Canadian Tire Corporation Limited Conference Call to Discuss Consolidated Financial Statements and Segment Reporting
Oct 08, 2013 AM EDT
CTC.A.TO - Canadian Tire Corporation Ltd
Canadian Tire Corporation Limited Conference Call to Discuss Consolidated Financial Statements and Segment Reporting
Oct 08, 2013 / 01:30PM GMT
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Corporate Participants
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* Dean McCann
Canadian Tire Corporation Ltd - CFO and EVP, Finance
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Conference Call Participants
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* Irene Nattel
RBC Capital Markets - Analyst
* Peter Sklar
BMO Capital Markets - Analyst
* Brian Morrison
TD Securities - Analyst
* Chris Li
BofA Merrill Lynch - Analyst
* David Hartley
Credit Suisse - Analyst
* Keith Howlett
Desjardins Securities - Analyst
* Ben Yang
Barclays Capital - Analyst
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Presentation
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Operator [1]
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Good morning. My name is Dave. I will be your conferencing operator for today. At this time, I would like to welcome everyone to Canadian Tire Corporation Limited's investor education session conference call, financial reporting post information, our post formation of CT REIT.
(Operator Instructions)
Before the start of today's call, a reminder that the discussion will include forward-looking statements such as the Company's beliefs and expectations regarding certain aspects of its financial performance in 2014 and future years. These statements are based on certain assumptions and reflect Management's current expectations and they are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These risks and uncertainties are discussed in the Company's materials filed with the Canadian Securities regulators from time to time, including the Company's annual report. A summary may also be found on slide 1 of this presentation. Any forward-looking statements speak only as of the date they are made. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than as required by law.
Certain non-GAAP financial measures may be discussed or referred to today. Please refer to the Company's annual report and other materials filed with the Canadian Securities regulators from time to time, as well as the preliminary prospectus of CT Real Estate Investment Trust dated September 10, 2013, filed on SEDAR, for a reconciliation of each of these measures to the most directly comparable GAAP financial measures.
The figures referenced in this presentation are primarily drawn from the Company's 2012 annual report, as well as the preliminary prospectus of CT Real Estate Investment Trust, both of which have been filed in SEDAR. Pro forma figures in this presentation represent estimates of the impact that CT Real Estate Investment Trust might have on Canadian Tire's 2012 financials, had it existed during fiscal 2012.
I will now turn the call over to Dean McCann, CFO and Executive Vice President, Finance. Dean?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [2]
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Thank you, operator, and good morning, everyone, and thanks for joining us. Today I will walk you through a high-level view of the expected impacts that the proposed CT Real Estate Investment Trust, or CT REIT, IPO will have on Canadian Tire Corporation's external financial reporting documents. This session is intended to you provide, our analyst community and investor community, with an early view of what our Q4 2013 financial disclosures will look like. However, I would like to remind listeners that because the IPO has not yet been completed, I am limited in what I can say regarding CT REIT at this time. Before I begin, I'd like to highlight that today's presentation is intended to give a basic understanding of the impact on our financial disclosures but we recognize that some of the concepts are complex. As always, we are committed to working with you on any points of clarification that you may have after today's session.
Beginning on slide 2 of our presentation, you will find a summary of the rationale behind the CT REIT transaction and a high-level overview of the transaction's details. As you've heard me speak about before, we believe that creating CT REIT will surface the value of Canadian Tire's national portfolio of premium real estate for our shareholders, while still allowing us to retain control over the properties. It also provides us with increased financial flexibility and strengthens Canadian Tire's balance sheet. We also believe that establishing CT REIT will benefit our shareholders over the long term by creating a stand-alone vehicle that will support continued future investment and development in Canadian Tire's real estate. Prior to this transaction, we would not typically have pursued real estate development opportunities as part of our capital investments as a retailer. However, as a separate public Company, focused purely on real estate, CT REIT will be well-positioned to accelerate the growth of the real estate portfolio.
We expect the transaction to be valued at approximately CAD3.5 billion, with the estimated IPO net proceeds ultimately flowing through to CTC. We anticipate that the proceeds from the offering will be about CAD240 million, which is net of the cost for the Trust unit offering. We expect to use the funds as part of our normal ongoing operations and remind you that our approach to capital allocation remains, first and foremost, investing in our existing businesses; second, maintaining our investment-grade debt and credit ratings and paying down debt when it makes sense to do so; third, returning capital to shareholders, primarily in the form of dividends, as part of our well-established dividend policy and for 2013, our share repurchase commitment to buy back a minimum of CAD100 million of Class A shares; and finally, seeking opportunities to grow organically or, as appropriate opportunities may present themselves, inorganically.
Now, turning to slide 3 and the proposed CT REIT capital structure. CT REIT will indirectly acquire an interest in the initial properties from Canadian Tire. In return for the properties, Canadian Tire will receive a portion of the Trust units and all the issued Class B LP units and Class C LP units. These Class C LP units are actually equity but behave like rate reset preferreds and, for accounting purposes, they are recorded as debt on our balance sheet. This means that the opening capital structure will be approximately 50% debt and 50% equity. The Class C LP units will have scheduled redemption dates, with the first opportunity occurring in 2015, but it's important to note that they are not mandatory redemptions for CTC.
The ultimate size of the offering will be determined at a later date and the resulting enterprise value will be determined based on market conditions at the time of the IPO. Based on the CT REIT preliminary prospectus, we expect CT REIT will issue approximately CAD260 million in equity units to the public and the balance of the issued units will be held by Canadian Tire. Upon closing of the IPO, Canadian Tire expects to hold an approximate 85% effective interest in CT REIT before consideration of any shares that may be issued pursuant to [their] exercise of the overallotment option and is committed to being CT REIT's majority owner for the long term.
As we mentioned in our initial announcement, we do not expect that the creation of CT REIT will have a material impact on our consolidated financial statements. Given our proposed majority ownership position, CT REIT would be consolidated into Canadian Tire's consolidated financial results. On slide 4, you will find a summary of the potential impact to our 2012 financial statements overlaid by the 2014 forecast information presented in the preliminary prospectus. This shows a picture of what our results would have looked like had CT REIT existed at that time. Based on this scenario, the impact to EPS is a decline of CAD0.23 or roughly 4% of the 2012 EPS.
Moving to slide 5, the components of the EPS impact are -- first, CAD8 million of operating costs associated with operating CT REIT, things like public Company costs, REIT management, and incremental real estate and administrative support services; and second, CAD17 million pre-tax related to the portion of the REIT's earnings that coincides with the public, i.e., non-CTC ownership of the REIT, which is modeled here at 15%. In addition to EPS, retail EBITDA and retail ROIC will also be impacted by CT REIT. EBITDA for the retail segment would be negatively impacted by the addition of the market rent payments made to CT REIT. This is partially offset by the distribution CTC would receive on its Class B and Trust units. However, the distribution CTC will receive on Class C LP units is recorded in finance income so it is not reflected in EBITDA. These items would eliminate upon consolidation but do show up as a negative impact to the retail segment EBITDA.
Finally, based on the assumptions we have made in our 2014 forecast, we anticipate that there would be an initial decline of 30 to 40 basis points in our return on invested capital metric. The two main reasons for the decline are -- first, net assets will be higher due to proceeds received from the IPO; and second, CTC's income before taxes is lower due to leakage from CT REIT's operating costs and due to the impact of the minority interest. As a further note, because CT REIT has been structured as a closed-end Trust, the Trust units not owned by CTC would be classified as minority interest for accounting purposes and are therefore not required to be marked to market. This eliminates the potential P&L volatility that could arise under an open-end REIT structure and this was a factor in our decision to create a closed-end Trust.
Turning to slide 6, you will see our proposed segmented view of the consolidated Company. Starting with our retail segment, you will notice some changes. The segment would report its results as if Canadian Tire sold and leased back the real estate assets. Fixed assets and depreciation would decrease as the real estate assets transferred to CT REIT would be removed from the retail segment and operating costs would include the rent paid by Canadian Tire to CT REIT. Retail segment finance income would include the distributions earned by CTC on the Class C LP units issued by the LP and other income would also include monthly distributions received from CT REIT on the Class B LP and Trust units.
For CT REIT, we would report this segment's results consistent with the publicly-reported financial statements of CT REIT. We also plan to highlight the key operating measures as reported in CT REIT's financial disclosures. We will not include the activity from the remaining real estate in CTC in the CT REIT segment, as it will continue to be included in the retail segment. And as you would expect, nothing will change in the financial services segment from a disclosure perspective, and we will continue to report the same key operating metrics we have focused on to date.
We are aware that after the announcement of the proposed CT REIT transaction, many of you changed your valuation models to reflect a sum-of-the-parts methodology and we are committed to working with you to provide the information you need to get there. As such, on slide 7, we have provided you with an example of what our proposed consolidated financial statement segmented note disclosure will look like beginning in Q4 2013, with a breakout of the eliminations and adjustments in the columns. Once again, this uses our 2012 numbers overlaid with our 2014 forecast information from the preliminary prospectus.
So to wrap things up, we believe the addition of CT REIT strengthens Canadian Tire Corporation and provides us with increased financial flexibility. Canadian Tire has one of Canada's strongest brands and is one of the country's most shopped general merchandise retailers. Upon closing of the CT REIT IPO, we will also own majority interest in one of Canada's largest REITs. And with that, I'll now turn it back over to the operator for the Q&A session.
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Questions and Answers
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Operator [1]
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Thank you, Mr. McCann.
(Operator Instructions)
The first question is from Irene Nattel with RBC Capital Markets. Your line is now open. Please go ahead.
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Irene Nattel, RBC Capital Markets - Analyst [2]
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Thanks, and good morning, everyone. Dean, as you so rightly noted, we will all, for all intents and purposes, move to a sum-of-the-parts calculation. And so, when you say, on retail, that you're going to report on a basis that you sold and leased back the assets -- so, in other words what you're saying is -- what we see in SG&A -- your SG&A will include the rent expense that you are paying to the REIT?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [3]
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Yes, Irene, in the segmented information section.
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Irene Nattel, RBC Capital Markets - Analyst [4]
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In the segmented information?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [5]
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Right.
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Irene Nattel, RBC Capital Markets - Analyst [6]
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Okay. That's great.
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [7]
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And on consolidation, Irene, everything gets put back together, right? So, we go back to basically cost accounting for the properties, and the rent gets eliminated. You basically go back to as you were before on a consolidated basis.
However, for clarity, in the segmented information, we have taken the approach that we should show the transaction as it is, right? So, the retail segment reflects the rent that it pays to the REIT. The REIT segment reflects the rent it receives from Canadian Tire as the owner of those properties.
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Irene Nattel, RBC Capital Markets - Analyst [8]
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Okay. In looking on slide 7, that CAD321 million in inter-segment -- so that CAD321 million is what you're receiving from retail in rent?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [9]
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It's actually two things, Irene. It's the rent as you would think of a rent per square foot and other charges. And then it also includes property tax cost, which goes into the revenue line, then gets backed out in, effectively, the cost-of-sales or cost-of-producing-revenue line for the REIT.
So, the revenue line is actually inflated by the recovery of the property taxes from Canadian Tire that are then paid by the REIT. Is that clear?
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Irene Nattel, RBC Capital Markets - Analyst [10]
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I think so. Okay. Thank you.
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Operator [11]
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Thank you. The next question is from Peter Sklar with BMO Capital Markets. Please go ahead.
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Peter Sklar, BMO Capital Markets - Analyst [12]
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Dean, back on your slide on page 7 where you're providing all the segmented information, have you given thought to also providing segmented information with respect to the Company's debt?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [13]
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Peter, I think this is a question that comes up occasionally with the guys, and so we're aware of it. And there are ways to sort out what the financial services' debt is as you go through our MD&A and notes. But I think as we come to the close of the end of the year, we are looking at ways to do a better job for you of clarifying that. So, point noted.
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Peter Sklar, BMO Capital Markets - Analyst [14]
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Okay, so we'll stay tuned on that.
And then just one last question. Your slide on page 4, where you have the CAD8-million negative effect due to the additional operating cost associated with the REIT, then you have the CAD17-million leakage for minority interest, and then it all nets down to negative CAD18 million. So, what's in between the -- when you sum the CAD8 million and the CAD17 million, and you get to CAD18 million net, is the difference the tax effect?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [15]
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Yes.
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Peter Sklar, BMO Capital Markets - Analyst [16]
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Okay. Is there anything else (multiple speakers) or --?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [17]
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CAD18 million is after tax of those two items.
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Peter Sklar, BMO Capital Markets - Analyst [18]
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Okay. Thank you.
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Operator [19]
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Thank you.
(Operator Instructions)
The next question is from Brian Morrison with TD Securities. Your line is open. Please go ahead.
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Brian Morrison, TD Securities - Analyst [20]
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Hi, good morning, Dean. I don't necessarily have an accounting question here, but I do have -- with respect to your Class C units -- when you talked about the redemption rights, how they're spread out from 2015 to 2038, can you maybe talk about why you've structured it in a way that you have two payments in 2015 and 2016, and then you go into intervals between 4 and 3 years all the way out to 2038? Just wondering if you might be able to explain the rationale behind that structure?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [21]
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Yes, Brian, thanks. And thanks for not an accounting question. That's terrific.
No, the reason we did the 2015 and 2016 -- if you look at maturities in Canadian Tire Corporation, they line up perfectly. So, the reality is, as we've talked before, this gives us some additional flexibility to make a decision around where we might choose to issue debt, and then turn around and have proceeds from that retire the debt at the Canadian Tire Corporation level. So, we just lined up the coming maturities in 2015 and 2016 that are on the Canadian Tire Corporation side.
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Brian Morrison, TD Securities - Analyst [22]
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Thank you (multiple speakers).
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [23]
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And then after that, we just -- we picked, if you will, a very balanced maturity schedule out to 2038, as you noted.
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Brian Morrison, TD Securities - Analyst [24]
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Thank you.
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Operator [25]
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Thank you. The next question is from Chris Li with Bank of America. Please go ahead.
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Chris Li, BofA Merrill Lynch - Analyst [26]
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Hi, good morning, Dean. With respect to the impact on CTC consolidated cash flow, will that impact be similar to what it is on the earnings line in terms of the magnitude of the impact on the cash flow?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [27]
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Yes, very similar, right? At the end of the day, because of the significant ownership -- the 85% ownership -- it's really those two items noted on page 4 that impact cash flow.
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Chris Li, BofA Merrill Lynch - Analyst [28]
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Okay. And nothing really material on the CapEx side?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [29]
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Very little. There's some -- the only other factor as you think about it is the -- in the REIT, there will be maintenance capital over time, but frankly if you think through that, that's the same maintenance capital that we would have had in effect as the owner of the property pre-REIT. So, it really is page 4 that affects it.
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Chris Li, BofA Merrill Lynch - Analyst [30]
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Okay, and then just maybe a point of clarification. On slide 5, where you talk about the impact on your retail segment EBITDA, and on the last point you also noted the removal of depreciation on properties sold to CT REIT. For depreciation, how would that impact EBITDA? If it's EBITDA, how would the depreciation -- I thought that would be after EBITDA?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [31]
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Yes, it is, right? So, it doesn't affect EBITDA. So, I'm not sure --
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Chris Li, BofA Merrill Lynch - Analyst [32]
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Okay. So, okay.
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [33]
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Yes, so, if I'm not understanding your question, we can take that offline, but depreciation wouldn't affect (multiple speakers) --
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Chris Li, BofA Merrill Lynch - Analyst [34]
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Wouldn't affect -- okay. And then maybe last question, just in terms of the fiscal date, would there be any differences between your fiscal year end versus the CT REIT fiscal year end, and would that be any -- cause any material differences? Or from an accounting perspective, or just from a dates perspective, how would you line up the two together?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [35]
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Yes, basically, they'll line up, right? We're going to use a December 31 date for CT REIT.
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Chris Li, BofA Merrill Lynch - Analyst [36]
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Okay.
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [37]
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The only thing for retail is you sometimes end up with a day or two over the course of the year end, because we typically end on the last Saturday of a fiscal period. So, there might be a day or two off, but effectively we're both December year end.
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Chris Li, BofA Merrill Lynch - Analyst [38]
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Okay. Thanks, Dean.
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Operator [39]
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Thank you. The next question is from David Hartley with Credit Suisse. Please go ahead.
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David Hartley, Credit Suisse - Analyst [40]
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Dean, thanks for doing this, but Brian asked my question, so thank you.
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [41]
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Oh, okay. Thanks, David.
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Operator [42]
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Thank you.
(Operator Instructions)
The next question is from Keith Howlett with Desjardins Securities. Your line is open. Please go ahead.
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Keith Howlett, Desjardins Securities - Analyst [43]
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Yes, I just wanted to confirm -- there's no capital gain on this transaction at the Canadian Tire level?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [44]
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No, there's not, Keith. We used the structure to basically organize it so that it was an appropriate tax treatment as we moved the properties over.
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Keith Howlett, Desjardins Securities - Analyst [45]
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And would that hold true for additional [vendants] to the REIT?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [46]
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Yes, by and large, it should, depending on the circumstances. Obviously, if it's a brand-new property just completed, it would be at cost anyway. But the fundamental answer is yes.
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Keith Howlett, Desjardins Securities - Analyst [47]
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And then, there will be two different depreciations booked -- one at the REIT and one at Canadian Tire, which will be back to the historical?
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Dean McCann, Canadian Tire Corporation Ltd - CFO and EVP, Finance [48]
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No, at the CT REIT level, for their financial statement purposes, Keith, they're at market value. So, they won't have depreciation.
And depreciation comes back into play when it comes back onto the consolidated books at Canadian Tire Corporation. In effect, we just, if you will, roll the clock back with respect to booking depreciation when we put Humpty Dumpty back together again.
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Keith Howlett, Desjardins Securities - Analyst [49]
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Great. Thanks.
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Operator [50]
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Thank you. The next question is from Ben Yang with Barclays. Please go ahead.
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Ben Yang, Barclays Capital - Analyst [51]
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Hi, Dean, thanks. I had a question on depreciation, but you just answered it. So, thank you.
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Operator [52]
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Thank you.
(Operator Instructions)
Thank you, ladies and gentlemen. A telephone replay of today's conference call will be available for 1 month, and the webcast will be archived on Canadian Tire Corporation Limited Investor Relations 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 your lines. Thank you for your participation.
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