All participants, please stand by. Your meeting is ready to begin. Please be advised that this conference call is being recorded. Welcome to The North West Company Inc. second quarter results conference call. I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead, sir.

Thank you very much, and good morning, everyone. And I just welcome everybody to our second quarter conference call. Joining me today from North West Company is John King, our Chief Financial Officer, and Amanda Sutton, our VP of Legal & Corporate Secretary. I’m going to start the meeting actually by asking Amanda to read our disclosure statement.

Thank you, Dan. 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 Forms and its MD&A under the heading Risk Factors. Back to you, Dan.

Thanks, Amanda. I'll begin with a brief overview of our second quarter results as provided in the press release and the report to shareholders, and then I'll open up the call for questions. Overall, the results in the quarter were better than they might appear at first glance. I want to highlight a couple of factors to explain this. First, we were up against an extraordinary same-store sales and earnings increase from the second quarter last year, which was pandemic-driven. Second, we had a non-comparable gain resulting from the sale of most of our Giant Tiger stores last year. And finally, a lower foreign exchange rate between the Canadian and US dollar this year, had a negative impact on the translation of our international operations. To help sift through some of the noise and put the results into the quarter in context, we've also provided a comparison of sales and earnings measured to pre-pandemic results in 2019, just to give a better indication of our financial performance. With that, let's dive into the second quarter results. Sales in the quarter were down 12.9% compared to last year, largely due to the Giant Tiger transaction. Considering that on our same-store sales basis, sales were down only 4.8%. Also, just to keep this performance in perspective, bear in mind that last year, we had a 25.4% increase in same-store sales. When comparing to the second quarter of 2019, same-store sales were up 21.4%, which provides an indication of the amount of pandemic-related consumer spending that was actually retained. Now, let's talk about regional-specific results. Canadian operation same-store sales were down 8.7% compared to the 30% increase last year. That said, note that compared to 2019, sales were up a very strong 24.6%. We continue to be positively impacted by COVID-19, but to a lesser degree than last year, within community spending and government income support being the main factors. Other factors that have contributed positively include our strong supplier relationships and the advantage of owning a cargo airline, which has enabled us to maintain a solid in-stock position and meet the continued demand of our customers. One of the challenges in the quarter was the impact of forest fires in Manitoba and Ontario, which resulted in evacuations and store closures in eight of our communities. As a result - as a response to this crisis, though, our teams partnered with the Red Cross delivering same-day supplies and food hampers to the evacuated public temporarily staying in Winnipeg. This really speaks volumes about how our teams continue to inspire us by taking to heart the role in the communities. Switching gears to international operations, we continue to experience tailwinds, starting with the increasing tourism observed in some of our markets like the USVI, coupled with the income support payments through the American Rescue Plan. In Alaska, wholesale sales related to the USDA Food Box Program, were a success. DC delivered 900,000 pounds of produce, dairy and meat, to over 115 communities. This was partially offset by the timing of the Permanent Fund Dividend payment. Last year, a dividend payment of $992 was issued early and paid in the second quarter. The PFD dividend this year is expected to return to its regular calendar timing and be paid in the third quarter. Therefore, our general merchandise comparative sales performance for this quarter was negatively impacted. Overall, international sales increased 2.8% over last year. On a same-store basis, sales remained strong and increased 1.1% to last year. This is very pleasing, especially considering that in Q2, it was a 17.2% increase. The gross profit rate in the quarter was up marginally compared to last year. An increase in the gross profit rate in Canadian operations was driven by changes in the sales blend and lower markdowns. This was largely offset by lower rates in international operations due to the impact of lower gross profit rate as a result of the USDA Food Box Program sales, a higher blend of cost US sales, and a lot more promotional activity in certain markets. Our selling, operating and admin expenses were down 40 basis points as a percentage of sales, excluding non-comparable factors, mainly related to the 24.7 million pre-tax gain on the Giant Tiger transaction in 2020. One of the factors contributing to lower expenses in the quarter was a $5.3 million increase in COVID - or $5.3 million decrease, I apologize, in COVID-related expenses compared to last year. While earnings from operations and EBITDA were down compared to 2020, primarily due to the Giant Tiger transaction gain last year. Adjusted EBITDA was up 30.4% - $30.4 million or 56% compared to 2019. Now, I want to take a moment to briefly refer to the performance of the airline. North Star Air had another very strong quarter, driven by higher third party cargo revenues. A gradual increase in passenger travel in the quarter also contributed to improved earnings, especially when compared to the negative impact on passenger-related earnings in the second quarter last year, due to the COVID travel restrictions. In aggregate, the impact of all these factors is that net earnings decreased $20.2 million to $42.4 million in the quarter, but were up $24.5 million or 136% compared to 2019, which represents a compound annual growth rate of 53.7%. Okay. Now, I want to transition and make a few brief comments on CapEx and some cash flows. Our capital expenditures in the quarter were $29.7 million, up $16.3 million versus last year. This does include the North Star Air purchase of an ATR 72-500 series airplane. This aircraft is being configured with a wide cargo door, which will give us a competitive advantage in Northern Canada, since only one other aircraft of this type is serving the region today. This aircraft is expected to be operational late in the fourth quarter, and will provide efficiencies in loading and utilization. In addition, the wide door also creates opportunities for specialty payloads and greater third party revenues. Also, speaking to share buybacks in the quarter, we purchased 8.3 million of common shares under our normal course issuer bid for a total of $13.6 million purchased year-to-date. We also announced a 2.8% increase in our quarterly dividend. And it's important to keep in mind, this is on top of the $0.03 per share or 9% increase last year, and in line with our past track record of pre-COVID - on a pre-COVID basis. Looking ahead, the near term outlook continues to be highly influenced by the uncertainties of COVID-19. We do anticipate our same-store sales to be lower in the second half than they were - in the second half of 2021, as we lap the strong sales gains in 2020. Likewise, net earnings in the second half of 2021, are expected to be below 2020, but compare favorably to 2019. However, there continues to be uncertainty related to the impact of COVID-19 and the Delta variant, as well as the timing of the economic recovery, which of course, makes forecasting quite challenging. To finalize, let me just say that overall, we are very pleased with the financial results in the second quarter, particularly as we were up against exceptional pandemic-driven results last year. I also want to, again, acknowledge the efforts of our frontline employees who continue to serve our customers within the challenges of this COVID-19 environment. So, I am going to open up the call for questions here shortly, but before I do, I do want to give a brief comment on the executive team. I am pleased to announce that Kyle Hill has been appointed the President of the Alaska Commercial Company. Kyle joined Northwest in 2018 as the Vice President of Strategy and Special Projects. And most recently, was the Vice President of Procurement and Marketing for AC. I am also happy to announce that Jim Caldwell will be joining Northwest as the President of Canadian Retail, and he'll be starting later this month. Jim is an experienced retail executive, having served in senior roles with Walmart, Lowe’s, the Brick, and actually most recently, as the President of OK Tire. With that, I'll ask the operator to open up the call and for any questions you might have. Thank you.

Thank you. [Operator instructions] The first question is from Michael Van Aelst from TD Securities. Please go ahead. Your line is open.

Hi. Good morning. I just wanted to start off with the price investments that you started a little while back but paused for a while. So, are you still planning on increasing your price investments? And if so, when would we expect to see those?

Well, as you know, we did hold that. Thanks for the question, Michael, but we did hold that this last quarter. There’s a lot of volatility in the market currently. So, we are working on a price investment, and it's - with the objective - with the same objective, to increase our sales, our value to our customer, and our gross profit dollars. But given the volatility in the market right now, we really thought that we have to - we are working on recalibrating some of the metrics on how we go to market with it. So, yes, we will. we're currently in kind of a test stage, but we expect it will probably be fourth quarter or first quarter next year, is when we would have more surety as to when we could roll it out.

Okay. All right. And then, are you able to give us what the impact of the fire-related closures were on same-store sales?

I won't disclose the total, but I could say that it was relatively light, but I wouldn't - I actually am not going to give the number out, Michael, at this point.

Okay. All right. And then COVID costs were running - I think going into the quarter, you were talking about a million and a quarter - a million a month, and you only did 1.2 million in the quarter. Is that a good gauge for going forward?

Yes, I would say so, Michael. It's good sign so far. Like we've been focusing, as you know, on our safety and really keeping people safe. The vaccination rates in a lot of our markets has been high. So, that's helped out a lot. And as well as the participation, a lot of our store managers, most of our store managers are vaccinated, as we're encouraging them heavily to do that. And it's definitely worked out in our favor.

Okay. And then the fourth ATR that you picked up, I think originally you had said late Q3. And now, you're saying late Q4 by the sounds of it. So, is that just a delay in receiving the aircraft and retrofitting it or?

It's the retrofit. That's correct. It's the retrofit. Just receiving some of the parts in today's environment, it has pushed it out, but we're quite confident that it's going to come out in Q4.

Okay, understand. And then finally, on the PFD, the last I saw was it seemed like there was a holdup or there was - and I guess, holdup in signing off on it. And it was going to get pushed beyond October. Is that - is there written other developments that you believe that it's going to get paid during Q3?

No, but our best guess right now for what we know is that we do believe it will be paid in Q3.

Okay. And what are you hearing for the size?

We've heard a range. We’ve gone from five back up to - 500 back up to 1,000. So, I would say they're probably somewhere within that range.

Okay. Thank you. Have a great day.

Thank you. The next question is from Mark Petrie from CIBC. Please go ahead. Your line is open.

Yes. Good morning. I wanted to just ask about inventory levels. It was up pretty nicely, obviously though, a lot of different pieces in your business, including FX. So, and I know you were trying to build inventory at least selectively. So, can you just give us an update on sort of where you're at with regards to inventory levels across your business and specifically non-food?

Yes, absolutely. In fact we've taken - like we saw that obviously early on, there was a lot of escalation in inflation. So, we went out and we procured as much as we could on the front end, obviously with our sea lift program. That's something that we took full advantage of, as well as our electronics throughout all banners actually, getting ready for our third and fourth quarter selling events. So, I would say that we're in a strong position as it relates to our inventory levels. And we're absolutely ready to meet our customers’ need coming here into the third and fourth quarter.

Okay, perfect. And you mentioned the farm box, the Farmers Food Box Program in Alaska. What's the status of that program, and do you expect it to be a factor in your ability to grow that part of your business?

We've learned a lot from it, Mark. Like it's not - we're not participating in the USDA Food Box Program currently, but what we have done is, we've cascaded it into a sales opportunity and we've - we're still doing that type of service, but not - it's not being paid for by the USDA. So, it's something that we're just working with different communities and offering this service, much of what we learned when we were providing this service for the USDA. So, no, it's not being compensated for by the USDA, but it has cascaded into a solid business opportunity for us to provide those types of products to the number of the communities that we're not in today, as well as obviously the ones we are.

And how material was that? Like is that subsidy going away, like is that a material impact on your business? I mean, I understand you're saying you've learned things and now in some respects, presents an incremental opportunity, but it not being subsidized, does that matter to sales growth as you lap it, I guess?

Yes. It's definitely impactful. It's not going to be - it's not a program that they're offering currently. There was 900,000 pounds as I indicated that we put through this program. So it's not huge, but it's not invisible either (indiscernible) market, I should say. It’s not necessarily the quantum.

It's all good. Okay. And then, I guess just my last question is sort of a broader one. And I just wanted to ask about your sort of various health initiatives in the north. And I know this is a business that you guys have participated in for a long time, but you've gone through various sort of evolutions of it. And I know it's somewhere that you've launched new businesses. I think last quarter the wellness health business, if I have that right. So, can you just sort of in a broader context, talk about where you’re at kind of with regards to your offering, and if you think that will be a material opportunity in call it the next 24 months?

Well, we're continuing to evolve it, Mark. And as you're aware, we just opened up our store in Astro Hill, Inuulisautinut Niuvirvik. It’s a healthy for you. So, we're in optical services there in that. We’ve been - I mean, it's still early on, but it's been shown to be a valuable service to our consumers. So, it's really just a continue-on. It checks a lot of boxes. It's obviously a great service to our community, and it's definitely a void in Northern Canada today. And we feel with our competitive advantages, we think we can continue to offer better service in that regard. So it's really a continuing evolution, is probably the best way I can put it.

Okay. Appreciate all the comments and all the best. Thanks.

Thank you. [Operator instructions] The next question is from Stephen MacLeod from BMO Capital Markets. Please go ahead. Your line is open.

Thank you. Good morning, Dan. Morning, John. I just wanted to ask some quick question about just what you're seeing in terms of your Northern Canadian communities with respect to trends in out-shopping, just with restrictions having been relaxed. Are you beginning to see more of your community residents increasing their proportion of out-shopping, which obviously, in-shopping was a big benefit to you through COVID?

You know what, not as much in Northern Canada, very marginal. AC or in Alaska, our Alaska operations, there was some more out-shopping. But really it's been - in Northern Canada, it's been very marginal. I mean, for - the comparison we say is that the higher the vaccination rates, the more people are to stay at home currently, and because of the lower vaccination rates outside of the community. So, it has kind of led to stronger business results, obviously, people staying in market. So, we haven't seen that open up that we might have anticipated earlier on, but we expect that later on in the year, it'll probably open up a little bit more as vaccinations start to match those of some of the communities in surrounding areas.

Right. Okay, that's helpful. And then, are you able to - last quarter, I think you had mentioned that exiting COVID, or maybe once things normalize, you sort of expect to return to kind of a mid-single digit growth rate in terms of same-store sales growth. Is there anything that would have changed your view, or is that still kind of what you're expecting once things settle out?

Nope. We're still under that same expectation.

Yes. Okay, great. And then the increased dividend was a surprise. Obviously, you announced a nice increase just two quarters ago. So, can you talk a little bit about what your priorities are for excess cash flow as you sort of move through the next 12 to 24 months?

Well, it's - obviously, we've announced our AC strategy. I believe it was two quarters ago now. And so, that's some of our priority. We've got three new stores that we're going to be opening this year. We just opened Astro Hill. We had a store earlier in the quarter in - sorry, it was last quarter in Rankin Inlet. So, we are following suit with our AC strategy. We have other opportunities, kind of tuck-in acquisitions that we're actively pursuing in Alaska and as well as Canada. So, that's - there's nothing major, but that's really what we're looking at, kind of for the - continuing to pursue in the near term. There's also the e-commerce strategy that we're starting to roll out in Alaska. So, that's another initiative that we're putting a lot of focus to. But other than that, it's really just sticking to the game plan. I mean, obviously, now I've been in the role for four weeks, and really starting to take a look and see where the opportunities might be. With the new leader coming in for Canada, I expect a lot more focus and we're going to be looking even harder than we already are for new acquisitions and opportunities, just to further our footprint and continue to service the customers that we know we can bring value to.

Right. Okay, that's great. And then are you still sort of focused on - when you think about acquisition opportunities, you're still focused largely on health and other commentary businesses that would tuck in nicely to the retail store base?

Yes, that's correct.

Yes. Great. Okay. Well thank you. That's it for me.

Thank you. There are no further questions registered at this time. I'll return the call back to Dan McConnell.

Okay. Well, thank you very much, and I appreciate you joining me here for my first conference call, and I look forward to speaking with you next quarter. Thank you.

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