Edward Kennedy - President and CEO Paulina Hiebert - VP, Legal and Corporate Secretary John King - EVP and CFO

Michael Van Aelst - TD Securities Tal Woolley - Dundee Capital Partners Sabahat Khan - RBC Capital Markets Stephen MacLeod - BMO Capital Markets Neil Linsdell - Industrial Alliance Jim Durran - Barclays Matt Bank - CIBC Keith Howlett - Desjardins Securities

Good day, and welcome to the North West Company's Third 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 everyone, and welcome to our third quarter conference call. I'm Edward Kennedy, President and CEO of North West Company. Joining me today are Paulina Hiebert, our VP, Legal and Secretary and John King, our EVP and CFO. Before I start my remarks and open for questions, I will ask Paulina to read our disclaimer statement.

Thank you, Edward. Before we begin, I'll 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.

Thanks Paulina. So before I get into the operating results for the quarter, I'm going to just comment on the accounting aspect of our quarter specific to stock based and variable comp tied to performance. So we saw a swing the other way when the stock price was higher, the stock price went down in the quarter and the mark-to-market on our stock based comp is a credit against the charge last year. We also are in a scenario where we pay our short term incentive pay, we have a pretty firm threshold of pay, no pay and if we trend out our performance right now this year we're close to no pay zone and that is of course an adjustment on our short term incentive pay. So those two adjustments come back into the P&L and it's a credit. And when you separate all that, I think it's in Note 9 to the financial statements, it's a tough quarter because you take out last year and this year's and you weigh it all out and we're down maybe $1 million, $1.2 million in EBITDA. So that is what I want to talk about. I mean I will say that the way we're set up in terms of that risk of variable pay, as kind of a natural shock absorber in the way our earnings will level out over time over any given year in fact and we're set up that way because we want to have consistent cash flow. If we don’t hit our targets, that all comes back to the company and it helps protect on the downside both for dividend and just general cash flow. So this is one of those years, it could get better in Q4 but our best outlook is that it is that kind of year when the incentive pace is going to be in the low end and it is going to come back as a credit for the benefit of our shareholders. So now on the operating side, the quarter had some things that we knew were going to be tougher specific to Alaska. I think most of our investors were aware that we were facing permanent fund dividend cut that was 50% and when you think about North West, a lot of our core customers depend on government transfer payments, they are typically not that volatile but the permanent fund is a transfer payment that has volatility attached and when it's cut by that degree, the discretionary spending really dries up and we noticed that in our market. So to give you an example it affects the entire national division’s sales performance and general merchandize and food in the month of October which is when the permanent fund dividend hit, our general merchandize sales were down in the 40% range and that is certainly a very high number, we are actually trending quite well in Q4 because the money that wasn’t there is not there and customers move on to other spending occasions et cetera. But during that spending period of October we were hit pretty hard, even our food business was down I think about 5.2. And that's a big decline in food of course. When we comp that over the last time we had a similar size permanent fund and adjust for inflation, we are still growing our food business and our food markets share in Alaska, general merchandize is [indiscernible] that really is dependent upon those income flows. So now that quarter is absorbed in Alaska as I say they are moving forward and they are trending certainly above plan pre-Q2 - Q3 pardon me, the sales line coming up the half way through Q4. The other one that was more predictable on from the negative side for us was margin compression and we knew it was going to get worse before it got better and I'm talking specifically about our Giant Tiger business in Western Canada. I think the reported food deflation by one of the banks for October was the lowest and the West was in Manitoba at negative 3.7, 3.8, Saskatchewan was minus 3.6 and Alberta was minus 3.4. Those are unheard of levels for food deflation. What they tell us and what we see is a real heightened price intensity, competitive price intensity in the market and so it would be safe way dropping the prices, Wal-Mart is in the picture of course, Loblaw [indiscernible] save on food, opening new stores in Winnipeg which is a factor more recently but really it's about all a lot of hyper promotion and pricing that we are price taker of at Giant Tiger, we have a limited food assortment, we tried, we blend our gross through our fashion in our non-food assortment and are really working hard on to make sure we can offset margin compression in food. It doesn't help if we have real super warm weather until recently getting some of the seasonal sales off the door, so that confluence isn’t great for the business and it's a tough one short term. As we see the way things have shaped up now, we're more dialed in on how do we get planned out of our assortment, how do we add food assortment, put that a range that we can with our limited space get a little more gross but more importantly really bring it to the front and center of our stores what we think are exceptional hard line and soft line merchandize items and assortments particularly focusing on home products as we index ourselves against Giant Tiger in the East, we think there is definitely room to improve there. In the fashion lines, the Giant Tiger has promoted and relaunched with branding, we definitely see traction. So Giant Tiger for us is always a medium to longer term play with these - with the volatility of the business there is two aspects; one would be weather related, the other one is on the discount end of food retailing what is going on with price intensity and on both counts, we had a tough quarter. So on a positive side, start with Caribbean, we continue to grow that business top line and bottom line, it is kind of subsumed within the Alaska results but when we search through and look at how things are going, certainly the Caribbean side of the business was healthy in the quarter and it actually brought along the entire [indiscernible] business and we continue to get decent growth out of that business. We think we will in Q4 as well, and we continue to believe in that part of our retail [indiscernible]. In Northern Canada it is a little more complicated, I mean we put a lot of money and I will talk more about our CapEx plans moving forward into we call top markets and then top categories, a big emphasis on convenience, fresh food service. We look at our blend certainly has been trending and the trend has got a nice acceleration to it through Q3 and then what we call P9 October, P10 November the blend shift is starting to take hold cumulatively. The challenge we have has been more on the expense side and that is starting to ratchet down. I said this before, I think we took probably too safe approach in terms of staffing up for these different food and service offerings that we're focusing on and when we step back and look at all this, we already were short of plan in terms of sales, a couple of markets accepted but we are definitely not online with where our OpEx should be in those stores. So as we brought that into bear and fine tuned it, it is things like cross-training in the store and changing some work processes, we are starting to see the leverage of higher blend, a more favorable blend of gross profit with our labor [torque-ing] [ph] down and that is a big expectation for Q4 into next year that Northern Canada retail will carry more the weight as it should we believe with the effort we're putting into the business. The other part that's impacting Northern Canada retail that we think will be a stronger net positive, that wasn't as strong as we hoped in the quarter, is rising income is tied to first of all Child Benefit payment improvement that was made by the Federal Government. We can quantify particularly in Nunavut, the farther northern regions where the customer base is tax paying and is in the sort of sweet spot 20,000 to 40,000 of income where the maximum delta was an improvement to the Child Benefit payments per child, paying a number of children under the age of five and so forth. We can correlate directly in those regions nice lift to the sales. Where we haven't seen as big of a lift is in First Nation Communities and communities that are on locations where there is obviously a little more out-shopping. We have some fine tuning to do on our promotional activity as we try to capture large and larger basket sizes on these key payment days and this by the way is one of them. This is a Child Benefit payment date that will be a major part of our December sales plan both the Giant Tiger and in Northern Canada retail. So there is it's a net, it's kind of a nice problem to have and how do we track more dollars locally through a better offer promotionally. These dollars are there and certainly as we have more success there in the far Northern regions but we think there is a lot more upside in the near north and below the Arctic level as well. So those are kind of the mixes of sales and expenses, cost factors that affected the quarter. We did announce or disclosed in the outlook that we're going to be better balancing and I would say we did from Day one with our top market strategy that accelerating CapEx into these markets that has a defensive and a growth component to it. And then we have looked at the blend of defensive/maintenance CapEx versus growth CapEx now 13, 15 products into it as we get through next year, we will be closer to 17 of these stores. What we're finding is the average cost per project is higher than we want and has been driven up largely by the maintenance capital that once you open up, it will start to spend the capital that makes sense to do lot of the end of life cycle of near end of life cycle replacements which by themselves won't get you lot of accretive returns. And if we had a more robust Northern Economy and we are more confident that there was an income lift behind the investment we are making to, to not just grab share but sell a broader range of products and services than we would feel better about moving that program along faster but it's not that in fact we look at it the other way, we want to take the best of the best whether it's Tim Horton's food service idea, Costco pack size, things we can do on a capital light basis and continue to roll those out to our other stores, top markets and otherwise but pace is on a slower rate are CapEx on the top market stores themselves. It is a careful assessment, sometimes as we have in the last quarter, our stores destroyed by fire, there is insurance involved or landlord is ready to rebuild the community landlord ready to go. So we are not going to defer that kind of capital for obvious reasons. But if we go back to sort of our basics the nuance here is we are still putting capital first into our top markets or going to pace it over timeline that keeps us within our sustaining CapEx range of around $50 million a year, next year is going to be little bit higher because we can't just turn it off but as we plan into 2018 and 2019 that is the kind of sustaining plus maintenance CapEx used to expect from North West and I think above beyond that is clearly earmarked for growth investments or dividend increases or some combination. So tuck-in acquisitions is a number that we're working on that we're quite positive about in terms of getting them done, new store growth at Giant Tiger will be another example, fewer convenience store openings these kinds of things would meet the build, our IT projects we haven’t talked a lot about but it's spend in the $30 million range, $40 million when it's in the final phase is done for years from now, we spent 6, we got I think John 15 next year roughly and then another say 8 or 7 in 2018. That has got a growth aspect and a sustaining aspect to it, we know there is attached from a pricing promotion ability and order replenishment but we also towards end of life cycle platforms and point of sale merchandize management. So it gets parsing of the $50 million that I described and parsing on the growth side. But that is the way, we're going to try to be clear with our investors and helping you understand how we are allocating capital. When you think about the top market strategy itself as I say we it is still the first calling our capital but based on the reality of what we have experienced two fold, I will repeat that again, one is the amount of sustaining capital per project relative to growth CapEx that we're putting in and two the general economic environment that we're within and it can range from almost well certainly recession conditions in Alaska it's just very muted in Northern Canada not enough that says we should be putting $7 million, $8 million into each of these stores which is range we're looking at it as we start to get into more and more projects. We will spend that money but as I say we will phase it out and we're careful not to defer to the point we're in by competitive entry or we actually slowdown the performance of the store from a functional safety or whatever type of reason. So that criterion will be applied and we will work within the CapEx range that I just described. As far as the outlook for the rest of the quarter or next year as I just commented on Alaska, there is some uncertainty there, we don’t see the PFD being cut again, we do see the state having a closer fiscal gap and we're hoping that that takes place sooner than later and the stake can create revenue sources that allow them to avoid I mean to cut services essential type for sure that would affect all Alaskans but especially markets that we serve. Northern Canada we remain more bullish on the income growth that we've seen through some of the programs the Child Benefit, nutrition north expansion. We are waiting to see more clarity on where the government spending its capital and in the north but we do expect another very supportive Federal budgets for in business communities in Canada with spill-over effect to consumer income and a real sense of urgency being communicated to the Federal government to get that money out and spent which seems to be a challenge right now. So, this is a concern but we do see coming through ahead where we are funding for in business communities will improve at a faster rate. So we continue to see NCR as one of our better and as our biggest banner, a key driver next year. When you look at Giant Tiger, it is a tougher situation, I talked already about how we are trying to get our blend on the gross profit side more favorable. Don’t know what is going to happen with the seasonal selling conditions but there are pretty soft comps for us to beat next year and come out ahead of what we finished. We're also going to like finish 2016, I would say the same for Alaska even with another year of fiscal constraints given the PFD impact that is probably the biggest thing the state could have done to hurt spending in our communities and it is already been done and we don’t see it dropping further. Cost-U-Less for us we think has solid momentum. We have a little concern over rising energy costs obviously we benefited from couple of years of decline, so depending on how they will stabilize and move up, that could of the utility side. Zika virus were in the process of the tourist season, we seem to be weathering that aspects and time will tell we will have a better picture on how that all turn out by the time we come to our March quarterly meeting. So with that operator, I would be happy to turn the call over for questions.

[Operator Instructions] The first question in fact is from Michael Van Aelst of TD Securities. Please go ahead.

Hi good afternoon. So I have a few questions. First of all on the infrastructure spending in the North, usually you can kind of see when the materials are coming up - I guess during the summer months that there's some spending coming. So is there anything that's going to hit in the first half of the year or are you expecting it only in the second half of 2017?

There will be some that hits in the first half and we do know from the shipping company that we co-own and other sources where the projects are, but the construction season won't start till regardless really if most is in the second half. So June, July would be the earliest but it's a little lower than we expected and this gets back to something we talked to in Ottawa, indigenous community side, are quite concerned on the money that is not leaving Ottawa not getting out to the communities. So there is two parts to that, I mean there is the Arctic stores that are on the Sealift, that freight is already in there and then there is the winter road stores which will be provisioned in February and into Mid-March and those are usually last minute things to begin with. But the housing numbers we've seen are ahead of last year, the number of housing starts by community and we don’t have is visibility on major projects and obviously the bigger they are, they have already missed the boat literally for next year. The best thing that can happen is they make the Sealift for this spring and construction starts late in the fall of next year, that is kind of timing.

Okay. So mild increases in infrastructure spending in the first half and you're hoping for bigger increases in the second?

Correct.

And then on Alaska, is there normally a PFD impact in the fourth quarter as well in terms of the drop in spending or did you comment that it was already starting to settle?

No, there usually isn’t, there is already a number of other like there is - factors that come into play in the quarter, the Alaska Native Corporations have dividends and some of them are coming in line, some of them are reduced, our comps are pretty good right now, so it is like whole another story started and that is behind us.

Okay, great. And it seems like you're able to mitigate the impact from that drop better than you have in prior periods where we have seen that fall off in the PFD. Can you talk about some of the programs that you may use to do that?

I would like to agree with you but I think the - everyone - there is a lot of focus on promotion but if I looked at the number of checks that were cashed and the number of - one of our big promotions is if you bring your check to us, we will give you back $1200 and if you have 2000, we will give 2400. [The number][ph] came back and took us up on that offer was lower, so I can't actually quite agree with you, I think - we look at it again I would say we have - there is more direct deposits, we have to go after that more aggressively. I think from an expense side they did a good job when they saw the way things are going but I think we just had an average performance given that the PFD was kind of what it was. We have a bit of vulnerability there and we did what we could but it hit us pretty hard in October.

Okay. And sorry - finally, on getting back to the north, the extra staffing cost that you talked about, did any of it come down in Q3? And how do you - when you talk about it for Q4 and next year, are you expecting it to just kind of fall off gradually or is it a pretty big sharp falloff at some point?

Yes, Q9 was a pretty big improvement from Q8 and then Q10 was a pretty good drop as well. We have laid out our targets for next year, we are looking that this would be more front-ended because we have learnt a lot and even from a management time focus as we started to phase out the projects there is a lot more time to go back, back into these market situations and view some good decision rules. So the short answer is the drop is going to be more dramatic through Q4 and into Q1 and then we have a work force management system we are implementing as part of our systems platform. That would give us the next level of efficiency but the roll out by platform I think it actually starts in Alaska in the second half of next year but NCR is going to be brought down in Q4, Q1.

All right, thank you.

Thank you. The next question is from Tal Woolley of Dundee Capital Partners. Please go ahead.

Hi good afternoon. I was just wondering, Edward, if I look back historically since about 2008, your CapEx was around like average about $45 million to $50 million until we sort of got into the last couple of years. When you talk about going forward, does $50 million - is that enough really to get the growth projects in at the rate you want to get them in over the next few years?

No but it's and it is not like -we are not trying to be queue with the language either but what we have done is we put the top market produce I thought they are going to run 75% growth CapEx, 25% maintenance, it was optimistic because they are running more 50:50, 60:40 maintenance sometimes. So in that $50 million, we have thrown all the top market projects so let's say there is for a year, $6 million, $7 million maybe to 5 then you got some IT and you have got some new general miscellaneous maintenance CapEx. North is of $50 million, if we got new product service idea that are really discrete i.e. we are going to put it into this, put in 20:10 or 30 for reals or whatever the program is, we would call that growth CapEx and if - we're going to do it LED relapping which we're doing but same kind of energy with the high payback up to that in the growth bucket too. Clearly the Giant Tiger new stores would be in the growth bucket and any tuck-in acquisitions. So if we get back up to the range we're at now say $80 million to $100 million it will be for very accretive reasons and not in this kind of big area we're in today, we are putting the money in to top markets, we make a lot of money in these markets but at the end of the day and they have been giving us a better lift, I mean the delta is there versus the rest of our business but it's not accretive enough and it's dragging along too much maintenance capital. So 50 is our base and I think you start to layer on in any given year, I would say that if we have a $100 million CapEx spending year that should be a good sign that we think we got $50 million worth of growth opportunities, and if we don’t, then it's obviously not going to be that high.

Okay. Maybe I can approach this another way. So how many years - sorry, the way you expressed on the call, I was sort of getting some impression that maybe you were trying to slow the CapEx. But maybe it just sounds like you're trying to slow the rate of maintenance CapEx that's making its way into the budget. But how long would it take you now to get through the top 40 program versus what you thought you were going to run at before?

Yes it would be five more years.

Five more years, okay perfect.

To get through those 40 odd stores.

Okay. And then I just wanted to touch on freight too, with oil sort of bouncing all over the place, obviously it's still lower, but just what should we expect for freight outlook given when the communities get - some of the communities get refueled? How are you thinking about freight over the next 12 months?

Well again it's the oil question and all I can tell you in our budgeting, it's a downward risk factor and that there is obviously more pressure as utility cost going up and down and we've made some accommodation for that. But for the timing is when exactly will that barge, by fuel or whoever is buying the fuel that goes on the barge, what price they attain and et cetera. So we just - we identified it as an upward pressure, it's a bit of money that we put in against that but we haven’t said it's going to be a shattering flip the other way in 2017. I guess we have had a couple of years pretty good benefit from that particularly in the Caribbean.

Okay. And then just on the Nutrition North program too, you've got an expansion into some communities. Has there been any further discussion about expanding the overall budget available per community, given the popularity of the program? Do you have any sense where the government might be leaning on that?

No, they have a lot of community consultations and I think there is a lot of different perspectives. We certainly have advocated that the dollars have to go up if they are going to make a more meaningful impact on healthy living choices in our case, I don’t have a sign that that is necessarily going to happen. We certainly like to preserve the program the way it is structurally and then look at enhancements over that. There is a lot of things that we – that are not inside the four walls of our store for example they have got lot of advocacy in their meetings, consultative meetings on country foods which are harvested while so forth. So it could go in number of different ways, I think that the government is inclined to keep the core of the program and recognizes the cost efficiency of it and how people can figure logistics very efficiently to deliver this program. And the fact that it's somewhat misconstrued as probably reduction program given it's only $70 million in size, the government is going to have to come to grip with some of the income security things that we increasingly advocated for things like social systems that is an index to cost of living in the North. There is a lot of other living cost factors besides nutrition and food that the government needs to consider and adjust so that people who are the lower income stratums can live the quality of life that they would otherwise that they should be able in the North like they would in the South and that is kind of a broader answer but I think it's as a government had listened to the consultation process, there is a lot more going on in just Nutrition North and I think it's very important and it is positive for the North and it's positive for retailers in the North that we do have a government that seems to be listening and we will see now with the budget coming up, what kind of program investment they are prepared to make.

Okay, that is great. Thank you very much.

Thank you. The next question is from Sabahat Khan of RBC Capital Markets. Please go ahead.

Thanks. Just on the ERP program or the implementation that is going on, I know earlier in the year you noted highest risk will be about nine to 12 months in kind of are we going live at some of the banners, how is that progressing a bit there?

No we're not going live, we are targeting the work force management is in call it in some stores right now, POS would be the next main work stream and then merchandize management but we're well into next year, we probably go live. A lot of the configurations that are unique to say that the risk trade that we pass through already is the discovery phase where we take their systems out of the box and we map it to our requirements, try not to pay many call past et cetera. But there is no great surprise for those that follow our company we're so broad with what we sell it's so shallow in terms of the depth of volume we do. It moves out of the box, system packages don’t capture that well, they don’t know what to see when road is, they don’t understand what a store warehouse is, they understand a store backroom, if you don’t have a full suite of financial service applications attached to POS like we do and they don’t serve the range of products. So we know we have got some things to make and we built into the budget that I already sort of disclosed to you but it just take more time on the integration side and on the mapping side back into our existing systems, financial systems specifically and all said I say were a regard sticker shock for, that was the risk so we’re now managing that because that came in a bigger number than we expected and now it's going to be the management of the actual implementation and it will be. There is a risk and we have a system, we have a governance model to manage, we’ve got some good business leadership and ownership we’ve done system installs before, not always great but I think lot of – challenged that way so longer, short as got three years to get all this in and start to get our ROI out before then but it will be three years before as completely installed.

Thanks. And on the universal childcare benefit taxes is the income support estimate number roughly $50 million still does….

Yeah, that’s still the number that were, that was our recent estimate, I mean we’re – I think every month were very finally get better, better analysis on the tax sizes we refine that but that’s kind where we kind of still are what’s different as looked before as our capture rate in different types of communities and it seems to be much heavily skewed in terms of the benefit for family to taxpaying families and particularly end of the markets that we serve, markets that are outside of first Nations so that none of it in our first territories on non-status communities in rural Northern Saskatchewan, Northern Manitoba.

All right, thanks and then one last one for e on the acquisition that you know diligence is done on is there any time outlook on there and is there any information we share on midsize metric – on upfront and should we took closing.

After way, we’re still in the government approval stage and nothing is disclose that.

Thank you.

Thank you. The next question is from Stephen MacLeod of BMO Capital Markets. Please go ahead.

Thank you. Good afternoon. I just want to turn to the Caribbean, I mean in the past, the past quarter you cited Zika has, the Zika virus has a potential headwind but doesn’t look like that is in your outlook anymore doesn't seem to have impact of the quarter so, can you just talk a little bit about how that evolved over the last him several months in terms of sales in the outlook and Caribbean markets across to us.

Yes, I think the Stephen we’re looking more to right now to Q4 and I would say it’s early a kind of mentioned us that I like to get through Q4 before I said Zika is not a concern, I think the. We get mixed signals on dismemberments and cruise ship landings will tell occupancy rates through the incidence of Zika virus if you look at it by island, with the exception of the Cayman Island, it's gone up dramatically month-by-month and they don’t talk about that as publicly but it's true so were cautious still cautious about Zika and if I didn’t mentioned already I’ll say Zika is a concern but one of these things that it’s a 12 month business and cost you less and we just need to get ourselves through this through season and see you didn't really impact the business and by how much and then what’s, how long this is going to hang around as a concern. So I can tell you but I if it’s anything at all, that I think about on at cost you last these days it's well the Zika virus in fact the a negative impact on our business.

Okay, that’s great. Thank you. Okay and then in Western Canada, you need to talk a little bit about the competitive pricing environment and food deflation in the market as the competitive – more intensive loss called several months or several quarters.

The last quarter, yes. It’s P8, P9, P10 to three months of Q3 would we watched are looking at the margin compression and it was getting worse by period P7, P8, P9 it seems to be stabilizing. We just had I mean we’ve a lots of stores in October so they save on foods entry into one of the big market known as by us. I don't think the consumer segment overlap is strong with their offer but in general it has gotten more intense were not projecting it to keep rushing down but as we outlook into next year we were accepting that the margins were we’re seeing today are probably the best carry-forward assumptions for a 2017 so, the trend of worse we think of stabilizing but some uncharted territory here with the current deflation numbers like I quoted you…

Okay, thank you. And then just finally on the stock based comp reversal in the quarter can you just confirm what the impact wasn't in this current quarter and then in the comparable period last year you mentioned that normalizing for both of those periods the EBITDA was down modestly make sure I’m getting the numbers right.

Sure, Stephen 10.9 financial statements you can see the share based comp in the quarter was a credit reversal of $4.8 million last year in Q3 it was an expense of $3.7 million.

Okay, that’s great thank you.

Thank you. The next question is from Neil Linsdell of Industrial Alliance. Please go ahead.

Yes. Good afternoon guys. On the top, the top 40 the top markets programs and you been doing this in a long enough now, can you quantify the improvements that you're seeing in the stores you have renovated versus the rest your network.

Yes. That kind of led us to the conclusion of phasing out further. What we saw was accretive on the growth CapEx is and diluted on the non-growth because the non-growth has growth, it's sustaining CapEx so we call internally a capital appropriation request every time we’re going for the project like this forward to look. We would have allocated, what is that capital – what’s supposed to drive for performance and I think that could be quoted few years ago saying that to for $3 million, $3.5 for that was probably in the one 40 range for the whole program. So now we audit what we actually done and so 13 stores the 4.5, your average is around $6.5 million and you’ve got 50% plus on maintenance CapEx. We’re dragging; so that dollar of growth cap that we got to support another dollar of maintenance CapEx and now it’s like okay and you spend $60 million so far make it actually 65. And to get 35 on a growth caps and your business had a support $30 million sustaining CapEx and yes, your hurdle rate on the $30 million but is that the – way you want the program to unfold and it isn’t, we again if we had, if we saw more and we’re going to be highly selective like as we tried to be already but the others point I’ll make is to do this in the selective way that ideally that would have, the world would have start wouldn’t have stores - on, Chief Council saying we really want you to in this case start to we’re going be building on October next year, we want to move over to our community from the island you've been on and we try to do this we have, for 15 years and now they really want us and if we don't strike now change over chief and Council things can happen. So we get pushed around by this so, we have to keep our powder dry for these situations to and there are very important investments so, the program can get hijacked in different ways that maybe we shouldn't predict at the beginning and it quickly become a very capital intensive project with a lot of sustaining CapEx attached to it and then I'm explaining to myself are important to investors I was spending $90 million and half of that is sustained CapEx and that’s not sustaining CapEx in the 50 bucks that just described in the $50 sort of cap that we’re going to be using. This is a big chunk in their $15 million, $20 million that goes into the other miscellaneous CapEx that you expect any company will have a retail chain of, refrigeration renewals markets will start housing but it's the doors for us, the roofs, the things you have to spend capital on regardless and group of that too, if you’re going to create this extra program for your top markets for students fertilization in our world we expect more growth for a dollar and we don't want to be foolish about it in the sense that, we’ve had lumpy CapEx spending in the past so we’re not going to hit the 50 every year right in the, for the reason I just mentioned about this, things that can happened that we can predict but unless great advantage we have is the deferral capital spending and were another retailer would have their maintenance capital in a tighter lifecycle for distorted core, other branding reasons, other consumer phasing reasons that we don’t have to the same degree. Our consumers expect they want the best price, they want great service in terms of reliability, it is much more utilitarian after that, in fact the worse thing I can do is cut a ribbon on a store and say who is paying for this big store. They want to see a bargain and they will reward you that way, so we are looking for obviously end-of-life cycle, we have to take care of that but we're looking for growth out of our capital. So when it's all said and done this phasing change it is not going back where we used to be although it is just taking some of the best parts of what we still are which is to be able to defer capital and still sustain a very solid business. But it's being more careful if we got a sustaining capital intensive project and we don’t think there is competitive entry and we think that store is still fine for other three, four years and it's going to get done three or four years from now. It is not going to get accelerated and that is basically what we're doing, we are sliding all these stores now into that five year timeframe that I described earlier and we learnt a lot of lessons and some of the growth CapEx that we like to see in big ticket, we can't push rope uphill kind of thing and if we don’t see the income growth in community or region, all of our big ticket selling ideas are going to work. So we are careful now with how many big ticket selling areas we create, they are effective to a point and then they just classify the loss income gravity and if the income is not there then we simply can't justify putting the CapEx in even though it might be great way down the road, it can wait too. So all these things get drawn to the pot and our best thinking right now is to phase it out, take the best of the best to quick wins out of these stores, put them in other stores and make sure that if we're going to go north of $50 million, it is very, very specific growth CapEx that is highly accretive and aligned with our overall or inherent business risks. And I haven’t talked about this very much but that does mean that we will look at more tuck-in acquisitions not just to fill the CapEx bucket, I mean if we don’t have good ones and we will look at our dividends going up and things like that. So it's just for me another iteration of this strategy that we don’t take our eye of the ball in these markets they are still segmented out, we still measure them but I will say the biggest different going forward is that we make it less capital intensive and more product and people focused and I think that was one of the weaknesses of the current strategy until we adjust that it became very capital dominated and we didn’t always put enough focus on the people and the product side. And I don’t mean the new products services just the attention you should be putting on those kinds of stores. So we have got some change in structure coming very shortly, that is going to help us get the right level of executive oversight on these. And then the stores, I think they will still outperform but they are going to outperform based on attention not on capital invested.

Okay. And there is nothing as far as quantitatively saying well it's 50% basis points higher growth rate on the stores we did?

Well it is quantitative and it's more than that actually but it's on an ROI basis, it's not high enough because of the dilution of the sustaining CapEx cost to growth, we have gotten very measurable growth out of these stores and we are happy about that but if it has to do with the convenience assortment or the convenience or real machine or Tim Horton's program then we can take that and not take the whole $7 million of the next store type of thing. So it's a drag along maintenance CapEx that we're trying to phase out and still sort of have [indiscernible] but the stores have, they have outperformed which is validating for us that these growth programs that we have talked about the top categories will drive results. But we have to find out less capital intensive way of getting across all of our stores.

Okay. So the extra cost that you have been incurring say on the staffing in the interim, is it basically negated the increase and that will improve over time as you get that right sized or do you still…

Yes they have also even though stores at the bottom line have been net contributors but the drag is again I guess the capital we put against it, the staffing costs are high and they are coming down and we are changing resource structures from our learning of what we really need to run those stores at that level. So that is kind of one of the games we don’t need more capital to figure that out and as we take those programs in other stores as well like even the Tim's themselves, we have had some staffing challenges there too in some of the staffing rules we have worked on with Tim's to make sure we can get that right cumulatively will be a big positive next year.

Okay. And speaking of staffing, I mean you have mentioned previous years that that has been one of your bigger concerns as far as getting qualified staff trained, I mean is that still a problem or you do staffing that is always gone away?

Yes it is what we do in the sense that it is at the top of the house at the store manager level, I don’t think your levering fully satisfied with do we always get the best match and we have got very, very good people running our stores. It's up to us to match with the best store situation and we will have to keep working on that. So again from a structure standpoint there are things where adjustments we are making to get the right executive oversights on our store groupings to stand top of this and we will keep fine tuning it. I think we do expect better improvement retention next year over the past year. We had a lot of joiners our team in these food service and food prep areas we have had to look at cross-training as I said earlier to get leaner. But from a quality standpoint we still haven’t I think got to the point where we got the right training and on-boarding to optimize the business and I think that is still is an upside for the Northern Canada especially versus the other banners.

Okay, good and just one other thing, on the Nutrition North, could you just remind us the number of communities which are benefiting from the Nutrition North compared to the number of communities in your network in Northern Canada and what would that represent as far as dollar value of your revenue in the area?

Sure there were 53, we have added 24 so that is 77 communities out of 130. As far as percentage of total sales it would be about we are now up to probably 70% of our sales are in the Nutrition North markets in Northern Canada.

So similar to my previous question can you quantify any kind of benefit as far as increased sales or profitability or bottom line in those communities or that percentage of your revenue?

Well in the program side we all know, so it hasn’t been index inflation. What happened on October 1 is that 24 communities were added that where we have stores they were, but we are in the program given the full level of subsidy which is a much more meaningful amount than they have before and we can't tell you that we are seeing a big lift in the Nutrition food sales in those stores. Overall sales not quite what we would hope for yet and I have back to my comment about promotional activity in those markets because when folks have more discretionary income through price reductions or just through transfer payment increase, it is not an automatic, it is going to come back into our store. So we have got to really look at our promotional spend to how we do it to attract that kind of customer on the money base. So long and short is the 24 markets that have much lower food prices in our stores and other stores that are local. What they do is the rest of the money is going to be up to us to compete for. And it's only been two months, so I wouldn’t say that it's going to be a net positive for us one way or another and for our customers more importantly. They are getting much lower price healthy food. So the big picture is Neil is not really, probably not that material, if it does, we will start talking about it because the biggest communities are more, the furthest North communities that went to the program were in five years ago at the full subsidy level. So they are locked in there and it has been generally a good thing for the consumers in those markets to get that subsidy additional ones just arrived and we will be monitoring how that turns out in the next while.

Okay, fair enough. Thanks.

Thank you. The next question is from Jim Durran of Barclays. Please go ahead.

Edward just wondering on food deflation front like I would assume by now that in the Canadian operations, you have seen some deflation in your cost of goods sold, are you using those funds to plan investment spend at Giant Tiger or is there some pass through to the Northern stores?

It's proportionate, I mean we don’t not if we Giant Tiger gets what it needs to compete and so as Northern Canada, so it is that deflation is the difference is in Giant Tiger we have just seen more deflation at the retail side than the cost side.

I assume though on the Northern stores that you have got more choice as opposed to the competition forcing your hand or how would that play out?

Yes I mean we're not a price taker the way we are at Giant Tiger, I mean lot of our focus in lot of these categories is to grow the volume, so we tend to be investing in price and we are always testing elasticity but we're our bias right now is to invest to grow kind of even in the Northern business and use that as an advantage the pass through, I mean we do with an overall positioning with our customers, we want to think of us is going to the mat for them to bring the best cost and prices into the North. We think we will get rewarded, we have been rewarded before with tonnage increases, so that is kind of our attitude in the North than in Giant Tiger as I explained before it's a whole different game.

Dividend increases, I know it is the board preview but I'm just wondering if the Zika virus piece there is still a risk factor now left the Alaskan dividend cut, are you feeling any more confident about your cash flow outlook in any greater sense of if we might see a dividend increase in the next six to nine months?

Well the cash flow we feel confident about because we just got a bunch of pay that would have been out the door and that's just a reality. So, and it lags it does, that is a payment that would take place in Q1. So next year's cash flow looks pretty solid from - and again that is kind of shock absorber I mentioned at the outset and I think for the Board that is the kind of thing that they have to consider because the money either goes to grow the business or sustain the business is a variable comp for management or it goes back to the shareholders. So we are very conscious of that and we don't want to - I would think that's kind of decision that we would give a lot of color on it, if dividend went up or down in March and take very seriously that if we do see getting signals on cash flow that the dividend is right there for front and center to be considered for an increase and if it isn’t we have got a real good reason why not.

Okay, that's helpful. Thank you.

Thank you. The next question is from Matt Bank of CIBC. Please go ahead.

Hi guys. First just following up on that last comment, on the incentive comp that is pay or no pay, could we get some sense of how big that is?

How can we help further there, John? We've already – what's happened in the quarter.

Well Matt in the quarter you've got the numbers on the share based comp which is and I think that Note 09. The incentive plan pay would be included in the employee cost up above, in the quarter it was down roughly about a $1 million, I think was the overall impact there. As Edward said in his opening remarks, we were down after adjusting for a number of these factors and you have to be careful that we don’t adjust for those negative ones but we did call out incentive plan and we were down roughly a $1 million, $1.1 million.

Okay, thanks. Can you talk about the strength in general merchandize sales at Giant Tiger in the quarter and how sustainable that is for the next few quarters given the tough market we have been talking about on the call includes sort of includes…

Yes I think the branding as I mentioned on the apparel lines has been - still has momentum and you may have noticed or not but the Giant Tiger is running National TV and that's new for them. So I think the brand awareness on fashion does have some legs to it. It's something we have to do better those are the numbers where they need to be and I mentioned at the outset about in home products, window coverings is one area that we - it's a big, big category in the east, we'd better at in the west. But after that I mean I, like we need that we have right now and the last two weeks is 20 below in Winnipeg and November was I think 7 degrees above normal everyday on average not just in Winnipeg with further north. So not a great, not a great month for selling seasonal stuff and GT gets pushed around by that a lot. So I know I'll tell you when we get to Christmas, how this all turns out but I am very pleased that we've got to weather we do, I think it's going to be great for our Christmas selling, Giant Tiger in North Canada where winter company and this is just that we needed what our customers need. So, those are that granular short term answer but with GT we find it’s interesting how seasonal it is whether it is a seasonal price issue in food or a seasonal weather related factoring in soft goods and hard goods. What's constant s behind of those, we fundamentally believe in the brand and in the positioning of this is a junior discount store. And we do support Giant Tiger’s brand building and the longevity that seems to be delivering. We do plan to continue with our store openings next year. We’re very bullish on rural locations and you heard me say before any urban infill’s we can get out of great price. So, we got a full roster sites and we’re going to be after them with our store opening in 2017.

And to the - it's been three store opening year-to-date I believe in GT. What’s your plan in terms of number of next year?

We’re actually at four now and I’d say four to five with - if we do three in a year, we have to we’ve to do five in another year that’s typically our arrangement with Giant Tigers it's average for a year and we expect to hit that in 2017.

Okay, thanks guys.

Thank you. The next question is from Keith Howlett of Desjardins Securities. Please go ahead.

Yes, wondering if you disclose your food consumables mix at Giant Tiger?

No, we don't. I mean it's about half the business so we don't disclose but I just disclosed it, I don’t know - that’s about 50% of the sales. And we do brand higher than the east, that’s a slight disadvantage it can be the advantage some quarters and years but right now it’s little bit of disadvantage.

And do you incorporate tobacco in the food side.

No.

No, so that's separate from that.

Yes, that was a very large but it's separate and it's at steady-state.

And then just in terms of the - your license incorporates PC does it or not?

Yes, it does.

It does. And should you have any plans - I don't think you have stores there do you?

No, we had one in Cranbrook several years ago but today our growth focus is Western Canada and just keeping - and backfilling in Manitoba. We’ve got more than enough sites there right now, British Columbia will have to get on our planning but couple ways away from that.

And as you look across Alberta to Manitoba, do you see any difference in the competitive pressures at Giant Tiger or just specifically relating to those three new over - save-on stores in Winnipeg.

Little more intensity on Winnipeg even before the save-on is opened but I think the - again and might have been demo, I don’t want to advertise it for any of your guys but I think it was demo publication that call high on food inflation, deflation by province in the month of October and all that western province that’s were in the 35, 36 range and that would hold to it what we’re seeing. It seems to be across the West, I can’t comment on BC, as I say about store there but really crosses Edmonton, is the one big market in Alberta where we're up against most the players and then Saskatchewan and Winnipeg of course.

And then finally, there has been no change in the public assistant checks in Winnipeg, I’m not sure if that’s a big part of your food business on the day that the government, federal government checks or distributors or.

Well, today is the big day and the checks amounts have gone up. The Child Benefit payment day is the biggest money day and the next one is at the end of the month social systems. There has been no increase in social systems but like a lot of the conversation I talked earlier today, on this call the Child Benefit payment is the one we're really watching and we say we have some fine tune to do that, make sure we are getting good offer in front of our consumers who will spend talents and spend the money with us or we get down to our Giant Tiger store and really compelling for that shopper. And I do think like if look at 2017 I mean this is a real target for us to go after to be more and more relevant to the shopper on that day or just before that day reminding that we’re the place to shop and stock up. And I think it's going to be a driver of our Northern Canada business for sure and it should help Giant Tiger in the rural areas more importantly where we’ve had little fewer more basis points, couple hundred more basis points to play with compared to the city and food. This is interesting, I's a first I’m actually have to - have to call the call because we have an internal meeting with our staff and unfortunately I think it's a good thing we gone for an hour but I can't take the call much longer. So I want to do - we could wrap it up and John and I are available for questions. This could be one of those conference calls I mean will have to be actually or back in call, if you need to reach us please do together or one of us will work will answer any questions you have. Okay, with that operator unfortunately I have to cut off the call and we wish everyone a very happy holiday season and Merry Christmas. And again we’ll take all calls and questions but just at right now we only had budget in an hour, that was our shortcoming I apologize for that and yes we'll carryon from there, okay. Thanks very much.

Thank you. This concludes our meeting for today. Please disconnect your lines at this time and we thank you for your participation.