Q1 2013 Canadian Tire Corporation, Limited Earnings Conference Call
May 09, 2013 AM EDT
CTC.A.TO - Canadian Tire Corporation Ltd
Q1 2013 Canadian Tire Corporation, Limited Earnings Conference Call
May 09, 2013 / 04:00PM GMT
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Corporate Participants
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* Stephen Wetmore
Canadian Tire Corporation Ltd - President and CEO
* Marco Marrone
Canadian Tire Corporation Ltd - COO
* Dean McCann
Canadian Tire Corporation Ltd - EVP and CFO
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Conference Call Participants
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* Brian Morrison
TD Securities - Analyst
* Peter Sklar
BMO Capital Markets - Analyst
* Irene Nattel
RBC Capital Markets - Analyst
* Vishal Shreedhar
National Bank - Analyst
* Chris Lee
BofA Merrill Lynch - Analyst
* Jim Durran
Barclays Capital - Analyst
* Mark Petrie
CIBC World Markets - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Kyle and I'll be your conference operator today. At this time I'd like to welcome everyone to the Canadian Tire Corporation Limited first-quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.
(Operator Instructions)
Earlier today, Canadian Tire Corporation Limited released their financial results for the first quarter of 2013. A copy of the earnings disclosure is available on their website and includes cautionary language about forward-looking statements, risks and uncertainties which also apply to the discussion during today's conference call. I'll now turn the call over to Stephen Wetmore, President and CEO. Stephen?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [2]
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Good afternoon, everyone, and thank you for joining us today. While this is our smallest financial quarter of the year it has nonetheless been a busy quarter. We set ourselves up for the remainder of the year. Dean and Marco are going to cover the quarter in some detail, but let me touch on some important initiatives and announcements from today.
In April we announced that the Corporation and our Associate Dealers have reached agreement on new terms for Associate Dealer contracts, so it's the culmination of some great work on both sides and an extremely important milestone for us. Given this news and the many initiatives we have under way it's probably time to provide a more detailed look at our organization, so it's our intent to plan an Investor Day in the fall of this year.
This past quarter has demonstrated some real innovation at both CTR and FGL Sports. In just a few months we designed, developed and implemented the Canadian Way, our new CTR digital catalogue. We've started to deploy 5,000 "fast-find" or product locator devices in CTR stores for staff and customer use in store.
We opened Sport Chek digital lab store which serves as a test site for features and technology that may be rolled out across the FGL, Mark's and CTR store networks in the future. We launched a partnership with Communitech, a digital development lab in Kitchener-Waterloo, and just last week announced the opening of the Canadian Tire Cloud Computing Centre in Winnipeg.
Now with respect to our Q1 results, I believe it was a good start to the year. Financial Services, as is typical, was the major contributor of earnings in the quarter and performed well again delivering growth in their receivables portfolio and doing a great job working with the retail division to grow in-store financing programs.
For the retail business, it is a very small quarter that was marked by the arrival of winter in January and February but a very cold March relative to last year. Despite the weather challenges, I'm extremely pleased with the positive sales results and momentum we saw in key areas of all our retail banners, but most importantly in our automotive parts and automotive service areas.
Our first-quarter results show that there was a reversal in the declining automotive service performance that we identified in Q2 2012, largely due to the additional training, recruiting and assistance we provided to those underperforming stores as they transition to the new automotive service systems and technology.
At FGL Sports, Michael Medline and his team successfully completed the banner rationalization initiative, closing all non-strategic banners on time and on budget. In addition, the team did a great job with customers in generating excitement and attention to the store closure deals and we have ended the quarter with a significantly smaller amount of inventory on hand than we had expected. FGL was less affected by the March weather pattern and the Sport Chek business grew well in the quarter with same-store sales up some 3%.
At Mark's, the sales and earnings performance was tempered by weather challenges and tough year-over-year comparisons, but we continued to see a favorable response to our products that focus on our innovation and quality and durability, features that differentiate our products from those of other retailers. In addition, the strong performance of the GTA region in Ontario was a highlight in the quarter and evidence that the rebranding efforts we made in this market last year are working very well.
With that, I'll now address the other announcements we made this morning. First our announcement that we are moving forward with the process of creating a Real Estate Investment Trust or REIT. We are still working through the steps but let me walk you through our thoughts on the transaction. As you know, having control over our real estate assets has been an integral part of Canadian Tire's operation for over 90 years and we continue to believe that we have a competitive advantage in owning and developing our real estate assets.
That said, we believe the creation of a REIT as a publicly traded subsidiary aligns our longstanding objectives of retaining control over our properties while surfacing the value of our real estate holdings for shareholders and providing the Company with additional financing flexibility to access funds to invest in and grow our business over the long term.
In fact we believe that the CTC REIT will build on our successful track record of acquiring and developing retail and related properties and provide CTC with a variety of options to fuel growth through improving returns on store development and to further invest in real estate should it so choose to do so.
Lastly, it is with mixed emotions that I speak about the departure of Marco Marrone from the Company and the appointment of Allan MacDonald as Chief Operating Officer of CTR. I'm excited that Allan will be bringing a new generation of leadership to head our namesake CTR business. I believe his past four years have positioned him well to take on the challenge for the long term, and I have full confidence in his ability to lead the organization.
Marco's many accomplishments during his 27-year tenure at Canadian Tire have helped to form the Company as it stands today and he will be missed. Allan and Marco will work together through a transition period to insure a smooth shift of the role and I can assure you it will be business as usual during this time. With that, I'll now pass things over to Marco who will provide additional details about the performance of CTR during the quarter. Marco?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [3]
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Thanks, Stephen. As I start with covering the results for the quarter, let's recall the weather situation last year in the first quarter. We really did not have any winter in January and February a year ago and then jumped straight into summer in March right across the country. This year, winter started in January and wouldn't go away.
Comparing weather for March between the two years, you can see the difference, especially during week 12 of the quarter. For example, one day in week 12 and take Winnipeg, a year ago they experienced plus 20-degrees Celsius while this year the temperature was close to minus 30 degrees Celsius. With that kind of weather, no one is outside gardening, washing their vehicles, or sitting on their patio.
In fact, when we launched our new cloud computing center in Winnipeg last week it was still only minus five degrees. This difference in weather impacted our results in Q1 of this year, specifically in the last three weeks of the quarter. In fact, trying to compare this quarter is a bit of a challenge and perhaps not that useful, but let me share some numbers to highlight this.
After the first 10 weeks of the quarter CTR was right where we thought it would be with good growth in top line sales with areas like automotive service up 6.5%. Fast forward three weeks and sales ended down 1.6% and auto service was flat for the quarter. The decline in sales growth is directly attributable to seasonal categories, all impacted by weather.
In addition, seasonal categories such as backyard living which has barbecues and patio furniture, and key categories such as gardening, cycling, car care and accessories and tires, were all down compared to the previous year. However certain categories performed extremely well, reflecting the impact of our work and focus in these areas.
For example, the living strategy execution has driven our performance in this category. In the kitchen, home organization and pet care areas, sales grew in the mid to high single digits demonstrating that consumers are responding to the execution of our merchandising strategy.
Another area where we have recently turned our focus is our outdoor recreation business. Hunting performed very well and fishing and camping sales were up in the high single digits during the quarter. I should also mention that the approach we've used to grow the outdoor recreation business will now be applied to our fishing and sports businesses in the coming quarters. One final comment on our first-quarter performance relates to inventory carryover which was a concern last year. However I'm pleased to say we are in a very good position this year.
Over the last year we have developed plans in key areas of our business and are executing against them. We brought on David Mock, as Senior Vice President of Merchandising and we have continued to build our merchandising bench strength with key additions and appointments in categories such as Sports and Fixing. We are continually improving gross margins and finding the balance between driving top line and margin improvements.
We focused on our digital strategies and I'm thrilled that we launched our digital catalogue at the end of the first quarter. It becomes a foundational piece in our digital strategy and sets us up for digital commerce later this year. We focused on our store formats, progressing on over 187 living strategy conversions and smart store conversions in the first quarter alone. As well, given the success of our hunting and fishing pro shops, we will be doubling the number of these during 2013.
Our marketing campaigns are resonating with consumers and if you have seen our latest bike ad you will see what I mean. I think it's some of the best work that we've ever done. Our customer experience continues to improve with such initiatives as the "We Care" program and our Fast Find technology. These are just a few of the initiatives on our plate but it provides an excellent view of the focus and execution of the team.
Now in closing as you've already heard or read, I'm leaving Canadian Tire after 27 years. The organization wanted me to commit to a longer time frame in my current role, but at this stage of my career I was not prepared to do that. In my experience, once a decision like this is made it's best to make the change quickly as it is in the best interest of everyone. Now is an appropriate time to transition the role to Allan MacDonald.
First of all, we recently completed the successful negotiation of our Dealer contract, which was an important piece of work to complete. Second, Allan and I have worked closely over the last 12 months developing the strategies and plans to drive CTR into the future. Therefore, Allan can step in and continue to drive the performance of CTR. As well, we are entering our planning cycle and I felt that I should not start the planning process if I was not ready to commit to a longer time frame.
Allan will be a great leader for CTR and I will do everything I can to assist him in an orderly transition and be there as required. I've enjoyed my time with Canadian Tire, I've made many friends and have some great memories and I also want to thank all of you. With that I'll hand it over to Dean.
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [4]
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Thank you, Marco, and good afternoon, everyone. I will first walk through the Q1 results for the Company and then address the REIT announcement that we made earlier this morning. Our consolidated results were in line with our expectations for the first quarter of '13. As Stephen noted Q1 is our smallest quarter of the year in terms of retail sales and earnings contribution. With retail segment earnings typically representing a mid single digit percentage of full year results for the retail segment.
Before I walk through our Q1 performance, I want to draw your attention to a few disclosure and presentation changes we've made to our external reporting documents this quarter. These are summarized on slide 4. Briefly, the most significant is the update to our ROIC calculation methodology to include operating lease obligations. This makes more sense for us now given the increased proportion of our retail business that operates from leased locations given the addition of FGL Sports. In addition, we've expanded our disclosure related to our cash flow statement and segmented information.
On slide 5 our consolidated financial statements for the quarter, in the interest of time, since we have a lot to talk about today, I will only touch briefly on factors that influenced our results for this quarter. Consolidated operating expenses increased over the prior year, which as you'll see in our other disclosure documents was largely due to the timing of planned incremental marketing and advertising expenses as well as higher occupancy costs related to the addition of 19 corporate-owned stores to the network. That said, we're still on track to keep operating expenses in line with revenue growth and continue work to identify operational efficiencies to permanently remove costs.
In the retail segment, Marco addressed the CTR sales and revenue performance and noted the continued strength of our margins that grew in the quarter. The delayed arrival of spring has resulted in an increase in our corporate and store inventory at CTR but nothing that won't be dealt with when we get some sun. Both FGL and Mark's reduced their inventories in the quarter.
A specific highlight for us in the quarter was the completion of our banner rationalization initiative at FGL Sports. To summarize briefly, we successfully closed 113 non-strategic locations with the majority of those stores winding up operations in the first quarter of this year. And to date, we've converted five stores to our Sport Chek or Atmosphere banners and have a further 13 stores that will be converted later this year or in early 2014.
As you've seen from our first-quarter results, the strong sales performance at our FGL banner stores was largely due to the liquidation sales at stores closed during the quarter. However, we also saw a solid same-store sales results at our Sport Chek banner stores. This is offset by a lower gross margin, which did understandably come down with the clearance of the stores closed and higher year-over-year occupancy costs related to the new Sport Chek stores that have opened since the first quarter of '12.
Overall, income before income tax for the retail segment decreased CAD1.5 million versus Q1 12. However our retail EBITDA was up 1.8%, largely from the higher revenue and gross margin contribution of our banners.
Turning to slide 7, Financial Services posted another solid quarter, reflecting gross average credit card receivables growth and improved credit portfolio metrics. Throughout the quarter we continued to see improvements in the rolling 12 month credit card write-off rate due to improving bankruptcy rates compared to a year ago. And we also continued to see our return on receivables at levels above our aspirational range of 4.5% to 5%.
As I mentioned in our Q4 call, we continue to expect ROR to come down as we work to grow receivables balances, but we believe it will remain elevated in the 5.5% to 6.5% range throughout '13.
As I mentioned earlier, we updated our ROIC calculation to include operating leases. Reported ROIC was 7.35%, but on a normalized basis was essentially flat to Q1 2012 at 7.52%. ROIC is a continuing focus for us and we will work to improve it through tight capital and opex control.
Our cash position remains strong with our balance sheet continuing to get stronger. We used about CAD14 million of our cash in the quarter to repurchase roughly 196,000 of our Class A shares in addition to shares purchased for anti-dilutive purposes as part of our 2013 buyback program. Our capital spending was on plan in the quarter and we remain on track for CAD400 million to CAD425 million of CAPEX for 2013 plus the impact of a potential new site for a future distribution center.
With that, I'll change direction and provide you with some of the key features and steps that we'll be taking over the course of the next few months in respect to the REIT announcement this morning. As you can appreciate, we are still working through all the steps required to complete the REIT, so we are somewhat limited on what details we can share at this time. That said, in terms of timing, we expect to complete the IPO in the fall of '13 and anticipate that Canadian Tire would retain a significant majority interest in the REIT of 80% to 90%.
We expect the capitalization of the REIT to be a typical structure with a 50/50 debt equity mix and the debt being intercompany with CTC. Canadian Tire currently owns more than 350 of its 490 CTR store properties, 2 distribution centers, a modest number of stores under the Mark's, PartSource and FGL banners and a number of CTR-anchored retail developments.
The owned CTR properties comprise approximately 25 million square feet have a historical book value of approximately CAD2 billion and are located in all provinces as well as the Yukon and Northwest territories. Over the next few months, we will prepare a number of properties for inclusion in the REIT, which includes completing environmental assessments and performing individual property evaluations.
Based on the preliminary work we've done to date we anticipate the initial portfolio would include roughly 250 properties comprised largely of Canadian Tire retail stores, Canadian Tire-anchored retail developments and one DC representing in total about 18 million square feet and approximately CAD3.5 billion of estimated market value. CTR properties that are currently being considered for replacement, relocation, or future developments would be retained by Canadian Tire and would not be included in the REIT initially, but over time we would expect some of these properties to be acquired by the REIT.
We expect the creation of the REIT would have minimal impact on our consolidated financial statements as the REIT statements would be consolidated with the Company for financial reporting purposes. We would however expect that there would be a one-time increase in cash reflected on the Balance Sheet from the IPO proceeds, as well as an increase to the non-controlling interest.
We would also expect minimal impact on Canadian Tire's cash flows because lease payments to the REIT would be largely offset by the receipt of REIT distribution on Canadian Tire's retained interest in the REIT and from interest payments received from the intercompany debt. For segmented reporting purposes, we would create a new segment for the REIT which would be in addition to our current retail and financial services segments.
Finally, we expect there would be minimal impact on Canadian Tire's debt metrics and don't anticipate any significant tax effect for the Company. With that I'll turn it over to the operator moderating the Q&A. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Brian Morrison from TD Securities.
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Brian Morrison, TD Securities - Analyst [2]
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Yes, hi good morning. Question on the REIT if I can. Dean thanks for the capital structure update there. If I'm to look at the depreciation and amortization in terms of what would be allocated to the REIT versus the operating company, could you maybe break that down for us specifically in terms of what might be move over from buildings lease, hold improvements, et cetera?
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [3]
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Yes, Brian. We haven't kind of specifically kind of hide those numbers out but when you have to remember when you put everything back together again on a consolidated basis when you're looking at Canadian Tire, you effectively put the depreciation back on the consolidated balance sheet anyway, so I think we should just take that offline and have a chat about that, so we can kind of help you understand that better.
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Brian Morrison, TD Securities - Analyst [4]
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I completely understand the consolidated portion, I'm just saying would it be fair to take a proportion of 70% of buildings and lease hold improvements and throw that on to the REIT, I understand on a consolidated basis that it's hold.
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [5]
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It's fair to do that but you're also talking net book value going to market value, right, so it's not just an automatic kind of calculation is all I'm saying.
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Brian Morrison, TD Securities - Analyst [6]
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Okay, maybe we can follow up offline. In terms of the proceeds of capital can you maybe give us understanding in terms of your priorities in terms of accelerated share buyback, dividend, potential for acquisition?
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [7]
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I mean first of all, Brian we won't see any proceeds obviously until we do the IPO, which is going to be later this year. And the initial proceeds obviously are going to be not massive for lack of a better word, and we see that as coming into kind of our overall cash bucket in terms of operating the Company. And we're kind of sticking with the same kind of messaging around how we intend to deploy our cash resources from a capital allocation point of view focusing on investing in the business, protecting our debt ratings, looking at protecting our -- continuing to follow our dividend distribution policy, and looking at acquisition or growth opportunities with remaining cash. And obviously we're also supporting the currently announced buyback program we have of up to CAD100 million so that's how we're kind of thinking about the cash at this point, Brian.
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Brian Morrison, TD Securities - Analyst [8]
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Okay, last question. In terms of and this is more on the operation side, in terms of the store closures of FGL, is there any way that you might be able to quantify what the nominal impact might have been on the retail performance during the quarter?
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [9]
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Really tough to do. The guys did a fantastic job of managing that, to plan and frankly better than plan, I would be remiss if I didn't say that. One of the challenging things is that it's such a great job as clearing inventory, creating excitement as we said in the stores that we actually ended the quarter with less inventory than we expected to from a provisioning point of view but that shows up in the margin as an operating piece. So all I'm saying is really tough to quantify kind of one way or the other what the overall impact is, but suffice it to say, the provision that we put in place in the second quarter last year was sufficient to deal with everything associated with that activity, the guys did a great job.
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Brian Morrison, TD Securities - Analyst [10]
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Okay, thanks very much.
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Operator [11]
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Peter Sklar from BMO Capital Markets.
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Peter Sklar, BMO Capital Markets - Analyst [12]
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Thank you. Just first a couple of follow-up questions on the REIT. You mentioned that there's the additional 7 million square feet of real estate that you own that's not initially going into the REIT that may go in down the road. Can you give us a sense of timing on that? Is that something that would potentially be a year away if some of the properties come to development fruition or is that more three to five years down the road?
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [13]
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I think the best way to answer that, Peter, is that the REIT over time clearly will acquire more properties from Canadian Tire. That's the likelihood as a source of growth with respect to the REIT. The first source of growth with respect to the REIT will be the leases that it starts out within place with Canadian Tire and those will be market leases. So they will have terms in them in terms of rent escalations over time so that will be a source of growth. But clearly, an important source of growth going forward will be the opportunity to acquire additional properties from Canadian Tire, so I wouldn't put any kind of time frame on that. I mean we've got a pretty big stable of properties left and there will be ample opportunity and ample opportunities for the REIT to acquire some of those properties, over the first year.
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Peter Sklar, BMO Capital Markets - Analyst [14]
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Okay, and then back again on the deleveraging. I see initially you have the IPO proceeds but then subsequently I would presume that the REIT is going to mortgage the properties and that the REIT would use the proceeds of the financing to repay the notes owed to Canadian Tire, so over time, over a number of years, Canadian Tire is going to substantially deleverage. So I'm just wondering if you can talk about what you're going to do with your balance sheet as that phenomenon happens.
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [15]
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See I don't think of it that way. The fact is out of the gate, basically we are taking back inner Company debt from the REIT as payment for basically half of the value of the properties, Peter. The opportunity is for the REIT to issue additional debt into the future, but you really have to think of that as if the REIT issues debt given our ownership position, it's Canadian Tire issuing debt so there will be opportunities as debt matures in Canadian Tire Corporation as an example. We will have the flexibility to choose will the Corporation issue that debt in replacement of maturing debt or would the REIT do that, right? And then repay some of the inner Company debt between the Corporation and the REIT. So there's flexibility but that flexibility is going to be exercised over time based on where the appropriate or the best use or best source of capital is from a cost point of view.
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Peter Sklar, BMO Capital Markets - Analyst [16]
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Right. Okay, I understand and then just one last question on Canadian Tire Retail. You did have the negative comp of I believe it was 2.4% and you have explained on the call how the weather impacted you. I believe nationally, in Canada we've had pretty good weather in the second quarter. Can you talk a little bit about how the second quarter is unfolding in terms of the weather and how that's impacting you?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [17]
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Hi, it's Stephen. Well obviously as Southern Ontario has picked up, our stores are busy to say the least, so it has to, but it has been extremely unpredictable across the country as Marco mentioned earlier. I mean last week, in Winnipeg was minus five and Saskatoon, they had flurries. So we're monitoring it, so in each area, there's huge pent-up demand and I think what we have gotten ready for and I think it's the right thing to do because it started to happen in some of the bigger markets, is to almost treat this like a Christmas rush. And as it breaks our stores are going to be full and they have to be replenished in a hurry so distribution has geared up, supply chain is under way with it now so we're making great progress and like I say, as the weather breaks totally across the country we're doing extremely well where it does break.
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Peter Sklar, BMO Capital Markets - Analyst [18]
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Okay, thank you for your comments.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [19]
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Okay.
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Operator [20]
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Irene Nattel from RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [21]
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Thanks and by now it's good afternoon everyone. I was just wondering if you could address the question of why now on the REIT because clearly, this is something that we've been talking about talking around for a number of years. And also whether we should be making any link between the signing of the new Dealer contract, was there anything in there that improved your flexibility and your ability to do that, to do this? Does creating the REIT in any way impact anything in terms of the relationship with the Dealers and how they pay rent?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [22]
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Hi, it's Stephen. Well, we have, we never as a Management team or a Board ever stopped looking at opportunities and to say that we haven't considered this type of opportunity many times over the last years would be not telling you the truth. Of course we look at it, but it is -- what we have truly concentrated on over the last number of years is getting our businesses focused and trying to get them to operate in the way that we know they have the potential of so doing. And keeping an eye on all the other aspects of creation of shareholder value. And we constantly and have constantly increased our dividends. We this year have also invested in a CAD100 million share buyback, so we've monitored this all the way through.
Having said that, we are totally unable to tell the world how valuable this property is when it has been hidden within the Canadian Tire structure. And the market now is we would think in almost perfect condition and with the acceptance of high quality REITs with major tenants, it seems to be accepted well by the market and I can't see a better time from our perspective to surface the value. Hopefully we'll do that during the course of the year to show the tremendous value of the properties that we have. And obviously I'm going to have -- follow up what's happened during the course of the day here but I suspect it has surfaced some share value. And so we've listened to you very closely over the years but we just think the market is right. So yes it does create a vehicle that we could access should we need funding.
I do believe too that spending the last number of years in securing the assets that we have in terms of the strategy and a performance criteria, making the acquisition of the Forzani Group puts us on a track that we believe we can grow this Company through organic and inorganic means substantially over the coming years. And this gives us another I guess financial flexibility to execute that. And as far though as the Canadian Tire Dealers and the Corporation are concerned, in simple terms this has absolutely nothing to do with the contract. So we do not in the contract tie market and escalating market rates to the stores and work that into our contract with the Dealers. It would just be impractical, volatile, just doesn't work so we have calculated values in the contract for land and use of buildings in a very different way and so it has absolutely nothing to do with that contract and is simply a relationship between Canadian Tire and the REIT.
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Irene Nattel, RBC Capital Markets - Analyst [23]
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Okay, thank you. That's very helpful. So then there was nothing that -- signing the new Dealer contract was not a pre condition to do the REIT?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [24]
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Oh, no, not at all, no. But between you and I, I had hoped to sign the Dealer contract last year. Just I'm slow, so no, it's very coincidental.
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [25]
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The way to think about it Irene, the way everybody on the phone should be thinking about it is the REIT announcement is founded on basically purchasing property, acquiring property from Canadian Tire Corporation and executing leases with Canadian Tire Corporation, full stop. And then the Dealer contract is completely -- the relationship the Corporation has with the Dealers is governed by the contract which is a very complex comprehensive document and those two things are completely separate things, in fact and in structure.
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Irene Nattel, RBC Capital Markets - Analyst [26]
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Okay that's great, thank you, Dean. And if I could ask more of an operating question, clearly I think weather has had a significant impact on traffic and on purchasing patterns, probably right through to early May if the snowstorm in Montreal recently is anything to judge by. But as you look around and I'm sure you did, do you have any sense as to whether there's been a change in the competitive environment, has the opening of the Target stores made a difference at all to you, do you feel like you're losing market share anywhere or really when you take a step back and drill down it really is all related to weather?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [27]
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Irene, it's Marco. When I go through all the results for Q1 and I look at even beyond and go through each of the categories you can see the impact weather had year-over-year. It's just a direct correlation. We track all of our categories, we're looking at even the markets where there are new competitive entrants in that marketplace so we understand our business and it's right back to weather. As to Stephen's comment before, you can really see what happens when that weather does become normal, as I'll say in the spring here and as we head into summer you can see the reaction of the consumer and the performance of our stores.
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Irene Nattel, RBC Capital Markets - Analyst [28]
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That's great, thank you.
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Operator [29]
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Vishal Shreedhar from National Bank.
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Vishal Shreedhar, National Bank - Analyst [30]
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Thank you very much. Stephen, in the press release you mentioned organic growth and acquisition opportunities related to this REIT's proposed REIT transaction. I was hoping you could expand on that and in particular what type of acquisition opportunities might you seek out or organic growth opportunities?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [31]
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Hi, Vishal. Those ones, those are always really difficult ones to come out and give you a lot of clarity on because you can't just disclose where your current interests lie or anything like that in terms of acquisitions, so it's a very difficult one but I can always give you general direction on it. I think when we look back at the foundations of our business being Living, Playing, Fixing and Driving and certainly apparel is a big enough area that it could form the fifth leg, those would be the areas that you would want to both organically and inorganically grow, so that's what we currently take a look at. If you inorganically if you will, want to grow, then this is a matter of obviously within a Sport Chek world and Atmosphere world drive growth as fast as you possibly can. For Michael and his team to get his big stores and showcase stores done, to get his online transactions up and running as fast as you want, et cetera, so pure organic. I think the same for Mark's and they have got a raft of ideas and concepts that they want to invest in. And for CTR, the success I know that Marco's highlighted to you in terms of our Pro Shops, outdoor rec, hunting, fishing, he's also mentioned I think in the last call that we were interested in express and new concept stores. All those things to me represent huge opportunities from a organic point of view.
There's no reason in the world that Canadian Tire, once we're ready and want to, can take other fantastically displayed concepts within store, which are actually stores within stores and move them outside the Canadian Tire environment, if they fit more within a mall concept. So all those sort of things to me are driving organic growth as fast as we possibly can. Inorganic, if you will, is a little bit of different definition for us in that, it's -- to me it's just a take off from what we have because I've always explained Mark's for example, that while we purchased Mark's, we were in the apparel business and we knew our customers. It made obvious sense, CTR should have developed Mark's in many ways. It should have existed because of that. And take another store and developed across the country. So we stay pretty close to those five categories and inorganic would have to continue and that was a very obvious move when we did the Forzani Group. Logical, it fit within our customers, it fit within the pricing elements and product offerings, so that's where we would continue to look.
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Vishal Shreedhar, National Bank - Analyst [32]
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Great. I just have two quicker ones. Dean, just wondering on the cadence of the buybacks and why they were a bit slower than perhaps many anticipated in Q1.
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [33]
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One of the challenges, Vishal, is you only have a limited amount of time that you can actually buyback in a quarter because of blackouts and those kind of things. Additionally we did some hedging transactions in terms of options, those kind of things that are normal course kind of things. So the reality is there's just limited opportunity to actually exercise buybacks. So we were able to buyback just short of a couple hundred thousand shares in terms of the buyback and we expect to continue that into the next quarter as well. But I would have liked to bought back more in the first quarter to be quite honest with you. But we were able to do about CAD14 million worth as we indicated in the release.
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Vishal Shreedhar, National Bank - Analyst [34]
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Okay, and just on Management changes, I think I was certainly surprised about Marco's pending departure just given that he's relatively new in his current role, and my understanding was that was a role that he wanted and given his track record. So Stephen as we think about your time here at Canadian Tire and your outlook and your longer term view, how should investors think about it?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [35]
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Well our Chairman said at the annual general meeting this morning that I'm not going anywhere any time soon. So I guess that's out of the public domain. If I -- going back 15 months or so when Marco took this on, if Marco had said to me then or somebody else had said to me, Marco can only take this on for 15 months, I still would have said that he was the right guy to take this job because at that point in time, we had so many initiatives under way that needed execution and that's what my big deal was a year or so ago when Marco took over. He had displayed all the talent necessary to be a fantastic executive in terms of execution and he's done that. He highlighted to you all the areas that have been taken and completed, so it is a segment, and I believe that what Marco is getting at that it's the right time is that he's completed those jobs, those big initiatives that he took on in the spring of 2012, and if you stayed on with this, now you're into the next planning cycle. We do our strategy with our Board and internally in June. He would have gone through that cycle and then prepared for 2014 and now you're into another year. You look at the timing we manage to get these projects to where they are, launch of catalogues and all of the launches of the stores and the big one, which is the Dealer contract done and so when Marco reflected he too knows that this is a five to seven year job.
Allan MacDonald is what we classify internally as a ready now candidate. He's ready to run a business unit. You put all the factors together and Marco didn't want to take on a role for five to seven years, which I fully understand. So we're not going to miss a beat. The two of them have worked extremely closely together. Alan has, 25% to 30% of the business is automotive, so he already has that and in the last year he took over all of the marketing and all of our digital initiatives. So he's coming to this ready to continue to roll and Marco will do everything possible to ensure that we don't miss a beat and that's I said it's business as usual so that's kind of where we are at the moment. And I also believe that entering the new era with a Dealer contract needs long term, in which Marco knows too, but the implementation of this contract is different and complex and so we need continuity for the long term, so it all kind of adds up but this is a great time to transition.
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Vishal Shreedhar, National Bank - Analyst [36]
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Okay, thank you very much. Best of luck, Marco and Allan as well.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [37]
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Thank you.
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Operator [38]
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Chris Lee from Bank of America.
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Chris Lee, BofA Merrill Lynch - Analyst [39]
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Hi. First question, in your analysis in terms of the timing of making the REIT announcement, did you consider making the announcement after the Loblaw REIT was priced in July so you can get a better sense of the market demand and valuation or are you fairly confident in terms of marketing investor demand that you can fetch the CAAD3.5 billion evaluation?
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [40]
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Yes, Chris it's Dean. The reality is we've been looking at this for awhile and we basically came to the stage that we satisfied ourselves around all the sort of really important questions we had to answer around control and those kinds of things, and we're frankly, we're at the stage where we need to start doing market valuations and environmental studies and so on so on, and you just can't execute that work without somebody kind of noticing. And then you're basically in the public domain at that point, so frankly, we're kind of a get on with it people, so we're moving this at our timing. Obviously we're watching the Loblaw situation and so on but we're really moving this on the basis of what's right for us and we'll continue to do that.
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Chris Lee, BofA Merrill Lynch - Analyst [41]
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Okay, that makes sense and in terms of the expected proceeds from the REIT, if I kind of just do the math correctly assuming you capitalize at 50% debt and 50% equity and assuming you sell 10% to 20% I'm estimating you'll get proceeds of somewhere between CAD175 million to CAD350 million. Is that, am I in the right ballpark there?
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [42]
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Yes.
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Chris Lee, BofA Merrill Lynch - Analyst [43]
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Okay.
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [44]
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That's sort of math.
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Chris Lee, BofA Merrill Lynch - Analyst [45]
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And from an impact on earnings statement perspective I understand why you would have minimum impact but I guess all else being equal the fact you're selling down 10% to 20% of real estate, in the minimum there will be some leakage in terms of minority interest and cash flow. Wouldn't that be the case?
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [46]
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Yes, but you know on an ongoing basis, Chris, it is really quite immaterial.
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Chris Lee, BofA Merrill Lynch - Analyst [47]
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Okay, I guess last question, just in terms of timing. When would the prospectus be filed and when will we get more information in terms of how to model the pro forma statements?
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [48]
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The prospectus, we're working towards kind of later in the year. I mean that's all we're kind of saying, fall. There's just still a lot of work to do as I said, mentioned those valuations, the environmentals, and so on, which is just stuff that takes time when you're dealing with a portfolio this size.
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Chris Lee, BofA Merrill Lynch - Analyst [49]
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Okay, great. Thank you.
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Operator [50]
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Jim Durran from Barclays.
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Jim Durran, Barclays Capital - Analyst [51]
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Good morning or sorry good afternoon now. With respect to the Dealer agreement, are you going to be providing us with any granularity on the components of it? And consistent with what was done the last time when a Dealer agreement was signed, what kind of financial benefits there might be to shareholders?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [52]
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Well, Jim, it's Stephen. I think the short answer is yes but I believe that we want to give some thought as to how can we take you through the business model in a way that you understand it better than you do today? That's what we're trying to without getting down into the complexities of this contract, and that's the difficulty so that you can actually understand it better, I think, is our intent. And I'm loathe to try to say that the Dealer contract will generate us X amount more money, because I just don't want to make a statement that isn't achievable. But I believe that if we gave you the components properly and you understood it, and maybe some of the main drivers within the enterprise how we work together, you'd be able to have insight and some transparency within the organization that maybe you've never had before. So that's our intent and that's what we're going to try to do. And we will be in contact with you to ask the type of things that you may want to see so that we can understand whether we can go there or not.
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Jim Durran, Barclays Capital - Analyst [53]
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Okay, look forward to that. On the REIT, I don't know if you've had time to look at the REITs that you'll be competing against for investor interest but can you give us a sense of what kind of growth profile you would see for the REIT?
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [54]
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Yes, Jim, it's Dean. The reality is our advice as we look at the market and understand it is, the growth profiles with respect to REIT are, what's expected is actually pretty modest, right, so just surprisingly modest. But from an opportunity point of view if you were to rank order where growth comes from with respect to the REIT going forward, first is obviously, these will be market leases between Canadian Tire Corporation and the REIT, and meaning there will be rent escalations and so on as part of those terms, right, which would be reflecting the market. And then secondly as we've mentioned we've held back a substantial portfolio of properties from the Canadian Tire Corporation perspective, so there will be opportunities for the REIT to acquire that going forward, acquire some of that on an ongoing basis going forward as those properties are developed. And then thirdly, over time as the REIT, if you will, gets its legs under it, there will be opportunities that the REIT then can consider for further growth, so I'm not going to give you a growth number, but we're well aware of what kind of market, if you will, and expected in terms of what a REIT kind of needs to generate, and we're not worried about the REIT's ability in this structure to achieve those.
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Jim Durran, Barclays Capital - Analyst [55]
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Okay. And when I think about the ongoing renovation, upgrade costs of the retail network over time, where do you see renovation spending dollars or new format dollars being spent by the REIT on a leasehold inducement standpoint or staying within the retail operations?
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [56]
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Staying within the retail operations, Jim. I'm learning new concepts here. Triple net, quadruple net things like that in terms of leases, which to me in English means the lessee, being the Corporation, would be responsible for those costs going forward not the REIT.
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Jim Durran, Barclays Capital - Analyst [57]
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Yes.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [58]
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We do have people here who know all this.
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Dean McCann, Canadian Tire Corporation Ltd - EVP and CFO [59]
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Yes, thanks a lot, but the reality, you know this organization we have a tremendous kind of real estate group, we've been one of the premier developers in Canada for the last couple of decades led by Ken Silver and his team so we've got tremendous expertise in this that we're drawing on obviously.
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Jim Durran, Barclays Capital - Analyst [60]
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That's great, thank you.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [61]
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Operator, it's Stephen. I think we can take one more call but we have to finish at 1 PM so I apologize to anybody who does want to ask us something, but obviously we're available and we'll follow-up with all of you but if we could just take one more call and I apologize to the rest of you.
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Operator [62]
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Mark Petrie from CIBC.
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Mark Petrie, CIBC World Markets - Analyst [63]
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Good afternoon. Just following up on that last question, with regards to the REIT, can you just talk about the Management structure, Board, and Management and also, what is the thinking exactly behind sort of retaining the 80% to 90%, is there a specific strategy sort of driving that or just maybe if you can just expand on that please?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [64]
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Mark, over time over the coming months and as we disclosed sort of all of the details certainly the Board composition, Management structure, et cetera will unfold all that to you. I think the way we tried to express it within the release within our remarks was that we would obviously have good governance practices and et cetera to meet market conditions so that's how that would go. In terms of the initial ownership of float, you have to, you simply have to make the float large enough that it is in fact a liquid float, so that's where you kind of come into the 80% to 90% ownership. And it's a great starting point for us and we'll go forward from there.
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Mark Petrie, CIBC World Markets - Analyst [65]
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Okay thanks. And then just in terms of the operations, can you just talk a little bit about the improvement in automotive and auto service, what you think is driving that, how much of it is Dealers getting trained on the new systems and improving execution, and how much of it is the market, and how much of it is sort of weather or whatever.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [66]
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Well I think certainly we had weather conditions conducive to the performance of our automotive business in January and February which we were comping over a very different situation. So we had hoped that we would see some great improvement in that area and we did. We did well in parts, we did well in the service. I think also going and dealing with the 50 stores that were struggling with the implementation of the new systems helped greatly too. This is our first kind of quarter in some ways to be comping over the new system. And the new system recorded things in different ways and different categories and it required a lot of training and expertise on behalf of our store Management in terms of utilizing the system to upsell and that sort of thing. So I think we're starting to fire well with it. The Dealers across-the-board have made tremendous commitments to driving our automotive business. We've cleared out, I know there's some line reviews in tires, et cetera that we also dealt within this quarter which set us up very well for next year and our inventory situation looks extremely good. It's just one of those things I wish at the end of February could have taken you through all of the different numbers in automotive, you'd have gone, oh, my gosh, you've finally cracked it. But anyway I can't because of the last two and a half weeks of March. So I'm very pleased with how automotive is going.
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Mark Petrie, CIBC World Markets - Analyst [67]
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Okay, thanks a lot.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [68]
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You're welcome. So operator, I think we have to call it a day. Thank you very much everybody. I know it's a busy day for joining us and we're always available to answer your calls and thank you again.
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Operator [69]
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Thank you, ladies and gentlemen. The telephone replay of today's conference call will be available for one month and the webcast will be archived on Canadian Tire Corporation Limited IR website for 12 months. Please contact Lisa Greatrix or any member of the IR team if there are any follow-up questions regarding today's call or the materials provided. This concludes today's conference call. You may now disconnect.
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