Canadian Tire Executive Insights: Forzani Synergies, ROIC

On Thursday, Canadian Tire Corp (TO:CTC) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Forzani Synergies

James Durran – Barclays Capital: Just wanted to go with the Forzani synergies in the quarter. You indicate you are reiterating your C$25 million tariff for this year. Can you give us some idea as to when we might hear more about banner rationalization, which now is a key tenant of what Forzani was working on before the acquisition?

Stephen G. Wetmore – President and CEO: Jim, it’s Stephen. Yeah, we know what’s topical and obviously we’re doing a fair amount of work on it and it’s our intent to take it to you as soon as we complete the work, but I think I said last time it was months away type thing, so we recognized, we are (taking that too) ASAP.

James Durran – Barclays Capital: Just on the automotive side with the infrastructure backbone in place now, what indication should we be looking for in terms of further improvement in that business?

Stephen G. Wetmore – President and CEO: Well, let me give you an overview and then either Marco or Glenn can kick in. Jim, its Stephen. The automotive infrastructure which is kind of the backbone here to obviously run our business and offer the customer a greater customer experience was fully installed in all our stores, about a quarter early in fact. So now the system is there. We’ve done initial training and Glenn has his field team out there working with all the stores on a priority basis to upgrade their skills and talent in using the system to maximize its potential. So, that’s kind of the focus for 2012 is to maximize the system and so all other aspects of automotive, I’m very pleased of the fact, I mean I think we’re on our game plan there and we are seeing a lot of the great results coming out of it and so very pleased, so that’s sort of a stage of the IT infrastructure investment at least.

James Durran – Barclays Capital: Just last question, you talked about expenses being up in the quarter to support some of the initiatives there that are being pursued. Should we expect that to continue throughout the entire year?

Dean McCann – EVP Finance, CFO: Not as a percent of revenue Jim, but I think one of the things that I’ve gone about this before, I prefer not to have a calendar year-end because it cuts our seasons off and it’s not how we should in effect plan our business, so we start our project at the beginning of the year against the smallest quarter and run it in that way, so the trending I think will be very similar to last year. We do have a few cost running through the first quarter, severance costs et cetera that are non-recurring, but for the most part then what we end up with is kind of margin catching up with the operating expense line, so same sort of trending as last year.

ROIC

Vishal Shreedhar – National Bank Financial: I just want to get better sense on the ROIC, it’s been declining for several quarters now and I know you commented that you added Forzani but Forzani would have almost fully contributed last year in H2, so I just want to get a sense of what activities you have underway to help improve the retail ROIC and perhaps what we should expect as we go through year.

Dean McCann – EVP Finance, CFO: Firstly, I think where the decline is occurring is primarily because of the increase in their return on invested capital calculation which occurred in the first quarter 2010 which is bumped by that large tax settlement, but excluding that we’re kind of performing and doing quite well I think on the ROIC side, it’s a long journey as you know and we want a full year of, we’ve taken in the total capital base of presenting, but not against the full year of earnings and certainly last year had its share of noise in the total earnings calculation because of the acquisition. So I think this is the full year that you’ll see the Forzani kicking against that capital lease.

Vishal Shreedhar – National Bank Financial: Just a follow-up. In terms of costs, I recall perhaps a year or plus ago Stephen, you said that it’s easier to save $1 million in cost than it is to generate C$10 million in sales and paraphrasing, is that still your view and what costs programs do you have underway, which would help reduce the pressure on that line?

Stephen G. Wetmore – President and CEO: Yeah, it is much easier to do that and we’ve pretty much completed all our non-merchandising review in terms of process review, all our major contracts have been renewed or reviewed from that sense from travel and right across the board in IT, communications, et cetera. This is the second year of our merchandised productivity program and it’s we had intended that in 2011 that program would at least pay for the cost of implementing it, which it did and we’re going to see those benefits flow through in 2012, we’re tracking them in terms of product categories and we will do our best not to lose that margin gain from being able to purchase smarter if you will. So the issue that happens in the industry during a transition time, is that what becomes difficult is that, while you are transitioning to new, and take a customer connections, customer complaints for example or something like that, that would drive into our call centers, now you are getting them – very many of them are happening within the social media channel. So you have employed more people to take care of the social media channels, and you haven’t been able to adjust your cost base in other places. In many cases, that’s what’s occurring, so you have to be vigilant in going after and getting the old cost base out and flipping over to the new as fast as possible. So we have our sights totally set on that as well.

Vishal Shreedhar – National Bank Financial: Along the same lines, over the last year or so, the core retail business, I am talking ex-Forzani, hasn’t been growing. It seems from the commentary that you gave earlier, that that trend is going to reverse. Did I get that right?

Marco Marrone – COO, Canadian Tire Retail and EVP, Canadian Tire Corporation: Over the last number of years, I mean, top line growth in the core retail business has not been stellar, because of the economy primarily. Comparatively speaking in the industry, I think we have done extremely well, but – and we have gone through some periods, certainly 2011 was a great one, where we lost spring and lost winter, yet performed very well. So the secret is, for us – is to be extremely vigilant on trying to take the costs out of the business, drive the top line and maintain those margins, so we got everything going at that. The buildup of our automotive business, is a side of the business that has a higher margin contribution, therefore, we are pushing that hard, and watching our promo regular mix on a virtually a daily basis, so that’s the combination if you will, and we are after all those (owners).