North West Company Inc
TSX:NWC
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North West Company Inc
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Please be advised that this conference call is being recorded. Good day, and welcome to The North West Company Inc. Fourth 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, operator. Good afternoon. Sorry for that delay. There was the glitch with the operator trying to find us at our usual number. But anyways, here we are. I'm going to get right into the key highlights and factors in the quarter and then open for questions.I want to focus on a few areas that, I think, stand out and need explanation and more color perhaps. That includes North Star -- sorry, I'm in a rush here, but I shouldn't be. I'll first ask Amanda Sutton, VP and Legal Counsel, to provide our usual disclaimer comment.
Thank you very much. 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.
Okay. Thanks, Amanda. And also with me today is John King, our EVP and Chief Financial Officer.So I was just going to say, areas I want to touch on are in North Star Air, our airline business, and update on the Caribbean recovery and how it impacted the quarter, weather-related factors in Canada that were unusual, even by our normal cold weather standards, comment on margins in Canada and Giant Tiger performance and some other people changes at North West that are important.So turning first to NSA. NSA was an EBITDA contributor in the year. It's a bigger number than we disclosed in the financial notes because it's before depreciation. A couple million dollars less than we expected for the year overall.The difference traces back to a decision we made at midyear and to adapt to a situation, a competitive one, where we were applying to lease fully equipped aircraft and then move forward, which is a longer-range decision to acquire 2 ATR aircraft and fully crew them as owned and operated aircraft of NSA.That had implications for capital. That was disclosed in the last quarter, the acquisition of those 2 aircraft. It also has implications for operating expenses as we crew up the training and recruitment of the pilots and the company overall.As we've grown the business, we recognize that the operating requirements resource-wise are larger. And we're very pleased that there -- we are building a business here that's formidable and meets our needs and the needs of our customers in the North, but it also has ramp-up costs.So those 2 factors, the CapEx, which you know about, maybe less the ramp-up costs as we've seen it unfold through the third and the fourth quarter now, certainly has been an impact on NSA's fewer financial contribution. And then the other factor that came with that on the CapEx and the OpEx side, to a lesser degree, was the opening up of our -- of a Thompson air base and the construction of a new permanent hangar there. It was difficult, and this is kind of a weather theme as well. We had a very cold, wet winter in Western Canada, much of the north. And operating out of temporary facilities in Thompson was expensive and taxing on our people, but something that we've literally weathered through.So I guess, want to paint a picture here of the way NSA fits within our business because on the one hand, we think we bought it well. It's an accretive acquisition. But on the other hand, it really was the building block for a longer-term investment strategy that is completely aligned with us being a superior distributor of products and services to the North and where we need to as well as people. And that is, again, part of our overall position as a retailer to underserved markets.So we know we're doing it, and we're very confident that as we go live and fully operational with the 2 ATRs, we will be moving North West cargo faster and cheaper and more reliably to our markets and realizing the financial returns as well that go with that.Now the timing of it is a factor, and there's no question, it's taken longer, a couple of months on the certification of these 2 aircraft than we expected. The first one will be flying by the end of April, the second one in July. Our Thompson hangar will be opened in mid-May. So we -- those are long lead times, something that we're probably not used to because we do build stores and then open them. But the idea of buying planes and not being able to fly them right away, we get that as far as the plan. But the reality is, we have to -- we now have to watch it and manage through it and wait and plan for the go-live dates.We also had a Dash 8 aircraft, a combi aircraft, to the -- service to Northwestern Ontario. And we have a, I call it, a legacy passenger business. It's very important to that operation and to the community we serve that we're providing competition and a very great option to existing services, leveraging the operating scale and performance metrics of NSA.So we certainly kept an oar in the water there with the Dash 8 edition. It's a fully crewed aircraft that we're leasing. Not a lot of money in this and not intended to be. We just want to continue to provide the service and ensure the community see the very best that we can bring to them in that important region and basically learn from that. So that was a factor as well that would have -- it's kind of a wash through in sales and margins but on a net margin basis, would have brought down the ratios.That's the NSA overview. Again, as an investment for us in a building strategy, we're very pleased. We like the team, and we like the way things are going. But we're anticipating anxiously and positively the midyear turn on of that business to full force. What we call Phase 2, which is bringing in the cargo businesses of the Central Arctic in-house to North West Company through NSA.We're also far along on optimization of cargo efficiency through extended receiving hours in our stores, use of lighter weight plastic pallets and the store-ready pallets. So there's a number of process innovations that are integrated -- that give us integration efficiencies between the 2 companies and also deliver a financial return.On the Caribbean recovery, this is something that is uncharted for us because the scale and scope of these 2 hurricanes was one thing and we got the initial impact. But what happens afterwards has been a little difficult to manage. I think it's on us that we had closed doors and we had merchandise to reroute. Looking at it now, should we put those -- that merchandise into the system, I'm not sure where it would have gone, but we did.We put it against other stores, inbound trade. And we put it into supply chain that was already disrupted. There's been a shortage of containers. They've been redeployed for other uses or some of them just hasn't been found post-hurricane. And the ports themselves, whether it's in Puerto Rico, Florida, in the BVI, are not at the capacity and the efficiency.So we had a backup of containers, either because we put too much product in and then it never -- it was all -- it was backed up in these cargo constraints or they were just backed up, period. And it's too bad because there's 2 parts of this. One is it delayed recovery in terms of sales and stock rates. But also on the islands that were directly impacted, they've been beneficiaries, I'm talking about Barbados now and Curaçao, to a lesser degree, Cayman Islands.We should have done much better. We should have taken advantage of those situations, but we didn't. We didn't have the fill rates and the in-stock rates to do so. So that was, I guess, an unintended or unexpected consequence of the hurricanes. The stuff that was expected was the fact that we're out of business in 3 stores in the BVI and 2 large ones, one in St. Maarten and one in St. Thomas.We reopened the St. Maarten store. As much as the community service than anything else, there is no money to be made yet. We're just -- we're selling dry groceries in a section of the store. Phenomenal effort to make that happen. The full store opening is now pushed out to July. We are finding that the reconstruction is challenging because of the availability of contractors and tradespeople. This is unprecedented, the degree of work required on the islands, but we're making progress. And that store, let's say, will be -- should be fully operational by the end of July and completely rebuilt and reopened.St. Thomas is a longer play. We're going to be into 2019 -- well into 2019 before we have that store rebuilt, and we understand that. Now financially, we disclosed -- there's roughly $50 million -- $50 million to $60 million that we're not going to have in sales next year that we would have pre-hurricane on an annualized basis, and we're going to lose about 10% of that at the bottom line. So it's tough. I mean, we'll get some of that back -- or all of the CapEx back that we need and most of the BI. But as we extend longer, our BI only goes for a year. So there is going to be some financial impact here I know we've disclosed already. And certainly, when we do our modeling and our planning for 2018, it's just a reality that we have to work through.On the BVI, we were a little more optimistic. We believe that because we're a wholesaler, we have a multiple footprint there on the island and we're in a very strong market position. We recovered faster. We're just uncertain on the port capability, the reconstruction economy, whether it's going to replace the tourism downturn. There's a few unknowns.So from our side -- and we're planning our business in the Caribbean, it's hard for us to plan an uptick in earnings given what I just told you about the closed stores for sure. But even on a comp store basis, we're somewhat cautious here on uncontrollable factors that we're going to learn as we go.We think within our control, we're running a good business. In St. Croix, we're doing very well. In the BVI, all things considered, we're doing well. Cayman is pretty good, too. Barbados, I think, we should be doing better, but we've got to get our supply chain nailed down to make that happen. And I think it's just a matter of months, not quarters for us to get a grip on this and make sure that we've got a good flow of containers to our stores.Weather-related factors in Canada, this is something that no one likes to bring up as an excuse. And I'm just going to say that I don't like to hear it, but the metrics are such that we had flight cancellations. And the weather conditions have been cold and more unpredictable in the -- extreme in the Northeast.So in Baffin Island, into that region, we had 270 flight cancellations compared to 160-odd last year. The freight eventually got there, but to the critical end of November or early December, shipping, receiving and selling period, we were in big trouble and it affected our in-stock rates and our product spoilage rates as well. So the trends in those stores were fine. We were doing well. And we could just -- we see the drop-off, and that's what I can put 2 and 2 together and buy into the weather story when -- if the flights are canceled and the sales fell off and the shrink and spoilage went up, then that was material. It did have an impact on our regions that served the far north.The more southern regions that were affected by winter road, this is the double-edged sword of cold weather for us. If it's really bad, then we have the kinds of things I just described. But also, if it's early, we have early outbound shopping by our customers and personal vehicles. And we -- so December this year, compared to last year especially, was really popular for outshopping and affected our sales.The good thing is that heading into Q1, a lot of outshopping has happened and folks, they're not fatigued by shopping, and these are very long drives over the winter roads, but they've done their main shopping or traveling and so forth. And as we head into Q1, we're starting to see a nice rebound there in the same regions that were affected in Q4.And I'll also mention, it's kind of when it rains, it pours, or when it snows, it blizzards. In this case, in Alaska, we had a lot of disruption, weather-related. More frequently, it was cited by our operations teams. And there, we have a bypass system where the freight moves through a mail process and carriers are allowed to hold it for 72 hours then move it to another courier for 72 hours.If they can't move it, we are looking at major changes to the way we move freight. We're not talking about as major as the North Star Air model, but we're certainly looking at models that are outside of the Post Office system or that work with the Post Office on more innovative solutions that would save money and product costs from avoiding these delays.Just a point on margins in Canada. I think that a factor here to consider is we've absorbed a lot of freight increases, about $4 million worth last year. We chose not to pass those through. And I've brought this up before, but it's just rolling in through the quarter. It was another hit to the bottom line that we had to absorb.And we did it because we knew we had a better solution coming with the NSA rollout, even though it's delayed. And the fact that these freight increases are very concentrated by -- from third-party airlines who chose to raise the rates on particular routes, and we didn't see the fairness to raise prices based on that alone, knowing all the interrelatedness of cost factors as we see now from the inside of the airline looking out, and we will recoup part of that on an average basis and the rest will recoup through the lower-cost structure of our own air cargo once we turn it on.And then finally, on Giant Tiger, sort of looking backwards and forwards. It's a smaller part of our business, smaller than it was, unfortunately. But even priority wise, it doesn't move the needle too much one way or another, but it sure -- because it's such a bigger top line, it has some back-end synergies on procurement costs, but it affects things like comp sales and margin compression overall.We've deflated in that business in the quarter. We estimate over 3.5%. That's a pretty severe price deflation. We have not kept up on the cost concession side from our vendors, so that's hurt the business for sure. It is something that we're working on very, very hard to make sure that all of our suppliers are coming to the table with the cost support that we need to be in the market at the right index.We're very aware of gap closing with Giant Tiger East. They've had a fantastic year with their stores. They've got tremendous sales and profit growth but have -- their key volume soft goods and hard goods items, we see no reason why we can't do the same if we put the focus on it and the shoulder to the wheel.So it just kind of -- there's 2 parts. There's -- one is that making GT important enough, which we are now so that the people that are accountable are -- know that we're all on this, but not so important that the tail wags the dog versus the other -- the bigger opportunities that I've just described that can really make a difference in 2018 and beyond.A couple more points on 2018. When we look at our business in Northern Canada and Alaska, we continue to focus on the convenience side of what we sell and this -- that bundle product offering that I've talked about before, includes financial services, it includes some pharmacy, although we have some margin erosion there with the generic reform.But on balance, when we put into the mix all the convenience food categories, single serve, tobacco, I think I mentioned fuel and our growth in food service and HMR, this year, we are very focused on margins. Both from a margin control, shrink cost, the cold chain but also on the markup.And we feel that we -- as we focused on execution for several years now, investment in these categories, including extended store hours, we haven't taken as much advantage of what should be the margin structure of these categories. And this year, we believe that is important. And in both Alaska and Northern Canada, we are pursuing a strategy that really positions those categories with the convenience pricing that fits within the overall value proposition of what they represent to the customer and for us.So that -- that's an initiative under the convenience Top Category realm. Also under Top Categories and convenience is acceleration of stand-alone convenience stores. We are putting up 6 stores that are modular. They'll be going up and slated up for opening late this year into next year. And we also expect to open another 4 or 5 convenience stores through -- mostly through acquisition there. There could be one greenfield in there where we repurpose a store. But we're very -- given the size of our market and the nature of the business, I think we're being pretty aggressive on finding C-store locations, which we see are very accretive and quickly accretive compared to a few other investments that we have on our plate right now.And just generally speaking or just talk about next year from an outlook standpoint, first, on the CapEx side, we've talked about moving our CapEx into the range of sustaining plus growth that's smaller than it's been in the past. And of course, the last year, with $172-odd million, 2 large acquisitions and then the follow-on CapEx for North Star, that starts to fade to the background in 2018 as we focus on returns from that investment.Our CapEx, I think we've guided in the $108 million range in our report to shareholders. There's $21 million in there of reconstruction, hurricane insurance-covered reconstruction. So you can back out or put it in, it's real money. It actually accelerates. We have 6 top market projects next year in various stages of construction and completion. And 2 of those, St. Maarten and St. Thomas, will be funded through insurance. That's one way to look at it, I suppose.When I back out the $21 million, I look at about a $10 million spend in our IT project, new Giant Tiger stores, the convenience stores that we're opening. We're getting very, very close to what I think is a good model CapEx, $55 million roughly our depreciation rate to sustain our -- and EBITDA growth in the mid -- low mid-single digits. And then additional CapEx on the -- as we evolve the airline business, we're going to have, of course, sustaining CapEx on largely the engine -- major engine overhaul. So our go-forward maintenance CapEx is likely going to be north of $55 million -- or it will be. It'll be -- whether it's $60 million or $65 million, it depends on how big the fleet of equipment builds out and beyond for the airline side of things.Generally speaking, the economic environments in the North is positive. We're seeing some resource recovery. We're seeing continued spending commitments by the federal government. As it moves to the social spending side and still some of the infrastructure, we need to get a line of sight on how much of that is going to go through, trickle through or multiply through communities.Whether it's through social assistance, greater support for social services, practically speaking, if there's more people employed in those fields beside a healthier society to those services, it will mean more wages rippling through the economy. So on balance, the positive is just the tone of the government towards indigenous issues and indirectly indigenous community development.Alaska, we think, will be solid. I mean, we've seen it weathered the worst of what could have been a downturn with the state's fiscal situation, still tight, but not as dire as we might have thought it would be. And as I commented already on the Caribbean, the other region that we're less certain about because of -- sort of the unknowns of how the recovery will proceed.In Giant Tiger, I've mentioned that we've had a big deflation. We've been chasing the market here on the food side more than we should have. We're there now where we should be on price. We're going to be there on cost. And I don't anticipate that we're going to see a big deflation. If anything, we'll start to see inflationary pressures in the market that we could follow-up as essentially a price taker on the discount food side and then keep working the -- where the profit is on the nonfood side.And before I leave Giant Tiger, I just got to mention that we did have a situation we took for fresh meat for our stores in Q4. There was a pretty abrupt supplier disruption. Fresh meat wasn't doing really well anyways, but we're putting it back into 10 stores. So there was a gyration there that didn't help. It was already a difficult comp store sales situation.And finally, before I turn over to questions, I'm just going to mention a couple of key personnel and structure changes. First, starting at the top, from our Board of Directors, we announced in our press release that Brock Bulbuck had joined -- Brock Bulbuck, pardon me, had joined the board. Brock is from Winnipeg and runs a very, very healthy company in terms of growth and performance, Boyd Auto. And we're very, very pleased that he knows about the general frame of our business. When you live in Winnipeg, you know about Northern issues generally speaking. You're tied into indigenous issues, for example, and of those are impacts on our business. And Brock brings a keen commitment to the interest in wanting to be on the board and play a very effective role. So we're very pleased with him joining.On the executive front, we've restructured the business to help drive performance in the way that the business is growing. So reporting to me now is a multi-president structure. It sounds maybe grandiose, but it's certainly not bureaucratically. We've got a complex broad business. I have -- there's a president of our North Star Air who was the founder of the airline and has founded other airlines in the north, Frank Kelner. Dan McConnell, previously our Chief Development Officer, has been appointed President of our International Retail Group.And this replaces what was a more horizontal structure. We had a Chief Merchant Officer, Chief Operating Officer. Those positions are no longer in place. And we're now going to drive the business more vertically by region and geography. And for Dan, this is very developmental too. He's been instrumental on our growth from the development side. But now in terms of line position, accountability, it's very natural next step in his progression. We are searching for a President of Canadian Retail. That search has been underway for about 1.5 months, and we expect -- I expect that position to be filled in the next 2 to 3 months.We're also looking at a couple of other key executive positions to give us the resources we need to drive the business both vertically down through our existing retail lines and horizontally through the complementary parts of our business, including the logistics piece that continues to grow with lots of potential.That's a little bit longer than usual. I appreciate your patience in listening. And now operator, I'll now turn the call over to questions.
[Operator Instructions] The first question is from Matt Bank from CIBC.
I want to start on the airlines. So given the higher CapEx and slight change in how you're building it out, has your expectation for the $8 million in annualized EBITDA changed?
The EBITDA is higher because the CapEx is higher. We've gone from a leased to owned model. That's the biggest factor, I hope, that changes the measure. So there's more dollars of return coming out of that investment because we put more into it.
Right. And when you do turn on Phase 2 mid-year, how long will it take from there to insource North West freight? And then from that point, when do you expect to actually hit sort of a full earnings run rate with this business?
So if you think of Phase 2 as -- honestly, there's other phases, but the one that we're talking about to get there is what really counts. So the one ATR comes on May 1 and the other one in July. Thompson hangar is up, I said, in the middle of May. So we're fully operational in July, say, end of July. We're achieving -- so be it from a quarterly basis, it kind of fits in with the back, I guess, the back half of the year. So Q3, Q4, we'll be completely -- 100% utilization in -- of all the communities, all the markets that we have planned to shift to North West cargo or North West cargo to NSA.
Okay, great. And I just -- the last one on this topic is, how much total CapEx will you have spent on the airline by the end of 2018?
We will be -- and John, you can correct me, but I'm going to say about $80 million, $85 million.
And are -- that would be including, obviously, the acquisition itself?
Yes.
Okay. And then I wanted to ask also, what do you expect your tax rate to be for 2018?
Right, Matt, with the U.S. tax reform that's going to come down, keep in mind that only a portion of our U.S. or international business is taxed in the U.S. But that effective tax rate for the year-end that we just wrapped up was 31%, and I expect that, that would drop by about 200 basis points. Again, depending on how the income is earned across the business and some other nontaxable factors.
The next question is from Michael Van Aelst from TD Securities.
I was hoping you could help quantify a few things, particularly, I guess, just start with the impact in the North from the weather that you discussed, the store closures, the cargo freight cancellations. Is there any way you can put a number on that because profits in Canada were clearly quite squeezed?
Yes. I think it's a good question, and the approximate number would be $1.5 million to $2 million.
Okay. And then the ramp-up costs for NSA, would that -- what would that have been? You were saying a couple million shy, so that would've been...
Yes. A couple million dollars has gone into what I would call ramp-up costs in the build out of their business. I think we're basically more than -- we're almost tripling the size of it. And they weren't set up to be that big when we bought them.
Okay. And then the third-party freight costs, you mentioned $4 million in 2017, I think it was. How -- was that -- does that accelerate or did that increase as the year went on?
It actually Q -- it was pretty much there for like 10.5 months. So it's being -- I mean, it was full -- in full in the Q2, Q3, Q4 and then -- and half of Q1.
Okay, all right. And then on the Giant Tiger side, could you give us a little bit more color of what you did with the fresh meat? Did you say that, that was something to do with your supplier, the reason why you took [indiscernible]
Yes. It was something that -- I think there's different views on whether it's driving sales in a bigger way because it was removed, but it doesn't really matter. The point is it -- we had a supplier who gave us notice that they weren't going to give us the case-ready meat anymore, their production house. The next alternative was a very large producer in Canada, which -- much higher cost. This is a marginal business already and under review, but we were -- it was abrupt because we pulled out of the stores. We had to fill that case with something better. I think we've got growing pains there and we've got consumer -- some upset consumers. In the stores where they actually -- where the fresh meat actually had a healthy blend of sales, which would be about 20% of the stores. So we realized that we dropped the ball in 2 ways, in my view. One is, I think, we should have been working with a supplier. I don't think it's on them entirely that we -- to plan this changeover and find if we -- we're going to -- we're looking everywhere we can just to find an alternative supplier. We think we will for -- and then -- but only go back to the 10 stores that we think we think in the first place had a profitable meat business. From across basket penetration, it wasn't that high regardless and if -- so we're trying to go from food into fashion, and it's a long shot from meat to fashion. That's not the same shopper. But it is important for 10 of those stores. So we finally get back in the fresh meat for those 10 and the other 35 or so, we're working harder to get the case, the 8 feet that was removed over to a much more productive range, which I'm sure we're going to pull off and get profit out of where we weren't before. So this is a bad news story that turned into a good news story, but we have to execute it.
Okay. And when do you cycle your price investments on the food side of Giant Tiger?
We're going to -- we're cycling those in May, and we're also looking at inflation before then. So I'm just going to tell you, like there's 2 sides of this because it's not good if you have to wait that long, and we should have moved faster in the cost side, but our supplier cost negotiations are in full force and we're capturing the cost concession or the price of $4 that we need to help. Can't tell you we will offset it completely. But -- so some of that erosion is starting to soften because of these efforts that we're making on the cost side, and there's also a bit of inflation in the market, too. So the big 3.5% deflation, that was like a wave that went through the business, but we're starting to chip away at it, so it'll -- it won't be until May, it'll be in the next few months. We start to work it down. So I would expect inflation this quarter will be maybe minus 1, 1.25 in GT.
Okay. And you talked about some increased square footage in the area. Can you talk about where that's coming from and mixed -- how significant?
Well, the square footage in our business right now would be Giant Tiger store openings, which is, I guess, a good 4 in the year, 2 in the -- 3 in the quarter, 2 in the quarter.
I was referring to the competitive...
I'm sorry. Yes, well that's primarily -- it's the addition of save on foods stores in the marketplace in West -- in Manitoba and Saskatchewan and not really converted in square footage, but just as impactful is we're still comping some of the No-Frills conversions from Extra Foods.
The next question is from Stephen MacLeod from BMO Capital Markets.
I just -- when you look at Northern Canada, I mean, one of the things that you've decided over the last couple of quarters, and particularly in this outlook, it seems as though the expectations are more positive around some of the government infrastructure spending in the North. I'm just wondering if you have -- what kind of visibility you have into the timing of that and what the spend is going to be geared towards?
Yes. Well, this is an age-old question, it seems, and I might give you an age-old answer. We know where there's going to be schools and sewer and water projects. And it -- but it's very, very concentrated, so a $65 million school sucks up a whole bunch of budget dollars. That's only one community, that's one construction crew, and we get some -- the multiplier of that isn't as big as the teachers that show up afterwards, assuming there's more teachers. So the number of those projects is about the same, actually. I mean, there's no -- if you're modeling and say, well, are they going to -- are we going to get a lift in sales because of a delta on CapEx, I would say no. I think we've got a decent capital spend economy going on in the North with schools here and there and sewer and water projects. But when we add it all up and I -- and we look at our, say, our budget, our financial plan for the year, it just -- it comes up to probably where we were last year, which wasn't bad either. So the CapEx has really not changed. In fact, some might challenge that it's been stretched out even further, depending on how you get the shell game through the budget process. What has grown and although it's stretched out as well is the social spending and that's what I kind of alluded to before is that it's trying to follow that one. That's really hard to do. What we're going to be advocating for more and more publicly is the indexing of transfer spending, and that's what sticks. That's what we know goes to people who need the money to live. And I'm talking about child benefit payments, old age, a whole bunch of social transfers that, for some unknown reason, and we don't want to be the first and the only people who'd say this, but should be indexed to cost of living and isn't. And that's a big one that we'd like to see happen, but it hasn't yet. And I'm just happy that we've got a federal government that I think will listen. The other things you're talking about, they're great big numbers, but the answer is it's very hard to trace them back to specific communities and someone getting a job on a social spending program that will then have money to spend in our store. Really hard to do, so we're actually not bothering on that one. We're going to wait and see what that social programming looks like.
Okay. Looks like that make sense. And then sorry, I may have missed these numbers. But I was just wondering if you could just quantify what the NSA ramp-up costs were and the below-target performance from Giant Tiger. Was it a couple million for NSA and about $1.5 million to $2 million from Giant Tiger?
I'm not going to get the Giant Tiger one, I'm just going to try to put it in perspective. The Giant Tiger numbers aren't big either way. We've had the worst of the Giant Tiger as we've -- it's kind of a lot of little things that happened. They could -- they add up to something that we care about, but it's not something that we're going to disclose. And then NSA side of things, a couple million dollars is the shortfall.
Our next question is from Sabahat Khan from RBC Capital Markets.And we will pass to the next question. The next question is from Mr. James Allison from Barclays.
So I just wanted to touch out real quickly about the dividend. So Edward, you previously said that you looked past short-term disruptions and focus on kind of the recurring business when deciding a dividend increase. I mean, understandably, there were some uncontrollables in Q4 that we've talked about. But was there anything in particular that caused you to postpone a potential increase this quarter?
Not particularly. I think the ramp-up of NSA, we get our head around. And I'm going to say that as you listen to us and we talk about the airline aspect of the business, it's revealing that we need to know it well. And I think there's a caution there, not so much on the plan, but I would say the natural integration of our knowledge at the sea level, so to myself and John and the key people that manage North Star, and we want to see this all happen. We get how the numbers work. We know why we did it, but we want to see it executed. We want to see these planes flying. We want to see the freight moving, et cetera. On the whole sort of totem pole of risk, that's not the biggest one, but it does -- we do consider all these things. So then probably at the top is the Caribbean recovery. That did catch us off guard and we are going to have supply chain disruptions. And we need to see some visibility there because there's another sort of leg of the chair or the table that we want to see solid performance from. Giant Tiger is actually neither here nor there on the dividend decision. And then the fourth one I'll mention is the margin expansion that we expect from our convenience categories in Northern Canada. Probably the least risky of all, but we want to see that and it's coming through the quarter we've had with a number of factors here, puts and takes, but more takes than puts, we would recommend to our board that -- exactly what I'm saying to you, that we should look at midyear, come out of Q2 go and make a decision and go right to September and do that. I don't think it's an end of Q1 decision, but I won't say never. But it certainly is a serious Q2 review to see that -- if we're generating the cash and we've got -- we're on plan in these key parts of our business, then we'd be looking at a dividend increase then.
[Operator Instructions] Our next question is from Neil Linsdell of Industrial Alliance.
I'm just wondering, on the -- in the Caribbean, with the way insurance proceeds are going to come in and your expenses are going to go out as you're doing the rebuilding, do you have any visibility right now on, say, what quarters or the time frame or the size of the payments you're expecting to receive, how that's going to be accounted for, just as we're adjusting our models?
Right, Neil. Good question. So the visibility on the status of the projects, I think Edward covered the availability of resources, et cetera. So from an insurance perspective, we need to get going on those reconstruction projects. And as we start ramping up that investment, then there'll be -- we expect to have some progress payments from our insurance company. But the timing of the receipt to the progress payments is uncertain. We know they're going to get them, we don't -- but to your question, for me to give you an amount and a quarter, that, I'm not prepared to do. The business interruption insurance, we've talked about previously. The hurricanes happened in September, early September. We've got a year that we're going to have to go through on those costs, then the claims will be submitted and then they're going to go through the claims adjudication. And we would be hoping to settle those in Q4. But we're told, with the number of claims overall and the process, that adjudication period could take a little bit longer. Okay?
Yes, it always does, you expect.
Well, actually, that's a part -- I'll just jump back in here. Part of the reconstruction uncertainty is the processing of individual claim. There's one big insurance company down there -- what's the name?
[ Adjuco ]...
[ Adjuco ], and we're a little concerned at the rate of their -- of the weight -- of the process of individual house rebuilds so far, so anyway...
Okay. And then I was just looking at the other store closures you mentioned in the quarter. There was one Northern store you announced the closure in February the Cost-U- You Less in Hawaii. Does that have any significant impact?
No. That would be a positive impact.
Right, because it was a cash -- it was a drain.
There's a closure cost to it, but it's got a short payback.
Okay. And then just...
Just for context on that, we don't talk -- I don't want to gloss over -- when a stores close, we don't close a lot of stores. But the problem with [indiscernible] and the challenge, a lot of local shoppers, but there's the Costco that opened in it, it hung in there, the entire time that we've owned Cost-U-Less, that Costco was there, but that's not the model for Cost-U-Less. We're not there to be a secondary store to Costco. So it -- as it started to go south, we had to make that call.
Okay. And then just from a broader scope, I don't think I've ever seen in your history as much kind of disruption and changes as you've had to deal with, say, in the last 12 months. So I'm just wondering, from a manpower perspective, with the acquisitions that you've done, I guess, at North Star and BVI, have you gained enough senior people to help deal with a lot of the changes in the disruption? Or are you taking a lot of time and expense at the head office level to deal with these? And is it draining your capacity to do your top market stores and such?
Well, I started to answer that question when I talked about executive changes. We could use some more horsepower in some parts of the business. I did move Craig Gilpin. He didn't leave. He's very capable in the right kind of role, in this case, to be the CAO, which he had started to do when he joined North West. So he is going in. He kind of flipped with Dan McConnell, and it plays to the strength he has on process and managing the construction site as well as IT and other support services. But more than that -- and then Dan on the other hand, it's going to -- he had RTW reporting to him. In the circumstances, RTW has had a very good year. Dan now has all of International, including the Caribbean. He'll be looking at the integration opportunities, which have been put to the sidelines because the other thing you didn't mention besides the number of things we took on was the effect of the hurricanes, it delayed a lot of integration and efficiencies that we wanted to achieve in the Caribbean. So that's on -- Dan's work plan is to say, "Okay, how do we integrate now BVI with Cost-U-Less and what does that look like?" In terms of the other key role I mentioned already in Canada, I think getting the Canadian retail role filled is going to be really important because I'm wearing the hat today and that's okay, but there's a lot of other things in the business that we want to get to. I don't think anything is in a dire situation, but we're talking about what could be more optimal. And I'll tell you, there is -- that we're on it. And I think out of all this, we're going to see some really interesting mixes of promotional talent from within and some new talent as well joining the company. And it's all -- to me, it's all headed in the right direction, but we're not quite there yet. So it is a concern. I mean, we couldn't have timed and paced the hurricane differently. Doing NSA and RTW at the same time, given our bandwidth, I mean, we're not architected as a company to do a big turnaround to be serial acquisitions, et cetera. So when we do these things, we were -- we do get strained. And it is right that some things might slide. So I think, given all the external factors last year, I don't believe it was that significant, but it is a sensitive point for myself and the board and the management team that we have the right people in the right roles. And with the search we have underway, a couple other key positions that I think will be filled in the near future, I'll feel a lot more positive about that in another 2 or 3 months.
So still a little bit of pressure, but you feel confident that in a few months, you'll back up at full speed?
Yes. And I think in part because of some of the negative variances that we know now. I mean, you kind of -- you go through and you understand it, then you start to go -- you attack them. I think we didn't know that last year. So those -- whatever unknown unknowns kind of things. So I think that even though we might have -- we could use a little more resource, the people we do have, we've got them more effectively on the right tasks. So that's behind the scenes, hard to put a number behind that. But I think you would hope that we're learning and adjusting, and I'm confident that we are.
Okay. Well, I'm sure this year will be easier for you than last year.
No plan survives its first contact with reality.
The next question is from Michael Van Aelst from TD Securities.
I just wanted to follow up on NSA. Can you correct me if I'm wrong? I think you're up to 13 aircraft now, is that correct?
Yes, I believe it is. It's the -- [ 9, 1, 1, 1, 2 ] is 13.
Okay. And how would you -- I know there's a number -- these are new or at least refit -- retrofitted recently. Would you say the entire fleet is in good shape?
Yes. 2 of those are leased powered by the hour, the Pilatus, the 9 Pilatuses are in good shape. The 2 ATRs would be considered almost new based on the hours on them and the cycles, even though they're 6 years old. So -- and the Baslers, I'm sorry, I forgot about the 4 Baslers and 3 of those are almost new. One is a leased plane that's going back to the lessor in a couple of months. So our fleet would be definitely be well above the average Northern Fleet. So just to clarify, it's 5 Baslers, 8 Pilatuses, 2 ATR 500s, 1 ATR 200 and a Dash 8. That's actually 15 -- I mean, 16.
And then when you look out over the next couple of years, once you have these -- the 2 ATRs coming on, do you see the need to add more?
I like the question, the opportunity to add more because we -- I guess, a CapEx issue or a CapEx opportunity. So we want to stabilize and get the returns from the Phase 1, Phase 2 expenditures. We -- everyone agrees on that. But it's -- I expect we're going to have more opportunity to grow the business. But to do that, you need planes. So that's the right answer to that question.
And our next question is from Sabahat Khan from RBC Capital Markets.
Just a question on the earlier comment around the convenience stores. You mentioned a couple of them are modular. Is that their permanent state? And with the convenience stores, are you kind of testing it out and you could potentially expand this over time? Or is that all you want to do at this point?
Well, next year, I said 6. We -- I think we've got about 20 locations circled, inclusive of the 6 that we think this design that we've done with ATCO could be really, really powerful on. I'm really excited about the way we've engineered this. We've taken the CapEx down to, I think, $440,000 from almost $1 million. We've engineered every aspect, so it can be -- by modular, I mean prebuilt and then shipped up like a container. We're going to fill it with freight, so we've cut the freight costs down on the way up on the C lift, and the model is really attractive. So I would -- I don't -- we'll see. I mean, the fact that we're doing 6 as opposed to 1, it means we're pretty confident. And then we would do -- we would want to do more. And if it's 20 or whatever we get to, there's probably, if you look -- this is in Northern Canada, but also in Alaska, too. We would look at that concept. So that's the scope of what we're talking about here.
And just on the CapEx, I guess, you mentioned it's elevated here at about $108 million. How long do you see yourself taking to get to about $55 million? And I guess, you said that's maintenance, but we should assume at that point, there's not much in the way of growth CapEx?
Yes. So I was working back from the $108 million because we got $21 million of insurance recovery expenditures. So you back that off, and we would have $87 million and I got about $10 million of IT that's over and above our normal IT spend, which is a major once every 15 years type of expenditure, 3 Giant Tiger stores, 5 convenience stores, so that's maybe out of pure growth CapEx. We're getting close to the $55 million to $65 million range, depending on how much depreciation, how many -- how big NSA gets in terms of engine refurbishment that we need to put back into that business. So 2019 is certainly doable. And then the other decision is where else do we have growth that we may want to invest. But right now, if you're talking about -- and this by the way does -- I mentioned 6 top markets next year. I mean, 3 of those -- to be fair, 2 of them, pardon me, are being accelerated by the insurance. But if we're still covering off 3 to 4 top markets a year within that spending and below, then I think we're -- we're almost there actually when I look at what the composites are of the current spend for next year.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Kennedy.
Okay. Thank you, operator. Again, we apologize for starting the call late and appreciate all the questions. Any follow-up, as usual, please reach out to me directly or to John. You've got our contact information. Thanks very much, and we look forward to talking to you on Q2 and -- Q1 in June. Good afternoon.
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