Please be advised that this conference call is being recorded. Welcome to the North West Company Inc. Third Quarter Results Conference call. I would now like to turn the meeting over to Mr. Edward Kennedy, President and Chief Executive Officer. Mr. Kennedy, please go ahead.

Thank you and welcome to our Q3 conference call. Joining me today are Amanda Sutton, our VP of Legal Counsel; John King, our Chief Financial Officer, Alex Yeo, who's our President of Canadian Retail Operations - Retail business. Before I start, I'll have Amanda read our disclaimer statement.

Thank you, Edward. Before we begin, I remind you that certain information presented today may constitute forward-looking statements. Such statements reflect North West's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements. For additional information on these risks, please see North West's Annual Information Form and its MD&A under the heading, Risk Factors. Edward?

Thank you, Amanda. I'll go through the highlights of the quarter as some of the challenges we faced and then open the call for questions. If I start on the positive side, we were pleased overall with our EBITDA growth in Canada driven largely by our Northern Canadian retail business, a slight uptick in our North Star Air, which I'll come back to, and not a bottom line improvement in Giant Tiger, although a much stronger October and a much stronger November. So these are very important trend indicators for us. Where we have - we are up over LY in both October and November, but not enough in the quarter to turn into a net positive. So looking at that way, GT was a small but - smaller net drag compared to other quarters, and we expect to be a positive in Q4 over LY. Within the Northern Canadian business, we had decent margin performance, pretty healthy sales, even though we were comping some large big ticket increases last year, which actually help our sales - our margin this year because we -- there were some payouts in Northern Saskatchewan, three land settlement payouts that typically drive big ticket sales. You can see some top line numbers, some gross margin dollars. We always tried to take that business or get it if we can. But - and the margin mix in Q2 - or probably Q3 was much more favorable this year in the mix of higher-margin products, including nearly from food service to convenience to our financial service business. So overall, a very positive blend shift. And the outlook here is also, we think, quite positive based on our quarter-to-date sales trends. We feel that NCR, or Northern Canada Retail, as we call it, will deliver a pretty strong quarter for us. On the airline front, the results were mixed, up over LY trending well into Q4 also. Still dealing with some - our maintenance costs per hour, flying hour, are higher on the ATRs than we'd like. We're getting close to C checks on our two planes, and we feel that the cost per hour in meeting to those C checks is higher than it normally would be. And we're also continuing to assess how we optimize our parts utilization so that we have the right just-in-time at the right cost for our fleet size, which is currently only two planes, but we'll be expanding to three wholly owned ATRs in 2020. Also in the quarter - pardon me, not in the quarter, so subsequent events, we had another plane accident, which was not good news and something that we're taking very seriously. No loss of life and destruction other than the plane itself. The other one from June is just coming on board ironically next week, and now we have this. These are all Basler planes that have been affected by incidents in the last 6 months, they're not connected. As far as we can tell right now in any way that would concern us, except that we take safety very seriously and any issues around that, that we can help to mitigate and prevent going forward. From a business disruption, having a plane that's out of service now, as this one will be, can be offset with our other equipment, and if needed, in - by third-party charter. As we head into the post-Christmas period, the plane utilization demand start to fall off. They're tied directly to the flow of goods, as you would expect, and the Christmas selling as opposed to January selling seasons. And just a reminder that the way this business is architect today, 80% of the business is captured business serving North West Company stores. So I'll just leave the gaming business for a minute. We can, of course, come back to it with questions. The International business had some factors that were explainable but also had an impact at the bottom line that resulted in total results being than -- less than LOI. In the BVI, we were up against some tough comps. The reconstruction economy in BVI has started to flatten out. We still like our performance overall year-to-date in BVI, but as we were up against some of the major construction activity from 2018, it was becoming increasingly impaired as we got through the quarter that we were going to have some headwind trying to grow against that. So we were down slightly in our RTW business, and it had been a pretty consistent growth driver for us. In Cost-U-Less, we - I'm going to just slide into some subsequent events as well when I'm speaking. We did prep and spend the time and resources to get our largest store open very successfully in November. And since that time, has been running at a very acceptable and a very positive sales level considering we're out of that market for 2 years. We are right back with our customers, and we really couldn't be pleased with the loyalty that's being shown to us and the brand equity we seem to have in that market. So now we're, of course, building on that, but it has been, overall, a very, very successful opening. Some of that expense is preopening in the size of a business like Cost-U-Less and even our over International business is material so that was a factor. We've also noticed that each INF [ph] used to have its own story. And in the case of St. Maarten, the reconstruction has been slow. There's been an impairment to the economy that's larger than we would have expected 2 years after the Hurricane Maria and Irma. And we - our visibility on that is uncertain on when there's going to be reconstruction capital put against public infrastructure, and things like the airport, for example. Everything seems to be more extenuated compared to the USVI and to BVI post those hurricanes. So bottom line for us is that we were opening that store a year ago but we have not achieved the numbers that we had pre-hurricane and we had expected to. We have to work harder to capture share because the pie has shrunk. So just a factor in our cost of this business that was a negative for us in the quarter. General expense pressures, which we're cycling through on insurance and some utility costs were a factor in the quarter. But incurring the expenses of a store that hasn't opened yet, in the case of St. Thomas and St. Maarten, softer performance were also factors. Probably the biggest one that is a timing situation and, again, was unfortunate was the timing of current fund dividend checks in Alaska typically would be triggered within a 2 or 3 day timeframe in the second week of October the latest. This year, it didn't happen that way. Maybe 1/3 of the checks came out within a short period of time in October. The rest have been dribbling. We're still getting PFD checks presented at our stores for cashing, and then, of course, customers, hopefully, spending their money with us, and we're into mid-December. So the entire check disbursement event didn't happen and it's never been like this before. It was an administrative glitch. And once that was triggered, then the -- if you think about PFD as being kind of a Black Friday, a condensed selling period, and you've got your promotions in place, it's not as impactful when you spread it out over 2 months. Having said that, we have transferred sales into November, into Q4 from Q3. Our outlook for AC is to get back bottom line that we've lost in our general merchandise performance. And the next two weeks already tell the tale, but November was a strong month and the biggest driver was the PFD checks that were still being presented in cash by consumers getting them up to 6 weeks later than normal. So those were some of the big factors in the quarter in International. We opened a new store in Farrell. We exited a store in Farrell. It's not a dollar-for-dollar trade, we're a smaller store now and that opening went really well. So we're pleased with our position in the market. Longer term, we're going to be after getting aftermarket share we had in our other store, and we'll see how that unfolds in 2020. But we're not going to have the same sales level and likely not the same bottom line in the order of magnitude. It's not material for all of International but it will be to the AC business. So they're hard at work at offsets in the sense of growing other parts of their business, whether it's a liquor business, their margin management and other parts of the division. I think that covers the main highlights in the quarter. I am just going through this. Yes, there were a couple of other store openings, but I - those are the major points I'd highlight. And now I - we'll open the conference call for questions, operator. Thank you.

Thank you, Mr. Kennedy [Operator Instructions] And the first question is from Michael Van Aelst from TD Securities. Your line is open.

Hi, good afternoon. Can you start off by giving us some kind of an impact of the PFD on sales and EBITDA if you're able to?

Well, directionally, I - we would have - our EBITDA would have been likely positive in the quarter. Our sales impact in general merchandise would have been - we were down 8%to 5% on a same-store basis, our plan was that being to be up 5% so swing factor was probably 13%.

Okay. That's pretty significant, okay. And then you talked about the $3.1 million insurance gain last year. But from what I - I look back and I don't see any mention of that last year and you had the $17 million gain, but you never mentioned the $3.1 million. And I think when it was brought up, it was only mentioned as a cash flow item, not a P&L item. So what am I missing?

Well, you're right, Michael. It's John. Last year in the quarter, we disclosed for the first time as a non-GAAP measure, the insurance gains. We had the large insurance gain in the International operation and we talked about that. The $3.1 million you're referring to was an insurance gain, a fire gain, insurance gain, in the Canadian operations, and that was actually comparable to gain in 2017, and so we didn't pick that up. And then, obviously, this year, when we're looking at the results and explaining the results, you have that non-comparable item in the Canadian operations, and so that was noted.

Okay. So you're saying that without that gain, if you would have - when you mentioned that without that gain, you would have been - your SG&A would have been down 0.2%. Did you take the gain out of 2017 as well - or 2018 as well - sorry, yes.

Yes. Yes. On a comparable basis.

So no insurance gain should be down 0.2%?

Correct.

So can you talk about some of the drivers that are allowing you to keep SG&A flat and how sustainable that is?

Well, I think in the quarter, like there are certainly puts and takes. I think we had, of course, the share-based compensation. The incentive plan costs were also down in the quarter. So again, some - just some puts and takes there, Mike.

Okay. But that's not a normal growth rate, I'm guessing, for the next few -- the next little while?

No. No.

Okay. And then your CapEx, you gave us a number of $70 million for 2020 so that's net of some insurance recoveries. What kind of insurance recoveries are you building into this?

Well, we're not - I'm not going to disclose that number. They're going to be much smaller than they have been in the past year as we work through the remainder of these claims. But I think the key point there is that we do see our capital investments coming down next year.

Now as I'm looking at the numbers, the range was higher than we -- our outlook is all looking higher because we did take some spending into the Barrow store move was a very fast one because the way that lease expiry happened. So we bought another business and remodeled the store that was not in the CapEx outlook. That's coming out of next year's spending. So I just want to point out, probably should have at the outset that Tom's making the point that we - we're modeling out our CapEx quite a bit lower heading into next year, and then years after even a notch or two lower than that. But this year, we did accelerate. We also bought a liquor store in Alaska and a convenience store in Alaska and these are opportunistic. But timing-wise, it's having this year, but it's going to be -- it will take down our CapEx next year in terms of overall. So there's a couple of things that just weren't planned as recently as August, actually, which is different for our business that we wrote checks on.

Since you - since we don't have an insurance number - recovery number for 2020, can you give us an idea of what your CapEx might look like in 2021 and beyond if you expect it to be contained even more?

Yes. It would be - and again, unless we're talking about really pristine growth, i.e., brand-new square footage somewhere or business, it would be in the $60 million range.

All right. Thank you.

Thank you. [Operator Instructions] The next question is from Matt Bank from CIBC. Your line is open.

Thanks. I guess, first, on Giant Tiger. I guess, could you share the drivers behind why Giant Tiger improved sounds like about halfway through the quarter. Was that execution? Was there any sort of weather impact? And then also talk about the competition that you called out in the release please?

Yeah. Well, working back on the - from the competition, we are cycling through competition that, things like going for road construction to new openings. We've got more of those that we're grandfathering, and the rest would lay heavily on execution. We've had to really do a better job on that focus, so I think we mentioned that we had taken a -- made a change in the leadership of the Giant Tiger store group. The person who came back thought they can immediately turn to switch but they used to run those stores. And we've really put our effort against our operating conditions in the stores. That's helped a lot. Shrink control is really important right now as well. We're trying to get on top of all the controllables. There still are some markets where we've got 2 and 1 I think we have not yet anniversaried to FreshCos. And there might be 1 No-Frills still in the mix. But the external environment is more stable, and our internal controls are higher on shrinking operating standards. The weather is helping. I mean, we're getting into an earlier, colder winter now. And I just - GT is really a month-by-month picture for us. We've had a couple of false starts, for sure, on trend. But based on what we've seen through October and November, they'd be 2 of our strongest bottom line months. So for all the reasons I just mentioned, operating conditions, better margin control, shrink control, colder weather and it's starting to [indiscernible] of openings that we had to face and the construction activity going away that tied up roads away from our stores, keeping people away from stores in Winnipeg especially.

Okay. And then turning to international same-store sales, you put up quite strong food same-store sales growth year-to-date. Looking back to Q4, last year was a strong comp, and you called out tough laps in BVI even this quarter. So how do you think about the sustainability of the strong food growth in that geography?

Good question. Some of the food is helped by the PFD. So having that in the market in November, December will help Alaska sales, Cost-U-Less, although it's not a comp. I think the work we're doing in our competitive strategy in Cost-U-Less we're now well into it, both loyalty program, our signature categories in fresh and some of the general operating conditions and having moved that office down to Boca Raton, our key people are in markets on a much more frequent basis. So the trend, top line, Cost-U-Less ex-St. Maarten should be decent, just based on our own work. So that leaves BVI. And yes, you're right. For us to get to our plan, the team there still thinks they can hit their plan for the year. They will make that up on margin management. Sales will be tougher as we keep lapping, which we should have figured out. I mean, some of those comps and momentum last year were going to flatten a bit. So lots of puts and takes, but we - we'd be very disappointed if we weren't up in sales just on the PFD alone and the work we're putting into our Cost-U-Less stores despite BVI may being maybe a point up.

Thank you. And then on North Star, you called out earlier this year that you had achieved run rate target earnings in that business. I know you called out in your prepared remarks some noise on the maintenance side. Would you say that the run rate has been sustained?

No, I can't say that. And I think it's, again, quarter-by-quarter, as we launch this, having two accidents in a year, there is an impact because we have to then charter planes and spend more money on that. And I think we're -- as we go here and we're sizing up this -- the -- our equipment, moving from 2 to 3 ATRs, there's scale. Looking at the Basler fleet itself, those are the DC-3s, both of which were in the two incidents, not so much because of that. I mean, it's - if you look at everything when something like this happens, there's nothing to factor both the plans. But the consistency of one type of equipment is something we're looking at because we still have to get our -- we have to prove that we can get our parts per hour down to what should be the industry standard for a Northern airline flying ATRs. And every time we have a setback a larger parts expense, it's always on a one-off explainable. But if you get behind it all, we think there's a pathway here to get to the standard we need to. We may need a parts airplane to spend a couple of million dollars on an airplane for parts. We may look at converting just to an ATR fleet. These are all things down the road that would help. The team is outlooking more normalized parts. They have to show parts per hour expenditure. We have to show it to ourselves over consistent quarters. So to answer your question, to trend where we need to be right now is showing that for our plan for next year, the team has signed off on that. But I need to see more quarters. Otherwise, I would say it's too aggressive to have our EBIT running where we said it would run this year because of the Q3 setbacks. So even though we were up EBITDA overall I can't even though when I say it was up in EBIT for the year - or for the quarter, pardon me, there still was about $800,000 in parts expense tied to maintenance that we did not anticipate. So I'm not saying times it by four and that's our shortfall to our run rate, but that event, plus the incident and having to charter a plane now bridge, would be examples of why we're falling a couple of million dollars short.

Thank you.

Thank you. The next question is from Sabahat Khan from RBC Capital. Your line is open.

All right, thanks and good afternoon. I'm just - maybe one more follow-up on the airline question. I guess, with the – two of these planes having issues, I guess, do you see a potential need for maybe - now is it the planes might be a little old or are they just kind of maintenance-related issues? I'm just thinking, is there a potential need over the next kind of 6 to 12 months to maybe pour some capital into the NSA business to get it going again? How are you thinking about that?

No, no. We're not thinking that way, I mean, it's the capital -- it's not so much more capital. It's -- well, I did mention $2 million for planning for parts, so it's not 0. But we've got the newest fleet of anyone flying planes in Northern Canada, and we're the only ones in cargo-only. The Baslers aren't old planes, they're new planes. They're more than reconditioned, they're turbocharged and completely updated avionics from a DC-3 frame. They're made in Wisconsin. They only do 2 or 3 a year. But it's a very specialized aircraft. It's for short-haul, has more flexibility, the ATRs can carry - ATR 42 can carry a little more weight and has a higher parts per hour utilization. So we're just weighing the pluses and minuses of that. The - when you have the 2 incidences, I mean, you always do a deeper dive on making sure everything else is going well. And from what we can tell, again, there's no dot to connect between the 2 that would stand out. But it's more about optimization here. And the one that I didn't talk about, that is still very important, is how we continue to streamline the handoff - or the handshake between North West, logistics and NSA. It has taken longer and it's breaking more new ground because other carriers don't do what we're doing in terms of plane-ready cargoes and lighter pellets and so forth. So there is some learning on both sides for that. None of that is capital-intensive. It's more about execution. And I come back to the growth side of it and taking an airline from $30 million to over $100 million in just over 2 years and making sure the organization structure can handle that. And we're definitely stopping at this and then looking carefully at how we grow, where there's third-party cargo or elsewhere. And I'd say right now, we're still in that stabilization mode to make sure that we're driving the service to the stores and the cash flow from the business that's all part of the plan. But it's not like much more capital, it's just getting the utilization out of it that we expected. And by the way, on that point, if we did exchange, and it's just a consideration right now, ATR for Basler, it would -- on a dollar-for-dollar basis to anything the Baslers are more expensive planes.

Okay. And then just a comment around stabilizing before growing, is that in relevance to pursuing other business with additional planes? Because I remember, I think around the time of the acquisition, you mentioned potentially using this as a platform to maybe go out and acquire other similar businesses. Is that what you mean by, sort of, putting that on hold? Or just generally not…

Specific - no, no, the specific within the airline. And we've got work to do on Giant Tiger. We've got -- we've created a structure with 2 presidents running our retail business units. Alex has joined me today, and Dan McConnell is in Boca on his way back down there after our board meetings today and yesterday. Like we want to make sure that the other theme at North West right now is a more decentralized SBU structure so that our businesses are really being driven and winning in their markets, driving free cash flow. The airline is exactly like that. Yes, it's a vertical integration but it's a cash-generating business when it's run the way we think it can be. So call that -- all that's called stabilization, I suppose, but it's also for growth. I mean, we do want to see higher comps out of our -- certainly our early Canada business and our Cost-U-Less business, which received the most hands on attention. GT is a bit of defense to make sure we get cash flow growing again. And the North Star air particle growth would be third-party cargo. We have - we are acquiring another ATR 72 that will give us some more capacity for a third-party cargo. But we're still staying within our flight path, if you think of a big V from Winnipeg starting to North with Central Arctic into Northwest Ontario, it's actually the more right-adjusted. We're not looking at going anywhere else geographically right now and that's the focus. So any growth beyond what I just described is going to happen at North West. But first, we've got to get the cash and the stability out of the existing portfolio.

Okay. And then just one last one for me on the GT. I guess, there's been a bit of variability there in the performance over the last few quarters? That do you think is just a matter of working that banner through some of the difficult -- whether it's competitive environment or some of the issues in the economy? Or is there stuff that you think you need to address at a higher level, with that banner, and whether it's the scale or things or this? How are you thinking about the performance of the banner going forward?

Well, when I first - I have described it from the top-down and this is a strategic fit and it doesn't check off the core competencies of the other businesses I was talking about. We haven't said it's outside because it's still with us. So it's all about head down and let's get the best performance we can out of the business. But I can't say any more than that. We - this isn't a keep-all-your-options-open type of business for us because it has - it's sort of day-in-the-sun under our ownership. Now it's a real grinder and we're rolling out first base and doing our best, but we're also considering options.

Thank you. The next question is from Michael Van Aelst from TD Securities. Your line is open.

Hi. Just wanted to clarify, the ATR - the third ATR, that's in your $70 million for next year?

Yes. Yes.

Okay. And as you roll that up or roll that out next year and ramp up the business, is that expected to help or hurt your profitability initially?

The ATR specifically?

Yes.

Yes. Well, it'll come on stream in June. What it does is, we have a -- I said 2 ATRs, we actually have a third but it's an ATMI like a power by the hourly. So there's a -- we can revive us on that. It starts to replace capacity that was more expensively outsourced. That outsourced capacity can still be used if we want to develop third-party business. But the core business is going to be owned fleet so it's accretive. I mean, it was - it's a business and investment that we would apply our normal risk-adjusted return expectations, and buying an ATR makes sense for us. It gets us that ROI. So the short answer is, after it's online, we will expect to see the return kick in and on a roughly CAD 14 million [ph] investment, and we would expect a 20% return.

Okay. And then you mentioned that NSA was $2 million short. Was that for Q3 or for 2019?

No, I was annualizing some issues that are happening or have happened. We're not out of the woods yet for this year. We've had - we had a really strong quarter. We just had a channel - more challenged one against plan, not up against LOI. But on the run rate question that was asked to me, that would be more of a full year shortfall that we're looking at right now.

Okay. And then when you look at the St. Maarten cost utilized, how big is that relative to some of your other - like, I know you mentioned St. Thomas is your biggest, but how big is it relative to some of your other cost investors?

It's actually on the smaller end but its margin structure is very -- or was very attractive. And the mix of merchandise, it's -- it had both B2B offline business and general merchandise blends higher margin, gave it a better bottom line than a store that might be quite a bit larger. So we missed that contribution at the bottom line and a little bit less on the top line. And this goes back to my point about the economy, and especially, a store like that, where general merchandise is a little more discretionary spending in the population in St. Maarten is still down, I think, about 20%.

Okay. And then just last question. A lot of the higher costs, like utilities and insurance, started in Q4 last year. Have we now cycled all of those or are we still expecting increases in utilities, insurance and whatever else in Q4 and beyond?

I'll talk insurance.

Yes. I think the utilities, we should cycle. But the insurance will be another quarter.

Okay. And how significant is it in Q4?

I put in there in the outlook. I think it's $5 million annualized so a quarter of that. And then I've also - I think it's important to highlight, in the outlook, we talk about insurance costs not only increasing for this year but also looking forward and the changes in the global insurance market, whether it's property or aviation and how those play into the policy renewals for next year.

All right. And your office relocation costs another - I think it's - was it another $1 million or $0.5 million?

About $0.5 million is what we - what we're estimating. We're substantially done that. There's a few little bits there to come through in Q4.

And that will be it? That will be the end?

Yes.

All right. Thank you.

Thank you. [Operator Instructions] There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Edward Kennedy.

Okay. Thanks, operator. Thanks, everyone, for your attendance on the call today. Any questions or follow-up, please reach out to John or myself, and we'll be happy to try to answer them. And look forward to being on our Q4 conference call, which I guess, John, has now moved out, right?

Yes.

I don't know if we've mailed it.

And I think it's important for everyone to know, in the report to shareholders, we did highlight that our fourth quarter earnings will be incorporated into our annual report. So we're no longer going to be issuing a separate fourth quarter report, which is commonplace in the market. So that fourth quarter results will be released on April 8.

Okay. Thanks very much for the call. Operator, we're wrapped up.

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