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Edited Transcript of CTC.A.TO earnings conference call or presentation 7-Nov-19 1:00pm GMT

Q3 2019 Canadian Tire Corporation Ltd Earnings Call

Toronto Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Canadian Tire Corporation Ltd earnings conference call or presentation Thursday, November 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allan Angus MacDonald

Canadian Tire Corporation, Limited - Executive Vice-President of Retail

* Dean Charles McCann

Canadian Tire Corporation, Limited - Executive VP & CFO

* Gregory George Craig

Canadian Tire Corporation, Limited - CEO & President of Canadian Tire Bank and President of Canadian Tire Financial Svcs

* Gregory Huber Hicks

Canadian Tire Corporation, Limited - President of Canadian Tire Retail

* Iain Kennedy;Executive Vice-President, Enterprise Technology and Supply Chain

* Mahes S. Wickramasinghe

Canadian Tire Corporation, Limited - Executive VP of International & Chief Corporate Officer

* Stephen G. Wetmore

Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director

* Susan M. O'Brien

Canadian Tire Corporation, Limited - SVP of Marketing

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Conference Call Participants

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* Brian Morrison

TD Securities Equity Research - Research Analyst

* Derek Dley

Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst

* Irene Ora Nattel

RBC Capital Markets, Research Division - MD of Global Equity Research

* Keith Howlett

Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst

* Mark Robert Petrie

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst

* Patricia A. Baker

Scotiabank Global Banking and Markets, Research Division - Analyst

* Peter Sklar

BMO Capital Markets Equity Research - Analyst

* Vishal Shreedhar

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, my name is Valarie and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited third quarter earnings conference call. (Operator Instructions)

This morning, Canadian Tire Corporation Limited released the financial results for the third quarter of 2019. 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 will now turn the call over to Stephen Wetmore, President and CEO. Stephen?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [2]

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Thank you, Operator, and good morning, everyone. We have a fair amount to cover this morning. So first, a few comments on our financial performance, which in general was in line with our expectation overall, continued great performance from financial services in both GAAR growth at 7% and in earnings growth, both of which are on track for the year with no signs from our data on a weakening economy or credit card portfolio.

Comparable retail sales grew 2.7% in the quarter. We are tracking over 3% year-to-date, ahead of our stated aspirations. Mar's performed as expected in the quarter, given they were comping or very strong 2018 and a later start to initial snowfalls in the West. SportChek led the way this quarter with comp sales of 4.6%, continued strength in e-commerce growth and excellent progress on our key initiatives and digital and in-store customer experience.

CTI continued its impressive quarterly growth this quarter and I know, Allan is going to comment on the strength of our core asset in a moment following its 22nd straight quarter of comp sales growth. I'm also very pleased with the progress. The Helly Hansen team is making both internationally and with our Canadian colleagues and meeting our growth targets for Canada and our long-term expectations remain very strong.

We also formally closed our Party City acquisition and transitioning is on schedule. And in September, we reduced our ownership in CT REIT to 69.3% as part of our overall financial plan which in addition strengthens the REIT's public float. Earnings per share performance in the quarter on a normalized basis was on plan and on par with last year's results.

Adjusting for the accounting changes at Financial Services in the third quarter of 2018 translates into a 10.2% growth on a year-over-year basis. This is all led to our announcements today on our updated capital allocation plans. Over the course of 2020, we are targeting our general operating capital spend to be in line with our estimates for 2019 spend, reflecting investments to drive our strategic initiatives and maintain the health of our network.

In addition to our general operating capital, we've also set aside funds for the commencement of our Toronto distribution center For Mark's and SportChek of approximately CAD 100 million. And in relation to our operational efficiency program, we have allocated CAD 50 million of CapEx, but I would caution that this is a very rough estimate at this point.

And with a view to balancing investments with returns to our shareholders, we also announced our intent to repurchase CAD 350 million of our shares by the end of 2020 and have increased our dividend by 9.6% per share, which I'm pleased to say is the 11th increase in the last 10 years.

I talked to you last quarter about operational efficiency. In the last three months have allowed us to finalize our program, launched the program internally and engage our entire organization behind our approach and what success looks like. Well, the last number of years have benefited from our focus on maintaining the strength of our margins, which will obviously continue under this program, we are now in a position to introduce enterprise-wide initiatives to reduce our existing cost structure.

This morning we announced our operational efficiency savings target of at least CAD 200 million of annualized savings by 2022. While a portion of these savings will flow through in 2020 and 2021. It will be the 2022 fiscal year that will benefit fully from our CAD 200 million plus savings target.

Our operational efficiency program is part of an enabled by, our enterprise strategy focused on a one company and one customer marketplace. It allows us to be more focused and effective by doing things once and to eliminate redundant costs. Centralization under one company enables critical functions such as marketing, procurement, sourcing, et cetera. To have one view for our company and our multiple banners can operate with common systems and processes which provides opportunity to systematically decommission our older and costly legacy systems.

So literally hundreds of initiatives that we have in motion and have identified can now be placed in an organized structured program for execution and tracking. And of course we are continuing our extensive programs targeting internal and external expense reduction. In order to support the operational efficiency program and realize these savings, we will need to invest both OpEx and CapEx over the next few years to accelerate the program. We expect to record one-time cost reported quarterly as an adjustment to EBITDA. We recorded the first of these costs in Q2 2019 and expect to continue to incur costs through 2020 and 2021. We will update you regularly on the program on our quarterly calls and disclosures.

With our loyalty program and our data management and analytics stronger than ever and with great products on offer supported by our digital and in-store experience, and I believe we are in a powerful position to grow and compete.

Now just before I hand off to Allan, our search for Dean’s successor as Chief Financial Officer is on schedule, and we are following our time lines at this point. Dean will be closing out the fiscal year and be with us for our fourth quarter call. So we will obviously update you at the appropriate time.

And with that, I'll hand the call over to Allan.

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [3]

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Thanks, and good morning everyone. As Stephen said, we delivered a strong third quarter in our retail businesses and we're continuing our growth in sales and gross margin across the banners. Investments in key building blocks that we've had historically like Triangle Rewards digital in owned brands delivered meaningful results in Q3.

With 9 million active loyalty members, we're close to 70% penetration Canadian households. And the Triangle Rewards program provides us with a single view of our customers. And the ability to engage them in a more personalized way which is happening regularly through our 5 million weekly email and app communications.

Now our focus is on growing share of wallet and engaging customers to shop more categories and banners knowing that the more they shop the more loyal they become and the more they spend with our family of companies. That was an example, our customer that shops across five banners, spends 13x more per year than a customer who shops just one. And in Q3, our number of customers shopping more than one banner increased by over 20%. This is a sign that our Triangle marketplace is resonating with our customers.

Next is digital and e-commerce. And we reached some milestones on this journey. In Q3, we had 100 million visits to Canadian Tire. CA alone. This makes Canadian Tire. CA one of the most visited retail sites in Canada. We've also achieved a milestone of CAD 500 million in annual e-commerce sales across our banners.

This underscores just how effective our marketplace of stores and great digital properties has been at engaging our customers, and growing the business. In Q3, we relaunched our CTR mobile app with enhanced search and functionality for our automotive customers. And now we have over 500,000 monthly visits. At SportChek, we rolled out mobile point-of-sale in 60 stores with the plan to expand to the entire network by Black Friday. But this is enabling our associates to check out our customers anywhere in the store decreasing wait times and enhancing their experience.

And we've also been testing free shipping at SportChek from Triangle Mastercard members. We've seen encouraging results, including an increase in the number of transactions made with our credit cards and more SportChek customers applying for Triangle Mastercards online. This is another great example of the power of our marketplace and the collaboration between the retail and financial services.

To summarize our recent success in digital. We put together a video, which is on our Investor Relations website and I'd ask each of you to have a look. It highlights our progress and how we're attracting and retaining the most loyal and profitable customers. And lastly, our owned brands performance, which is another critical building block to our success, exceeded our sales and margin expectations for the quarter with owned brand penetration continue to increase up a 185 basis points from last year.

Our owned brands play an important role in growing share of wallet and increasing frequency with our high-value customers. A great example is the introduction of Pet and Wholehearted, a premium pet food offering. Pet has grown 13% in the last year and we're very pleased that 54% of the customers are new to the category.

So our investments really paying off in this regard. Helly Hansen's Canadian business grew at a remarkable 60% versus last year. Now this was our plan all along. Capitalizing on opportunities at SportChek and Mark's, as they built their inventory positions for key following winter seasons and introduce fantastic new displays and merchandise.

And we have high expectations for Helly Hansen's continued success, especially with the ground on -- the ground being light here in Toronto this morning. In Q3 we completed our acquisition of Party City, officially cementing our position as Canada's funds store. And as of mid-October, customer shopping with the Triangle Credit Card can now -- are in Canadian Tire money at Party City. I'm incredibly pleased that our Triangle marketplace has once again grown.

And as Stephen just spoke about our operational efficiency program in the CAD 200 million plus in annualized savings we started to pursue, I'd like you all know that the team and I are incredibly energized by this challenge. It's a challenge to do things differently to do them once and to strive for simplicity in everything that we do now.

Now, it's a big job, but we have a track record of taking on big jobs and executing them very effectively, like repositioning CTR, resetting SportChek, launching deliver to home or reinventing our iconic loyalty programs. These are just a few examples of what we've been up to. And why we're confident this tool will be a great success. So we all look forward to updating you on our progress over the coming quarters.

But with that, I'll hand it over to Dean.

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [4]

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Thank you, Stephen and Allan, and good morning, everyone. Want to start by addressing a few items that are important to outlining our results this quarter. We have normalized for severance store closure and consulting costs associated with our operational efficiency program and costs associated with the acquisition of Party City for combined total impact of CAD 22 million in SG&A costs in the quarter.

Year-to-date, we have a normalized CAD 30 million of OE costs and as Stephen said we expect to continue to incur these charges into 2021. As we implement the program to realize our stated savings target of CAD 200 million plus by '22. As a reminder in Q3 '18, we normalized earnings for the Helly Hansen acquisition costs at CAD 22.4 million.

IBT normalized for these items is CAD 329 million and EPS is CAD 3.46, both essentially flat to last year. However, our earnings growth for Q3 '19 is 10% for IBT and 10.2% for EPS, when we consider the two accounting items at financial services we highlighted last year that bumped the comparative by CAD 36 million.

We also absorbed in our earnings for the quarter, a non-operational foreign and translation loss at Helly Hansen of CAD 15.8 million related to the depreciation of the Norwegian Krone, the NOK. We have been working with the Helly Hansen team on exchange management over the last year and while this level of movement at the City, so C level is not all that significant.

We do not anticipate seeing an impact to this magnitude going forward. If we were to adjust for this exchange shift, our retail segment IBT growth would be well north of 10% and EPS up another $0.20 on the quarter. Retail revenue excluding Petroleum increased 1.2%. Our banners individually saw strong revenue performance with increased shipments to dealers at Canadian Tire and higher revenue at Chek, Mark's and Helly Hansen. Revenue growth was slightly diluted as we take credit at the consolidated level for intercompany sales from the Helly Hansen to SportChek and Mark's only once the product is sold to the ultimate retail customer.

Therefore, there is a delay in the recognition of revenue in the retail segment which bodes well for us going into the fourth quarter. Retail gross margin excluding Petroleum continues to be well managed, up 19 basis points. Pure product margins were up in all businesses, at SportChek we continue to experience higher freight costs related to our strong e-commerce growth and are making progress on that front as part of our operational efficiency program. The depreciation of the Norwegian Krone that I mentioned earlier is somewhat masked very strong performance that Helly Hansen delivered. As Allan noted Helly Hansen's Canadian revenue growth was extremely strong and on a constant currency basis, their foreign revenue was flat compared to '18, due to timing shift of shipments.

Our OpEx ratio continue to improve, normalized for IFRS 16, retail OpEx excluding Petroleum, depreciation and amortization improved 73 basis points in the quarter and 77 basis points at the consolidated level. The improvement reflects the benefits of lower share-based compensation, and marketing expenses and the contribution of the cost containment initiatives already underway.

Financial services delivered strong performance with 7% GAAR growth, including a 2.5% growth in active accounts and 4.5% average balance growth, the latter is a strong indicator that the value of the card is resonating with our customers and our focus on customer engagement is paying off. Our credit risk and agent metrics remain healthy and stable with PD2+ flat versus last year and better than planned.

The 6% write-off rate is right on plan and as expected given the strong growth in active accounts we experienced in 2018. We are constantly monitoring the risk metrics and making adjustments to our credit models parameters based on the performance of our portfolio and customer behaviors that we see. Last year we adjusted our allowance model in Q3 for $15 million. This year, we made a smaller tweak and while the allowance remains within the target range of 12.5%, there was some redistribution of allowance compared to the prior year and prior quarter due to the continued refinement of our model assumptions.

ROIC improved slightly versus last year to 9%. As always, this is our most difficult metric to achieve, but the combination of our outlook for the business as well as operational efficiency has met, we continue to drive towards this target ultimately. Capital spend for 2019 will come in at the low-end of our 2019 disclosed range up to $475 million to $550 million, primarily due to timing of our planned -- a timing of planned real estate projects.

And with that, I'll turn it over to the operator for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Irene Nattel with RBC Capital Markets.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research [2]

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If we could just start with the operational efficiency targeted $200 plus million, can you give us an idea of the cadence? Is it going to be like $25 million to $50 million in terms of the targeted savings? And how much of that do you think is going to flow down to the bottom line?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [3]

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It’s Stephen. Many of the program initiatives are obviously underway. The structure all but we wanted to wait until we had the program designed here so that when we could not only track but assign all the work streams to individuals and start the proper cadence in terms of initiation of it.

So you'll see a lot of it obviously starting in 2020 and in order to ramp up to a full $200 million by the end of 2021 then much of the programs have to be kind of in place by the end of 2020 in the early part of 2021 to tell you the truth. The more complex ones will be sort of 12 to 15 months from now in terms of the full effect of decommissioning certain systems and things like that, but we're going to push very, very hard.

We would very much like to tell you, and be able to explain to you that there is X amount happening in this quarter and X amount happening in that quarter. But as we proceed through the next two or three quarters, we can probably give you a little bit better idea on obviously on our progress, and as you see us taking some onetime charges in individual quarters that will certainly give you an indication of how fast we are moving as well.

So it's really we're looking at full kind of $200 million with the savings by the end of 2021.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research [4]

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So full $200 million by the end of 2021 and how much of that do you think you're going to have to reinvest Stephen or should we be actually looking at $200 million flowing down through the P&L?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [5]

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Yes, sorry, Irene, that was the second part of your question. I guess the way -- we've tried to explain it here internally, so that everybody understands. If in theory you could stop our company tonight and implement every one of these initiatives that we currently have on our plate. Tomorrow morning, we'd be operating at $200 million less half structure.

So it's taking money out of our current cost structure. And as far as reinvesting, we the reinvesting part is just normal course operations as far as we're concerned. This is to eliminate these costs out of our current cost structure. So if we implemented them overnight and they all drop to the bottom line.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research [6]

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So then, sort of putting words in your mouth. Stephen, we should see a significant portion of the $200 million to the bottom line.

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [7]

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Yes, absolutely. That's absolutely our intent. I mean, yes, it's -- you're investing at the same time, you're saving and obviously we'll try to take you along that journey. But if we continue the way we are and invested in our new areas of business and our distribution centers, all these sort of things and didn't do this program then our P&L going into 2022 would be hurt by more than $200 million. So this is an aggressive program to take out costs in our current structure.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research [8]

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That's very helpful. And then on the e-commerce revenues in excess of $500 million. Can you talk about how you're seeing that building across which banners and what kind of growth rate is reasonable to expect from here on out?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [9]

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It's Allan. You are choking on the other end of the phone, not because of your question, I might ask. We're seeing it across that you look as you would expect, we're seeing the e-commerce revenue build and I look at it from a couple of different angles. One is, by category, you would expect obviously SportChek lends itself very well to e-commerce growth, as those Mark's and a lot of categories, but not all within CTR.

And we've said over the course of time that we were using SportChek as our sort of bellwether and our innovator around e-commerce, so not surprising that's leading the pack. In terms of growth, I would say, growth is reflective of engagement. We don't have a strategy necessarily to grow the e-commerce revenue. We have a strategy to grow the engagement in the marketplace and the customer share of wallet and customer engagement and we're using both channels to do that.

So we're not targeting a specific growth rate, and as you would expect as the number gets bigger, the growth rate is going to get smaller, even though the dollar value continues to grow. So I'd be hesitant to put a number on it, it's not hard to grow $25 million e-commerce business by 100% but a $500 million when growing by 100% is going to be pretty, pretty substantial, so I'd say that you should expect it to continue on the trajectory it's on today. We think it's going to be really, really obviously important as we go forward and it will grow in line with the rest of the business.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research [10]

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That's very helpful. And so I guess. Let me ask the question a different way, Allan. In categories that lend themselves to e-commerce and where we're seeing more and more sort of the shift towards e-commerce, how would you say that your banners are doing in those categories? And do you expect the e-commerce penetration for you guys in those categories will rise to market levels?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [11]

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So I'll go back to something, I think I said in the last analyst call. And that's, we're not going to relent any share. We are not going to give up share in categories that are important to us. So you can expect Canadian Tire and I'm talking about the Corporation here to vigorously defend and continue to grow its share in those categories, and if they lend themselves to e-commerce that's exactly why we put the investment in. And what you're seeing at SportChek is exemplary of that. So that's a business that's been obviously more disrupted by e-commerce and some of our other categories and we've at 4.5 growth this quarter. We're not only defending our share. We're continuing to grow in an e-commerce is planning important role in that. So you should expect Canadian Tire Corporation to show up in categories where they lend themselves to a digital channel and be fiercely competitive the same way we would bricks and mortar.

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Operator [12]

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Our next question is from Derek Dley with Canaccord Genuity.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [13]

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Just sort of following up on that line of questioning, you mentioned that there is going to be some cost associated with the operational efficiency program. And again around $20 million in cost this quarter, should we expect something similar in the upcoming sort of near term quarters as you look to drive this cost savings initiative?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [14]

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I know you want to forecast and we would too actually be able would like to know how fast we can get certain programs up and running in certain initiatives but paybacks -- paybacks when you invest in operational efficiency are extremely rapid. And so the 2020 year will have its share of onetime costs, even operational efficiency programs that generate 20% and 30% return on invested capital are extremely valuable, so you can look at other companies, you can look at other retail organizations to see what their paybacks are too. But it's a very rapid payback.

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [15]

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And Derek, just the way I think about this is and we know we knew there'd be the quest to try and model this all out. And the reality is it's going to be lumpy, right? I think that's what we all feel and the energy as Allan said right in terms of the business. Taking this on right and Greg Hicks very involved in that point in terms of the leadership of it, who is the biggest user actually of these SG&A services, so that's not lost on anybody since Stephen as pointed out, many times, but these initiatives, there is some, there is literally hundreds of them, so it's going to be lumpy, right. And the good old days of being able to put a big provision away and draw down on it are gone, right. So you basically have to realize the cost, record the cost and then, as Stephen said will give you a sense of what the benefit is, the payback period is , where that's doable. And there will be a waiting obviously the more complex ones are going to be later in the program, right. So it is an all kind of just being able to be it just perfectly model it out, but there will be cost involved and it's energizing, I think for the organization to be able to get at some of the things that we've always wanted to get at it from a efficiency point of view. And I think that'll be energy -- energizing for employees in the organization to finally get out these things, but it will be a bit lumpy. But I don't know that helps or not?

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [16]

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But it's -- no, it does, it does. I just wanted to clarify one thing, so you expect to be at $200 million sort of run rate cost savings at the end of 2021, is that correct? So for 2022, you have the full benefit?

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [17]

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Yes, that's what we're targeting.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [18]

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Okay. Great. Just in terms of the overall retail environment, the promotional environment, I mean, did you see with a highly competitive this quarter and have you seen any price inflation return to the market at all?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [19]

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Well, yes, it was competitive. In terms of price inflation like we're very pleased with where things are going in terms of the product margin. Nothing noticable, I'm looking at the business unit presence that are here in the shaking their head. I mean these things tend to happen really gradually when they happen at all. But generally speaking, where we haven't had to disproportionately invest in problem, as you would have seen by the results and continue to maintain and grow our share.

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Gregory Huber Hicks, Canadian Tire Corporation, Limited - President of Canadian Tire Retail [20]

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Yes, it's Greg speaking. I would say that coming-off our conversations on the last call, given the late start to the spring. We would have indicated on the call that we were starting to see a little bit of competitive activity in some key seasonal businesses, but that seem to really level out in the quarter and to Allan's point especially and big businesses and the seasonal and gardening, in particular, we were able to appreciate our margins and had a very strong quarter on the top line. So we balance point really didn't see inflation at the cost base and we were able to compete very effectively.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [21]

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And just one more if I can, so switching gears onto CTFS. You've had exceptional GAAR growth over the last few years really and we've seen that the return on receivables come down into the high 6 level, which I think previously with them sort of target of, so how do you think about the balance of GAAR growth in return on receivables going forward?

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Gregory George Craig, Canadian Tire Corporation, Limited - CEO & President of Canadian Tire Bank and President of Canadian Tire Financial Svcs [22]

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Thanks, Derek. It's Greg Craig here. Yes, I think we've talked about this before, when we started the journey a few years ago with kind of integration on the retail side of things. We didn't really have a high GAAR growth if I go back to two to three years ago. In fact, we were flat and when you're flat with GAAR growth, you're going to see your [ROR] as you've mentioned, kind of get to an elevated level, that wasn't really kind of our sustained run rate, we really wanted to kind of put more energy in it. Getting that integration back with the retail banners, getting that traditional growth rate back up and running for receivables and we expected -- fully expected that the impact on our ROR would be to diminish.

So we're really comfortable with the level that we're at. I think I said in the last call or a call or two, I think if I look ahead, a little bit we see our receivables kind of going more or less back to kind of industry growth levels as we focus more on engagement with our customers versus just kind of that upfront acquisition and it takes a little bit of time for kind of the efforts from an engagement perspective to really lead their way into through the portfolio.

So I would expect you see kind of the guard number of moderate a little bit to be pretty much at industry levels and the ROR probably would be relatively flat over the next little while as well.

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Operator [23]

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Our next question is from Mark Petrie with CIBC.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [24]

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Hey, good morning. There's been a lot of noise in the retail gross margin over the last couple of quarters and in Q3 you noted the 19 basis point improvement, but could you just give a bit more context in terms of the various puts and takes that impacted retail gross margin percentage?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [25]

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I'll start. Yes, it was, it was nice not to be talking about MSAs and the quarter-over-quarter kind of impacts of that, as I mentioned many times. I think in the last couple of hours here. But I think the things that really stood have at least from my perspective and I will now turn it over to Allan, Greg and the guys, but is that we basically had good product margin growth across all of the businesses.

FGL included and FGL a little little haircut right and mostly a function of, obviously the continued growth of e-com, but that's a good thing as I think a lot of the initiatives that the guys have put in place to over the sort of turnaround period that Allan and TJ have been driving are showing come to fruition around inventory allocation those kinds of things. But it was a very clean quarter I think with respect to margins, is the way I would describe it.

And as Allan and Greg said earlier, we didn't see and if you will, deterioration in margin at all from a competitive point of view. So I'll let Greg add what he wants. But I would describe as a very clean quarter. Kind of quarter, we like to have with respect to margins, and we continue to compete without ceding share as Allan said. So you guys can add.

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Gregory Huber Hicks, Canadian Tire Corporation, Limited - President of Canadian Tire Retail [26]

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Yes. Mark, in CTR, I'd say margin management was the really highlight for the team in the quarter, we were comping large rate increases and margin dollar growth in the quarter last year and margin rates were stronger on the backs of owned brand mix sourcing gains and they offset some headwinds that we had in the freight and foreign exchange line. So I'd say we continue to be bullish with respect to the team's ability to manage our margin rates and still drive the top line.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [27]

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And then I just wanted to follow up on the e-commerce discussion as well. Obviously this is going to be a larger component of your revenue going forward. At the same time, you noted the margin pressure that came with that growth at Chek. So going forward, how do you sort of expect the increasing percentage of e-commerce sales of total sales to impact your profitability? And maybe, I don't know if you can talk about it by banner?

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Allan Angus MacDonald, Canadian Tire Corporation, Limited - Executive Vice-President of Retail [28]

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It’s Allan. Well, I mean there is a couple of things there. I mean we have all kinds of different products that have our products very in terms of margin and velocity greatly across the board, if you could. As you probably appreciate everything from lost leaders’ high margin categories. So when you think of this as a channel as a sort of $500 million revenue stream as it stands today, it's no different than any of the rest of it. So it's a blended it's part of our blended margin first of all.

The second thing is because of some of this is operating cost, I mean the fact of the matter is that distribution fulfillment in Canada is expensive and it's a scale play. So we've got a lot of work to do as we continue to build scale to make sure that and this is part of operational efficiency by the way to make sure that we're capitalizing on opportunity to scales presents when it comes to fulfillment and freight. So that's really in front of us. So our job is to make sure that when you look at the whole marketplace and our product assortments that we've got a blended margin then we're happy with.

And by the way, we don't mind growing categories that have a different margin profile than our average that's fantastic, especially grows engagement but the other piece is making sure we're doing it really, really efficiently, and we've got some work to do there. That just hasn't been our, it hasn't been available to us because we just didn't have the scale and that's going to still take some time.

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Operator [29]

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Your next question is from Vishal Shreedhar with National Bank.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [30]

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And just on the operational efficiency initiative and I know it's early days, but how should we think about the benefits and COGS and SG&A, is it more weighted towards SG&A?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [31]

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Yes, it's more weighted towards SG&A but we primarily Greg I guess the Greg Hicks and his team have initiated this, but we've had a focus on our, on very specific complicated COGS reduction exercises and initiatives going on. I would say in general, they are probably 40% or 50% implemented at this stage of the game. So over the next couple of the years there'll be fully, fully implemented. So it helps with margins and the efficiency of the product and there's a variety of different angles. But primarily what we're trying to do and some of our supply chain costs are obviously incorporated in our COGS. But the big areas of spend in an organization, our COGS including supply chain your IT costs marketing costs, etcetera. So right across the board, we've got initiatives at this stage of the game, I'd wait to more heavily on SG&A than I would on COGS.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [32]

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Okay and, off the top, you just -- the team talked about execution ability and large projects. The retail landscape is -- there's many stories of decommissioning or implementing new IT systems and and things go awry. Just given the complexity of the systems nowadays. So how has management thought about that as a decommission these systems and in order to protect the ongoing operational business?

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Gregory Huber Hicks, Canadian Tire Corporation, Limited - President of Canadian Tire Retail [33]

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Well, we've got our head of technology here too and kick in, if you want to -- but I -- one of the reasons we did not attack a lot of this over the last couple of years for that reason. We are layering on within technology, the capacity and capabilities for us to execute. And so the amalgam of our data, etcetera, and designing at all, was a big deal for us and putting in all the new tools to be able to access that data for customer purposes and marketing purposes and sales.

We did not want to start decommissioning big systems during that period of time, but Ian and his team have a very comprehensive kind of road map here of how we'll go about this, when, what we can turn off, what we have to do ahead of time to change the applications that are running on those legacy systems. Some of them are relatively straightforward because you can turn off 2 or 3 because we're putting a one company approach to things. But as far as actually changing the way that you do business that has to be structured and that's why we waited for this program. So it is complex. But we've done many, many other initiatives that I would classify as more complex than decommissioning some of our legacy operations.

I don't know Iain if you want kick in if you'd like to.

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Iain Kennedy;Executive Vice-President, Enterprise Technology and Supply Chain, [34]

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Yes, this is Iain Kennedy. Further to what Stephen was saying, there is a lot of pre-planning that has gone in over the last couple of years, as it relates to looking at strategic investments and setting up the environment in a way that would allow us to actually consolidate simplify integrate and then decommission. And part of that process, as I've said, has been underway for some time, but I think we're uniquely positioned now to start actually implementing some of those initiatives under the operational efficiency umbrella and the timing actually works over the next two years as well for us. So the pre-planning aspect of this, the risk mitigation side of this equation and then the careful planning going forward over the next 24 months or so are very important to how we do this and that would risk mitigate those kinds of changes.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [35]

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And just in terms of the cost that you are going to segment out what -- would the cost be separated out has -- as you go through the quarters implement these initiatives or will there be some costs that that you're just going to have to incur in order to decommission these systems may be extra FTEs for a period of time or consulting costs or what have you here?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [36]

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Well, yes. Hi, it's our intent through the one -- the cost that we would disclose to you in the quarter to give you some idea of where the costs are coming from, as Dean has done with some of the costs that we've incurred in 2019. So the best we can, we'll try to layered into bigger buckets for you, so you can try to understand it. I understand it better. If that's what you mean. We're not, you don't want to go -- yes, I mean there is a depth to it, but it doesn't, then it's not really giving you that much information but we'll do our best to try to say these are the areas that we've kind of invested in the quarter and what our one-time costs are.

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Operator [37]

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Our next question is from Peter Sklar with BMO Capital Markets.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [38]

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Changing topics to other matters, can you talk a little bit about Helly Hansen? So you had the very strong growth as you shift into your Canadian retail banners, but you indicated that your international sales were flat. So what's going on there and what's the strategy for Helly Hansen, as it pertains to non-Canadian Tire customers?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [39]

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I'll start a bit, Mahes is here too if he wants to kick in. Yes, the selling in Canada. I think Allan covered it very, very well and we're extremely encouraged about this, the selling and internationally Helly is performing exactly where we had expected them to perform at good growth rates in key markets and though on a comparison basis, on a year-over-year basis, Helly's ordering pattern changed slightly. So more heavily weighted last year to Q3 versus Q4 of this year. That's just the nature of some of the customers and so that shifted a bit in terms of their international performance and it being flat, but the major markets, key markets, U.S. markets, etcetera, are all performing to expectation. I don't know if Mahes would have missed something you want to comment on that.

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Mahes S. Wickramasinghe, Canadian Tire Corporation, Limited - Executive VP of International & Chief Corporate Officer [40]

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Yes, big part of the year-over-year is related to the NOK Norwegian currency depreciation. Adjusted for that, I mean, you will see constant currency basis. You will see a growth. The U.S. especially we are very pleased and the level of growth in the U.S. market.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [41]

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Okay. And then the other thing too. Changing topics on Triangle, you're seeing a lot of growth in Triangle both in subscribers to the loyalty program, number of transactions you're collecting, the tremendous amount of data. Can you give us an update on what you're doing with all of this data in terms of your assortment in terms of targeted offers, I don't recall seeing any targeted offers that I've received, so we could have an update on what Canadian Tire is doing with all this data?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [42]

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Susan O'Brien's here. So she knows 10 times more than the rest of us. So she is going to handle those questions for you.

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Susan M. O'Brien, Canadian Tire Corporation, Limited - SVP of Marketing [43]

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Okay. Hey, it's Susan. So it's a great question. Obviously, I love that you pointed out sort of the quality of the data, we have. A number of initiatives happening on how we're using that data, number one. From a business perspective, we've started to segment the data. So we understand better who that customer is. We've been working with all of the business unit heads to help them identify who their customers are and using our business tool called CAT which is category analysis tool. We've been able to help them understand who is buying in the categories they compete in.

And so from that perspective. They're starting to be able to develop better assortments that could attract a customer, maybe they don't have in those categories today. Second, from a marketing perspective. We are using that data in a significant way to be able to personalized communications and I know you mentioned you didn't get any buy. We set out 5 million unique to week and we're seeing a massive return on those investments. So this year…

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [44]

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I guess is you'll get one next week.

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Susan M. O'Brien, Canadian Tire Corporation, Limited - SVP of Marketing [45]

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So we're seeing an efficiency that we've never seen before in a personalized communications, we doubled it in Q3. We went from four to one efficiency up to nine to one. So we're really pleased about that. And we're also looking from a segmentation perspective that lifetime value of our customers, which we've never done in the past and that's going to enable us to. From a marketing perspective to be able to choose which customer groups are most interesting and profitable to us and then allocate our marketing investment against that. So a number of initiatives underway. We're really pleased with the progress. I think we have a fantastic team in place, data science team helping us make way better decisions on our marketing investment as Allan pointed out. From an operational efficiency perspective, this is helping us meaningfully use that marketing dollar better than we used to in the past.

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [46]

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The only thing I'd add is at a summary level, Peter. The number of customers, you're absolutely right in your sort of your question, the number of customers we're attracting. I mean we're at 70% of households today so that if that number can only get so big, but Susan pointed out, we're transitioning to one of our key priorities being how much we're engaging these customers, share of wallet, how many categories, they're shopping, how many banners there sharpening, how many visits we have in their average basket size, these are metrics that are going to be transformational for us in the future. And this is how we're going to be thinking about the business. So as Susan rightly pointed out, there is a ton of stuff going on here. And we'll continue to talk to you more about in the coming quarters.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [47]

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Okay. And Susan, I just don't understand something you talked about 301 growing 921. I didn't understand that.

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Susan M. O'Brien, Canadian Tire Corporation, Limited - SVP of Marketing [48]

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Okay, so when we sent out the personalized offer because it is customer level, we're able to do a whole back with you on every offer every week. So we sent out 5 million offers to our customers. We hold back a percentage of the customer base. And so we're able to measure how much return, did we get on that marketing investment. So when we started the program we are around 4 to 1 that was sort of, you know,you spent dollar to offer a customer, something you would get $4 back. We are now based on using the data developing really strong algorithms to predict what a customer might want, we're able to make an offer that returns when we invested dollar to communicate it we get back $9.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [49]

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And is that margins or sales?

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Susan M. O'Brien, Canadian Tire Corporation, Limited - SVP of Marketing [50]

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Sales, we're at sales. It's sales. But obviously with the data we have today, we can start making decisions on which are the most profitable customers as well. So as we think even through search to be able to pay -- to pay to get customers come to our website. We can now start to figure out which customers are more profitable than others. And so you can just see as time goes by, you start getting far more efficient, plus if it's more personalized and customized for the customer. Overall, they're going to be more engaged. As Allan said, we're getting at that flywheel effect of you know me better. Therefore I come visit you more often. Therefore, I get more data and I can make them even better offers. So it's a great flywheel effects you get with using customer data.

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Operator [51]

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Our next question is from Patricia Baker with Scotiabank.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [52]

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I want to come back to the operational efficiency and I just want to understand a little bit better. Stephen or Allan. The process that you went through to get to that $200 million in dollars in cost savings. Did you benchmark your overall SG&A against sort of other global retailers and come up with what you've, -- what you believe to be an optimal SG&A rate for the size of your business? Or is it really come about as you've built up this one company and now that you've got one company you identified areas where you didn't need to have duplication?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [53]

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I think -- it's Steven. Greg Hicks has gone through this whole exercise, he's biting at the bit to answer them. I'll hand it off to him to go about.

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Gregory Huber Hicks, Canadian Tire Corporation, Limited - President of Canadian Tire Retail [54]

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Yes. So Patricia, Maybe, maybe I'll try and give a little bit of deeper -- deeper color in terms of what we've been up to since the last call, over the course of the last 90 days. I'd start by saying that we're trying to ensure from the outset that this is not business as usual program. And for that reason, we tried to ensure our approach delivered on this objective. So we're attempting to make this a transformative effort and effort that involves the entire organization. So we've approached the assessment of the opportunity to run our business. More efficiently in the manner in which we think an investor would. It's important to note that we aren't starting from scratch like we've talked about the last three months, we've spent organizing our current activities into a coordinated program across the enterprise and engaged in a leadership around where we're going with our strategy and its enablement of a cross-company effort like this.

So concurrent to setting up the necessary coordination and tracking mechanisms. We have conducted a very thorough benchmarks, to your point, we did that by function, we had outside kind of assistance to help us do that to benchmark across the worldwide industry and that's enabled both the trajectory in the full potential. And I call this work again into an independent investor due diligence approach. This combined with the work we already had underway and care at key areas of the business like IT and supply chain gave us the confidence and disclosing the cost targets that we announced today, from there we've subsequently set up a program structure with leadership throughout the organization by function to work at the opportunities from a bottom-up standpoint. You know where to Stevens opening remarks, we now have hundreds of initiatives identified in size. And then over the course of the next many weeks, we're going to look to develop and implementation roadmap that looks for unlock and looks horizontally across the business as opposed to vertically.

We'll will work to properly sequence all of the activities, will map our dependencies and develop a much better understanding of the sequencing of costs and benefits associated with the program so the organization has been fairly busy over the course of the last 90 days.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [55]

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It sounds like it. Thanks a lot, Greg. Can I just ask, how does this project, the size and scope of this project compared to the multiyear productivity initiatives that you that the Company was engaged in several years ago?

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Gregory Huber Hicks, Canadian Tire Corporation, Limited - President of Canadian Tire Retail [56]

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I mean from my standpoint, it's much more far-reaching because we're reaching across the entire organization. I think Stephen alluded to the fact that most of our work effort previously was focused on our COGS base with a lot of that traveling through CTR. And this is trying to punch every key on the keyboard in the P&L and travels across the enterprise.

So from that standpoint alone, I'd say it's a much more involved work effort and like we said, it involves the entire leadership of the organization.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [57]

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And Greg, I just -- I don't want to put words in your mouth, but actually, these are words that you said to me, I just want to remind you. So with this operational efficiency. I think you mentioned that at the end of the day what you want to see is more of the top line dropping to the bottom line. And this is big. This is a big group to get there?

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Unidentified Company Representative, [58]

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Yes, I mean, I think, Stephen, kind of hit on our objectives in terms of what we're trying to accomplish. We want to make sure that when we come out of this, we have a better kind of competitive framework as well. So I'd say those are the two big objectives if we can in a deliver the types of returns we would expect to provide to our shareholders but also ensure that this company has set up effectively to compete going forward I think we'll all be extremely happy with the efforts that we've put forth.

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Operator [59]

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Our next question is from Keith Howlett with Desjardins Securities.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [60]

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Yes, I had a question on the supply chain. In terms of your e-commerce fulfillment. Can you discuss whether you're looking at dedicated facilities for any of the banners? Or is it all multi-purpose, do you see supplemented or by deliver from store?

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Iain Kennedy;Executive Vice-President, Enterprise Technology and Supply Chain, [61]

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This is Iain Kennedy. Let me answer the question if I may. From an e-commerce perspective and fulfillment perspective. We're utilizing multi capability distribution centers across the country in terms of how we handle that. And so, it's actually an integrated part of the process flow we have for supply chain that uses enhanced material handling and data and analytics in terms of looking regionalization of inventory and other things such as that essentially tunes the available inventory and the speed to delivery accordingly across the supply network, it's very much core to what the supply chain team does today for bricks and mortar store replenishment as well as quite frankly e-com fulfillment as well.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [62]

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So it will be a difference when you build the new Mark's, Sport Chek DC?

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Iain Kennedy;Executive Vice-President, Enterprise Technology and Supply Chain, [63]

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It's a great question. It's one of those distribution centers that we are investing a little bit more in some level of automated material handling that's core to it. Just in terms of a pick-pack unit of one in velocity. But at the same time the efficiency you gain within distribution center for e-com fulfillment actually benefits bulk shipments that we would make to physical stores as well. And so the combination of the two actually has tremendous value and integrated them into the same facility is actually very beneficial as well.

In addition, this particular DC is one that we're consolidating eight distribution centers into one and the utilization of technology and process flow efficiency in an effective way enable us to consolidate those eight into one, and actually get cost savings and efficiency gain as a result of that. So it's very powerful for us.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [64]

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And then just in terms of the, -- are there any learnings for the Canadian Tire network from the mark's FGL or will it remain exclusively store to home for Canadian Tire?

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Stephen G. Wetmore, Canadian Tire Corporation, Limited - CEO, President & Non-Independent Director [65]

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It's Stephen. Look, every one of our banners that we're pushing hard benefits the rest of our banners. Scale and e-com is extremely, extremely important so and what Ian just described is the scale of eight going into one. And so therefore we have the scale heading on a one on a new fulfillment basis, understanding how to fulfill orders and not split orders across the country is very, very, very important trying different methods of enticing customers to pay for certain freight cost etcetera is all very important with this too. The efficiency though of going across this country with the number of retail stores that we have, as we've always said, has given us a great, great advantage.

So Canadian Tire Retail itself is performing very, very well. And so from that aspect of it, it's not a -- it's not a pick costs related issue, it is really just getting kind of more volume for freight costs as opposed to anything else. I think PJ -- and PJ with Mark's and SportChek have has some different issues in terms of picking and being able to pick from store and supplying from stores. So the centralization of some of our fulfillment centers will benefit them tremendously.

But this is going to be an evolution. I would say that Canadian Tire Retail at the moment is very efficient actually in what they do. And I think the rest of our organization were inefficient. I don't know how to describe it, we're paying too much for [PIK] costs, we haven't got all our the efficiencies lined up yet and so many of those are part of our operational efficiency program and we're working extremely, extremely hard at it, but it will have a much greater beneficial effect on our margins through on Mark's and SportChek. As we become more and more and more efficient. It is a -- it's difficult, but I think, SportChek with TJ's leadership is really leading the way and telling us things that work and things that don't work, trying to be more efficient, etcetera, across the board, the new equipment that Ian is referencing will all help with the PIK costs and we're investing a lot in freight efficiency, if you will.

So -- and SportChek's doing a tremendous amount of work for us on that side. So short answer is yes. But that gives you some color as to how they affect each other.

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Operator [66]

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Our next question is from Brian Morrison with TD Securities.

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Brian Morrison, TD Securities Equity Research - Research Analyst [67]

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Just a couple of housekeeping questions. Now that you have the completion of the acquisition of Party City now complete, how should we think of the integration and the timing of its presence within the dealer stores?

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Gregory George Craig, Canadian Tire Corporation, Limited - CEO & President of Canadian Tire Bank and President of Canadian Tire Financial Svcs [68]

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Yes, Brian, it's Greg. The deal closed, as we talked about, October 1. So we've been very busy, getting to know the team members up here in Canada, visiting the stores all those traditional things you would expect and planning a category launch into Canadian Tire stores for 2020. We think that we can have a meaningful presence in a large number of stores as we head towards Q3, not a full assortment but like at the end of way we would do a regular category reset where we're getting into a category. We believe that there is opportunity for us to shoe-horn, a pretty good representation of a party assortment into the majority of our Canadian Tire stores and make that our 201st category. So that's what we're working towards. So you can expect to see spring goals of product, more product and item focus over the course of the next 6 months, we're launching a couple of New Year's Eve celebration SKUs into the network.

As a first step but seeing the category show up more materially and stores as we move towards Q3 of next year.

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Brian Morrison, TD Securities Equity Research - Research Analyst [69]

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And then just from a capital allocation perspective, I'm trying to understand the disclosure of the reasoning for CapEx towards the lower end of the range this year and also the limited participation in the NCIB in the quarter?

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Dean Charles McCann, Canadian Tire Corporation, Limited - Executive VP & CFO [70]

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Brian, it's Dean. Well, on the first part. With respect to the CapEx, I mean I think we highlighted that. It really just comes down to is planning of real estate projects which we'd like them all to be perfectly kind of scheduled, but it doesn't quite work out that way. And there is a incredible diligence that the retail guys go through in combination with the real estate team around each project and what we expect in terms of returns out of that.

So that kind of discipline, I think is a very, very good thing and has been practiced in this organization for a long time and it does lead sometimes to taking a bit more time in terms of executing against any of the projects. On the NCIB. I mean the $300 million to $400 million, we said $300 million to $400 million I think we ended up just south of $320 million something like that.

We've re-upped right and put a target in place of $350 million. So we would start to execute against that. I think we want to be very targeted right in terms of, as I say, executing against that program, and we still view very strongly that our -- the valuation of our stock is as well undervalued in terms of what we see and we'll act accordingly over the course of 2020.

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Operator [71]

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Thank you. This was the last question. This concludes today's conference call. A webcast of the conference call will be archived on Canadian Tire Corporation Limited Investor Relations website for 12 months. Please contact Investor Relations, if there are follow up questions regarding today's call or the materials provided. You may now disconnect.

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