Edward Kennedy - CEO Paulina Hiebert - VP, Legal and Corporate Secretary

Michael Van Aelst - TD Securities Matt Bank - CIBC Jim Durran - Barclays Neil Lindsell - Industrial Alliance Securities Stephen MacLeod - BMO Capital Markets

Good day, welcome to the North West Company Inc First 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.

Hi. Good afternoon and welcome to our first quarter conference call. Before I begin with the overview I'm going to ask Paulina Hiebert to read our disclosure statement on forward-looking and other disclosure.

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 more information on these risks, please see North West's annual information form, and its MD&A under the heading risk factors.

Thanks, Paulina. So, I’d like to go to the quarter, there may be more questions because of the adjusted earnings and EBITDA presentation which was a bigger factor in the quarter, stock base comp options specifically and the RTW acquisition transaction cost stamp this page to the BBI government. But I want to leave that for a minute because, on the core operating side the quarter was pretty good and when we look at the net effect of RTW and the improvement in our Northern Canada business I'm encourage that we’ve got some good trends and momentum going. So, let me start with Northern Canada, this is an area that gets a lot of attention, especially for our top market and top category work that you've heard a lot about in over the three years or so. And what we're finding is in the top markets we’ve got 19 completed projects, the other 21 or so are now all grouped together, so we track them, not because they got capital, because we’re tracking the processes and the merchandize assortment and our effectiveness on all the non-capital areas in the store. The 19 that received capital are out preferring our other stores as we would have hoped they would, because they are gaining new services and sometimes expanded selling space, but a complete rebuild of often the store inside. So based on our projections and we approved the capital, these stores are on track and that's an improvement over the sort of mixed results early on where you heard me describe our challenges with expenses and the food service sort of the culture of the company needed to be fully formed so we can deliver this product on a cost-effective basis, a consistent basis. So we now have lots of learnings 19 stores worth and even more if we consider non-top markets that have food service introduced. So we're gaining the benefit of those learnings and adjustment. More importantly with the blend shift to food service to our convenience category, they're starting to show up in a more pronounced way in our food business in Northern Canada. It was certainly a big factor in growing our food gross profit despite the offset of some pretty serious margin compression and our Giant Tiger markets we continue to see with these still difficult communities in Alberta and Saskatchewan, the additional competitive store footage towards hard discount, the role of price reduction last fall, early fall by Sobeys, Safeway and cycling through all that makes for a very dynamic but a pretty tough market for food in Western Canada. So Giant Tiger is half of the business, but food has felt that effect, when we get great weather like last two weeks, we shoot the lights out of sales on the higher market part of the business, the general merchandise and fashion, but we still have to sort of bear that burden of staying lower food GP gross profit, at least till we've cycled through say September last year, maybe even a bit into, more into Q3. So I'm just spending time on that because even though that happened we still drove improvement in our Canadian business, I think it also puts in perspective that if we get things right in Northern Canada, both brand execution at the gross profit line we can offset a lot of other factors in the business. Further on Northern Canada we had great general merchandise sales, GP gross profit not so much, the blend shift there was more to big ticket. I think that's a great sign though on incomes in the north, mostly government transfer related, but whether it's motorized or furniture, we had some very, very impressive results. Looking at the motorized side we don’t get the same gross profit, but it's still gross profit dollars. We had some higher mark downs in other seasonal categories, little happy about that, but we were high coming out of winter and we had to deal with that. Looking forward with our northern Canada business again, just at the gross profit line we see quite good momentum on both food and general merchandise and we think our margin rates in general merchandise will firm up as markdowns come down and we'll see more of the improvement that we've seen on the blend shift side in food. So we add all that together and we think the prospects in Northern Canada top line are pretty solid. The other leverage factor for us going back to my point about our costs and top markets is really managing our staff and payroll productivity and you can imagine we had sort of high water mark actually in Q3 of last year of very good sales and we're now bringing that down consistently, Q4 was a beginning and Q1 it's happened again and we can go lower. As we do that it tumbles to the bottom. So we do expect to see more of that type of positive performance out of our Northern Canada business. As far as Giant Tiger goes, if we can -- we had a great seasonal assortment, we had two great weeks. This weekend's going to be cold in the West, it's already cold in Regina, Saskatchewan, Saskatoon, could be a tougher week, we've got a couple more and then we're at the July markdowns, but we should do better in Q2 in Giant Tiger on the general merchandise side overall, it wasn't the best weather to sell seasonal fashion in Q1, and then we move on. So I just want to put in perspective we are in Canada. The other big thing and I'll come back to that actually is the acquisition of North Star, Eric. So staying on the retail front and moving to international again we were overall pleased with the quarter, when you take out the noise of the transaction costs, largely the stamp duties that we pay to the BBI government that aren’t capitalized they're just expensed. Tied to that acquisition the RTW acquisition was the weekend to our fiscal year and we actually took ownership of our controlling position. So in accordance gone well there. We’ve improved the in stock conditions in RTW, we’ve done a lot of initial assessment integration work. We’ve negotiated lower costs both logistics and our suppliers, we're continuing to work on that. But we’re now, we announced in our AGM today that we’re going to be cutting costs by $1.5 million on key items, both for our wholesale and our retail customers. That will take affect by the end of June and we think that’s going to be another very big momentum builder to keep as we experienced in both Barbados and Cayman when we put our stores there, that we start to bring dollars back to the Island that might be leaking offshore because people are looking to save more money. So we can do that, we feel and help deal with our retail economy because we also lack wholesaler on the Island and that will be real interesting investments in pricing and we did commit that we would, when we found cost savings, we would look towards and best see that in price and sat down with the BBI government and talked about getting a business license to have this transaction approved. So that’s right way, the rest of cost plus business is a bit of mix bag and we got a very strong Ireland and continue to do well on Cayman Islands, for example. We tend to find the higher end responders [ph] to do better. The others are a little more sluggish, a little more margin pressure in Barbados and we had this time last year still a very solid market for us, now that’s store's mature. In totality, if I look at international [indiscernible] should continue ex our acquisition to be a growing bottom-line business this year. Even though, we have constrained fiscal situations going on in Alaska, they came through nicely in the quarter and they continue to prove to us as a division that they can manage costs, really focus on our consumable business, the things that are, again C-Store categories, fresh categories and high end in stock. So you’re always there as a convenient store and if your customer doesn’t have the money to buy big tickets, at least you're there for their basic everyday needs and that seems to be coming to the front right now at AC. So not a dynamic environment economically, but we’re able to whether it so far and the year has started out pretty good for Alaska. Turning to the North Star acquisition. We expect to complete that this week, we're closing the schedule for tomorrow actually. Once that's in place, as I announced today and gave more detail on in my remarks, we’re going to be moving quickly to effectively double the size of North Star's business by converting routes and freight and we move through other carriers to North Star and Eastern Ontario, probably Northeast Ontario, west side of [indiscernible] Bay actually, Northern Manitoba and the Central Arctic, which is Tibloc. So we got that mapped out, we are having to invest in equipment for capacity. So we talked about the Basler aircraft that we’re adding, requiring fifth plane and we’re leasing a fourth. And I talk a bit about how the Basler is a low cost, simple to run. Although, at first look it appears to be somewhat antiquated plane using a DC3 airframe, but the state of the art avionics and turbo charged engines make it an ideal plane for Northern flying and we think the top plane actually for this kind of cargo that we’re going to be using it for. And I also commented that the North Star acquisition is really about the people knowledge and skill, the culture of the airline; how it syncs up with ours, is it enterprises, is it customer driven and these people that folks that run and work at North Star, they live and running better aligned to the best of their ability and do a very, very good job. So we’re very, very excited about moving that service culture and operational standard into the other regions that I mentioned. We are pretty fast paced to make this work. So Right Way, first four months of Right Way acquisition where we’re head down on sort of the quick wins are early things we needed to accomplish. We expected the next four months and be really busy with an [indiscernible] and then we’ll step back and take a pause and see how we’re doing probably over the next year or so and our model is unfolding both with respect to the logistic advantage for our own freight and advantages for any third-party freight that we decide to carry. So, overall I think a lot more positives in the quarter and we’re still in not the best economic environment, but I like the fact that we’re taking control of our situation and some of the things that we start -- that we did basically back a couple of years ago on the food side, are our improving our gross profit rate and in driving the bottom line with expense control come into place. I like the early start to the Right Way acquisition and with North Star Air we'll report as we get into the next few quarters of the year, but we’re ready to go. And our plans are in place assuming that we close, the shareholders approve the variable volume [ph] structure and we’re looking forward to the next chapter and their development under our ownership. There aren’t too many to many changes to the outlook for the year, if you noticed in the report to shareholders it’s -- we haven’t said too many different things about the way the year is unfolding that way, very-very intense price competition in Western Canada, we think are going to be some -- cycling through that as we anniversary last year, but economically Saskatchewan and Alberta not out of the woods at all yet, so we have to face that reality. Northern Canada are really picking up some good momentum, Alaska holding up despite the condition. Cost less on puts and takes, but we’re on top of that business and we expect it to be net contributor in terms of growth this year at the bottom line and that we have RTW kicking in. As far as our growth agenda beyond our key initiatives for the rest of the year, we do have some integration to do here and as you know Northwest we don’t do a couple of acquisition like this in the first half for the year is a lot already, but we are committed to continuing to work and the Caribbean with other owners of stores and island that we’re targeting and really developing further those relationships. So, we’re going to optimistic on this, nothing eminent, but it is part of our growth plan for the next three years, to continue to look at island, higher end tourist islands preferably, but also reinvesting either to additional stores or expansion and some of our best proven markets in the Caribbean as we continue to build scale there and basically grow the business. I think that covers the high level and just a quick update we have a $34 million IT project of product enterprise, it's moving along. Our board members said today almost really how smooth it is, is there an unknown, unknown. I don’t think so, but than it would be unknown, unknown, I wouldn’t know that. And -- but it is removing smoothly and we -- or an implementation of our POS and work force management are granted the more complex implementation is still to come on our merchandize management system and that begins in the fall. But, we’re happy with the cadence of the project in the way it’s being managed. Okay, with that operator I like to turn the conference to the questions, over the questions.

Thank you. [Operator Instructions] The first question is from Michael Van Aelst from TD Securities. Please go ahead.

A few clarifications just to start. So, when you look at your adjusted EBITDA, that's the first time I think you've been publishing that, but why did you choose to only back out the portion of the stock based compensation tie to options rather than the [indiscernible]?

Well, Michael when I looked at the option expense, first of all that was the most significant portion of share based compensation that was driving the variant, but when you look at the components of our share base compensation, there is PSUs or is deferred share units and those kinds of things, they tend to be a pretty consistent within other public company. But I think separates Northwest as a differentiator and share base compensation is the accounting treatment for our options and they are accounted for as a liability and there is a mark-to-market of that expenses. So, our optioned expense is subject to more volatility than what a typical or a vanilla type option would be. So it was that component that I highlighted to add back, the rest of it is clearly an explanation within the quarter. I think the total delta on share based comp was close to 7.6 million, 6.8 million expense this year versus an $800,000 recovery last year, but the auction component of that was 4.3 in the quarter compared to a $1.3 million recovery last year.

The DSUs and the PSUs, did they move around with the share price as well?

Yes they do, absolutely.

Maybe I'll just jump in. When John was looking at this and we thought, okay this might be the quarter when we should break it out a little more clearly, it's so material, but is it different, like what's different about us. What's different is, with our growth and yield incentives to management we have a declining strike price option, which means, as we keep the dividend yield up we get a credit from part of that yield against the strike price of the option. That declining strike price features what characterizes our, I guess you can paying to the option and requires the quarterly mark-to-market. That the only thing that's unique about us. The rest, the PSUs, the director DSUs which are also mark-to-market, yeah they're volatile if you have the swinging share price down 10/10 as we had, but they're not different than anybody else, so that's where John drew the line.

Okay I mean just as far as I know most other companies would just adjust for the full amount.

Oh they would. Well, we're not -- well I guess we'll get feedback, but I'm just giving you the rationale, we were reluctant to do it in the first place, but it's such a big number, we felt we had to do something.

It's good to look through it, just to see how you're doing operationally right, I mean.

Right, exactly.

Okay, just on the other topics then, the Right Way acquisition, can you quantify the contribution on a sale on EBITDA level?

No, we're not going to segment that. We were positive in our international business without it and we were of course more positive with it. So that's all I would say.

Okay, so you did grow though without international business in local currency without Right Way.

Yes

Okay. And then in your other comments on the infrastructure spending on the north. It seems like you’re more positive on some of that hitting in 2017 than you were in the last couple of conference calls. Can you update us on that?

Yeah, I don't think I even used the word infrastructure though, it seems like, -- I think really what's happened that it’s income programs like the child tax benefit improvement, some social assistance in the way it's been paid and done right now. I think we're benefiting from that more than anything else and the current share notarized our focus points for us and the customers have money through that. I don't have -- if you've [indiscernible], but the infrastructure piece I think is largely still to come. I mean we -- there is a lot schools still to be built, there is peace treaties to be done and other things to happen, but why don't try and connect the dots, especially by the way in Q1 when it's a light construction timing year anyway for infrastructure. So we expect it to be a better year, again I'll use the proxy of our shipping business. It should be a pretty busy shipping year for us. But we're talking about being [indiscernible] and then it gets mobilized to start a construction product in the fall. So what you're hearing today I mean what I'm talking about with NCR is really more core government transfers to individuals living in the north and our focus of going after our share of that spending. And there have been improvements, like we talked about the child benefit payments going up and there were some social systems improvements in Nunavut and they've just announced another one where they're going to allow individual and social assistance to retain more of their social assistance, so they're not discouraged, that dollar-for-dollar takeaway to enter the workforce.

Okay, and on the cost you last say you talked about some in stock performance issues on the general merchandise side, what happened there and what's being done to make sure that doesn't happen again?

It's merchandise planning, we’ve changed people. We have a new Vice President of General Merchandise who's just joined the company at the beginning of April, pardon me of May, and I think it's been a hit and miss proposition for us. I think behind the scenes we've not been happy for some time with the performance. In cost this is a push model totally, so there are qualifying by store [indiscernible]. So it’s a complete cross stock operation, we don’t use warehouses, because [ph] stores are effectively a warehouse store. But you have to get the flow right, because you’re 2.5 weeks on the water just to get to Gwam [ph] and so the algorithms are there, but the category managers have to be on top of that and to me, it came down to the people and the focus of the business and it was certainly frustrated to see, because you'd like to think we're Comstock [ph]. But to answer your question, we have made people changes and it’s going to take some time for the new individual to get fully up to speed. But we’re optimistically made this change for right, for good reasons, I mean we have very good person coming into the company to manage that side of the business.

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

First, just a follow-up on the adjusted EBITDA. Was would adjusted EBITDA have been for 2016 as a whole based on this new definition ?

Well, Matt, if you go to, into the report to shareholders, there is a non-GAAP section and actually reconcile right back and provides all the details on the numbers. So the adjusted EBITDA in 2017 is 40.2 and 2016 is 36.3.

Right. I’ve got that, the reason I’m asking, because, share based comp was a pretty big number for Q2 to Q4, so figure out the year-over-year, how last year is going to come in when you displaced year-over-year over the next three quarters?

Okay. So I missed that question, Matt, sorry. You want to know what the impact to share based compensation is for all of 2016 and what the adjustment is?

Yes.

I have to get that, let me find the number. It’s in our annual report, we disclose that number right about our notes, okay. So I can send you that note reference, I don’t have it right here. But we do disclose our share based compensation and the individual components of that within in notes.

And then just a clarification on same-store sales, because in the MD&A the worlds were a bit confusing. It looks in the wording like [indiscernible] include in same-store sales, but I don’t think it was?

No. It is not.

Okay. That makes sense. And then can you just give a bit more detail on the strength in Canadian food same-store sales despite the weakness of West?

Yes. I mean, which again, we don’t break that out. But our [indiscernible] is up 2%. So I don’t know what exactly tell to you that. They were very healthy gains in Northern Canada, but I’m not going to say what the number is, there was less than 5%, but still very, very good.

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

You have this thing focused on the food comp store sales number. So are you not experiencing any of the deflation that more popular food retail markets are seeing?

Big types.

Yes.

I mean, that’s are the story that we narrowed it at 1.5 and same-store basis. We’ve got a big number in NCR and a very, very small number in Giant Tiger, NCR meaning Northern Canada Retail. And it’s deflation in Giant Tiger and a little bit of freight inflation in Northern Canada offsetting and less of that competitive dynamic that’s affecting our business in Western Canada with Giant Tiger.

So from infrance then, you’re actually seeing pretty significant volume performance in the market?

We’re seeing volume tonnage increases in Northern Canada and tonnage decreases in Giant Tiger.

And in your reporting structure here I assume you’re including food service in your food comp store sales number?

We do. Yes.

So how meaningful or contributor would that be at this point, you mentioned that you’ve got like 19 locations or some other QSR [ph] locations. Right?

Okay. Well, it’s actually a little more than that, because the 19 just in the top markets and I know it can be following a bouncing ball here, but top categories go everywhere. So we’ve got, I’m going 45 food service operations of which beyond the 19 another 15 would be Tim Horton’s, but that have been added over the last two years. So, they’re driving sales inside the store, there is some lunch shift, you could have a coffee program before 9 or just coffee or substitution I should say, even within the store we made sale more prepared foods and sale last, selling prepared foods in the store. But, that’s not being for sure and we’re taking share in the local convenience business, because and all those categories to battle single serve, pop, chips, fuel are anything that has to do extended store hours is growing the business as well. So, there are all concerns to the mix and then we tend to be challenged, I mean we’re holding our own, I mean tonnage was up in center store grocery is slightly down in center store of non-food grocery. But all the other permitted departments and the convenience when I just described are making up the difference to get tonnage growth.

And are you seeing the deflation trend though ease the way we’ve heard from some of the other retailers?

No. I mean what we’re thinking now is, we can get the depress about this, especially in the urban environment, because you’re losing basis points on your promo spend that’s where it seems to be really hitting us and I’m assuming hitting everyone else, because we’re -- I’ve explain before and I’m talking about Giant Tiger, we're a price taker and to protect the brand and I get concern that we aren’t being aggressive enough to do that, if we don’t keep our traffic up its going somewhere else. But I know that we’re sharp on our promotions, we do keep our traffic. Some of that is converting to our higher margin GM business and storing at the whole point is to blend out our gross. But as far as an outlook, I think are optimistic and hope as much as wishful, it’s not happening today. But we think, remind ourselves that it was last August when [indiscernible] dropped hundreds of thousands of prices, we will circle through that. So, it will stabilize put it that way. So, month-over-month, year-over-year deflation, I can’t see it, I can see it stopping as we get into the fall, but it hasn’t happened yet.

Okay. That’s helpful. I mean RW business you talked this cost savings number 1.5 million?

Yes.

Do you expect that all to go into price or do you expect some of that to fall-through the bottom-line?

This tranche is going to price, it’s not a legally binding commitment to anybody. And it’s a fine line, because one of the questions the government had and some of the other competitors on the arms that we would disrupt the market and put someone out of business. It hasn't happened in the Cayman, it didn’t happen in Barbados and we assured that we wouldn’t and it’s not predatory pricing, but because we’re a big wholesaler, like volumes retailers are our customers too, they will get their share of the cost reductions. And it’s something that we’re very comfortable doing, we know there is going to be more efficiencies, but out of the gates, the things that we found, that are more scale driven i.e. on freight. And some of this it skill and knowledge driven in terms of sitting across vendor and knowing what the cost should be. We've chosen to invest, and we have our record that help us that we can grow that way, we think that RTW can grow tonnage, they can keep again dollars on it. And they will make it up on GP dollars, very different in investing in price in Giant Tiger where you’re working off of a real challenge margin to begin with perhaps in a higher discount sense of the word. In a right way, this is kind of found money and I think it belongs to the customer.

And no negative surprises on the acquisition at this point. It sounds like it’s been fairly positive?

No, I’m happy with the reporting structure, this is going to, this is kind of detail and how we’re setting the up we have, the EVG who, Chief [indiscernible] Officer and has not had aligned in this unit before, but is running that some for the time being. And I like the focus, I like the team, I guess, we’re starting under resourced yet and I hope we’re not over resourcing either, having a lot of good people go down there and work on the procurement and logistics and all they are finding actually is more and more opportunity than we might have been imagined. And when you do think about a pretty well run, but companies steeped in tradition privately own by the same individual and group of shareholders for all almost 50 years. They just things that you can look at differently. So, I think it may not be all this year, I mean maybe to your question because we're putting this saving stock into the trying to grow the top line and make the business sustainable longer. I think it will get through the year with I think positive results but it'll be more into the next couple of years that we start to make changes that would really grow the business and have an even a more dramatic effect on the bottom line. But it's been solid and we knew we were going to do it, that it was a pretty stable business and had a very privileged market position. So we don't see a lot of downside this year and no surprises, negative ones anyway.

Alright that's helpful. Last question just take a little Zika virus. Do you have a better handle now on what you think it’s role is going to be on the business?

I think when it shakes -- when I looking at the number of cases the USDI is going to continue to be a problem. The USDI government had said that their GDP could drop by 2% tied to tourism arrivals because of Zika. And we actually had a great quarter [indiscernible], but for the wrong kind of reason, it was ahead of this putting syntaxes in, so we had a bunch of stock up on, we sell a lot liquor in those markets. It could be a tougher tourist season next year if that forecast is right, if the Zika cases are still rising. Cayman is not a real factor, BBI is not a factor, St. Martin is, but then it's crowded by the type of tourist that the European tourist that's distressed a bit and that applies to Barbados, the U.S. tourist is great, Canadian tourist no because of their dollar. And then the U.S. tourist will be shy about St. Martin. So Cayman, BBI, Barbados should be good. St. Martin for a number of reasons could be soft, with tourist and then the USDI is at risk because of Zika. That's when we hear the most about, I mean you hear about Puerto Rico, but it seems to be quite regional where the incident rates are really not epidemic like, but they're enough that people are worried about their tourism and then the Pacific is not a factor so that's the context of Zika. It’s very local to islands and the rate of incidence varies quite dramatically, depending on how good they were at preventing it in the first place. And then we have a hard time sometimes separating like a St. Martin is it because of the economy, it's in Europe, the dollar values in Europe and Canadian dollar, is that affecting St. Martin or is it Zika related.

I don't know if you're able to give me this number, but if I'm trying to wrap my head around how meaningful 2% risk might be for those markets that you do think might be exposed to that if it was to happen. Can you give us directionally like what percent of that business it might represent?

Well St. Thomas is one of our bigger stores, but if you're talking about process overall, we're talking about maybe 10% of the bottom line.

No, that's helpful, great thank you.

Thank you. The following question is from Neil Lindsell from Industrial Alliance Securities, please go ahead.

You mentioned the top 40 markets, you know 19 stores completed and you mentioned you've learned a lot. How is what you learned on the first half of this project going to influence what you're doing on the second half?

Okay. So in order it's going to be the fact of adjustments we make on labor. We're going to be coming out of the gates with the right labor rates and food service, whereas at the beginning we weren’t. Two is the capital spend, we were a little generous on the overall size of some of these projects, I don't think we oversize stores but we're going to be tighter on the spend per square foot of selling space and be very careful that we're not replacing departments that really don't need to be replaced and I'm talking about end of life cycle. So I think we've learned that, I think we're pretty disciplined on our capital spending it's a rule, but I think we got a little sloppy on some of these projects and everybody wanted to throw in the baby with the bathwater, going to spend money and all these needs come out of the woodwork now we're coming back and said what's really essentially here to solidify the market. As far as the blend of what we're really focused on, we're probably looking at -- this in a little more detail, but in the fresh category a very critical, constructively critical on how much space we putting to say produce tables, which are low density. And some other food service categories like bakery and deli and saying okay, guys, this looks pretty, but we don’t do businesses. We’ve got to go more vertical, we can -- so we go horizontal at $600-$700 a foot to bill and now we got a DPP out of that selling space. So those are some other learning I’d say. The other one is on the convenient business, so just getting more and more confident that the convenience part of the store, either the storm size of the store with separate hours and separate entrance or just the assortment gets pulled out and called out more and we get higher goals for performance weather it's store hours or sales and margins. And then finally, I guess tied back to staffing as a structure of the store that we try to be more realistic and then we don’t also to bringing a food service specialist. But in fact, retrain or skill some of the existing roles that they are accountable for food service and we don’t over-staff the top end of the store. Those are the some of the learnings that come out of it. The other one I’d say is finally is furniture. We’ve add mix results out of our furniture selling space. We just came out of fantastic quarter for selling big ticket. But it’s made me question how much dedicates selling space we put in the furniture, it’s nice to have it displayed out every day. But the customers need to be paused to spend their money, like everyone doesn’t furniture, right you buy it on special that perpetual some of that [indiscernible] machine on kind of stuff. But you got to promote it with credit, you got promote it with an event. We're probably leaning more back where we rent the arena and have an arena sale or truckload sale and reflects that space more than have it as a dedicated selling space. So those are some of the things that we would be adjusting going forward.

Okay. So is there specifically on the costs and labor, is it going to be 20% less expensive to do the renovations on subsequent stores, say?

Well, we forecasted, because we were pretty big and we’ve got a couple of or we still to do account. So when I said today, it was 20 stores to go out $100 million. And that sounds like to you were before, about $5 million a store. But in [indiscernible] it could be 15 to 20. So we take [indiscernible] out of the picture, your number is pretty big on, we’ve been expecting to save or reduce the cost per store by about 20%.

Okay. And is it too early obviously you’re saying, you’re getting good performance number out of this. Is it too early to say what would happen was you finish this program are there lessons and learnings you should go and renovate other stores outside of the top 40 markets?

It’s little early, but it’s certainly on our mind. Again, we look at the delta between those stores and the others. We want, okay, those are top 40, what about the next 40. And how much more can you drive in terms of sales and ultimate bottom-line. And I think the answer will be yes, I think the quick as long if accretive and cost is justifying know that, that we would look at another tranche of stores, and what does that mean for CapEx. Well, if those stores, if those divisions grow their EBITDA and their sales fund at kind of CapEx. Because the other problem or challenge we have of course is it does accelerate your sustaining CapEx, because you’ve got to go to store and do something you might have waited to go, just to get the growth CapEx into it. So that’s certainly on our mind, if the numbers are looking like they’re looking and that’s keep parsing them down and saying should we do more stores. I think our plates full right now, I mean not, and we’re not to the point yet where we’d accelerate that and start to add more the medium size stores within the next three years. But we’ll do the analysis to sure and if there is an ROI, then we would been capital faster. The bars are very complex and the lead times are long. So there is a bit of a bandwidth here as well within that construction team. So we’ve got to keep that in mind, there is so many good contractors like the airline business, we don’t have a lot of choices. So we got a keep mixture, we’re not going to compromise quality if we look put more projects under especially medium, if there will be more medium-ones than large ones by definition.

[Operator Instructions]. The next question is from Stephen MacLeod from BMO Capital Markets. Please go ahead.

Just coming back to the top market initiatives. Edward, you mentioned that, you’ve seen sort of great better sales growth in your -- the 19 projects, where you’ve seen crunching markets you have seen the projects completed. Can you talk a little bit about, what kind of sales lift you’re seeing in those specific markets relative to the pre-project numbers?

Yes. I mean, the fact that the control group is the rest of the stores, that's another way to look at it I suppose. But we would see and again depends on the mix that how many new programs you’re putting in, but 600 to 800 basis points of sales lift across the whole store. And of course some programs are very new or else brand new if you put it at Tim's, but it’s not just the Tim's, it’s the entire store, any top category in a top market store would tend to be outperforming the rest of the chain. So, I think that’s the spread right now that we’re seeing is about between 6% to 9% versus the rest of the chain.

And if you had to break the buckets down into key drivers of that. Is there any way to generalize or is it pretty store and market specific?

Well, if you look at my slide from AGM remarks, I took Baker Lake, which three years we started, I used that as an example to start what we plan to do and so now we’ve actually done, it was actually in 19 and we did. But that was a good set of hypothetical or theoretical store to look at. And we only added 20% selling space to that store, but we changed a whole bunch of things. So, as the numbers are up in that store in every department we touched and you say what where the biggest drivers. Well, the C-store, okay, but C-store looks like for us interesting. And they get an extra million bucks anther add or more maybe. You put Tim’s in that were 300 to 400 expanding your produce, you put it in a big club tag section, how is that doing, you got a furniture section I already explain that I think that still other one of the furniture dedicated space is worth to 365. You put a pharmacy in, its really getting great traction, the town never had a pharmacy before, in community pharmacy that is. So, it’s a good question on which one drives the most, I think if you have put the numbers together, I’d work back from the C-Store and food service, I’d go over to pharmacy and then I probably go to the fresh categories and say that’s where the most the growth is coming from. And then the work comps [ph] or the leverage with the effective storage structure/cost would make it all happen. But even a small thing like we would post out to the back of the store which gets a better flow of customer right to the store, is that helping other categories, probably is and because they're all up in the store. But, the heavy lifters are the ones that I mentioned.

Okay. And the most of the raining markets have the capacity for C-Stores, sorry, C-Stores in other food service?

Yeah. What I said, I actually don’t know if I mentioned in my remarks. But I, what I did say we have 30 sites that were spend it our C-Stores or in store. We could double that, that could be 30 more, so and that because beyond top market. So for example top markets at St. Thomas is the ASPI, so we’re going to expand our store at St. Thomas, we’re not putting a C-store into a costless format. So, there is stores like that that don’t aren’t even eligible for a C-store assortment. But there is a whole bunch of others that aren’t top markets, they just great opportunities for C-store. So, for example we’re looking at acquiring the C-store in Happy Valley, New Finland, Labrador and wherever possible we’re in the market to tuck-in C-stores. So, it’s a combination of top markets at just good locations for C-stores, including C-store within a store and we don’t disclose the blend of that, but just like the top markets, top I called it in my AGM remarks, I called convenience as super top category and it has the same kind of sales spread to the rest of the business as the top markets do, in terms of growth or year-over-year. So, we want to do more of those, and you know what dramatically or you’d say strategically we’ve for some time have been trying to de-risk our business from the easiest shopping categories or e-commerce categories. And we know that how to consumable C-store categories are really great, they don’t get out shaft or e-commerce. And next best after that are perishables at the end of the spectrum, its big ticket that’s big in both it need to be sold on credit that we can sort of how to offer to our customers. So those things haven’t changed, but we don’t you know, to be fair we don't break that out except I could just tell you that we're happy with the way those priority categories have gone, and you know back to center store it's not a disaster for us, but we're not, you know the tonnage there tend to be flat, in fact we do have some catalysation, if we sell more prepared food in some stores we've seen some of our center store drop because people have switched to prepared food consumption.

Okay that's great, and then just switching gears here to North Star Air, you know obviously closed that deal yet, can you provide us some information around EBITDA and what you expect the run rate to be. Can you just provide a little bit of color around the top line, like presumably some of the -- you'll benefit more on EBITDA than you will on the top line I guess. In terms of the post close run rate once you've completed your investment.

I think the revenue rate is about 32 million now and we're going to double that size, but then it’s going to be 80% to North West on request, so we're going to have the intercompany elimination, but from a size of enterprise standpoint we're still doubling in size.

Right, I see, okay.

And that's our phase, that's for this year and from there we'll look at other opportunities.

You mean other --.

Was two parts to that, the other opportunities in third party freight and other regions.

Right, end logistics in there.

And air cargo.

Okay that's great and then finally just on the CapEx, can you talk a little about what you expect when you include Right Way and North Star heading into 2017 for the balance of the year.

On CapEx, Right Way would be nominal, they might have $2 million in their CapEx plan and they're wrapping up the store project right now. There's no other new major stores. North Star we have a Basler aircraft that's going to be acquired shortly after closing. That's it right now, and that's in the I think it's CAD8 million or is it CAD10 million.

Okay, that's great, thank you.

Thank you, next question is from Michael Van Aelst from TD Securities.

On the annual meeting you said that your e-commerce was on the verge of becoming much more significant over the next, I guess over the next few years or so, or lot more, you're on the verge of doing a lot more e-commerce in general. So can you give us an idea of where you think you can take e-commerce?

Yeah, well first I'll say is that we're behind. We need to get the right structure in the organization to turn this on more, at the I guess I'll just call it the basic national organization of that initiative. What's working for us and I want to answer the question, but just going to give you an update on what we’ve done so far this year. So we are moving forward with our Pacific-Alaska wholesale B2C, B2B, it's a direct business today but not that strong digitally, it doesn’t have the platform we want and we're putting a platform in and we're using a with a new distribution center that we built or basically took over a building and then got it at the Anchorage airport we're setting up now a dark store that's our picking configuration, and we'll be launching that, think the target data's the beginning of September. So that'll be our biggest focus work in ecom and it'll about selling food, key volume items, five days faster than Amazon at or below their price coming out of Anchorage as opposed out of their Seattle warehouse and having a DC right on the airplane apron so that the plane lead us right up to the door. That's food and there is versions of that that we can envision in Northern Canada. You know that's some catalysation in the sense that other customers who'd switched to our ecom offers or the instore one, but the way we look at it, it’s going to happen for those customers regardless, but that's still to unfold. What we're behind in digitizing our general merchandise offer so we have to digitize our motorized machine catalogue, digitize our specialty general merchandise that can't go to all stores. And the timeline for that is a little up in the air, as I mentioned we just replaced our general merchandise Vice President, what I like about the deal individual, but he comes with a strong retail supplier and, but stock goods supplier, but also technology background. So he is very conversant in the need in the opportunity. So we just put the pieces together, to get that. And by the way, most this is not, it’s more of a shop [ph] by approach and we just get into business in these different lines and get them out there. There are some brands concern that we get the right brand, but I think we’re going to find with North West and we will help multiple ecommerce brands, the one we have up in Alaska for, Pacific-Alaska wholesale different of course in the one we have in Northern Canada. Now even within Northern Canada, we may have sub-brands depending on the lines of merchandise we sell. So for example North West Motorsports is our brand for motorsports and that’s what’s known by our customers. And we may be selling North West Motorsports parts or machines in the markets we don’t even have stores, so it took to the e-com. The big picture here for us is that, we need to find ways to be so differentiated that people will themselves to our sites for the total delivered value of the e-com offer and by that industry gets back at the logistics. We have been able to demonstrate that we’re going to be able to shift product maybe on our financial credit. But to that customer more reliably and I keep saying that it’s pretty important and our shipping lanes faster and that equal or better costs. And if we can apply that to their existing spend keep in our retail ecosystem than, I think we’ve got a fair shot here to take good chunks of categories that today are out short. And even shifts of our in floor or on the floor selling space to this digital channel. That’s the idea and they applies not just the food, of course, as I said it can apply to even big ticket bulky categories that you would normally bringing Sealift. We have the mattresses work that way, but people still want to order the furniture they really want to buy in terms of fabric selection and they'll pay the extra freight as long as you get it there in reasonable time and it doesn’t arrived damaged. That kind of a retailer, who I think we are already, but if we enhance our logistics aspect to the offer than I think we have simply compelling. So that kind of, that’s the bigger picture for us and where we think it can go. But we just need to put more irons in the fire and start learning from our mistakes and successes. So the first one is Pacific-Alaska wholesale in the fall. We will have some of our merchandise up in the fall as well. But we won’t have learnt enough to talked more about intelligently and of course with NSA, we considered that to be enabler, we’re just getting going on there. So the pieces are there, some stuff we put into the puzzle, but I think it’s going to be more into learning, into next year and that also making sure we have the people on our team, who can drive this on top of, we’re doing already in the rest of the business.

And two other shorter questions. One, when does the new food supply agreement kick in with metro?

It’s started three weeks ago.

And then in Alaska, you talk about the top economic conditions. So what would you say is helped you get off to a good start regardless?

Regardless, I think our -- we’ve got some money in the market, some government relief tax money has come in tax refund money. It hasn’t been desire, I mean as we kind of suspected, like the worst case was that we were going to have cuts to state employment in there have been some. But I think that the base core income of our customers is more core than working for the state government and a lot of our customers are work in the state government they’re receiving transfer payment. So the snap program still there, that’s the nutrition allowance one. Although the Trump administration proposed to cut it by third I think, I don’t think that'll get through Congress. So I think we're defining as the core income still in Alaska. The competitive situation hasn’t change better or worse, and we’ve run a pretty type business expense wise. So we’ve shown before that we can -- might not -- the bottom-line by more than 5%, but it’s not the bad year for us in Alaska, that’s okay.

There are no further questions registered at this time. I will now like to turn the meeting back over to Mr. Kennedy.

Okay. Thank you very much for your questions. We look forward to being on the line with you and September were going to be Cambridge Bay, where the new [indiscernible] Research Station or center that open surely after our board meeting up there in September and we’ll look forward to updating on our acquisitions what the pricing situation is with our Giant Tiger stores and our momentum in Northern Canada. Before I wrap up, I want to just acknowledge and let you know that Paulina Hiebert, our VP and Legal and Corporate Secretary is retiring, so she will not be on this call unless I extended her retirement further, but I have done already to the middle of August. So, there’ll be another individual a very capable, it’s hard to replace Paulina. We recognized just recently for our governance, which was, which group was that gave us the --

Canadian Corporate governance.

Canadian Corporate governance. So, and we’ve to reflect on this is our board I know maybe it doesn’t interesting to investors and analyst, but I think you do appreciate good governance and I think North West tries hard to that respect. But behind the scene, when Paulina joined us 7.5 years ago. We weren’t logging at the wilderness, we were okay. But it was, we didn’t have legal department at all and we didn’t have the expertise that Paulina brought to the table. We build a very strong legal team here. And just want to let you know what Paulina has gone, but she’s helped us a lot and whoever is coming next will continue our governance practices and try to make it even better. So, with that, I’m going to wrap up. And again thanks everyone we’ll look forward to speaking with you after Q2. And if you have any questions in the meantime as usually you can track down John and I. Thanks again

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.