance in-house. So that's an NSA factor in the quarter.Otherwise, I'm pleased that we've been on our plan. We've been integrating our structure. We have 2 Presidents in place running our International and Canadian Retail divisions. The third one is -- runs NSA. Alex Yeo joined the company in early September. His background was from McKinsey and from McDonald's in China, and he has taken on the Canadian Retail President role. I was temporary in that since I restructured back in December. The President of International role is held by Dan McConnell, who's our Chief Development Officer in that kind of a role for 15 years with North West and has been since the beginning of the year running our International business. I really like -- I like the fact we've got these 2 key people on role, but I like the SPU (sic) [ PSU ] leadership we're getting with the dual President structure and we're going to keep driving and refining that into next year. Looking at their plans and their initiatives, I'm really positive about what they can deliver, and it helps me as well manage my time to focus between those 2 groups and then of course, our airline.So that's just a bit of background on our management capability. Going into next year, generally, I mean, we're still in the quarter. I'm going to say we think the quarter momentum will keep up the third quarter pace. We would like to see sales improvement at GT. We think we will as we cycle through some of the construction situations in Winnipeg. And we look forward to, again, buoyant general merchandise sales and just executing against our plan next year.One thing that we're particularly keen on is we've been on an initiative called Pure Retail where we've been streamlining actually hundreds of thousands of hours out of our stores and now, we're to a point -- I may have alluded to this at the last quarter report, but we're changing store structures. We're trying to lean out our store structures for better retention and job satisfaction of our key roles, specifically the store manager, but also to get maximum productivity out of our -- out of that key cost investment in our business and we've had some real good gains. We've got a nice flywheel going, where I think we have another big opportunity in 2019 to, we call it, liberate more hours in our stores. Move into some things faster than we might have otherwise in terms of auto replenishment for food and GM basics, which for us is much of a streamlining for inventory as it is a streamlining for work processes. We're very fortunate to have quite a predictable sales pattern, especially -- actually in our northern stores around the cadence of weekly -- monthly, weekly and daily shopping patterns in our deep data analysis of that is -- gives us I think a leg up on other retailers that have to have more complicated algorithms. So we're going to be testing some of those things in 2019 and keeping, as I say, the focus on leaning out our store offer as well as selectively look at our e-com.I'll just end with the -- there were 2 fire incidents in the quarter, one in Happy Valley, one in the Klawock. Well, I think Happy Valley was in the prior quarter actually, then it spilled in there into fourth quarter with the reopening -- Klawock was in the fourth quarter, pardon me. Both stores were reopened within , I think, a pretty fast period of time, especially in Klawock, we were back in business within 9 days. But we've also learned from that in terms of how we look at our stores. And certainly for mitigation, we've got 2 things going on, one on the hurricane side is to get our most vulnerable stores, St. Croix and USVI and BVI that we haven't touched already up to category 5 protection level. And then in the North, we've got an active priority task underway to check our stores on their fire resiliency and some of that is the wiring inspection, some of it is just looking at the nature of the cladding in the store, and the other side of the store to protect against arson. It's very selective. We can look at stores and score them on where they could be potentially more vulnerable, but we clearly have seen this as a risk in the business. We have BI insurance. But the point that we recognize is getting the customer back, getting back into business, and I think the St. Thomas store would be most indicative of that where we're going to be 2 years into this and we realize we're going to have a bit of an uphill battle. We're going to be up for that battle, getting our customers back and getting back the leadership position we had in the market. But I just wanted you to know that front center for us are both of those. One is definitely climate change driven, the hurricane, it's all about resiliency. The other one is it's not. It's a combination of making sure we've got the right safety standards in place and preventive measures in our stores, but also from -- and then in both -- whether it's electrical or more uniquely for us when we do business, we have some arson risk that we had to mitigate better. I'm very confident we can. In hindsight, I wish we were doing this last year, but we're doing it now, and I think it's going to pay dividends in terms of prevention in the years ahead. So I apologize for drifting around a bit on this, but I think, I'm just going to turn to John for a sec. John, is there anything that I should have mentioned I haven't? Sorry?
No, I think everything is laid out in there.
Well, there is the other -- well, John mentioned the gain, the insurance gains and then the stock-based comp stuff. I'm leaving that alone because it's not operating performance driven. There is going to be though, I guess, as a heads up. And for people who model our performance, it's going to be tricky. I think we're going to try keep things on an adjusted basis. You should know that we're insured and then we have damage, whether it is the warehouse that was destroyed in the Klawock or the fire that was in Happy Valley, we're covered for insurance. So at some point as we -- the stores are open again, but there is another step of renovation, maybe reconstruction, some replacement of assets, as that takes place and the payouts takes place, there's typically a recapture on depreciation versus book value in the BI part as well. So unfortunately, we're going to see some of that carrying into 2020 for sure. There will be some in 2019, there'll be some in 2020 as we close those files. I don't have much more to say about that, except that we're doing our best to make sure we don't have many more of those files open going forward.With that, operator, I'll open the call for questions.
[Operator Instructions] We'll now take your first question. Please go ahead.
It's Mike Van Aelst. Can you hear me?
Yes.
Okay. Good. So I guess, the first question, just on the impact of those fires, can you give us a sense as to maybe what it was in the quarter and what you think it will be in Q4 with the Klawock fire?
I can't yet. We haven't actually out looked it because we're -- the Klawock fire is -- it's fresh, I mean, we're heading into Christmas and we just restocked the store. We sold off everything in the store. And I've asked for that. But to be fair with the people running it, they're doing a great job. We're getting a lot of business back, but I don't know what it will be yet.
How about the Happy Valley fire?
Happy Valley is not material.
Okay. So NSA in the past, you've given us an indication of the profit, the EBITDA and then kind of the revenues. Can you give us that for this quarter as well?
I'm not going to give the exact number, but you know the basic math, based on the invested capital and we didn't get there on an annual basis in the quarter. And I -- even though we were up over LY, if I was to cite a gap, let's say between our EBITDA performance and what may be some analyst would have thought we have been, we would have been passed that gap if we had hit the numbers we expected to. I mean, next year's plan is to be there. We have to execute that. In its interest, these are all in-house -- so called -- they're much -- they're controllables. But every time we add a dimension to the business, a building dimension, a building block dimension, we've got to put expense upfront to build a capacity-like maintenance, to add planes, then we're going to have a -- we're going to delay that to another quarter or 2. So nothing that's happening with NSA tells us that, that isn't the model because the model still works, but as we've -- I'm going to say -- I mentioned -- I've said this before, but the time around -- this time next year, we'll be on our way to quadruple the size of that business than when we bought it and that's the difference. I'm understanding probably better than before that as you bring your freight volumes in and you pick up some third-party business, which just makes sense from a utilization and an optimization standpoint and you generally grow a business, you have to invest in that growth. And I think that's the one aspect of this that is a little different than anything else we do. I mean, RTW, we bought it ready-built and we've been fine tuning, iterating it et cetera. This we bought a foundation, now we're building the first, second and the third floor. And to get the returns while you're building it is a little tricky and I don't want to force it. I know investors don't want us to do that either. But I do want to be as clear as I can and I'm trying to do that right now by saying that next year, we should be closer, much closer to getting the -- our return net assets out of that. And I would say focus more on the EBIT part because the D goes back into the engines. And unless something changes from where I sit today and I look at next year's forecast and where we are in the quarter today, it should be pretty much the same forecast we had last year for 2019. So that tells you something that we should be stable in 2019, but I'm going to say that there is a risk element to the growth of NSA that I need -- we just all need to be very cognizant of at the management side in North West that we're building that into our forecast. I don't want to -- I feel that I over promised a bit in the quarter and I didn't want to, but I do see it stabilizing and I do see us getting our ROI out of that business.
When you said that -- you had said that you think the problems are like that -- the ramp-up costs are largely behind you. So can you just give us some detail as to where you stand in terms of actually bringing the maintenance in-house? Like you said you didn't have -- I don't know if you had hired the mechanics yet or not, but you have the management [indiscernible] ?
Yes, the management has been hired. There are some mechanics hired. The largest portion won't be hired until -- and this the other aspect, is that next year we're likely going into a hangar, site and nature to be determined, but that hangar will [indiscernible] to be built for [ least ] . And then as we ramp up that hangar, it gets turned on -- and this is different -- the hangar in Thompson is a hub for transshipment. It does some light maintenance and refueling and it's also -- there's pilots up there that are on and off sort of shift. But Thunder Bay or wherever we do this, will be a hub for our maintenance of all of our equipment and that will become -- there will be more ramp up in cost when that happens but it'll be closer to when you get the return. Like the ROI on this is the delta on your parts and your maintenance labor. And so we want to time that so we can turn it on as close to when we start incurring the expenses. But we've built into our plan next year, the good thing is we're also going to be full year on our revenue. Keep in mind that we only put the ATRs in full force in July. So we'll get a full year out of the ATR and much smoother flying. We had 1 down a lot during Q3. It wasn't -- we even had an issue with the avionics, it wasn't Arctic flying ready. So that had to be done. So there were a number of curves that affected the ATR utilization in Q3. As far as what's affecting the P&L right now cost wise besides maintenance expense and delay time, we would -- and that's where we moved away from certain maintenance providers for that reason is that we have added maintenance parts, management type folks, experts in those areas to build this capacity for us so we've incurred costs there as well.
I guess, what I don't understand is if you have your maintenance -- sorry, if you've added the admin and the management people and those costs are going to stick around, but you don't actually -- you aren't actually bringing all the maintenance part in-house until some point later in 2019 when you actually have the hangar, how do you actually -- how is it behind you?
Okay. Well, it's utilization. I should talk about the whole piece of it. It's -- like if we didn't have the -- if those planes aren't flying the full utilization, then we're using the third-party plane at a much higher expense to us. If we're not flying the planes fully on terms of the weight in the cube, which we've been adjusting as we go through and make sure that they're flying at night. So there's still some gap there that we're closing. So it's really about the plane utilization that we've learned as we've gone along and also picking up in the gap so that some third-party revenue, which we're now capturing as well and building that into our model for next year. So you're right, the costs are still there, but the maintenance costs will go down. We feel we're over that. We had to do this avionics upgrade, which is really maybe not a maintenance, but it's an upgrade. And we think we now have the maintenance part figured out even on a temporary basis with the right third-party provider to get us through the mid-year next year. So those are the key assumptions that would drive an improvement. It's not going to get us all the way to the full ROI, but it will be significantly better than what happened in Q3 this year.
Okay. All right. And then on Giant -- on the side of Giant Tiger, I think it was last quarter you had talked about an improved outlook in part because you had inflation coming through, but also because you were getting some -- you're starting to see some potential for supplier concessions. Can you just update us on both of those? Like where do you see inflation being -- going over the next year? And how successful are you in getting those concessions?
Right. So inflation for us, the way we see in Western Canada anyways, is in the 1%, 1.5% range and we are seeing more pass-throughs from our competition, which would be Walmart superstore. So we're seeing that now in this quarter and I'd expect us to see it into next year. On the vendor side, it's been tougher. We've had more vendors come back to us, push backed because of their input cost inflation, which is real. But we've done some vendor consolidation, we've done, I think, just good negotiating to try to put more business behind vendors. So we picked up by one of our key brand contract outside of West, and we've had a major improvement there. We picked up on some of our CPG vendors. I'm not going to say who, it's not really important, but we've gained there as well. So the nice thing is, we're very concentrated. We have a lot of store brands that don't get us caught up in some of the -- getting pushed around by bigger CPG guys. So on balance, if you put some of the supplier stuff, which has been a reduction even in an inflationary cost world and then to be able to pass through, it does get passed on to us by suppliers, we think we're going to see margin expansion next year. So it's a long answer, but the answer is that we're seeing both the things you pointed out. What we need to see is more traffic. We have a very promotional shopper blend right now at GT. So it's -- we like to see it more fill-in shopper, less cherry-picking shopping. We want to focus more on in-store features and get them funded by our vendors and we're able to do that. I mean, working with GT East or GTSL. We see that as a winning formula for them. And we'd like to do more of that in our own stores. And as I mentioned that the focus on rural areas is really important too. I think we see less pricing intensity in markets where we're not in the shadow of Walmart. We don't mind it in the city because there's more of the room -- there's room to go around, but in rural areas, we like to be the -- sort of the top discount player and that's where we're going to focus our new store growth next year.
[Operator Instructions] We'll now take our next question. Please go ahead.
It's Matt Bank with CIBC. So I guess, just to follow-up a little bit on the NSA maintenance build out. I know it's early, but can you give a sense in terms of where manage you the capital cost for the maintenance insourcing next year? And then even more broadly, are there any other incremental capital projects still under consideration for 2019? Just trying to get a sense of total CapEx beyond the $65 million sustaining base.
Sure. So the hangar would be in the $7 million range. Equipment beyond that, like planes, nothing, I'd say, is close enough that I would put into a forecast. And it may not be anything. In fact, I'm -- likely isn't. I think our fleet -- we could have some leases. We have a couple now, a couple of Dash 8s. We could continue with that or replace them with ATRs or add on the lease side. But in terms of more conventional CapEx, it would be that hangar, and it has the ROI that I mentioned on the maintenance side. Other growth CapEx that we're looking at, I mentioned we opened the C-stores in the North. We have upwards of 5 pharmacies. We'd be happy to get 3 or 4, both accomplishing greenfield and acquisition. So that's as far as I would take our growth CapEx outlook right know. I know that's not a big number. If you look at -- if you add all this up -- sorry, plus 5 Giant Tiger stores. So if you took a 65 and you add another 20 to them, you'd be in the ballpark of where that -- what I've just described you would take you.
Okay. And then just a broad question in terms of returns. By my math, the past couple of years you've had, call it, $100 million plus of growth capital spend. Just wondering how you'd characterize where you are in terms of maybe like innings or some sort of percent achieved of the returns on that capital over the past couple of years and your confidence in terms of hitting hurdle rates now versus when you originally made those investments.
Okay. Well, I'd start with RTW. I think we've exceeded the hurdle rates there. NSA, we were there, and then we put more cost in the business. So now we slipped back, but we're still holding to that. So again, it's a multi -- it's a longer year build-out to get the ROI. So that if you look to the 2 chunkiest parts of our growth CapEx, John, help me out here, the RTW only will be 40 -- what's it in Canadian dollars? CAD 30?
Yes.
And then NSA was around -- they were close to that, right, and then we've added another 35 or so, 35 to 40 actually in NSA. So NSA would be the biggest one that we're still looking to get the 20% on that, and that's still in our gun sights. But if I said to you, we're getting it -- we're annualized, picking up $40 million on our EBITDA at NSA, then we're going to get close to that. But it's taking longer; next year I'm talking. And that's still in our radar. I'm trying to think what else would stand out as an individual project. The rest are fairly small. Our pharmacy and C-store openings are accretive demonstrably, and we're very confident when we do those projects. So when I step back and think about it now, okay, the one would be on Giant Tiger new stores. The maturing of those stores, it takes typically longer, 2 to 3 years. So there's where you're laying out your CapEx and then you're billing customers and then you get your accretion. So that's more of an NPV. And I know when you guys are thinking, well, okay, but that's the way it works. You're building a business. You're building a brand and sometimes in new markets or in new neighborhood. And we've just realized that, that comes with the territory. So we have -- that's an investing type of activity. And I would say that cumulatively, if you took that CapEx, you're probably looking another $20 million that's got a longer tail on the ROI.
Okay. And I just want to turn to the Caribbean. So just to clarify in terms of where you are in terms of stores being reopened. So St. Maarten store was open for 2/3 of the quarter and now all Cost-U-Less stores are open. And then what percent of Riteway sales would you say are still affected overall?
You cut out for a second, but you talked about Cost-U-Less all being reopened. No, we're not. It will be another year before St. Thomas is opened. And RTW, there's one store that we've -- just the landlord is not going to rebuild. It's not material. So we may build at that end of the -- of Tortola with another developer at some time in the future. But RTW effectively is at 100% as of right now. So we're firing on all cylinders in the BVI and St. Croix, St. Maarten. Really the only place we're not is St. Thomas.
We will take our next question. [Operator Instructions] .
It's James Allison from Barclays. So Edward, just touching first on the dividends. Obviously, great trends in the quarter both in the same-store sales growth and margin across both your segments. Are there any more boxes that you'd like to see checked before recommending a dividend increase in Q4? I know you mentioned North Star not hitting your targets in the quarter. So is that something that you kind of have to play more of a wait and see before you get more bullish on the dividend?
I don't think North Star would be determined that way. I think we're -- where I sit today and having seen what happened in the quarter and what we're addressing because it's all in-house and it's execution and it's not market, third-party customer, whatever external economic environment, whatever driven, and I think I can get my head around that or my management team and the Board that, that will not play a factor in the dividend decision. We are -- everything I said so far would say that we should have confidence in our quarter -- or in our -- in those top performing Caribbean islands to continue doing what they're doing. So we're in the right direction. I mean, there's is nothing really in the way of that happening. It's just that I'm not used to saying a yes ahead of when we actually do something. So I think I should just stop there.
Fair enough. I'm not sure you can answer this question, but on the insurance gains, just looking through the cash flow statement, you recorded just over $3 million cash inflow for the quarter. First off, was that mainly attributable to business interruption payments? And as you think about the next year, next coming quarters, are you able to provide any kind of -- send some guidance on how that should trend as you get the balance of the payments from the hurricane disruptions last year?
Okay. So James, first off, in terms of the explanation, I'll point you back to the report to shareholders in the liquidity section. There is a timing issue here on the gain you mentioned where I talked about the amount recorded in investing activities. You'll see up above, we recorded $16.9 million reduction in cash flow from operating activities. Those funds were received, as we noted, in the fourth quarter. So you'll see that hit in the investing line in the fourth quarter. So that was a bit of a timing. In terms of talking about going forward gains, I think, Edward gave some color on that earlier on in the call. We're not going to put out -- or put forward any guidance in terms of numbers. It is a timing-related issue in terms of how the claims progress, and a number of factors that I just don't think it would be appropriate at this time to comment on those forward-looking numbers.
Fair enough. And then finally, John, just can you remind us what you see as the tax rate for the full year and for next fiscal?
Yes, the tax rates moved around a little bit with the non-taxable share-based comp. I think that tax rate on an outlook basis will be around the 25% range. But again, it really depends on -- given the geographic areas that we operate in and the various taxation rules ranging from no tax in places like Cayman, BVI, et cetera, to other jurisdictions, it can move around.
We will now take our next question. [Operator Instructions] .
Neil Linsdell from Industrial Alliance Securities. You've talked about leaning out of some of the stores, the efficiencies. Is this related to the -- you talked before about your point of sale, inventory system upgrades, your IT infrastructure. Is this all related? And can you give us an update on the steps and the time lines there?
Sure. I'll do the update on the time lines and I'll talk about how it connects back to this. Next year, we're rolling out our point of sale to all banners. We'll be into '19 -- I think late '19, we'll finish up. So that's a big task to replace our point of sale, but we've been testing and piloting this. So it's going to be underway right after Christmas, selling. Workforce management was installed in our stores this -- well, actually early this year, it was completely done, but it was back in 2017. Our merchandise management system, which is called Power HQ, it comes NCR, the vendor and not the -- our retail division, is going to be installed as soon as they give us the upgrade of their last -- their next release. We'll have it live in Canada within Q1 and then shortly after, early Q2, international. So it's a very busy year, technology deployment-wise. What's happened with the initiative we call Pure Retail has been very process-laden. So the technology becomes an enabler after the process, which I like because it's taught us to get really hungry for leaning out and streamlining process. So from a pricing standpoint, I'll just get some of the benefits that we hope to capture next year in margin management. And it's interesting, right, because some of these projects go back 2, 3 years. And when you build your business case, the world doesn't freeze frame while you wait for all these things to happen. So we've done margin enhancements already through our shift to convenience pricing -- convenience assortments, pardon me, and other things that happen in the business that enhance margin. But we -- from a pure margin management, where we can look at our gross profit dollars, penny profit by item and do proper category planning, it's hard to put this in words, but we haven't had that ability with our legacy system. So we've got a very strong EVP of Food Merchandising. She's very -- waiting impatiently but waiting to get the system called category optimizer on the desk of her category managers. And we'll start to see there's -- built into that business case is margin enhancement and then basically the assortment optimization. There is basic functionality -- we can't do -- the first time I probably discussed this was probably years ago now, but we can't do multiple pricing. And we cannot do 2 for 1, 3 for 1, 4 for 1, et cetera, buy 1 get 1. We can't do that in our current system. We'll be able to do it with our new one. So there's a promotional effectiveness. The touchscreens, we didn't -- our cashiers, we have a productivity gain built into that. And as we've looked at the testimonials and measuring the productivity of the ones we installed in our pilots, it seems to be holding water. So there are some gains there. The merchandise management system is also an enabler for the auto-replenishment that I described earlier. So by having the proper robust merchandise management system, we can then start to trigger these algorithms to lean out our ordering processes. Finally, on a net costing basis, there's a module called Billback Manager, which allows us to more effectively track our vendor revenues and get into net costing on a SKU basis. This is a problem for a lot of retailers, is tracking where their funds are coming from. We're going to have this organized in a very, very effective way. So we think as we scrape that, we're going to pick up money, at least that's the way the business case works when you're looking at other retailers that are putting these systems. So there are a number of benefits. On workforce management, this is one where the technology went ahead of the process. So it was installed largely in 2017, but our Pure Retail process on actual work activities streamlining started in '18. And now we're saying, well, we haven't used the tool to its full potential. We want to be activity driven, not cost of sales driven. And now that we're measuring these activities, we're going to see some very interesting gains next year, I believe, in workforce productivity because we're going to be planning labor to the activities that we haven't really measured as much before because the tool is only as good as your processes. And that's kind of -- it was flip-flopped on that. When you add all that up, it's built into our planning, our financial planning. I'm going to say it's one of the harder ones to keep track of. And I think again, because if 2, 3 years past, from when you start a product to when you implement it, a lot of factors change. We have no regrets in terms of doing this. We think it's been very smooth, a little bit longer, but no more costly than we first forecasted in terms of -- there was one bump at the very beginning on cost, but there's been nothing since. So we're on budget, quality and a little bit behind on time. So overall, this is part of the enablement. But the real one that's driven this is just the process lines that we've had of leaning out the stores. If it doesn't relate to get sales or serve customers or help actively manage your staff, then we don't want it done in the store. There's a lot of things we're doing that's going to make the store simpler and a stronger selling machine. To the extent that as we look at the theme of our year, still Pure Retail but the subtheme is get sales. I think it's very apropos because of the income environment we have, either regionally or by market, and also the way we feel attitudinally at the North West right now that the time is now. As we build up our ability, again, through processes and merchandise planning skills, that this is the time again to go get sales. So we've got one foot on the cost streamlining but another foot we've put into getting sales much more aggressively in the last couple of years.
Okay. And just one other thing. Last quarter, you did talk about the alcohol sales situation in Bethel, Alaska. I think they had a vote to overturn that ban. Are you up and running there again?
No, we're not. We have to negotiate something with one of the existing license holders, which is what we're trying to do. And we're cautiously optimistic we'll be selling liquor again with one of the licenses that could become available to us. But our license won't be one of those. It's not activated because what's being disallowed with that license is the location. It's a location disapproval. But liquor can be sold again in Bethel, it just can't be sold there. So they won't add more licenses. This is all part of the regulatory structure for that market. But there are licenses available for us to negotiate and acquire and then open a liquor store again. I can't tell you when that's going to happen. Clearly, it's a pretty big part of our overall offering in Bethel. And we think we did it responsibly and effectively. Maybe that location wasn't the right location, but it was approved. So now we're looking for another location in Bethel. And we expect -- we'll -- I'll have a much better idea by the time I get to the end of the next quarter. We might be in business or I'll know whether -- why we're not.
Okay. I'm sorry, just one more thing on Alaska. After the earthquake, no significant damage or lasting impacts, right?
No. We sent people home that day so that they can make sure their homes were safe and their families and we were back at work the next day. No damage to our distribution center or office, which are both located together at the Anchorage Airport.
We'll now take your next question. [Operator Instructions] .
It is Steve MacLeod from BMO. I just had 2 questions first. Ed, in your prepared remarks, you mentioned the hiring of 3 more people to run international. I believe it was the Canadian business. And you were talking about some of the initiatives that they've undertaken. Can you just give a little bit of -- more color around what changes you expect them to have implemented?
Sure. So I'll start with international. He's been in the role the longest. And he presented to -- well, he worked with me on this, of course, but to the board and BVI our CUL Caribbean strategy and Pacific but focused on where we see the most growth potential, which is in the Caribbean. So that's a comp strategy that revitalizes the value proposition and the key elements we're going to be going after the signature categories, which tend to be in fresh, meat produce and alcohol and also a big focus on what we call "Treasure Hunt." So it's a lot of the in and out, new items we want to drive more sales from. And it's still building our strengths. We take credit for introducing Black Friday to a lot of these islands, and it's a great Black Friday again. So we're going to build on that but build more reasons to be at the Cost-U-Less. And as a warehouse format store, we also want to be indexed properly. We've just struck a new deal with BJ's Wholesale Club. It's very attractive, exclusive to us in the Caribbean. So his focus is about the merchandise and getting that aspect right and making sure we're priced right. We should be indexing 85, 90, for sure, against the conventionals on the islands. That's what he's focused on. Alaska is not on autopilot because just to remind you, both presidents have -- each have 2 banners. We do see upside. We would like to open some C-stores in Alaska and just, again, take advantage of the selling opportunities with the income rise of the PFD and some of the larger projects that are underway there in our markets. But his -- what his imprint is going to be, as I see 2019 unfolding will be in CUL Caribbean and RTW. So Dan had RTW from the time we bought it. And again, I said earlier, it's an iteration process. Besides hurricane-proofing it, he's going to be taking full advantage of the reconstruction economy, which is still very, very vibrant as we see it going through 2019. But the biggest difference will be getting grounded in UCL so we have the confidence. And we already know the kind of islands we -- I'm going to tip by hand in exactly which islands they are, but we typically like, again, more economically resilient islands. So the ones -- if you look at the government bond rating, we like all the islands we're in now, including Barbados. I think it's a good market, but we would tend to focus incrementally at smaller ones that are a little higher income and also look at one more vertical. We think that -- and he's pointed this out as well or validated, that having the distribution as well as the retail is really important from a margin capture standpoint. And it's also problematic when you don't, if have you have to buy from your distributor who's also a competitor, if they're vertical and you're not. So we have a recipe that we think makes sense on these islands, and he's going to be executing against that. It's not capital-intensive. I'll just flip to that for a second in terms of competitive strategy. But as he grounds it and we see, I'll call it, just greenshoots of growth, margin and sales, I know because he's got a development background, he's going to be very interested in where we can grow either organically or through tuck-ins. Flipping over to Canada, so Alex Yeo has only been in the role for 4 months. But I think he's done a very good job sizing up the opportunity in Northern Canada. And it's both grow with the North and grow within. You heard me talk about this thematically. So grow with means taking advantage of the income inflows. Grow within is all about market capture. You've got to be careful on how far you chase center store growth like any other, I'd say, more full margin retailer, which are -- banners are up there. But we do think there is some recalibration on the way we price to try to capture more center store product that could be out shot today. And then it becomes -- and then it's down to the people side and the people quotient. You heard me talk about maybe ad nauseam, but it's a big deal. I'm glad that Alex coming in, independently and maybe dispassionately, is getting passionate about the fact that we need to improve our recruitment and retention. We've done some deep diving. Another key person I've added, Kyle Hill, is coming on as a VP of Strategy, working directly for me but loaned out, people like Alex. Great background at BCG. He ran a non-profit called Teach for Canada, Rhodes Scholar, Ph.D., NASA scientist, only 32 years old. And this guy is all over the people quotient and making sure that we're sizing up the right fit for role. Right now, we've got too many poor fits for roles that are on us, not on the candidates who are doing their best, but are they suited to be in the milieus they find themselves working in and then it's also about training, on boarding, et cetera. We know empirically that if we can improve the retention and the capability, that goes with being in your role in the store for another year or two, there's a quantum leap in the contribution margin of those stores. So I'm just telling you that, again, thematically, Alex is focused on that. He does see the -- grow with the rising boat as well. He knows that if we stay on top of where the incomes are surging that we can drive sales there. And he's -- I think, by nature, he's also quickly dialed into the productivity part that was asked about earlier in terms of our labor productivity, activity planning and as he called it, shrinking the bathtub of the number of key roles we would need to run the stores if we truly have leaned out the hours of work required that are more complicated, which, of course, helps our -- the number of people we have to recruit and select from outside the community. So that's just a flavor. And on the Giant Tiger side, he's working very closely with Toby Noiles, who is the EVP of Food; had a senior role at Safeway in the States; actually, is from Winnipeg. In terms of our assortment optimization, a focus on fresh. I talked about the in-store price promotion program they have, a never out program, to be business ready. So he's got a percent of his time on that. And Toby reports to him. And that's kind of where, by proxy, he's focused on GT.
Okay, that's very comprehensive. I appreciate it. And then I just wanted to clarify on one thing on the NSA business. You mentioned in your remarks that you would expect to sort of return to the growth you would have expected when you bought the business when you head in 2019. So is that -- is it fair to read that you would expect to see that doubling of the revenues in 2019?
The revenues don't -- I'm trying to think, John, of the run rate. It's also complicated because it all get eliminated, right? It gets interesting when you guys -- or when you, women and men, see this and read it, you're getting it net of elimination. So if we take -- so NSA's growth next year, I think, we're forecasting $94 million. I'm just going to -- it's not reported. So I'm just going to -- you have to go with me here for a minute. And then a big chunk of that gets eliminated. Like I'm going to say 70% gets eliminated, so doesn't hit the top line. But that $94 million is on -- when we bought the business, it was $30 million top line. So -- and that's with us largely focused on our own business. How much third-party we choose to go after for optimization and just profit maximizing remains to be seen. The big difference will be we'll have half a year of that full run rate but also some of the OpEx pieces on maintenance that we feel that with -- both taking our maintenance in-house and managing our maintenance better because some of the in-house management people that we brought in are going to manage our parts in-house immediately, they have started already, and then be able to manage of external providers better than we have. So we just feel there there'll be more stability. And then with the load optimization and working with our supply chain people at Northern -- or North West, there's going to be a margin enhancement next year certainly on the back half on a comp basis. And then the first half is not really comp because we didn't have those planes flying. So the size of the business is larger. The margin contribution will be more. And then in the back half, we should be able to take out the noise that hurt us this year.
[Operator Instructions] We'll now take your next question. [Operator Instructions] .
Two questions. First, the Nutrition North changes that were, I guess, discussed yesterday by the government, do you see that impacting your business in any way?
Yes. As we get the details on it, like milk's going to drop another $2 in [indiscernible]. It could be $10 million in price reductions. And we're -- again, I'm just going to ballpark. For us, in our half of the program -- like we're about half of that program. It's probably actually a little more than half of $10 million. I think the $10 million is conservative overall. So for our pricing, there may be $5 million, $6 million of price reduction. So it's quite significant. It's interesting. We still have to decipher some of this product would normally maybe be sea-lifted or winter-roaded in, but it would fly by air now. But more importantly, they focused in on categories that are staples for the consumers who live and work every day in the North and they're more relevant to those consumers. So I think that, that advice was listened to and taken by the committee, the Nutrition North Advisory Board and by the government itself. So we're completely aligned with that. We think that the program has always worked better when it's more focused on key items and not spread too wide because it is only what it is. Like it's a lot of money, not to discourage that it's $100 million. We would like to see indexing, but we're pleased generally that we're passing on every penny of this to encourage sales and affordability for our shoppers. So I think we're going to -- as soon as we get this in place, we've seen in the past that it generates more demand and more unit growth and healthier foods. And it frees up more dollars in people's pockets to spend elsewhere, hopefully in our store. But wherever they spend it, it just gives them more income security.
Okay, great. And last question for me, probably for John. Can you give us any sense as to how you your -- or at least the initial -- your initial views on how IRFS 16 will impact you next year?
Well, Michael, I'll point you back to the RTS, Report to Shareholders, and financial statements. We've given an update there. We haven't released any financial metrics on that. I think we're consistent with the other retailers in that regard. We plan to release those numbers with our annual report, so in Q4. Our project's on track. So no concerns there. But I'd just point you back to that note for a more detailed explanation of where we're at.
So by the time you actually give us the guidance, Q1 will already have been released though, no?
No, it won't. It will be before our Q1.
It appears there are no further questions over the telephone at this time. I would like to turn the conference back to our host for any additional or closing remarks.
No additional remarks. Thank you for all the questions. And if there are any follow-up, you can call John or I directly. I think if you need our contact info, it's at northwest.ca. And we look forward to being on the call with you in March for our year-end Q4 report. Thanks very much.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.