Edward Kennedy - CEO Amanda Sutton - VP, Legal & Corporate Secretary John King - EVP and CFO

Jim Durran - Barclays Michael Van Aelst - TD Securities Stephen MacLeod - BMO Capital Markets Matt Bank - CIBC Neil Lindsell - Industrial Alliance Securities Sabahat Khan - RBC Capital Markets Murray McNeil - Winnipeg Free Press

Good day, and welcome to the North West Company Incorporated Second Quarter Results. I would now like to turn the meeting over to Mr. Edward Kennedy, President and Chief Executive Officer. Mr. Kennedy, please go ahead.

Thank you, operator. Good afternoon and welcome to our second quarter conference call. We've got a good connection, we're up in Cambridge Bay with our quarterly meeting here with the Board. We've been touring stores in the Kitikmeot Region of Western Nunavut. Before I get into the quarter, I'd like to. introduce with me on the call as well is John King, our EVP and CFO and also Amanda Sutton, who is our new VP General Counsel and Legal. And I am going to ask Amanda to read our disclaimer statement.

So, before we begin, I remind you that the information presented today may account to 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, Amanda. So, I'm going to start with the review of the quarter. I'll go through by our business areas, different banners. I'm also going to provide you with an update on our outlook and the impact of hurricane Irma which is still unfolding. A very current event that's affected a number of our stores in the Caribbean. I'll start with our core [ph] performance in the north as the highlights in the quarter were led by our northern businesses. Northern Canada had a very good sales performance on the food side led by our convenience and food service categories. Those are focused top categories as we refer to them. They were over half of our Northern Canada food increase and we're well into the double-digit. We benefited from higher federal child benefit payments as I think most of our investors and others in the company are aware this took effect last July. So, we had some of that still cycling through and that was helpful on the money days we'll now start to comp that in Q3. There were a couple negative factors in the quarter, supply chain disruptions. We've moved our Eastern food distribution relationship from [indiscernible] to metro. Those supply stores essentially in the east side of James Bay and up through Central Nunavut and parts of Baffin Island. The metro part has gone well, but we have also had to change our freight consolidation and what would as you are familiar with North West we have usually a few wrinkles in our outbound logistics in this case we have consolidation service that provides additional service and wrapping and staging product and that has not gone as well and as a result we had some disruption through to basically the end of Q2 and affected our in-stock rates in our Eastern Canadian market that is being addressed. We're actually changing the consolidator service as we speak and we'll have a transition to a provider who works with us in Western Canada is well established and we have a high confidence level in their ability to meet our needs. So that was a negative and then another one that where we're still dealing with is the freight increases that we received from carriers into this year that we will be addressing through the way we can figure our routes with North Star Air, the carrier that we acquired. That won't happen overnight. In fact, the route configurations and expansions only started on August 1, essentially the start of the third quarter and they will continue through the rest of the year. I'll talk more about that in the context of our capital spending program for the rest of the year. But that was a cost factor on a year-over-year basis would have been a negative to our Northern Canada stores. So, all things factored together though we were pleased with the with performance in Northern Canada and again we like where the blend shift is going. We think the convenience categories and food service have got still significant growth upside. We did some good ticket business as well, which is the other end of that curve or line of where we want to play and grow our sales. Turning to Alaska, another good performance and here we've been cautious given the macro environment of the states of the situation in the price of oil that ties to that. I think we found and it kind of reminded ourselves that there's a lot of other forces that play here in in the north and specifically the fishing season was very robust in the rural Alaska markets where we've got our core number of stores. There's a construction project spreading was still decent typically federal related projects certainly the state spending on infrastructure is being curtailed. So those factors were good drivers for us. I think we executed well but combined together we had some decent comps, the comp sales in Alaska were above our expectations and kind of counter intuitive to the way we thought the year was going to turn out. Just to corner on the outlook on Alaska as we head into Q3, we expect the current - as the announced rate will be comparable to last year. So, we on a year-over-year we've had the big downturn there. How folks spend their money given some of the uncertainties economically in Alaska could be a concern. I'd say we are customer, or again our core customers are anomalous in the sense that they tend to be more spenders and savers of their PFD checks and we'll be prepared for that and expect to get our share of that business since we have the right products ready to sell to them. So we're a little more optimistic on our outlook for Alaska, given the way that you started these fishing checks, the construction projects they are winding up. But the income that they generated will still be with some of our customers through the fall season. So we think there will be some carry forward there, that's sales momentum for us. Turning to banners that have been more challenged first in Giant Tiger. We've been dealing with food margin compression in our Western Canadian. The market where we do business with our GT stores and nothing has changed. It's still what it was if anything it's even tougher. We've recognized that we have to do better on ensuring we hold our traffic promotionally, which means that that's a margin investment in itself. We also recognized that this is quite structural and as we look at it quarter after quarter and talk about rational pricing et cetera. It's really not something that we would plan around. We never really did, we just expected that there would be a read down of some type with some margin expansion back again. At this stage, our approach is to really focus on first thing where we need to be with our food pricing but stress the other really great strength of Giant Tiger which are the soft goods and hard goods size of the business and much more margin opportunity there and more profit goes with that of course. So we're aware of where we need to go. We have to be on top of key items, really leverage our Giant Tiger relationship from Ottawa. That's what we're paying the royalty for. I mean their expertise on the buy side of the merchandising side in hard good and soft goods specifically is something that I don't think we've fully tapped into and the necessity there being the driver we're going to be spending a lot of time working with them to close any performance gaps between our stores and theirs in the non-food areas and today we do blend several 100-basis point higher in food. Not a good place to be in the current environment. So, our primary goal is to get our blend shift away from food but more accurately to grow our hard good soft goods business. Allocate more of a promotional space to those two particular categories or areas of the business and still try to get the traffic through the door and food but really focus on the profit side that we probably haven't spent as much time on as we try to manage our food market share. We continue to grow with Giant Tiger. All that being said, we opened stores in Red Deer Alberta, our third largest city our trade area in Alberta and Prince Albert, Saskatchewan which is a great trade area for us. It serves a nice mix of northern shoppers, it's one of those northern gateway markets we've been very successful with our Giant Tiger stores. So, some unusual actually to have a second store in a market of that size but it reflects more of the drift with our format and those types of customers. Turning to the Cost-U-Less, we had a mixed result in the quarter a little disappointing on the expense side. I think we saw a rebound in utility prices. Some of that oil related so as utilities putting rates up regardless. We knew that was coming I think we underestimated that it was a bigger swing back. Labor controls could have been better as well so nothing serious on the downside but we could have done better there because the sales were pretty good and I think we had more ambitious goals on the margin side trying too serious shrink improvements we got about a quarter way there which was realistic and then we dropped the ball on expense. So, our business was not what it could have been in the quarter, but it wasn't bad and the stores overall are well run. We have ourselves in a good position at least we did up until hurricane Irma. And I think this is a good time to give you an update on that and what our first assessment is of the situation we faced. As everyone is aware I'm sure the status of hurricane Irma is that it was a Cat 5 at least level hurricane. It was very destructive to certain islands including several of our [ph] stores and is now moving onward towards Florida. When it got to St Martin that was a very serious devastation situation. Our store has been seriously damaged, I don't think it's catastrophic in the sense that it has to be torn down and rebuilt but it's going to need some repair, some serious repair work based on what we've seen now with photos and what will have to be done. We don't know if the structural damage or the damage of structural beyond that and we will find out as soon as we practically can. St Martin itself for those who have been following this closely is in a very very difficult situation and the amount of destruction is so widespread and the infrastructure and accessibility, communications, physical logistics et cetera is very dire. So we don't have the assessments that we would if we had more access, but we know enough now to believe that we won't be operational there for a number of weeks if not longer and we'll have to step back and continually just [indiscernible] as we get more information. On the other side of the ledger, St. Croix in the UVVI was left largely unscathed it will be open for business there very very soon. In between that we have the BVI and St Thomas in the USVI. The St Thomas store in the USVI in our press release, it just shows how fluid the situation is at the time that we sent this out this morning we thought that store was damaged, but not substantially damaged. Now we see that it is substantially damaged, it may in fact be the most damaged of all the stores that we're aware of so far. Infrastructure wise St Thomas is not as in a bad a shape as St Martin. So, we are able to mobilize and we will have structural engineers on that side and making decisions as we go along. In both the cases, St Martin and Saint Thomas our early view is to look at alternative sites to be in business faster if there is repair and construction required and we're pursuing that today. In BVI where we have most of the stores by number not always the largest ones, this is the latest island the last island that was hit by hurricane Irma so it's still very preliminary on what information we have. What we do understand is that our main stores, our largest two stores that are right in the harbor are in very very good shape and we should be operational once the security situation there is cleared up. And I will just say that we have a -- most of our focus has been about what's going on from a human perspective and I don't know today or right now what's going on BVI but some of the early indications are that this could be the hardest hit island so we're very sensitive and aware and concerned with 600 on that island with the human tragedy aspect of this on property in upsetting people's lives. We're prepared for the worst actually right now, BVI as we look at the situation and we're just waiting for more information. So, I was talking about our store before I mentioned that and the other smaller stores on the island we simply don't know yet what level of damage and then to kind of time delay would require to get back into business. We recognize that this was something really important that our service to the island is key. We provide 90% food is what we sell, we are essential and we see all that this is an obligation and we're 100% committed to be back serving the islands and the people as they go through this very very difficult situation still respecting everything else that's happening and working full time with the authorities. Our basic approach right now is to do anything we can to help and to ensure the safety and security of people including not the least of the 1000 of our associates who work on these islands. Just from a financial side of things these stores that I've just mentioned, these 12 stores represent approximately 10% of our EBITDA and net income. We have insurance including loss of business, we think that the damage is within those insurance coverages. But we really don't want too much further right now except to tell you that these are the things that we know and that we're working through this in the next few days. So that's where we are positioned and where we are thinking and again this is a real-life situation, so things could change again and hopefully for the better not the worst when it comes to fatalities. But we are still waiting for more information in BVI specifically. I'm going to continue on and just a talk a bit about. strategy and outlook. As I look at our report to shareholders, it may not come out as much as it should which is the allocation of time and investment to the move aspect of logistics and supply chain activities of our business clearly the NSA acquisition was an example of that. So, I think as a focus area we need to recognize and reinforce with you that that is something that we've put emphasis on and we will talk more about it as we move to the next couple of quarters. As we stand, I mean we're just stand out actually, if you look at our CapEx outlook for the year ex the acquisitions we've already made we don't display [ph] any others of that magnitude this year. We have added airplane capacity and hangar capacity. That was accelerated to what we initially planned to do and it really was a function as we lay out our plans for NSA and had to react to other air carriers of their perspectives what was available for capacity of equipment's with third party carriers. We recognized that we were going to have to invest in additional aircraft to carry additional freight and all this is business case based. But it it's not inexpensive, but the dollars are high on the revenue and the revenue return in cost savings side as well. So, to first put the investment into it, they will require acquiring two ATR aircraft as well as expanding the hangar -- which will become a significant part of our hub operations in the north. So those three investments are the lion's share of the increase in our expected CapEx during the end of the year. As we go into next year, I mean we'll I'd say we're another quarter away from giving you the really really good visibility on our airline or air cargo investment plans for next year. Most of it is behind us in terms of giving up invest that we need to now build out the business to serve our needs to serve our customers better. On the other aspects of the business that are sustaining CapEx side as we work through that, we have said before with the stretching out of our top markets investment, we will see our CapEx fall back into the let's say $65 million to $75 million range and that's kind of where we're going. And I think kind of because we haven't nailed it all down for next year but that's the range that I expect that we'd be in and that includes the next tranche and the last big tranche of our IT investment which would be in the $15 million to $20 million range that we've described before to you related to point of sale merchandise management system and workforce management. I think that covers all the key areas that I wanted to mention in my remarks. John is there anything that I should have talked about but you would like to add. We did have the notes, you want to make a reference there.

No, we've disclosed those in the…

There are in there. Okay. I think everything else is the report and there is no other color needed right now. So with that, operator we'll open the call to questions. Operator?

Our first question is from Jim Durran from Barclays. Mr. Durran please go ahead.

Thank you. Good afternoon. Just focusing on the incremental CapEx. So, with respect to the increased capacity, is this you transitioning third party to owned and you're going to see an expense reduction in the margin enhancement at the end of the day even when you include the amortization of the incremental CapEx?

Yes. And we put this forward and then there's the margin with NSA so we're pricing let's say NSA has a retained profit margin as well. So, we get a cost reduction to our stores, NSA gets an ROI and then the big one that you don't put on the investment analysis is the service improvement. I'm sorry to answer the first part of your question, this is all third-party business that we're converting to NSA.

And your expectation is that the increased service potentially contribute to improve revenue because you will have less out of stocks or?

Exactly. That consistency will turn our merchandise and merchandise quality will be higher, the cold chain will be or whatever chain it needs to be will be more secure from a temperature standpoint. And then the grade, but the next level enablement from this is what we could possibly do with e-com [ph].

Okay. In the north as we sort of lack the childcare benefits contributions are you seeing any significant increase in mining activity development in the north that might help ease the transition from the benefit contribution to lapping itself?

It's noticeable. I don't know if it's significant yet. It's a point where we need to start citing it up better, it tends to be very regional of course mines are like that but here we are in Cambridge Bay and there's a lot of mining development activity in the works two to three gold mines. And we've got the charge that can't hire at research station here with $52 million operating budget about the go live. So as we move around the north and look at situations the metal bank mine expansion is in the Rankin line, the Baker lake Rankin inlet with Agnico-Eagle there is certainly more mining activity that we've seen in quite some time and what you see there is a cash economy, well-paid jobs and then we change our blend shift and sell more big ticket to take advantage of that. So of course, the child benefit payment was more universal covered all markets based on income and eligibility so we're replacing one thing not directly at all with the same kind of activity. But there is and we're noticing and we feel good about that we're seeing more and more mining activity. Western Arctic, Central Arctic, even the Ring of Fire is heating up again if we can work out the road situation there to access some of that mine. There just seems to be a lot more interest now and we're starting to see more and more stores report that. They're picking up business from junior mining camps and so mix should be as just described.

Last question just on the dividend. So, with a $50 million increase in the CapEx plan for the year and some these other, sort of unknown's right now. Can you give us any idea as to how you are viewing dividend increase decision timing for this year?

Well there's not going to be one before the end of the year. The board will look at it by a quarter by quarter and the investments we've made are all expected to be accretive and they will generate their own cash flows and you can model that into next year. So those will all be factors, how is the NSA integration working are we hitting the accretive type of targets that I've been referring to on freight savings and gross profit NDA et cetera. What's the cash flow coming out of RGW [ph] and now we have to deal with hurricane Irma. What kind of business disruption are we facing in the short to medium term. So those are all the considerations but I think we'll know and be able to communicate through all these drivers if you want to call them that at the next quarterly call. You'll get a better picture of what our cash will look like next year and more importantly what does it look like in terms of the investments we've made. How are they turning out? Are they delivering that incremental return in the free cash flow that supports that dividend increase? And then, even in the normal course we would be assessing that in December but those are obviously the big balls that are in the air right now and we made these investments for the reasons that we think are really solved and so but we have a couple quarters to see what the timing looks like on our ROI.

Great. Thanks Edward, I'll get back in the queue.

Thank you. Our next question is from Michael Van Aelst from TD Securities. Please go ahead.

Thank you. Just wanted to follow up on the NSA the increased capacity. I think last quarter you said you are going to be between 60% and 80% intercompany once it was fully up and running. How does the added capacity change that figure?

These specific equipment investments will increase that further will be moving north of 80% because they are geared toward our freight IE and WC [ph] freight. You know there are other as we see other opportunities that are more third party related but we're staying focused on our own plan which is to serve our customers. So, if the blend is going to get higher to North West.

Okay. So, when you and when you look at -- I think you mentioned higher costs tied down or something along those lines I didn't quite catch it. But when you look at your SG&A spend in the second quarter in Canada it looked like as it didn't go down quite as much as I was expecting. So was that tied to NSA cost or was that maybe the - did that have anything to do with training cost not falling off as much as expected?

We had NSA costs? You want to?

Yes, we had. In terms of the acquisition cost.

SG&A what would be a number in there. There is some NSA acquisition cost falling away. I mean we also had freight costs in there they are higher than last year that's what we are wrestling down through NSA. I mean NSA is defensive as well as a good thing for the business but we are facing and we have occurred high freight costs increases from some airline so that's part of the quarter as well. As I said earlier, we won't be able to get out of that as we've got it now we've put the one of the -- into service in Northern Manitoba and we're going to be moving forward with these other planes I mentioned and starting to offset those costs.

Well. Okay. And then the business interruption insurance how does that work like is it does it cover just the lost sales while the stores are closed or given the widespread destruction on the island does it also cover sales levels that you would have been at has there been no destruction?

I think at this point in time, I don't want to get into too much details on the intricacies of how that business interruption insurance works. It's safe to say it's more complicated than what it would seem on the surface. You have to go back and look at where the business was and you're typical run rates and a bunch of those kind of factors. So, at that point of where we are at in the process, I think that's all I can on that part of it.

Okay. And then on the Cost-U-Less it seemed like you had a softer first half of the year but you're still saying that you expect it to be similar to 2016. So what gives you the confidence in having a better second half of the year for Cost-U-Less?

Well, that's - for a second because things have changed this week and they are going to be still uncertain until we get through the next two days. But once you parked out, my point there would be that we learned in the first quarter that we had to be tighter on expense management. So in the second half my expectation is leaving out these markets that are affected by hurricane Irma that we're going to be managing our labor more tightly, continue to improve our shrink management and if we could hold our sales momentum we'll see a decent increase in the bottom line. Some of these expense factors drove a lot of it where they all controllable utility costs aren't. But when you have to face that reality you do find ways to manage your expense better. So, I believe that the Cost-U-Less division can manage the cost in the second half and pick up a bit more shrink improvement. And if the sales hold, say the Pacific region start with that there was no hurricane back there they should be fine in the second half.

Okay. Alright thank you very much.

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

Thank you. Good afternoon. Just on the NSA investments, just wanted to start there. With the new capacity coming in, it sounds like it's coming a bit faster than expected. And if that's the case would you expect that the contribution from NSA would be above that $8 million that you highlighted when you announced the acquisition?

But that would be - yes, the expectation would be that business is ramping up in size much faster and is getting larger than we have planned for this year. There is some ramp up investment that you have to train pilots, you have to build a hangar and [indiscernible] from the CapEx side you got to buy these airplane, they are coming in from offshore. They've got to be licensed and certified so there is that as well. If you're writing checks earlier but you're also building bigger business with a bigger ROI and bigger cash flow at the bottom then you expect it faster.

Right.

All those puts and takes work this year like for example the planes that we're acquiring that we are writing the checks for now won't be operational until Jan-Feb. So, it's coming in terms of business scale and in return to us but we're still a few months away from that.

Okay. Sounds great. And then just turning to GT, talk a little bit about changing the blend, the blend shift away from food to hard goods and soft goods. I mean can you talk a little bit about how you do that while not potentially impacting the traffic?

Yes. Well you can't compromise your promotional price and integrity. Now I see everyday price and integrity on your food, but the best example I'll give is that if you'd look at how are we different we know we start in Western Canada with natural runway of food and I've talked on this before it's been going, it's been the reality for many many years because there was not a lot of small junior side hard discount going on in Western Canada. So, we had an open market and people looked at GT for food and what that meant that we had to develop ourselves and our skill in merchandising fashion and hard goods. But an extent that we run corporate stores instead of franchised ones, I think we have to work harder to really drive the hard goods and soft goods. But it comes down to metrics and really kind of benchmarking yourself like I said like types store. So if we lay out a store and we look at the [indiscernible] including hard goods and soft goods. The permanent fixtured areas will look comparable but when you look at the promo space in the race track around the store you'll see all the palette positions for food in our stores and not in a Giant Tiger race store. But the promo price is you have to go look for it and it may not have the same quantities that we have. What you have in those promo areas in those key strike points in the store are hard good and soft goods. So that's the simple one then we say, okay we got to stop doing this and hopefully our customer is okay with that. To your question about killing the traffic, again we think that if our promotional price integrity is there then we're going to draw people in the store. But we want to see them shop walking past key items. So, for example, window coverings which are the panels that you hang on the windows and the rods that go with them are multi-million dollar business at Giant Tiger. I believe there are either one or two share in Canada in this starting from zero we're under developed in that space in Western Canada. We don't give the investment in dollars in flex base. Key items are another area where we look at the top 50 items and we look at our quantification and we see that we're light in some of these top key items where our store manager aren't aggressive enough as some of the franchise owners will have in the East. We've added merchandising specialists to help our managers make those decisions. These are insurmountable, I just think we haven't put enough light on them to recognize there's things that we can do. The customer will stop the way they shop, I mean realistically are we going to flip 900 basis points over in a year? No. Can we get a 150 to 200 basis points swing? That would be fantastic. The margin structure is completely different more than twice the margin on the soft good hard good side. So those are the couple examples of areas we're working on. It's also are a mind shift in the store. Our store managers are executives, we always believed in the food part of Giant Tiger. And now we've got to step back and then see how do we carefully deemphasize food still draw enough traffic in through the pricing but give prime selling space to the product that's going to go to the bottom line for us.

Right. Okay. And then just finally I know you touched on in your prepared remarks but in Alaska I mean the sales trends we actually quite positive or at least improved from the first quarter. Is there anything in particular that you would attribute that to?

Well, I think the two big ones to me are it's the wage economy in the summertime in Alaska and that's commercial fishing and construction and both of those were strong.

Okay. That's great. Thank you very much.

Thank you. Our next question is coming from Matt Bank from CIBC. Please go ahead.

Hi. Can you talk about how gross margins in Northern Canada food are trending? To what extent the improvement is continuing and your outlook for the rest of the year please.

Sure, the general is positive and we explained that tied to the blend shift and that blend shift continues to grow. We've invested in a lot more food service. That stuff, I mean it goes in the comp sales and maybe new equipment in the store. But we continue this cycle and add more of that equipment. We get more of those sales, we extend our store hours. We create stores inside the main store in terms of assortment. So, all those factors support margin improvement. We had a shrink initiative, it's contributed to that as well. There's still room to go there as well, but most of it is tied to the blend side. We have not done anything else that would drive down margins we're just working our blend and our focus into categories that carry a better margin. So the outlook is positive and it's going to be continuing focus of our northern businesses. I mean we're not running away from the shelf stable and we will overtime articulated e-com approach to deal with that and the businesses there is still very small by the way especially compared to the southern retailers. But in terms of really getting growth and I was talking about double top-line growth in the 12% range these are the categories that our customers are most responsive to. And if we pay attention to them it's about in stock and lot of details on closing gaps within like type stores I mentioned between Giant Tiger, East and West within our northern matters in Canada closing gaps between like type stores on their store hours. Their margins and sales blend in these categories. That's where we're going to win and we're going to keep doing that. So as long as we feel we still have a lot of untapped gaps there like 20, 30, 40 stores that still can be reached with those kinds of focuses and we're going to still drive some pretty good margin increases.

Thank you.

Thank you. Our next question is coming from Paul Lee from A capital. Please go ahead.

Hi, good afternoon. Just wanted to talk a bit about the speed of expansion at North Star. So when you are expanding that how - will you be eliminating some carriers fully or only partially because I am just trying to get a sense of how to connect that given that you might be competing with them a little bit too?

Well, first of all I've said that these planes are geared to carry like we work backwards from our freight requirements we don't say well let's buy these very expensive planes. Let's double the capacity than we need and go look for the other half. We're not really interested in doing that and cargo business. Certainly at this stage of the game the greater return with a much lower risk simply to move our own freight from a third party carrier onto our plane for all the reasons I've mentioned, which means there is still lot of freight for other people to carry. So nobody goes anywhere in terms of being removed from the freight lane. I guess it's competition in a way. But it really comes back to our primary strategy and the reason for doing this which I suggest is a lower business risk than selling the merchandise which is moving it saying that if the person only own an airline for two months. So I know it's not that easy, but it's about moving stuff to ourselves and that's what we are doing. So it's not about singling out an airline they all have their own very strong business model. I think we've explained that before, I mean that works for them. It always or often worked for us hence our movement to a full cargo model.

Okay. And so you don't see any because I have to assume some of these airlines historically has been adversely controlled we're going to do something and no community relations concerns as you embark on this?

No. That's a different question. I think the Exchange Group is not First Nation owned. First Air is owned by [indiscernible] which is a partner of ours in shipping and we are working closely with First Nations in North West Ontario that the relationship we have there is a business owned airline called Wsseya [ph] very long and proud history we're not going after business that are in market that are served by them respecting that this has been their traditional business markets. But we are serving the ones that they serve. And we want to work with Wsseya [ph] I mean our committee relation skills are very good and they're credible, so I think over time there is a good chance that we'll work closely with some of those airlines that are more of a symbiotic kind of relationship whether our aircraft or their craft may be needed or switch from time to time those kinds of things are more likely than conflict. But to the rest of your question we have to be very careful and not presume that just because we think this is great for our customers we really believe that. That it's going to be perceived that way out of the gates by other airlines, but when it comes to indigenous airlines those are the ones that we're paying attention to and we're trying to keep open line to communication and always explain why we are doing what we are doing and not being, I guess the best word is predatory. It's really about our own freight and not trying to take third party freight from anybody else.

Okay. And then just lastly, I'm sorry I think you mentioned this earlier on the call what you thought the CapEx envelope might look like start next year?

Yes. I think the $65 million to $75 million range ex-acquisitions and ex what I recall growth CapEx of airline nature, air cargo nature. I mentioned that we'll get more visibility heading into the December board or heading into Q4 on that. But we're obviously with the lead time for our store investment planning we're getting pretty locked down now where we're going to spend our money next year on stores. You know one of them was St Thomas and now if we have to do a rebuild there a substantial rebuild with an expansion that'll be part of it. But that has to be factored into this as well.

Okay. And then just my last question would be, you've got the acquisitions when I say the Right Way acquisition, the expansion of NSA they are going to be dealing with this hurricane recovery. From a project management perspective, you still feel like you've got enough management talent to get your arms around all the final things because it's a lot of money that you guys are deploying right now more so than you have in the past. I'm just sort of wondering how you feel about that?

Well, I'll come out [ph] NSA came with a very strong management team. They are, I think three deep in terms of really key C level [ph] people there that have got a great division of accountabilities. The accounting side of there is getting support from John King's area, and that's an easier tuck in, I mean John can scale his support team pretty, pretty effectively. And this is getting granular now, but it's kind of -- all these kind of questions I think need that kind of an answer. So then we go for an HR person in Tennessee, as they add -- they grow their staff complement. We are trying to keep the culture of their business and acquaint [ph] their safety culture but their enterprising culture is a subculture of North West, quite distinct. So, they're quite independent, as (inaudible) with that. They report to me and they are not -- they are autonomous part of what they are doing. I think is really key. So we can manage that, as we keep our alignment on while they are adding the planes to serve our stores. We've had great responses from our stores since they started to fly and north of Minnesota, outstanding service and accolades from the store managers. So that's a lighter touch. And then you go to RTW, so there we have a large majority position of the business. But it comes kind of ready baked with its own infrastructure. It's got its own admin and workforce. It's reporting up to our Chief Development Officer, Dan McConnell. We're moving -- we moved one key person in from our -- the General Manager of our Haven Store [ph]. We are moving one person from our Bellevue, Seattle office to be the Director of Food Marketing and Procurement. But they come with a very strong base of people that were in the company already. And we can -- given that the success of that business and the profitability of it, that we can now improve on it. We already started -- we've invested in price, a very successful price investment campaign in the middle of summer time, through cost savings we achieved. I think we're going to strike a good balance there with it, not taking too much resource away from what I've mentioned already and starting to just fine tune and work on different areas of business improvement in that business. The NSA rapid -- more rapid expansion sits in the first part of my answer, which is that we've got people there that know what they're doing and aren't afraid to ask for support, but at the same time have been kind of waiting and building themselves up for this opportunity to scale their business. So they're in that mode already and we just have to manage it and make sure we don't extend ourselves risk wise, on spending. So it's a good question of project management. We have the profitable [ph] resources that we -- we have that other business project manager on at IT-1 [ph], because of Hurricane Irma. That's another curve thrown into the park kind of thing and we'll see how that unfolds. But as I look at it today, if it's rebuilding two stores and maybe some smaller ones at BBI then we can certainly get our head around. We might have to add project construction manager or two. But again that's very doable as well. So I'm not hinting [ph] the minimum -- what you're saying is very fair and on point that we haven't spent this kind of capital before. But we're putting in to businesses that existed before, this is not greenfield. It does come with a lot of proven performance on the management or financial side, in the case of our RTW, and we can take that and grow it, and we don't have to extend ourselves in case of RTW, don't have to go faster than we need to, given the other things going on in our business especially Hurricane Irma.

Okay that's great, thank Edward.

Thank you. Our next question is from Neil Lindsell from Industrial Alliance. Please go ahead.

Yeah, good afternoon guys. Just for John, I guess on the insurance, I appreciate that there's lot of complexities on the business interruption side. But with the downtime that we're going to see from the stores which have been affected, in say the Q3, Q4 results is that just going to be reflected as we're going to see the reduction in the revenue, I don't know are expenses going to stay the same, are you still paying salaries during this interruption, and then that gets recovered afterwards with insurance proceeds.

So Neil, like I said, I don't have all those answers at this point in time, on how that policy works and intricacies of some of those things that you're talking about. So Edward had outlined in the beginning of the call, gave some context to the financial impact and the contribution of these businesses, I think it's still too early to say how long it will take for us to get back up and running in those markets. Certainly some of them are going to be longer than others. So my point there would be we'll have to see. In Q3, we will have more answers on how this is going to unfold.

Okay, that's fine at. And then then Ed you talked about your relationship with Giant Tiger, you talk about not necessarily having tapped into a lot of what they could do on the supply chain and I think that over the last year you've been working closely with Giant Tiger, to be able to source goods to supply some of your other banners. I'm just trying to understand a little bit more about, what you think you're kind of doing and why and how that's going to improve in the next little while?

I think that's a misinterpretation or communication. We're not really looking to get supply chain or product sourcing from Giant Tiger for other banners. What I was talking about is that -- there's little more context there. I think we've done a lot from a sales and op standpoint. 100% controllable areas of the business that we can act on and especially in the food merchandise inside of the store, and just the day to day operations of the store, shrink management, business readiness, in stock, especially in food. Those are all areas that I think that the team has done a great job elevating. But when you get to the [indiscernible] side of the businessman, and again I'm saying that with the -- I guess the recent full day meeting with Giant Tiger last week and. And just going through area by area where we are gapping, and fully appreciating that there are meaningful gaps that can be closed in our penetration within ladies and men's and children's, domestics and toys and -- different hard goods categories that GT has really seen, good growth on. We may have lagged a bit and now we got to understand why and again close those gaps. So that's been an ongoing aspect of our relationship for sure, but I think the iteration now is just the sense of necessity, that we need to -- we need to do these things better because there's no redemption in food. We can always manage food better. I think one area that we can continue to focus on is the cost side, making sure we are driving down the right costs with the suppliers. But after that we're in a market situation that is somewhat is what it is. Virtually got another whole half of the store to work with. And it's just a matter of how much time and effort we put into that side, and the point I'm trying to make is that we -- I don't really believe that we put enough into that. And we've been working too hard, trying to manage the food side, and protect it and control things that aren't just controllable to begin with. So that's where I was coming from.

Okay that makes more sense. And then just -- I don't know if I missed it but did you give an update on the top 40 initiatives and what's been rolling out recently?

We will end all this [ph] in the quarter. We're under way with the current program of stores. It is staggered out further. We are up here, in this region particularly, we have two top market stores and you stagger it out, stores that should have been next year or the year after and as I walk through them with our board, it's a temptation for everybody to say let's put the money back in faster, because there is an opportunity there, in these markets I referred earlier. You got great growth going on in Cambridge Bay. The entire region's got the gold mining and the government infrastructure investment. We definitely will be investing here, but we're on -- on a disciplined path. So we are at roughly 20 stores. They got 15 to go and we will do three, four at year end, and move forward from there.

Okay, fair enough, thanks.

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

Ed, just following up on that top 40 things, so it -- I don't know how to frame this. I am going to struggle a little bit but, if you were to sort of try and describe what percent of your Canadian business now has been impacted by increased convenience offering. And food service, not necessarily both, but at least one of the two. Like how far along are you in that path.

We've just rolled forward another three years and -- see this is now five years, four years into it -- into the convenience focus. And on those three years we've got -- the next three years out we've got approximately 40 stores that. So I'm talking of a 125 in Canada. And to give you some idea of the magnitude of -- these are 40 markets where we either will add a C store, put a C store in the store or enhance the food service offering. So, 40 of 125 to go. On the top markets -- well your question is more on the last thing but the -- we are getting a good ROI, it's just as I've explained the amount of CapEx to get -- the amount of staying CapEx, is just very high. So, we're trying to manage, the pacing of staying CapEx that triggers the growth CapEx that goes with the whole project. And the two do overlap, I mean to be sure, of those next 15, both. And eight to ten are in Canada. So, of those 40, eight to ten are top market stores, and when we do a top market investment we do the complete HMRN [ph] and convenience investment as well. They are tied together.

And on the call, you haven't given us a data point on this before, but I -- quite obviously we would be expecting that the 40 stores are a greater percentage of revenue and profit, than they are store count.

Yeah, we did give a number. I think we said our operating margin would be 50%, for the full year, yeah.

Okay, and when I look at your food comp store sales number, which in the context of the market right now is actually quite impressive. Like, would that mean that given where you're at right now on a roller out those newer initiatives are having a meaningful impact on the consolidated comp store sales number. Are we too early in that process?

No, it's too early and unfortunately Jim there is we've got, a tough situation with Giant Tiger which has big top line numbers. We had great comps at Alaska, good comps at Cost-U-Less and that's not, [indiscernible] is top market driven, or not it's both -- we haven't touched the top market, in our top category effect down there is kind of muted. Our comps in Northern Canada are strong, and they're still the biggest division of the company, and that is top market. The top markets are out indexing in the top category, they are hugely out indexing the rest of the business. And they're now at such a scale that they're bringing the whole division along. Though it is -- that does hold true in Northern Canada. But in Alaska, the external factors I mentioned, other external factors the Giant Tiger are all more important than these internal drivers.

No, that's helpful. Thank you.

Thank you. We have a question from Sabahat Khan from RBC Capital Markets. Please go ahead.

Just a question on the earlier comment on percent of EBITDA from the Island economies, you mentioned it was 10%. So, want to confirm, is that the portion of your EBITDA that's been exposed to a storm or is that for all Island stores as a percentage of North West?

That's the percentage exposed to the storm.

Okay. And then just on the - just a follow-up on the Top 40 questions earlier, are you - so, I guess, you're allocating more of your CapEx to NSA is that just because you feel that's a higher return in the near term? Or is that the sustaining CapEx that's causing you to shift a little bit more towards that versus Top 40?

Well, we would have done it anyway, we would have shifted, we would have dragged it out or test it out carefully with the top markets because we're - you know, if we just hold that one part of our strategy and say okay, are we driving incremental value from that. At the level we want to and the answer was good. Like the solid D, but doesn't meet our rate if we don't have to put that in a bad taste which, we just slow it a bit. We still like the strategy. We love these markets. We think there's a tremendous long term market for North West. Then, and if that come along, but that that ties into another aspect of our strategy which is, vertical integration where it makes sense on the move part, recognizing how important supply chain was to company like North West, how big our spend is, how complicated and elongated that is, and then the oligopoly/monopoly structure of our suppliers, those are all trigger points for this. It just so happens that you know as one who is coming back while the other ramping up, but it's not a like a teeter totter where we wanted to put money, take money out of our stores and put it into the move part of our business. I think, there is something down the road. I think if you go even further, you think and your start get thinner, can you lean out your stores more? Can you have a more faster - even can you imagine a supply chain that is so fast. We're going to test some of that, but we are also practical minded in the sense that it's a long ways to go, and you're still using airplanes, so we just need to fact find that out. Whether they're - you know we can do something that would actually result in a shift. In a net decrease of that's that employed to drive more turns and in a more efficient business model, because we know how much it cost to build whatever we do build at the store end. We're not quite there yet. So, what you're seeing right now is not that thinking, but there could be some of that thinking come into play in the next little while.

Thanks and one last one for me. You may have commented on this earlier but are you seeing any of infrastructure spend that the government have put in the budget this year? Will that more be a 2018 event?

We're seeing it. I mean we're seeing projects in communities, schools going up and some public infrastructure in terms of sewer and water. So, yes, that's a positive factor. I think we're probably about where it's going to be and next year should be pretty good as well. There's been more announcement lately on power station infrastructure with no specific project named yet by the federal government and none of it, so we're looking forward to that. If I missed earlier, there's the premier of Ontario would like to start building roads in northern Ontario and that's great. That by the way doesn't - we're still going to be at lots of air access communities, these are places that are thus far off, the roads today - the road network. So, you know what's happening, and I think that's a positive for the business that we've been looking for a while. But I'll just say one thing there that the products are very, very large, schools to be $60 million and just one community. So, it doesn't have that ripple effect, it's kind of like the mining part that I described and what we're finding is that the bucket of big projects is sucking up a lot of money. That's just the way it seems to work. You can quickly go through the whole budget in four or five communities.

Thank you.

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over. We have a question from Murray McNeil from the Winnipeg Free Press. Please go ahead.

Hi guys, I just have one quick question relating to Hurricane Irma. I'm wondering if you have any photographs that show the damage that may have been done to the stores in either St. Martin or St. Thomas, that you might be able to provide to us?

We'll check Murray. I don't know if I've got them here in a sendable form, but there are some around.

Okay.

I'll see what I can do.

Yeah, they just suggested, because you are out of town, it might be easier to pose that question through the conference call than it would be to try and get a hold of you where you are. So…

Got it.

If you do, and then you can email one to me, that would be great.

Okay.

Thank so much Edward.

Okay.

Thank you. There are no further questions at this time. I would now like to turn the meeting over to Mr. Kennedy.

Okay, thanks operator. Thanks everyone for your time today and for your questions. If you have any follow-up, once you can reach Sean and I directly, otherwise, look forward to talking with you on our Q3 conference call this December. Thanks again.

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