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Edited Transcript of NWC.TO earnings conference call or presentation 15-Mar-17 7:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 North West Company Inc Earnings Call

Winnipeg Mar 15, 2017 (Thomson StreetEvents) -- Edited Transcript of North West Company Inc earnings conference call or presentation Wednesday, March 15, 2017 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward Kennedy

North West Company Fund - President & CEO

* Paulina Hiebert

North West Company Fund - VP, Legal Counsel, and Secretary

* John King

North West Company Fund - CFO

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Conference Call Participants

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* Sabahat Khan

RBC Capital Markets - Analyst

* Jim Durran

Barclays Capital - Analyst

* Michael Van Aelst

TD Securities - Analyst

* Stephen MacLeod

BMO Capital Markets - Analyst

* Matt Bank

CIBC World Markets - Analyst

* Neil Linsdell

Industrial Alliance - Analyst

* Tal Woolley

Eight Capital - Analyst

* Keith Howlett

Desjardins Securities - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to The North West Company Inc fourth-quarter results. I will now like to turn the meeting over to Mr. Edward Kennedy, President and Chief Executive Officer. Mr. Kennedy, please go ahead.

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Edward Kennedy, North West Company Fund - President & CEO [2]

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Thank you, good afternoon. Welcome to our Q4 conference call. Joining me today are John King, our CFO, EVP; and Paulina Hiebert, VP, Legal Counsel, and Secretary. Paulina's going to read our disclosure statement, before I move on to my remarks. Paulina?

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Paulina Hiebert, North West Company Fund - VP, Legal Counsel, and Secretary [3]

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Thank you, Edward. Before we begin, I'll remind you that certain information presented today may constitute forward-looking statements. Such statements reflect North West's current expectations, estimates, projections, and assumptions. These forward-looking statements are not guarantees of future performance and are subject to certain risks which could cause actual performance of 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.

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Edward Kennedy, North West Company Fund - President & CEO [4]

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Thanks, Paulina. So I'll start, as I normally do, by going through our geographic segments, and give you a perspective on the performance in Canada first and then international. I think the highlight for us in the quarter was starting to see some turnaround and growth out of our Northern Canada business in a couple ways.

We had pretty decent top-line growth, given the low inflation environment. So we'd be solidly in the 3.5%, 4% range on top line, and GP growth as well. So gross profit's blend shift that we've been working on for quite some time, we're seeing that now and we expect it to continue. Whereas, as we've shifted more to food service, perishable categories, convenience type categories that carry a higher margin structure, that's coming out and really showing itself on the P&L.

Our top market stores, the ones we've been working on for some time now, we've been fine-tuning that. And for those who are used to the story on this, we've had to work hard on our stock costs in those stores. And as we've introduced these new programs and really shifted our culture and our mindset to not just running the stores on longer hours to go after the convenience business, but also to prepare more food for our customers.

There were some rough edges to that, and I'm very pleased that we're getting the twerk now out of the margin and as well on the blend side, as well as on the staff costs through better management. It's the first quarter we've seen this in our Northern Canada business, but based on how we're accomplishing it and the work that went into it and the way we're planning for this year, the accountability that we've got in front of our operators, I do feel that this is something that will continue. And we'll be able to get through the year and build off of that.

And just as a theme, because of our conditions remain challenged, almost where all of our banners are, there's no better time for us to dial in on the stock expense and our productivity at store level. Across all of our banners that's a mantra, but there's definitely more upside there or room for savings in northern Canada.

Across all of our banners, before I forget, the other key controllable initiative for us is on the shrink side. So we've tasked and focused on this now for a few months. And heading into the year, we feel that loss prevention and shrink will help bring us some operating margin out of these banners in what are tougher top-line condition.

So the story in northern Canada is generally positive. The macro environment there is still muted. I think we're going to see more and more pressure on the federal government to come forward with clear plans on putting capital investment into the north, into rural communities, into indigenous communities. But you've heard me say this before, maybe, ad nauseum, that it's taking longer and we can't take it to the bank in the sense of creating more jobs where we do business.

There are some bright spots, for example, Agnico Eagle confirming their investment in [Tunia Mines]. One extends the life of a mine site near Baker Lake; the other will be near Franken Inlet. So for the Central Arctic, or [Tidluc] Region, that's very, very positive.

After that, it's about us really going after market share intelligently and the things we've done before in terms of the shift, the blend shift to higher margin food products and then really, really working down our controllable expense. The rest of the Canadian business, of course, is Giant Tiger and this is definitely more challenging for us. We're working just as hard, I think just as smart with GTSL out of Ottawa on how we shift with the changing environment.

I think for those who really follow the food industry in Canada, particularly western Canada, it's no secret we've got a more intense competitive environment, that there's more food deflation. It's continuing, it does squeeze our margins, and we have seen that impact on our bottom line.

And when I give guidance or just forecast on this one, it's tougher for me to, if anybody, to really predict how this is going to turn out. We've seen cycles of this before.

We're working really, really hard to shift more blend to our version of higher margin perishables, which is fashion and hard goods, shifting more space to those categories. Trying to get more high margin blend food into our store, a little trickier when we limited space to work with.

We have a low cost structure, so we've got some downside protection here, but the volatility, which we don't like and I don't think people like volatility with North West period. But we've had a down stroke in our performance because of margin compression and food, and not a great seasonal selling season. We took high markdowns. The weather was very warm earlier in the winter, turned cold too late. So that, we needed that at a rate [to the stool] to really be strong if we're not going to get the food margin and we didn't have it. So that's the picture at Giant Tiger.

It can't hurt us, but it will definitely, it can definitely eat into our EBITDA growth, and it did that in 2016. 2017, we feel we've probably bottomed, but I think as this food competitive pressure grows and it continues in western Canada, it's unchartered territory, for a duration.

If I shift now to international, not as great a quarter as some of the ones we've had. We had some concern going into the quarter with our situation in Alaska. There's a bit of hangover from the PFD cut that happened back in Q3.

But in addition to that, since it's a big pot of sharing here, in terms of oil revenue-related royalties amongst different governments and sub governments, so the state of Alaska of course. But also at the sub-government level, there's the native and regional -- probably the regional and village native corporations and their surface and sub-surface rights and their royalty sharing.

And subsequently, we saw, with the way those commodities have gone, both mining and oil cuts in the dividends that would normally go in December. Sometimes very healthy dividends per capita, CAD1,000; CAD2,000; CAD3,000 and native markets and Alaska. So that compounded with what had happened in Q3, and it's, quintessentially, it's an income-constrained environment.

It's still unknown how the state's going to get themselves out of this fiscal mess they're in. Big positive news of oil discoveries off in the -- on land and offshore in the North Slope, but still, that's medium term at best in terms of converting those that into production and royalties for the state.

So in that kind of environment, we're all about opportunistically looking for -- this could turn into a buying opportunity in terms of tuck-ins, independent store owners and that kind of thing. But similar to northern Canada, it's about shifting the blend to low shopping frequency categories that are more defenses and have good margin structure, and then really dialing on our controllable expense. T

he other division, of course, is Cost-U-Less, and here again, we are a little softer in the quarter. It's mixed. We're pleased with a number of markets from Fiji to Saint Croix, Cayman, all very, very strong performers.

Guam was not. We did see the adverse impact of the way SNAP, that's the acronym for Supplemental Nutrition Allowance Program. Those are the old food stamp programs in the US. The Guam government decided to pace those payments out over a longer period of time in smaller amounts, which worked against the stock-up shopping pattern that our Cost-U-Less stores would entice from that program.

So we saw pretty significant fall off in our SNAP business in Guam, and we're still working on how we can adjust our promotional strategies and even pack size to get back a customer who doesn't have as much money at one shot and time of the month. So that variable alone, we have three stores, in Guam, given that it's not a very big chain, they're all big stores, did tend to suppress our top-line and the bottom-line trends we've seen.

The other thing that we observed and I'm asked about this, we ask ourselves, like what is the Zika virus doing? The numbers aren't, they're not exponential, but there's certainly a steep upward slope of Zika virus reported cases. And where we think it affects us the most, just looking at tourism statistics, is in St. Maarten, [Turkish Isle], St. Thomas. These are high incidences, and it has really multiplied. And we think that's one of the drivers here having an impact on tourism.

It's pretty much a mixed bag in the Caribbean. We are now, with the BVI acquisition, with a couple of Cayman, and to some extent, Barbados, in the higher tier end of tourism, which is a little more insulated. But we're also in the mass market end as well, so we are vulnerable to Zika. And generally speaking, how the US economy is doing and how folks are feeling about taking vacations into the Caribbean.

I think with that, I'll move on to a few other things that you would have noted in the quarter, perhaps. We have paid out less incentive plan or incentive pay this year. That does come back as a credit, I suppose, compared to comping last year. The way we structure our incentive pay if we don't hit our targets is fairly aggressive on the negative side and does cut the bonus pay down quite a bit, and that's what happened.

It's not that we fell short of our target. I'm very, very pleased. In your own organizations, you work just as hard, I find, whether you get a full bonus or not, and our people certainly have. Some things I think we didn't have as much control over as we could have in the Giant Tiger world with food margins, but it's up to us to deliver.

So the reason I'm going on about this is because when we cut the incentive pay back, that cash stays in the Company. And I do think, and it is intentional that when we set this comp program up with the Board, is that there's more upside potential for management, but on the downside, there has to be protection for the shareholder. And particularly, when we have this value proposition to our investors of yield and growth, if you want to protect the yield, protect the cash flow, and make sure we always are tweaking and twerking the business upward and not getting paid just to show up.

So this is one of those years, and I'll be talking after this conference call with a few hundred of our staff here in our home office. And they all know that, because we keep the report card all year. Not the best feeling in the world, but I can tell you we're just as determined this year, in 2017, that is, to earn our bonus, but also to get out there and keep improving the business.

I think it has tremendous potential as much as more than any time before. I could allude to the RiteWay acquisition as an example. Like, we're always strategically aligned; we know where we want to do business. It's in hard-to-reach markets where we have a very good footprint already, but as we open our doors to potentials for tuck-ins, as an example, we find there are real opportunities at very attractive prices and that we can continue to do that.

We can also keep tweaking our business, and we are going to invest in our top markets next year. So between that and our main system investment called Project Enterprise, we have a lot going on, not too much, but a lot that I think gives us strength in the market. And what I like most of all is that it's hard to measure on the P&L, but I know we gave more value to our customers.

Certainly Giant Tiger shoppers got lower prices, there were price reductions in northern Canada with the attrition north introduced into some new markets. We have been bringing efficiencies to the business and passing that through, and we're going to continue to do that with our RiteWay acquisition in the next quarter. So all these things are good foundationally for the business, and I think they work overall for the investors.

Just briefly, other highlights. You saw that we had a few projects completed in the quarter. Since the quarter, we've opened three more top market store renovation projects, so its been a busy sort of two, two-and-a-half months. And of course, we closed the RiteWay acquisition, and we're off and running into the New Year.

On CapEx, we've already said that we are pacing out our top market investment over a longer period of time. That's in place now; it's not turning the tap off, it's just dialing it back a bit. So our CapEx expectation, CAD85 million range, I think John is that where we are? CAD80 million ex RTW, ex any other acquisitions, which could happen, but that -- we have planned a CapEx program around that. These are projects that we've got in our pipeline, and there's a mix there between growth and maintenance CapEx.

I think with that, operator, open the call for questions. Just before we do, I'll ask Paulina and John if they want to add anything to what I've said already.

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John King, North West Company Fund - CFO [5]

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Just to highlight that in the quarter, one of the biggest impacts on the bottom line, all of the positive factors that Edward talked about that were on the Canadian side, we did have a withholding tax that on intercompany dividends that bumped up the income tax expense and was a key factor in negative impacting our bottom line.

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Edward Kennedy, North West Company Fund - President & CEO [6]

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Okay, thanks, John. So operator, we could open the call for questions now.

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Questions and Answers

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Operator [1]

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Thank you very much.

(Operator Instructions)

Our first question will be from Sabahat Khan from RBC Capital Markets.

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Sabahat Khan, RBC Capital Markets - Analyst [2]

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Thanks, so just on the top markets, maybe if you could update us on how many projects within that CapEx amount you have planned for this year, and how we should expect over the next couple of years the project to be wrapped up?

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Edward Kennedy, North West Company Fund - President & CEO [3]

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Sure. So we just opened 3 stores, there's 4 in the CapEx plans. Not one will be open actually in 2017; it will be 2018 before we -- pardon me, 3 open for 2018, and then we'll roll forward from there between 4 to 5 a year if we went to 2019 and 2020, and that would take us to roughly 35 stores. And we're still -- there's still a gap of 6 stores to the full number, but yes, three years will get us to 35 stores.

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Sabahat Khan, RBC Capital Markets - Analyst [4]

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Okay.

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Edward Kennedy, North West Company Fund - President & CEO [5]

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And the CapEx that goes along with that is averaging CAD5 million or CAD6 million a store. So if you think about the total CapEx, the top markets program in the CAD20 million, CAD25 million range per year.

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Sabahat Khan, RBC Capital Markets - Analyst [6]

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Okay, thanks, and then just on the system implementation that you have going on and how far along is that? Do you have some stores that have gone live, if you can update on that?

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Edward Kennedy, North West Company Fund - President & CEO [7]

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Sure, we've gone live in two regions in Alaska with our workforce planning system. That there's three suites are related platforms; one is workforce management, ie, labor, the refining and control scheduling.

Second one is our point of sale. We've piloted that in Sonora, California. That's our one US continent-based Cost-U-Less store, and the second one that's going to be in Curacao I believe next week.

And then on the merchandise management system, the third platform, we're not in pilot yet. We're in QA. So the goal here is to rollout the POS into Cost-U-Less. The merchandise madness system goes into Cost-U-Less first, and then we roll our POS across our other banners later end of this year into next year.

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Sabahat Khan, RBC Capital Markets - Analyst [8]

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Thanks, and then just one last one. You talked a little bit about Alaska and some of the headwinds there. Like are you seeing -- did you see any maybe improvement there as you got further away from the PFD cut, or is it still that market will recover when the oil and gas market picks up? Just some more color there.

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Edward Kennedy, North West Company Fund - President & CEO [9]

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Yes, it's actually much more volatile on a seasonal basis. So what I was talking about was that in Q4, we were seeing adverse effect of the dividend -- [native] corporation dividend cuts, which are a supplementary source of income post PFD. So it's all related, and that's a Q4 phenomena, because a lot of these dividends are paid around Christmas. So that's Q4.

So now what's the Q1 phenomena? Q1 phenomena would be things like tax refunds, so we're watching the tax refund situation, and seeing what's coming through there. Don't have complete visibility on whether it's going to be better or worse than last year, but that's the big shot of cash that happens in Q1 in Alaska.

Q2 -- oh, by the way, and there's also fishing, the Bering Sea fishery. And then in Q2, what we were watching is weather conditions, how quickly people get out on the land at their fishing and hunting and just moving about; what the resupply cost is of fuel into the [real] villages because that has to do with their living costs as well.

Construction projects, what's on the docket for that. Don't have that visibility yet, and that will be actually a leading indicator of where the state's cutting their spending, whether the federal government comes in with the Corps of Engineers and other federal programs to offset. We know there's one massive project went underway in Bethel, Alaska in terms of the hospital. But if you're getting the drift here, it's a seasonal.

So then we get into Q3, and I'll be talking about what's the PFD going to be. We think it's going to be flat to last year, but those are the real things that people care about that shop in our stores is are they -- what source of income will they get? What would their heating bill look like? What would their gas bill look like for their boat and motor or ATV? And that stuff kind of happens on a quarter-by-quarter basis.

The more macro state environment, will they put in income tax, not the worse thing that could happen to our markets given the low incomes. State sales tax would not be great, and we'll find out more about that shortly.

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Sabahat Khan, RBC Capital Markets - Analyst [10]

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One more follow-up, and have you seen Q1 to date business in talking to US about these tax refund checks getting pushed out a little bit, has that been somewhat of a drag so far?

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Edward Kennedy, North West Company Fund - President & CEO [11]

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Yes, it has.

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Sabahat Khan, RBC Capital Markets - Analyst [12]

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Okay, thank you.

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Edward Kennedy, North West Company Fund - President & CEO [13]

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And it will still happen, but it's being delayed.

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Operator [14]

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Thank you. The next question will be from Jim Durran from Barclays.

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Jim Durran, Barclays Capital - Analyst [15]

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Good afternoon. I just wanted to focus on food deflation. I assume you, like others, have seen deflation become more of a drain to revenue growth, and yet you posted a pretty decent comp-store sales number. Have you got a perspective on how you see food deflation playing out over the next couple of quarters?

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Edward Kennedy, North West Company Fund - President & CEO [16]

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It's such a mixed bag, Jim, because on the one perspective would be, what do you think is going to happen in the urban food space in western Canada? And we're forecasting continued deflation at least through to Q3.

Northern Canada, we do have some -- we are seeing some rate increases in air freight, which we don't like to take. But that's inflationary, so we'll see a bit of inflation there.

But we're also up against the Canadian dollar last year and prices of produce and even meat prices, so we're seeing deflation there. And that could shift depending on other conditions. So they've got some perishable deflation that's irrespective of competitive pressures. They've got competitive pressures in western Canada, and they've got deflationary fuel pressures in northern Canada, so that's why I call it a mixed bag.

If it sounds like I don't know what it's going to do next, it's kind of like that. Because our forecasting would be muted inflation and no real recovery across the whole business. So when I say muted, I'm talking maybe 1% to 1.5% inflation with a little higher inflation in Canada's north if we have to eat these fuel prices or pass them on.

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Jim Durran, Barclays Capital - Analyst [17]

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And sequentially, would you have seen, in your mind, more promotional intensity from the mainstream food retailers as you move through the fourth quarter?

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Edward Kennedy, North West Company Fund - President & CEO [18]

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Yes. We definitely did. We saw more EDLP price drops from Wal-Mart and we're matching from the competition. Yes, no question.

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Jim Durran, Barclays Capital - Analyst [19]

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Great, thank you.

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Operator [20]

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

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Michael Van Aelst, TD Securities - Analyst [21]

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Yes, thank you. You've touched on most of the things I was going to ask, but you talked about the excess training and staffing costs coming down in the north. Can you give us a sense as to what percentage you felt you were able to clear out in the quarter and how much is still to come? And the extent to which that had any impact on your ability to support the sales?

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Edward Kennedy, North West Company Fund - President & CEO [22]

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Well to answer the last part first, I think we got the sales. It wasn't a shock to the system, because we had been working on it for a few quarters and now we've set the expectations for next year.

Basis-point-wise, I don't think I would get into that level of detail, but it is material. And when we look at our planning for next year, it's one of the biggest contributors on a year-over-year basis to operating margin, planned operating margin improvement in northern Canada. Somewhat a shifting store structure without getting too granular. It's about job sharing food service roles, and other roles in the store, understanding what these roles really entail, whether they are staffed by community members or much more expensive people brought in with staff housing and full and those kind of benefits.

So everything has been done in a store by store that way, but we've got a lot of months under our belt now on how to do this. So the [bought] store plan, as it were, is for a reduction, and that will continue. And I would think at least into next, almost late November, we've got some pretty good comps to go after in terms of beating what we went through last year.

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Michael Van Aelst, TD Securities - Analyst [23]

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So I guess that means that the reduced staffing costs were only really in there for about half the quarter. And then we should, so we should see a full run rate going forward?

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Edward Kennedy, North West Company Fund - President & CEO [24]

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Right.

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Michael Van Aelst, TD Securities - Analyst [25]

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Alright, thank you very much.

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Operator [26]

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Thank you. The next question is from Stephen MacLeod from BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets - Analyst [27]

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Thank you, good afternoon. Just looking at the northern Canadian business, have you seen any -- you addressed it a little bit on your comments, but have you seen any color or structure put around the potential infrastructure spending into the North by the liberal government?

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Edward Kennedy, North West Company Fund - President & CEO [28]

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No, not enough. It's -- maybe we have to work hard to see it. We've got a Board member who does internet communication in the north and sets up networks with towers and such, and that's -- I forgot about that, get about CAD1.5 billion. There's a CAD1.5 billion fund for connectivity into real rural areas, so he's off doing that, so that's not bad.

But it's just like stuff's going on in the north, but there's not enough big projects that is making a difference for me to even report on. I don't know, we've got a budget coming up. I think you see some of this more broadly on the infrastructure spending from the fed side in terms of being behind and not being as visible, but I don't have it, I'm sorry.

And I would know -- I certainly would tell you more in the next quarter call, because our bookings don't -- we don't have booking information on our shipping business yet that would tell me that we're seeing this. And that's a good intel for me is that how many projects are going on the ship, which will (inaudible) people when they arrive to construct the school or whatever else is going up in the community.

So yes, it's business as usual. There is housing projects. There is money going to the north, but it's not a bulge like I thought -- when I started talking about this a year-and-a-half, two years ago, it doesn't seem to be happening yet.

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Stephen MacLeod, BMO Capital Markets - Analyst [29]

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Okay, that's great, thank you. And then just turning to the Giant Tiger business. The new store experience renovations that you've completed, can you just talk a little bit about what you've seen in terms of category sales impacts from stores that have been renovated versus previous, either unrenovated stores or similar stores in the area that haven't been renovated?

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Edward Kennedy, North West Company Fund - President & CEO [30]

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Sure, well I got to preface by saying that it looks more like table stakes, because when we first did it, we could see the ROI and the delta on. Now it's like, okay, let's get it done and finish the rest of the chain, because some of the stores need that refresh. And we know it has benefit, it will help the blend shift into GM.

But the big overlay to all this is the food market compression. So just to be in the game, it allows us to -- when we reorganize the store and the layout, it pushes customers through food -- pardon me, through fashion, through general merchandise, the power aisle and the racetrack of the store, as you come back into food is much more compelling for that margin shift. So that's probably the biggest thing.

But it's starting to look more and more defensive or just to keep us where we are, because we do have this big overhang of competitive intensity in food that is causing us concern and hurting our margins. So it's still the right thing to do; that's the bottom line, but when it was not as much gun play in the market, it was easier for us to say, if we do this new store experience we're going to get this lift. Now we're saying, if we don't do that, we're going to be in trouble because we're not going to be able to shift the blend more to GM and fashion and the store's not going to be as competitive as if we had it with its old decor package and layout.

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Stephen MacLeod, BMO Capital Markets - Analyst [31]

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Okay, that's great, thank you. And then just finally, John, on the tax rate, which was unusually high and you already explained the factors in the quarter. But going forward, do you expect the rate to be more in that 29%, 30% range?

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John King, North West Company Fund - CFO [32]

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Yes, I would say so, Stephen. Again though, there are so many factors that go into it. I talked about the withholding tax. You can see that number right in the RTS. The share-based compensation, the non-deductible expense in the quarter is a factor. In Q3 it was the other way, so that adds a little bit of noise.

And then the third factor that will move the tax rate around is the distribution of our earnings in the international operation across the various jurisdictions. Particularly with the acquisition of RTW coming on board now, there is no corporate tax in RTW, so factoring that in. But those are the factors that you have to consider.

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Stephen MacLeod, BMO Capital Markets - Analyst [33]

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Okay that's great. Thank you very much.

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Operator [34]

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Thank you. The next question is from Matt Bank from CIBC.

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Matt Bank, CIBC World Markets - Analyst [35]

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Hi guys, can you talk about in Alaska, your relative competitive position as we see these lower consumer incomes? Do you have the sense that your share has changed at all over the past year or two?

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Edward Kennedy, North West Company Fund - President & CEO [36]

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No, not in a meaningful way, but I am concerned about Amazon on commodities, nonperishable commodities. And for the same reason that we're trying to -- we're shifting more to the convenience strength of what we do in the markets we serve, hours of operation, higher unperishable, higher on single serve, higher on food service; the same applies in Alaska.

We are going to be moving ahead with a B2C. We have a B2C programmed today, a business called Span Alaska. We're going to make it a much stronger digital B2C, we think, and I'm answering something that is really it is an opportunity but it also answers your question is that we have lost some shelf stable market share to online.

And our advantage, we believe, is that unlike Amazon, we have a new DC opening at the beginning of May, distribution center that is, right on the airport runway. And we're going to have a dark store in there that can pick, pack, and ship at least three days, maybe up to five days ahead of Amazon, which is down in Seattle. Amazon's pretty full margin structure, so we're confident we compete on price and get into our customers hands quicker.

So we do have a plan to -- and we aren't, as you might know, we're not big e-comm player. But that doesn't mean we're not interested the space; we just want to make money at it, and do it in a way that's the real wedge.

So that's a long answer to the question about market-share erosion. We've had a long, slow market-share erosion in some center store categories in Alaska, much to do with Amazon, because unlike parts of northern Canada, Alaska is not quite as remote and there's much more frequency of air shipments from Anchorage and Fairbanks out to rural Alaska. I'm very excited about where this could put us in terms of being able to be in that space a little more seriously.

So and having said all of that, when we look at our opportunities in Alaska and what to defend against, that wouldn't be at the top, but it would be say between top three and five, and at the top is execution, local competition, and then it's the risk of do people have income to buy in your store, given the fluctuations with their income through transfer spending or transfer payments.

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Matt Bank, CIBC World Markets - Analyst [37]

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Okay, great. And then on share-based comp, it's been a lot more of a topic the last five quarters or so. I'm just wondering, was there a change at all in the way it was calculated or how many employees it applies to over the past year or two, or it's just a coincidence that it's been more of a thing lately?

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John King, North West Company Fund - CFO [38]

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It's driven entirely by share-price volatility, and I think that's the long and short of it. We have to mark-to-market every quarter. We have the characteristic of declining strike price option. We think it makes sense given the total return philosophy of the Company.

If we go through another year like the last one with volatility, maybe we'll look at that again. It's a lot of noise. We find the analysts tend to see that and understand it, but it's just something that creates a lot of noise. And I can't remember any year like this ever before where we had so much stock price volatility that, in turn, caused so much stock-based comp volatility in our earnings.

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Matt Bank, CIBC World Markets - Analyst [39]

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Okay, thank you, and just one last quick one. How many Tims do you have and how many more do you plan to do?

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Edward Kennedy, North West Company Fund - President & CEO [40]

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How many which, pardon me?

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Matt Bank, CIBC World Markets - Analyst [41]

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Tim Hortons.

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Edward Kennedy, North West Company Fund - President & CEO [42]

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We are, I believe we're at 24 and we're reassessing that with Tims. We have had -- it's going to be less than we -- like we were in the 65 range, I think when we first put this plan and vision together four or five years ago. We're more in the mid 40s now, and the reason for that is Tims would like to have baked goods in all stores. Tims would like to have service and not self-serve in more stores in their new go forward, and that cut the threshold on payback for us.

So there are other programs, and we're -- this is not a big negative. We think Tims is a great partner for where it should be, and we hope that we can get a good consensus with Tims as we work with them on this. But if we go out -- our plan right now three years would be adding roughly eight stores, eight Tims stores a year or kiosks to our stores.

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Matt Bank, CIBC World Markets - Analyst [43]

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Okay, thanks, guys.

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Operator [44]

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Thank you the next question is from Neil Linsdell from Industrial Alliance.

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Neil Linsdell, Industrial Alliance - Analyst [45]

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Hi guys. Just wanted to go into the RTW transaction. Now that that's all closed, is there anything we can think about as far as synergies with the rest of the Cost-U-Less stores in terms of opportunity to open up different types of stores in the islands that you're currently operating Cost-U-Less? Or is there anything that you're thinking about over the next year or two?

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Edward Kennedy, North West Company Fund - President & CEO [46]

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Out of the gates, our first priorities are procurement cost savings that we thought would go into RTW. But when you open up everything you could see, gee, they're buying a few things better than us. So that helps Cost-U-Less, but most of it is cost-synergy procurement savings that will flow through to RTW, and onto the shelf, to the consumer, and really set a great first impression.

Logistics cost synergies are another one that will flow through to RTW. Then we really roll up our sleeves, and to answer your question, we don't have a supermarket format in the Caribbean today. So we do believe that it -- the Caribbean is one of these go big or go home, and we've said that over the years, but adapting to performance.

So if we can perform we can prove to ourselves we can do this, we understand the market, then we're going to do more of that. And now we're just where we think we can really put a bet down on this and more of these types of acquisitions, but learn at the same time. So I think RTW can be extended as a supermarket format learning for us into other Caribbean markets.

Another tool for us or format to use to use, there's a couple acquisitions that come to my mind, where if we were just looking at a Cost-U-Less tuck-in, or rebannering a warehouse store, we wouldn't be able to do that acquisition, because it comes with supermarkets as well. So this gives us that whole breadth of format that I think suits better growth strategy in the Caribbean.

So that's our idea is to really buckle down on the cost synergies. There are some logistics things beyond that. They have a number of warehouses on island that we would like to work with to streamline or make more efficient.

There's a B2C additional opportunity there. We do a lot of yacht and catamaran provisioning, so the kind of solution, the dark store solution I referred to from our Span Alaska business will be taken into RTW. Those are some of the ideas we have out of the gates, but we are looking and talking, as we have before in the Caribbean region, to see what could fit if we were to make another move like this. More likely out six months to a year.

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Neil Linsdell, Industrial Alliance - Analyst [47]

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Okay, good. Just with the weather that we've been having in Canada, was there any impact where you can talk about how your resupply network is working, say in Q4, and how it looks for Q1 right now, maybe with the ice roads and with the shipping?

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Edward Kennedy, North West Company Fund - President & CEO [48]

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Everything is good. It was a wild winter. We had a January thaw, we had a February thaw, but every time the weather bounced back as it were and drove temps back down and our freight got in. So we're where we should be in the season in the winter road season in Canada, so that's good.

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Neil Linsdell, Industrial Alliance - Analyst [49]

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Okay, so no significant differences from, say, last year?

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Edward Kennedy, North West Company Fund - President & CEO [50]

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No.

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Neil Linsdell, Industrial Alliance - Analyst [51]

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Okay, good that's it for me, thanks.

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Operator [52]

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Thank you. The next question is from Tal Woolley from Eight Capital.

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Tal Woolley, Eight Capital - Analyst [53]

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Just on the RiteWay deal, just wondering about operating risk as you pick up the business. Are there any material projects going on in the business that you've got to pick up midstream and complete? And also just wondering too with respect to the market, are there any interesting quirks that we might not be aware of, like, something like a permanent fund dividend that you see in Alaska, anything like that that we should be aware of when we're thinking about the business?

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Edward Kennedy, North West Company Fund - President & CEO [54]

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Sure, so there is one. I think I even referred to it. Was in the -- was it? There is a store project that has to be completed, and that was a purchase price adjustment to pick up the cost of it once we figure out what it really was. So over on Virgin corridor, which is the second largest populated island in BVI, RTW was replacing a store and expansion replacement renovation. We're not going to stop that project. It's going to get done, so I think it's CAD3.5 million to do yet on that one.

There's nothing we've found -- we're going to find lots of things, beyond due diligence. What I find interesting when I was down there and spoke to all of the staff, and I recognize we have never acquired a complete (inaudible) head office. So it's going to be interesting to see how the integration works, in the Caribbean anyways, we've never done this, so culturally and so forth.

We are good adapters, keep saying that, I think it's true, our performance. So we're going to get this right, but it's -- I think it's going to open up more possibilities on integration and improving their business. A business that has been owned a certain way and run a certain way for 60 years privately, they'll do a lot of things we'll learn from, but there's going to be some practices that we can help them with.

There's nothing, to answer your second question, that we're aware of that would be a PFD type of distribution. Now BDI has a lot of wealth, Cayman-type wealth, in terms of banking and corporate registrations and so forth. Has a lot of tourism, that -- and what presses me is the resiliency of that.

When we looked at the P&Ls or the financials for RTW going back four, five, six years, it's got a consistency to it that is very, very valuable to us, and obviously to our shareholders. And I think that speaks to the type of tourism they do in BVI. There's an insularity to the price point they're at compared to some of the mid-end tourism regions of the Caribbean. So we're looking forward to having that instead of having to talk about volatility in tourism, and what we really want to do is roll up our sleeves.

We've got the Vice Chair, who was the former President of our international division is down there running the Company as a managing director. We have our Cayman Manager is going to become the Managing Director, really at that point, which sales and options as primary focus, and we'll have dotted or straight lines back to Canada on the [support rules]. And he's been an exceptional performer in Cayman for us, after the Vice Chairman, we settle things down with who reports to who, and I think we'll be off to the races.

I think the reporting structures will be really good, and the nice thing is that it's not a fixer upper in the broken sense. It's a fixer upper in the sense of how do we make it better and leverage it throughout the Caribbean. So the distraction element is a lot lower, and it shouldn't be a distraction. But re-prioritization. I'm able to insulate it without short-changing it from other tasks and other executives who have their mind focused where they should be and not in BVI.

So I like that part as well and we'll look forward on this, of course, as we go forward and how things are going. But so far, it's been quite good in terms of our learnings and what we think we can do with the business.

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Tal Woolley, Eight Capital - Analyst [55]

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You're required to maintain that head office?

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Edward Kennedy, North West Company Fund - President & CEO [56]

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We've committed, I've committed to keeping the size of head office, and that's a general parameter. It's not positioned -- each position will stay the same forever and a day; it's more that we'll have that presence on the island.

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Tal Woolley, Eight Capital - Analyst [57]

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Okay, I just wanted to also ask about the capital program. You talked a lot on the last call about trying to get the balance of growth and maintenance rate within the budget, and I'm just wondering, when I look at the CAD80 million you're planning to spend this year, it's roughly equivalent to what you spent last year. Have you tried to deliberately tweak that between the growth and maintenance capital within that budget, or does it look roughly the same as last year?

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Edward Kennedy, North West Company Fund - President & CEO [58]

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The growth part would be CAD25 million, picking up our GT stores. We allocate some of our system project to growth, because we always have gazillion high percent ROIs with these projects. So we'll take a sliver of that and call it growth.

And there's a few other projects that fit in there, some acquisitions. What else would be in our growth path? Top categories and markets, so the Tims rollout, of course. And top markets, we always split the CapEx between what's pure growth and what's end-of-life-cycle maintenance. So CAD25 million is the split, and I think we're a year away from bringing our maintenance CapEx down to depreciation, which would be another CAD10 million reduction.

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Tal Woolley, Eight Capital - Analyst [59]

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Okay, that's great, and then just lastly on the wages. Obviously, you had a big decline this quarter. I'm just wondering, can you quantify what the swing was on the incentive comp in the quarter?

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John King, North West Company Fund - CFO [60]

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Tal --I'd point you to -- I think your best direction would be in the notes to the financial statements. I think it's Note 9.

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Tal Woolley, Eight Capital - Analyst [61]

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Yes.

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John King, North West Company Fund - CFO [62]

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And you'll see there, we disclosed the wages salaries and bonus. It's down about CAD3 million I think in the quarter, and the bulk of that would be on the short-term incentive plan.

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Tal Woolley, Eight Capital - Analyst [63]

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Okay, and if I look at that full-year number, it's running about 3%. Through the first nine months of this year, it was running closer to 6%. And if I just take --combine that with the commentary you were giving Michael earlier, I'm guessing then, start thinking about wages going forward somewhere between that 3% and 6% would be a reasonable estimate?

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John King, North West Company Fund - CFO [64]

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You mean for the overall run rate for 2017?

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Tal Woolley, Eight Capital - Analyst [65]

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Yes.

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John King, North West Company Fund - CFO [66]

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Yes, I don't see your 6% number is not in the -- unfortunately, I don't see that right now.

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Tal Woolley, Eight Capital - Analyst [67]

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That was through the first nine months of the year, so that's if you looked at the first nine months, yes.

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John King, North West Company Fund - CFO [68]

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No, you've got to take a look at the whole year, year over year; that is what you have to do.

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Tal Woolley, Eight Capital - Analyst [69]

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Okay, perfect. Thanks for your time.

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Operator [70]

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Thank you. The next question is from Keith Howlett from Desjardins Securities.

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Keith Howlett, Desjardins Securities - Analyst [71]

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Yes, I have a question on your western Canadian business. I was just wondering whether your mix of food affects how deflation plays in. I could be wrong, but you seem over-weighted a bit to frozen and shelf stable versus fresh and refrigerated. I'm not sure that's correct, but if it is it is, does deflation affect your business, do you think, differently than your competitors?

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Edward Kennedy, North West Company Fund - President & CEO [72]

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Yes, and so two ways. Some of the deflation in produce, for example, would be less for us, because we don't have the big produce department when you walk into Giant Tiger, and the same as the ones you'd see in Eastern Canada. So you see everything is condensed when it comes to food; it's the best of the best, and not a lot of space compared to the full conventional market.

But anyways, so that deflation would be lower for us as a blend of all of the foods. Where we get [whacked] is that we've got a lot of commodities in the store in terms of key shelf-stable and frozen items. These are the key items that get promoted; these are the key items that people love to buy and stock up or cherry pick.

So we really get whacked on the promotional price intensity part of it. We tend to have a very high blend in the current environment of promotional sales, and we're trying to combat that and offset it from the ways I mentioned earlier.

So when you net those two out, less blended deflation because we don't have as much produce and as much volatility in some of the fresh categories, at least in that banner, but way more competitive price intensity driven at deflation in the rest of the store for food because of what we carry, we net out unfortunately a little negatively. We get whacked harder on deflation than a supermarket that can blend in gluten-free, all sorts of nutritious branded natural foods, can blend out their produce with 200 or more SKUs, etc, so we don't have that.

So we understand that. It does dry [crack] in our door. We're not saying it's -- we don't want to change it dramatically, but it does have a vulnerability, and it is right now in these kinds of price environments, we tend to take it on the chin of it.

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Keith Howlett, Desjardins Securities - Analyst [73]

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Thank you, and a question on services. You mentioned you're expanding food service at Tims and maybe others. I'm just wondering generally what the opportunity is for services, whether it's beauty or grooming or optical or pharmacy.

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Edward Kennedy, North West Company Fund - President & CEO [74]

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Right, we certainly turned over all those stones, and pharmacy would be the biggest opportunity, like the three you mentioned. We looked at optical and -- the biggest thing we find, and this is not forever. Things change, of course, and it's the regulatory, the self-regulatory restrictions that dry up the cost of living in northern Canada, beyond what they otherwise should be.

And these are self-protecting professions that require in situ physical presence, as opposed to online and virtual, so that kills optical for awhile. Almost killed pharmacy, but we -- think that is usually a remote market exemption.

But pharmacy is big for us, we think that tele-pharmacy, in situ pharmacy in bigger markets. OTC, it's not a service now, but over-the-counter has had tremendous growth for us and in whole health space, we like that a lot. So those would stand out.

Financial services, we keep pushing the envelope on what new cash-type services can work for us. One that we're looking at right now is money transfers back to -- for new Canadians, temporary workers, not just in Canada but Alaska, also the Caribbean looking at some programs there, look quite interesting for us to offer to our shoppers, they're the Western Union type.

Income tax prep, I think we've got a few more markets to penetrate, quite a few actually. So that's got upside. And then on our We card prepaid Visa, looking at whether we can extend that to other kinds of products, going back to the cash card for certain types of shoppers, and looking at extending our credit program to the different kinds of credit offers.

We would like to enable our shoppers to stay with us through the whole month with credit, for the day-to-day purchases for example, and not just spend it all. We need to get paid for that at the end of the month, but we're looking at ways to keep the relationship going, not just on the so-called money days but through the whole month.

Anyway, that's a synopsis of different service categories that you've heard of before perhaps, but we keep mining those and keep looking for regulatory shifts that allow us to move into other spaces. That's really sometimes the only constraint that we face.

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Keith Howlett, Desjardins Securities - Analyst [75]

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Thank you.

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Operator [76]

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Thank you. There are no further questions registered. I'll turn the meeting back over to Mr. Edward Kennedy. Please go ahead.

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Edward Kennedy, North West Company Fund - President & CEO [77]

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Great, thanks, operator. Thanks for all of the very good questions. We appreciate them and are happy to answer any follow-on ones. Typically they flow through John, but I always take the call and we'll get back to you promptly. So our next reporting to you will be in June with our annual meeting and look forward to talking more about Q1 and how the year is unfolding. And we'll talk to you then. Thanks very much. Bye.

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Operator [78]

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Thank you, the conference has now ended. Please disconnect your line at this time. Thank you for your participation.