Canadian Tire Corporation, Limited

Michael Medline - President and Chief Executive Officer Dean McCann - Executive Vice President and Chief Financial Officer Allan MacDonald - Chief Operating Officer Chad McKinnon - Chief Operating Officer, FGL Sports Mary Turner - Chief Operating Officer, CTFS

Emily Foo - BMO Capital Markets Derek Dley - Canaccord Irene Nattel - RBC Capital Markets Jim Durran - Barclays Kenric Tyghe - Raymond James Mark Petrie - CIBC Keith Howlett - Desjardins Securities Patricia Baker - Scotiabank

Thanks, operator. Good afternoon, everyone and thank you for joining us today.

I have most of the senior leadership team with me today and they will be available as always to answer your questions following our remarks. As you know, we held our AGM earlier this morning and I reiterated the importance of the work we are doing on our digital strategy and the strength of our brand, so I am not going to repeat myself on the call today and will keep my remarks focused on the quarter.

Earlier today, we kicked off our first quarter of 2015 with strong growth across all of our businesses. I am pleased with our EPS result, which was flat to last year and we achieved this despite owning 20% less of our financial services business compared to the prior year.

As you know, Q1 is always the smallest quarter for retail and typically dominated by our Financial Services business, which was the case again this year, but it is especially gratifying to say that I don’t ever remember seeing our core retail banners as a whole put up sales numbers like this before. As I talked about on the last call, we again had headwinds this quarter with the recent decline in the Canadian dollar and declining oil prices, but we still saw that top line growth fall into the bottom line, we managed our margins and our expense control is solid.

I also said last quarter that I expected to see some impact from the downturn in oil prices on our business in Alberta. We are now seeing limited impact, but I do not want to overstate it.

At our Canadian Tire banner, year-over-year sales in Alberta were still up, but we saw the rate of growth moderating somewhat lagging slightly behind the pace of growth across the rest of the country. As anticipated, the Mark’s business is the most affected and this won’t shock you, we saw sales decline in Mark’s stores that service oil patch workers in Northern Alberta.

We saw no discernible impact at FGL and a slight increase in write-offs in Financial Services. However, as we have mentioned before, a very small percentage of our receivables are in Alberta.

While we continue to believe that there will be some headwinds in Alberta, particularly Northern Alberta, we are encouraged, very encouraged by results across the rest of the country, especially Ontario and Quebec, which showed solid growth, more than offsetting this impact in Q1. Our Financial Services business had a stellar quarter, with income before taxes coming in at just over $100 million, a first for them and IBT was also up 22.6% over last year.

Obviously, very strong results, but I would remind you the earnings in this business can be lumpy from quarter-to-quarter, so I am not expecting to see this magnitude of growth repeated in the coming quarters. I continue to see momentum from all our businesses, which is what we are looking for, especially from Canadian Tire.

In fact, CTR put up its best comps for a quarter in a decade. That tells me that we are doing the right things, executing on our strategy and resonating with customers across all of our businesses, especially in the stores where dealers are really executing.

With that, I will move on to my usual four criteria for assessing the performance of the retail business. First, do we properly balance our promo and regular pricing where we are buying sales?

We didn’t buy sales in any of our divisions this quarter. We saw solid retail margins across the businesses during the quarter, were up – which were up 52 basis points after stripping out the petroleum business.

At Canadian Tire, our products continued to resonate with customers and our merchants did another great job managing top line sales and margins. FGL Sports posted 8.6% comp growth, while Sport Chek came in at 8.7%.

Last year, on our Q1 conference call, David Hartley of Credit Suisse asked a good question, were we setting ourselves up for disappointment in FGL in Q1 2015 because of the great results we had last year aided by the Olympics. I think I said there was no way we were headed toward disappointment at FGL due to our strong Chek brands, the continuous improvement e have been seeing and the fact that the halo effect from the Olympics would not be ephemeral.

So boy was I ever glad when we saw the FGL results in Q1. At March, the solid top line performance clearly highlights their resilience and ability to execute even when conditions are not completely optimal.

Second, did we drive sales through creative marketing? We continued to innovate with new advertising and marketing campaigns during the quarter.

For the first time in recent memory, Canadian Tire featured a dealer and our automotive service business on television. And they were in the same commercial.

We are really proud of both and on my view, it was about the time. And by the way, we posted very strong automotive and automotive service results during Q1.

Third, were Canadians choosing us for seasonal products and especially did our innovative products resonate with seasonal and innovative? And the answer to that one is simply yes.

Fourth, did we properly watch our expenses while continuing to invest in the future? Now, we still have a lot of work to do when it comes to removing costs from our business, but we saw strong expense control during the quarter.

And as I said, I was pleased to see more of our top line growth drop into the bottom line, but we expect you will see more progress in this area as our productivity initiative moves ahead. Clearly, we had a good first quarter, and I usually like to be more balanced with my remarks and highlight things that we can improve, but I had trouble finding much to pick on this quarter.

Now, I am not going to promise you every single quarter and the future will be great, but what we are aiming for is that the overall trajectory should be up, and that’s what we are seeing with this momentum we are building, especially at CTR. It all started with brand, and we have a management team that is executing our strategy like never before.

And while we still have some or a lot of heavy lifting to do with our digital initiatives, we are progressing on track with laying the foundation and continuing to build the infrastructure that we know will keep us strong in the long-term. And with that, I will turn it over to Dean.

Thank you, Michael and good afternoon everyone. My comments today will be brief and centered around a few key areas.

First off, I will note that we do not have any normalizing items affecting our quarter as our valuation that Scotiabank put was not materially different during the prior quarter – from the prior quarter. As such, a fair value adjustment it was not necessary in Q1.

Diluted EPS of $0.88 was flat to last year, reflecting the expected impact of the 20% interest in Financial Services earnings now owned by Scotiabank. Consolidated revenue, excluding petroleum grew 2.2% over the prior year.

Retail revenue ex-petroleum grew 1% over the prior year and in this particular quarter lagged behind retail sales, which were up 5.3%, ex-petroleum. These quarterly variances between revenue and sales are not uncommon.

And you may remember that we commented on this issue last quarter when our retail revenue growth outpaced our retail sales growth. As you can see from our results today, the patterns reversed over the course of several quarters and should be expected to eventually even out.

Our operating expenses excluding depreciation and amortization, expressed as a percentage of revenue typically rises in the first quarter and given the additions to retail store base over the prior year, the gearing up of activity for a New Year and the fact that it is our smallest quarter. I was pleased that Q1 ratio after normalizing for the effect of the decline in petroleum revenue rose less than the typical amount, reflecting the lower than planned expense growth and an increased focus on managing our costs and productivity despite the higher levels of activity across the businesses.

Now as Michael mentioned though, the biggest contributor to this quarter was our Financial Services business. Once again, they delivered strong GAR growth of 6.8% and income before taxes increased 22.6% over the prior year, primarily due to revenue growth.

While I think you can tell how pleased we are with the results from the Financial Services division this quarter, we don’t expect to see this level of growth continue for the rest of the year as we anticipate the impact of this growth to begin to leak into the results, dampening our ROI over time. In addition, given the higher level of uncertainty around the economy, we are taking a more cautious approach in our Financial Services business, which will slow down growth until the economic situation is clear.

Earlier this week, CT REIT reported its Q1 2015 earnings and also announced their intention to redeem $200 million of the Class C LP units, which mature later this month. We are working with CT REIT and evaluating the various options available for them to fund the redemption.

Our intention is to have CT REIT access public markets to fund the redemption subject to market conditions and we have worked with CT REIT, put a mechanism in place, to ensure we have the time required to facilitate a transaction. From Canadian Tire’s perspective, if the redemption is externally funded, the proceeds will be used to fund the maturity of $300 million in Canadian Tire corporate notes that are set to mature in June of this year.

Our consolidated corporate inventory division is higher year-over-year, but continues to be very clean across all categories. Stores are well stocked with spring and summer products and extended winter weather in the eastern part of Canada helped us to clear out winter related seasonal products at both the company and retail store levels.

First quarter retail ROIC was 7.94%, up 15 basis points over Q1 2014, largely due to strong retail segment earnings over last year. Compared to Q4 2014, the retail metric was lower due to the unexpected working capital balance buildup in the first quarter.

Capital expenditures in the quarter were $117.4 million, up over the prior year, largely due to increased IT and distribution capacity spending. And finally, subsequent to the quarter, we announced that Canadian Tire signed an agreement subject for approval, securing 12 leases on former Target properties.

This was a great strategic and financial acquisition that will allow Canadian Tire to upgrade and expand some existing stores in its network by moving into even better locations in a cost-effective and timely manner. Now, when we laid out our capital guidance in November last year, we could not have anticipated that six months later, this outstanding incremental acquisition opportunity would be possible.

So, of course, we fully expect our capital spending in 2015 and ‘16 to change as a result of this acquisition. However, the transaction has yet to close and is still subject to the various courts and other approvals.

As you would expect, the remaining moving parts that we are working through and we will provide an updated – update to our CapEx guidance if required once we have reviewed the acquisition as part of our existing pipeline of capital projects likely with our Q2 disclosure materials. And with that, I will turn things back over to the operator.

Hi, good afternoon. It’s Emily Foo for Peter Sklar.

So, on the gross margin, excluding retail gross margin was up 52 basis points and you attribute it to some higher margin products. So, can you elaborate what categories they are and whether or not this mix has anything to do with the extended winter weather in the East?

Well, I will take a try, Emily and the business guys want to jump in. I guess, the way I would describe, I am not going to get into specific categories, but what I would say is a number of kind of factors there.

And I would say that 52 basis point increase, we are incredibly pleased with that obviously in terms of the overall retail segment, particularly what we saw in CTR and FGL and obviously there was some challenge on the Mark’s side. The guys there did an incredible job dealing with the headwinds of those with FX, but as you know, the Mark’s business is the most susceptible to that and most challenged by it.

So, we really had very strong growth in CTR and in FGL offset somewhat by Mark’s, albeit with a great sales result. The kinds of things that are going on in there are numerous.

I mean, there is a ton of them in terms of the work that the various businesses are doing to offset the FX impact, but also from a product mix point of view, there are some very strong efforts being made to look at the good, better, best mix in CTR as an example. In Mark’s, they are looking at as we have talked before about putting more branded products in.

And FGL just keeps chugging on. So, I know that’s probably not specific an answer as you would like, but it gives you an idea of the fact that there is a multitude of things going on in gross margin there, all have a positive trend from our perspective.

That is helpful. On the flipside, on the deterioration of the Canadian dollar and its impact on gross margin, can you quantify how that’s impacted gross margin this quarter?

Nice try, Emily. The reality is that as I said before and it’s true, the Canadian dollar has an impact on us, right.

And obviously, as I said just a moment ago, the greatest impact is on Mark’s. That said, as we have talked before, the businesses have a number of levers to pull and exchange is just one factor in the determination of gross margin and they have been an exceptional job of offsetting it.

So, on an overall basis, I mean, you can look at the results, we are net up 52 basis points and I will tell you we are paying more for U.S. dollar purchase goods than we did a year ago, but there are lot of other things going on in terms of how the guys are negotiating with suppliers as an example, the mix of products, all of those various kind of factors that go into creating the margin.

Okay, thank you. Those are my questions.

Thank you.

Yes, hi guys. Can you just comment on the promotional environment given you saw a strong increase in margins, is any of that from less promotional activity or is it mostly mix?

Hey, Derek, it’s Allan here from CTR. In terms of the promotional work we are doing, it’s really a little bit of both.

We have been putting a lot of focus on revamping our showroom to make sure that we are really cognizant of where reg opportunities lie and we are seeing great traction there. And we are looking at improving the effectiveness of our promo.

So, it’s not just about volume of promo, but it’s how effective it is. And when you are a cost conscious environment, you are always trying to make sure you are maximizing your investment in promo, so that you have lost leaders there very, very effective and whether or not you are trying to eliminate them.

So, from our standpoint, really I would say it’s a bit of both. We are improving the effectiveness of our promo, but we are also improving the effectiveness of our ability to sell it right.

Okay, that’s great. And then just sort of following up on that can just give us an update on how the digital strategy is progressing at Sport Chek?

On the Sport Chek side, Derek, it’s Chad here. We are moving along nicely on that.

We will continue to test those that have had lots of conversations. So, we are going to add more digital acquires this year than last year.

We were highly successful last year. Good news is we came up against our first comp digital flyer where we did double-digits last year, did the same this year.

So, we are double-digit on top – double-digit. We continue to innovate things with Facebook and even testing some of the digital elements in our e-mail to our fan base and even our e-comm recently.

We did our first ever flash sale on e-comm and we did six times what we would typically do on 1 day sales by buying for that in testing. So, we are going to continue to test.

We are going to continue to evolve. And all signs are very positive so far now just dovetail with our work on our e-comm site.

Thank you very much. Appreciate the color.

Thanks and good afternoon everyone. Just wondering if we look at CTR, in the MD&A, you noted that sales of winter-related products were strong, but also the early spring in Western Canada had a positive impact.

So just wondering whether there might be an element of borrowing some sales from Q2 into Q1 and how you are kind of thinking about that?

Irene, thanks for your question, it’s Michael. Yes.

When you – that’s a great question, I will talk about it across all the banners and then Allan or anyone else who wants to jump in. Really, I don’t think of weather is having a positive or a negative effect on us in Q1 at all.

And when we look through all the numbers and we segmented them by banner and by geography, we didn’t see it. So while we were having a great cold January and February in Central Canada who was unseasonably warm without a lot of snow in Western Canada.

And the real cold stayed on into March in the Central and Eastern Canada as you know which would negatively affect you. And so when we looked at all the numbers together, we saw actually it didn’t help us and didn’t hurt us.

And so I think that these sales and margins you are seeing are clean sales and margins. And I do not think that we borrowed from Q2 this year as we might have done like what was it 2 years or 3 years ago when we had that – 3 years ago when we had that March that was so warm in Central Canada.

So I think we are on a very good seasonal pattern in terms of weather, which means it’s up to us. We are not blaming the weather at this point.

That’s great. That’s really, really helpful.

And then just if I might, a question on CTFS, in the commentary you noted that you are going to be more cautious as we move forward because of some of the uncertainty on the economic backdrop, is that really around just in terms of trying acquisition of new towns, is it around sort of closing open-to-buy and that sort of thing, could you just provide a little color there please?

Hi Irene, it’s Mary. Actually, it’s all of those things.

So I think what we are starting to do, what we have already started to do is to be a bit more cautious with new accounts, a bit more cautious with our active customers and also for folks who are inactive to curtail some of that risk. So I think that’s all going to slowdown our growth moderately, I would say.

But I think as we continued to monitor situation and see what’s happened with the economy or get better clarity, we will know whether we need to get a bit tighter or whether we can relax back to more normal standards.

That’s very helpful. Thank you.

Yes. I partly wanted to follow-up with Mary on the CTFS question.

So is it that you are not seeing any real lift in Ontario and Quebec while you are seeing some slowing in Alberta that’s causing you to take the stand?

Sorry, Jim and what’s in write-offs or aging, Jim is that what you mean?

Yes. I mean it would be obviously risk and also just natural growth?

So while we very much look at geography, it’s a hard thing to be black and white at both because even though Alberta obviously is having difficulties, it’s starting from a strong place. So what we are not doing is doing blank-outs of regional areas because of concerns of both the economy.

What we are really doing is fine tuning our models and our tactics and our processes to try to be just a little less aggressive or a bit more conservative when we decide to say yes or no to new or an existing customer.

Okay, that’s helpful. I guess Michael just on the newer Sport Chek stores, can you give us some idea of how they are trending to your expected plan?

Sure. I am going to ask Chad to answer if that’s okay with you, because he is in closer to those than I am at this point.

And are you talking about our general real estate or flagships, Jim?

Well, let’s focus on flagship.

Yes. Very encouraging like you said, the West Ed stores set a new record for us in sales.

We doubled our previous highest volume store. We are comp year-to-date and that’s up against a $2 million pickup in 10 days last year with grand opening.

So we are very happy there. Even more excited about Metropolis, this is an interesting one.

We didn’t add any space, so with the same space, we are up 58% year-to-date in there. So we are extremely excited.

We took out the outdoor business, converted it to all athletic, same space we are getting that type of productivity, so very excited in the two flagships and very excited now about opening two in the GTA in the fall.

Great. And then last question, this is probably going to become my regular quarterly question is just on e-commerce side, what kind of contribution are we seeing on the various banners I guess right now mostly Forzani, much less Canadian Tire in terms of e-commerce purchases into the comp store sales results?

It’s Michael, I will take that. Right now, we are seeing obviously great increases across all of our banners on a percentage basis is off a small base.

And you are right, Sport Chek is off a big – slightly bigger base, but nowhere close to the base we are going to have. And so sure it helps I guess on the very margin, but like you are seeing are bricks and mortar comps out of us at this point.

And soon we would like you to see bricks and mortar plus e-comm/omni-channel comps from us. So this is old school, hard work comps and we don’t have e-commerce working for us yet to boost our comps.

Okay. And Dean last question just the other income line was up quite substantially year-over-year and I know it’s not something we can really accurately forecast, is there anything extraordinary in that line item and should be aware of that for the full year or do you expect things to normalize?

I think Jim you got to look at it as it’s partly because it’s such a small quarter, right and it shows up in that retail segment. So it kind of looks wacky.

But the reality is, what’s in there is you have a little bit of a hit from a year ago right in terms of disposing a property and you get a little bit of a pickup in terms of disposing a property. And one was, last year I think it was a small loss, this year it’s a small gain, but you put them together and they end up being a little more substantial than particularly in a small quarter when it shows up in that sort of retail segment.

But the answer to your question, in terms of over the course of the year, like I am not expecting any wild fluctuation there, unless of course we take an action to say move a redundant property and do it not to the REIT, you know what I mean?

Yes.

We used to sell it externally, but we talk about that. These were small consequential things, but it was really a function of one set of signs going one way and one set of signs going the other way this year.

Great. Thank you.

Thank you. Good afternoon, Michael could you just highlight for us the performance of your pro shops and I think specifically how that performance is impacting your thinking with respect to the footprints and to the concept?

I mean, we are really, really pleased with the pro shops. I think it’s some of the best space we got in our stores going right now and it has been for sometime.

And Allan why don’t you give a little bit more color?

Yes. I think for the pro shops for us really a manifestation of bringing to life specializations in key categories more resonating for our target customers in various target markets whether it be living, hunting, fishing, some of the specialization on what have we done and some that we have in the works.

I think really another way to think about it is looking at the productivity of the space, looking at particular needs of the market and optimizing that. We are going to continue to do that in the categories we are in today in terms of continuing to roll them out.

And some categories we are thinking about for the future. So it’s – for us it’s business as usual and that it’s upping our game in terms of retail merchandise.

Thank you. And maybe just staying on the sporting goods market question, looking at your broader sporting goods business, are there any categories in quarter that you would highlight as either performing particularly well or that you are particularly excited about, you obviously flagged there opportunities you are looking at, I know better than to try to push you too hard on that, but if you could just give us some color on sort of where the wins are perhaps in quarter by category or what you are most excited about within the sporting goods market currently?

Let’s go to Chad first then over to Allan, because it’s across the divisions.

Yes. And Michael talked about it earlier, we had this advantage of 188 stores across Canada that the weather didn’t impact this.

But what we did move in the West and made the decision to move up our seasonal changeover and we flipped our stores earlier and had extremely strong team sports business. So our baseball and soccer was up 30, our [indiscernible] was up 27, bikes phenomenal start-up 44 to the season, driven primarily in the West, casual clothing up 12 and sandals up 37.

So we are getting a good kick on spring. We are still very excited and bullish about tech accessories and wearables, continues to be on fire, up 52% in the wearables technology for the course, so that continues to grow for us.

And then we also launched an initiative on training, which is one of our famous businesses in core and fundamental to all sport where we launched our all sports equal at – we are up 17% in the athletic apparel, which is a big dominant category for us and great margins and 14% in training footwear. So, we had very good success in some of our core fundamental businesses as well.

I will let Allan speak to CTR.

Yes, Kenric, I think from our standpoint, we have been doing a lot of work to revamp in our vernacular, our playing category, which is effectively sporting categories, but also includes some more in our traditional bonsai hunting and fishing and camping. And what we saw in Q1 was a lot of the work that we have done really take hold.

Hockey performed really well for us as we augment our assortment, being a little bit more relevant to our target market. We saw strong performance in outdoor, which is really encouraging.

And early signs in categories that are leaning into the spring, like bicycles, have performed well. I think from our standpoint, the big step forward with the playing category is that we become a lot sharper with our assortments much more purposeful or intentional when it comes to things like accessories and how we broaden out good, better, and best.

Customers are providing us with very good signs of engagement in Q1 and we will increase from where we are at this point.

Great color. Thanks very much.

I will leave it there.

Thanks very much.

Hey, good afternoon. I wanted to come back to the gross margin in CTR or in the retail businesses and particularly the reg promo balance.

Do you feel like that’s a structural change in the business? And how far along in the process are you in terms of doing a better job on managing that balance?

Well, I think we are still favoring structural and whenever it works against you it’s circumstantial. Hey, Mark, it’s Allan.

Yes, it’s structural and that has been very intentional and we are trying to strengthen our reg offering and make our products stand on their own merit. But coupled with that, we are trying to get a lot more considered and a lot more focused when it comes to investing in promo.

How far along are we is a great question? It’s one that we ask ourselves.

I mean, we are going to continue to optimize quarter after quarter after quarter as best we can. So, some of that will be really down to how effective we are in executing it.

Some will be down to how receptive the customers are to us getting that bounce a little bit in the end. So, in terms of we are going to continue to be a high level retailer, of course and we are really excited about the effectiveness of our promotional activity, but we are also, along with that, very pleased with the response we are getting on our reg offering as well.

And does this effort focus more on the everyday product or does it carry on into seasonal as well?

Well, it’s a bit of both. I mean, in terms of the everyday product we have launched some new products, as you might have seen, the FRANK brand, we think we have strengthened our offering and that’s something that’s a traffic driving product, it’s a household consumable we are really pleased with.

And then it’s hard for Canadian Tire to do anything meaningful, but doesn’t include the seasonal assortment as well because of our five categories and our seven seasons that we work towards internally. So, you are seeing it quite honestly in both places.

Does it impact the dealers at all or have they reacted to this?

I am not – how do you mean and what’s up?

Well, I guess as your balance in that reg promo and you are potentially shifting the types of products that you are promoting and how deep you are promoting, did the dealers offer you any feedback on that?

No, no, no, it’s pretty much business as usual in terms of our model. It’s going very, very well.

Okay, thanks. And then just in terms of the sites from Target, I know you can’t really comment on it, but in terms of the 12 sites that would be left over or with CTR moved out of, how many of those are owned in the REIT or out of the REIT and would some of them be repurposed to other Canadian Tire banners?

That’s still a bit influx, Mark, but I can’t remember the exact numbers. But I think eight of them are owned if I am not mistaken and – no, nine of them are owned, sorry, a hand signal is being waved here.

So, as we move to those nine stores to new sites or relocate to new sites and we will have to determine what we do with this call, redundant properties and that may well create opportunities for the REIT, I expect it will, but we haven’t worked through all the mechanics as to exactly what banners would go in. I think it’s more likely they would be developed for some other purpose than some of our existing banners, but that’s not a firm statement at this stage.

And then there is another couple of sites I think are existing leases that were moving out of an existing lease to the new site and then there is one other which I can’t remember exactly what the deal is there. Does that help?

Yes, yes, that’s fine. Thanks.

And then sorry just on CTFS, I just wanted to be or just wanted to clarify, as you commented that you expect that this rate of earnings growth is unsustainable, but the predominant driver of that is going to be slower revenue growth, is that what you are saying?

So, I am just trying to think of it simply. So, I think you will notice if you look back the last couple of years, our quarters are quite lumpy.

So, we will have a year-over-year quarter where we will be up 30% and then the next quarter we might be flat. So, we have had very strong growth on an annual basis, but it tends to come in chunks and there is a number of reasons for that, a lot of it when we acquired new customers, number of reasons.

So, I think we are signaling that if I am not 22%, I can’t necessarily deliver that every quarter. We expect to have decent growth in earnings on an annual basis, but I am also signaling or telling you that I have become more cautious because of the uncertainty in the economy and that’s going to suppress GAR growth.

So, GAR growth has been around 7% for over two years, which is well above the industry. And we are just – just until we understand better the direction of the economy, we decided to be a bit more cautious.

And we are cautious in a number of areas, but probably in particular on the new account acquisition. So, you will see those in the numbers going forward, a bit less GAR growth and a slower growth of new account acquisition.

I should also say we are lapping, we introduced instant credits about a year ago, which gave some real momentum to our new account acquisition and still working very, very well, but that was a bit of a one-time blip. So, I am lapping over those very strong numbers from a year ago.

So, you will also I think see the impact of that.

Okay. Much appreciate it.

Thank you.

Yes. I just wanted firstly start on inventory.

The inventory has been up the last few quarters, I think it’s up about 12.6% this quarter over a year ago. Is this sort of a new baseline of inventory to better serve customers or is it still temporal?

Actually, Keith, I mean, the business guys want to jump in here. I think the reality is it’s a bit higher and I think there is a structural increase here, right, but I know in the Mark’s business, but Rick and the team have put more inventory in the stores and that’s a function of some of the initiatives that the guys are chasing around branded products and so on.

So, there is a bit of a lift there. On the FGL side, I’d say it’s just volume, right.

I mean, you have been watching the numbers there. It’s simply a function of I would put down to the growth in the business.

Now, in the CTR side, I think the team there has moved up, as Allan kind of alluded to, moved up in terms of reg and the good, better, best and basically taking up, if you will, the value equation to some extent in terms of the inventory that’s on hand. So, if you look at units versus just the dollar value, it’s not as much factor of units as it is the dollar value.

And I just reiterate that we watch inventory very carefully in terms of the quality of inventory and we are exceptionally pleased with the quality of the inventory. So it’s just getting better and better quite frankly from our perspective and nice comps help a lot.

And just it goes up and down a bit each quarter, but the personnel expenses were up about 5.4% year-over-year, is that – do you think that’s unusually high for any particular reason or where it will…?

No, Keith. And this is where this quarter is really challenging because of the size of it, because I think it makes the number look quite lumpy and you have also got the petroleum effect in here, right year-over-year as a percentage of revenue.

I mean there is a lot of lumpy in there. But we are obviously watching OpEx ratio very carefully around this place just with the productivity work that we are doing.

And I can tell you categorically that relative to what even our plan was, we did better in terms of the absolute dollars we spent, number one. Number two, the rate of growth in OpEx ratio was less than it is historic.

It’s hard to kind of trick at all out of the numbers, right, from the perspective of petroleum moving around and things like that. But the way we are watching it, very pleased with it and our objective obviously is to drive that ratio down as a percentage of revenue over the course of the year and we are currently on target to be able to do that.

I mean, we have said we were going to do that when we were together at Investor Day and feel very strongly about that. And then specifically with respect to the personnel, I can tell you it’s just simply a function year-over-year, it traditionally does go up and it’s a function of the fact that we have a larger corporate store system than we had a year ago.

Alright, this with the addition of stores and so on, so there is an element of that that is just structural, that just happens. And then the second part of it is the activity level in place is rising, particularly kind of in the IT area.

But that’s all planned and all part of what we anticipated, if you will, going into the year with a plan to drive down the overall OpEx ratio over the course of the year.

And then just on the marketing expense, it’s pretty much flat and the last Q1 was elevated with the – I guess the Olympic programs, is marketing expenditure for the year likely to be up or flat or how are you looking at that?

I think as a percentage of revenue, I am not anticipating that it’s going to go up. I am looking at the marketers in the room and I keep telling them, I would never cut a marketing dollar in my life as long as they deliver the top line, which they did in this quarter.

I expected somebody to ask why it was flat quarter-over-quarter when we did Olympics a year ago versus this year, I ask that quite a lot. The reality is though that the teams did some really innovative incremental stuff in terms of the all sizes equal on the FGL side, you heard from Chad everything jeans campaign and those drove some great top line.

There is also a bit of timing in there, Keith. I hate to use kind of accounting madness but there is a bit of timing in there where you appreciate some stuff for the balance of the year.

And the accounting is such that we have to pick it up in the first quarter. But if you look at kind of apples-and-apples, there would be – it would be down.

But not down the full value of what we spend on the Olympics a year ago because it’s some of those incremental programs. But the timing, if I hadn’t had that timing effect, that’s kind of pulling some things forward, the guys will execute later in the year, it would have been a little bit down year-over-year.

And then just finally on the foreign exchange impact, which I know is a bit probably quite complicated, but is it you hedge when you place the purchase orders, so is it the open to buy that sort of affects Mark’s during a particular quarter, the things that they adjusted as the quarter went on or in other words, why is the FX not pushed out a bit if it’s hedged, so to speak?

Yes. You are right, it’s complicated, and I hate using that word to describe things.

But in the end, the Mark’s business has such a high percentage of its business that it’s acquiring U.S. dollars, number one.

Number two is if the business – with our hedging strategy, which I am not going to divulge all aspects of it. But with our hedging strategy, as the team drives incremental sales because we are hedging quite far out, they drive incremental sales and therefore that creates incremental purchases.

That can have an effect, right because you aren’t as highly hedged as you might have been otherwise. So that was, I would tell you, that was the factor in Mark’s in Q1.

And just year-over-year, they are more susceptible to it. So hedged or not, we are paying more for U.S.

dollars than we were a year ago, right. We were hedging a year ago.

We are hedging this year – this quarter as well. So the absolute dollars, if you will that you are paying in U.S.

dollars year-over-year is going to be higher, simply because the hedges we put on some time ago come to fruition in Q1 this year are more expensive than the ones that we put on a year ago and prior. So I don’t know if that’s making any sense, this is why it’s complex.

But once you get into it, you can make yourself crazy. But we are watching it and so far the results have been pretty good.

Thanks. I am crazy enough as it is.

Okay. Just in terms of the tools in home improvement category, I know that’s one you are working on, can you just update us how that’s going and what you are doing?

Yes, Keith, it’s Allan. We are really pleased with the quarter.

I mean overall, the performance isn’t quite where we want it to be, but we saw encouraging signs. It’s really the tale of two categories there.

Categories that are very static, what may create margin contribution. There is another half of the equation that’s very elastic and very prone to promo pressures and competitive pressures in the market.

The work we are doing tackling more difficult aspects of the category is actually very encouraging and paying off. And the other is much more within our control needed to fix.

So I would say, generally speaking and I know it’s a bit of a leap of faith, but we are seeing an improvement in that business that we are very encouraged and the work over the last year is paying off for us.

Thank you.

Thank you very much. I have two very quick questions.

First of all, if I could address my first question to you Dean, Canada CFO of the Year 2015 you always say that Dean. Well, at the Investor Day, when you gave your presentation and you talked about a lot of the initiatives that you are going to be charged with basically, really came down to you are almost going to be captain productivity for the company, can you talk about what’s – how much progress you have made, what are you pleased with and what we can look for to the next 12 months to 18 months on that front?

Yes. Well, we are making progress.

It’s the first statement I would make. And obviously, I think you are aware we have Lisa Greatrix as point on this initiative, which is just very, very good for me in terms of what’s being captain productivity.

But we had three buckets that we are chasing, the non-merch category, in other words working with our suppliers to get greater value. And I would say we are making great progress with that and we are going to see discernible benefits in 2015 that will filter in.

And we are already starting to see that and very encouraged about that. On the if you will kind of the, for lack of better word, the overhead side of things, we have got all the businesses stepping up doing some very, very good work in terms of looking for ways to make our processes more efficient from a back office point of view and already very good strides being made there with some early results that we are going to see early this year with a number of initiatives like a number of initiatives underway in terms of looking at other areas of the company, so and good engagement with respect to that.

And then the third bucket, which was the biggest bucket, was more around I described it as kind of the process that follow product from the moment it’s made right through to where it shows up at the customer’s door. That one is more complex, it’s going to take more time.

And we have got I would say an infrastructure in place and resource in place now with great engagements, particularly from I will throw a rose to Allan here, because I need him in terms of engagement from his business and his team in terms of looking at CTR and charging forward with some of those cost initiatives. So I think – and then an overall exercise visibility to where cost comes from in our organization.

So and we have really started down that road. So I am very pleased with that.

I will ask my boss to chip in here, but I am very pleased with the progress that we are making. And as I said right from the beginning, we want to show you on this as opposed to just talk about it and it’s got to show up in the numbers.

I mean, I am never completely pleased with it, but I think we are making good progress. We don’t talk about it a lot, because we just think this is the way you have got to operate the business, but the tone of the top internally is we talked about it a lot internally and so you shouldn’t miss the fact that we don’t want to talk about or want to show you these numbers as the feeling that we are not making progress or that we are not committed, we were absolutely committed to getting these and we are going to do it in the right way and we are starting to get them now.

And so you will see that come out and some of them as being said will take a little longer and some you just go get. So, that’s – the teams are really doing a good job and Lisa now in there a few months is leading it very well.

That’s very helpful. And I am assuming that with good top line momentum when you are going after people to look at cost a lot differently that, that momentum that we are seeing in the top line makes it a lot easier for Dean and Lisa to get people to pay attention to the cost side.

Absolutely. Yes, I know, People are easier to talk to when they are in a good mood.

Just my second question is for Allan. It’s just a small one, but I think it’s been a while you have gone through a few seasons now or few different seasons with the showroom.

What have you learned from that experiment, Allan? Is there good learnings from that, that you are going to be able to take back to the rest of the business?

Hey, Patricia. Yes, I mean, we are really – the showroom for us is I think we would have articulated this at the beginning, it’s a way for us to look at bringing some new merchandising strategies to light testing some categories or presenting categories in a different way.

And part of the growth that you are seeing is us taking those learnings and sharing them with the rest of the network. We are thinking about our product composition, our category composition a little differently between big ticket discretionary and how we could better leverage accessories and other higher margin, high-turn products are associated with it, things like that.

And I think as you see some of our new stores come online in some of our refreshed stores, you are going to see us incorporating variation of the merchandising that’s somewhere between the showroom and what we have today. So, to be honest, I don’t really have anything to criticize about in terms of the showroom.

You won’t see exactly that, but you will see variation of it. And I think probably the best example will be the store we are about to open in South Edmonton Common, where we are actually, I don’t want to ruin the surprise here, but we have incorporated the showroom strategy in a category by category way through that store.

It’s going to be pretty impressive in my view.

Okay, excellent. Can you remind us when that one is set to open?

Well, we don’t – we are not announcing it publicly yet, but look for late May, early June.

Yes, we are not trying to be cagey it’s just that we don’t open the doors until we really like that.

Until you think it’s perfect. No, I get that.

Well, perfect is a high standard that we strive for.

Okay. Thanks a lot guys.

Thanks, Patricia.

Thanks. I think those of you who were at the AGM or listened in have heard enough from me today.

So, thank you very much for your time and for tuning in. And as always, our Investor Relations team or any of us are here if you have any other questions or comments.

Thank you.