Canadian Tire Corporation, Limited

Michael Medline - President and CEO Dean McCann - EVP and CFO Allan MacDonald - COO Mary Turner - COO, CTFS Rick White - COO, Mark’s Work Wearhouse Ltd.

Irene Nattel - RBC Peter Sklar - BMO Kenric Tyghe - Raymond James Mark Petrie - CIBC Brain Morrison - TD Securities Jim Durran - Barclays Chris Li - Bank of America Patricia Baker - Scotia Bank

Thank you. Good afternoon and thanks for joining us.

You’ve heard me say that the fundamentals of our businesses have improved over the last few years and you can see it in the number that we hit this quarter. And I really like how we're starting to stack our comps at Canadian Tire and FGL.

With this being our third consecutive Q3 where we have posted solid same store sales growth in those businesses. Over the past year, I've given you my assessment of our retail businesses by walking through four criteria.

While I still look at these areas, I'm going to change up my comments starting today and provide you with some new perspectives. I spoke last quarter about the great work that we're doing to improve of our bottom line through productivity initiatives across our retail businesses and by taking a hard look at our SG&A.

We really saw that comes through this quarter with our earnings results and I'm encouraged with the momentum we're seeing to reduce cost and improve efficiencies across this company. I continue to have tremendous confidence in the execution that we're seeing across the board in all of our businesses.

At FGL, we are four years' into our five year strategic plan and FGL has executed on every single aspect of that plan. The results are strong and we still see unlimited runway for this business.

Our Mark's business which was coming up against strong comps last year is being hurt by FX in the Alberta economy and this is having a significant impact on our high margin industrial business. Despite that market is executing on their strategic plan and their business is managing very well through this period of rapid change, from the cycle will shift Mark's will come back and will be even strong than was before.

Financial services continues to put up solid results and as you will remember they were up against strong [IBT] growth of 23% last year. But today I want to focus on Canadian Tire and why I have more confidence in the business today than I might have had even a year or so ago.

The consistent numbers Canadian Tire continues to put on the board highlight the momentum we're seeing. We posted 3.4% comp-store sales growth this quarter and that was on top of 3.2% comps last year.

And that growth came from all our divisions which we'll like to see, but I'll take a second to recognize the contribution from our automotive division which saw solid results in tires and in auto service. There's so much that has to be going well behind the scenes to get the kind of top and bottom line performance, we are seeing at our largest division.

People always want to know the one or two things that we're doing to revolutionize the business but those who know retail well know that its not and never has been just one or two things, there's so many aspects of the business that have to be strong. It really comes down to good execution, the hundreds of things that we're doing right and the strong team and processes we have in place.

But that said, there were three areas out of the dozens I could cite that I want to highlight today which I hope will give you a better sense of what is contributing to the great results and momentum, we are seeing in the Canadian Tire business. First let's look at the top line, the success we're seeing here, really comes down to how our customers view our brand.

Over the last few years, our advertising has exemplified life in Canada and we've focused our products, marketing and store experience to reach a new younger demographic [the active] family that is responding very positively to our efforts. We also launched our tested for life in Canada initiative but we have 15,000 Canadian's our customers.

We have given the responsibility of testing over 4,500 of our product today; they're giving us their uncensored feedback on the quality of the products and their experiences using them. We take this feedback very seriously and as result of our new and renewed focus on quality [Technical Difficulty] improve the product defect rate compared to last year.

This program is engaging our customers like never before and we are making great strides in understanding the needs of Canadians. We've also gone through a transformation our assortments.

We have launched new national brands, new private label brands and improved the quality, value and range of choices for our customers. For example one of our top performing businesses this quarter was camping and we know that it's largely due to the positive customer response we're seeing towards our woods and outbound product offering.

These are brands that we own and in both cases we've improved product quality, style and design and therefore are able to command higher prices to the products we offer. Second I'll turn to the bottom line.

For the economy and weather and variety of uncontrollable factors will always impact our results. The underlying execution I'm seeing across every area of CTR does not compare to anything I've seen before.

However we're doing it, we're challenging all aspects of the business, we're using data to guide the profitability of our business through analyzing our buying, sourcing, marketing and pricing processes. You've heard us talk about the great work that our merchants have been doing to manage our margin performance.

By working with our vendors on sourcing costs, making changes to our product mix and analyzing and managing our promotions to name a few. In fact we've fully offset the FX headwinds that we were facing this quarter and last quarter as well.

So, the fundamentals are there and finally we are making investments now for the future. You've heard me say that digital disruption is all around us, nothing is exempt in today's world and there's a lot of complexity involved in creating and bringing innovative, digital technologies to our source and to our customers.

In a lot of cases it's unchartered territory for us and we've been laser focused on honing our expertise and finding ways to better manage our processes. The best example of this is perhaps the Edmonton showcase store that we launched earlier this year.

It is been a top performance for across the network since we opened, so clearly the benefits of that work are coming through and we'll continue to learn from this as we launch new technologies such as mobile apps and find new ways to bring a more digital experience to our customers. And of course what we're doing today at Canadian Tire would not be possible if our dealers were not on board, because it is our dealers who are driving our in-store business and delivering a hyper local experience to customers and communities across Canada.

You've heard me say that our relationship has never been stronger and you can see the proof of that in the work that we're doing in-store and of course the results that we're generating in our quarters. As you probably can tell I'm pleased with how our core Canadian tire banner is performing, but I don't want to leave you the impression that everything is perfect, because it is not and you know I like to give a balanced view of our performance.

For example we're making great strides in ecommerce across all of our businesses and you've heard me say that we're not yet where we need to be, but over the past three years, we've been putting in place the necessary infrastructure and talent to be a world class ecommerce organization and we're starting to see the fruits of that labor. Today we hear a lot about the innovation happening in ecommerce and already our efforts are online are helping to drive our current sales momentum, but one of the least acknowledged benefits of online innovation is its usefulness and helping better serve customers in store.

Earlier this week, we opened our first Sport Chek flagship store, at L'Équipeur and Quebec and next week we are opening two FGL Sports flagships stores in New York dale and Square One shopping centers in the GTA. These stores have an important role to plan making a statement for our brand and creating that deep emotional connection with our customers.

And we know that who these more our customers who visits our stores more often and generally higher basket sizes which ultimately drives our sales. So we are bringing our in store customer experience closer to bring real time, with extended our capabilities.

We’ve installed in store ecommerce stations at our Maple Leaf’s Square [indiscernible] store or customers complete their transaction even if we do not have the specific color or size in store that they are looking for. And they will do it online, or standing in the store allowing them to leave assuming [indiscernible] experience and with the assurance of the exact product they wanted will soon be arriving at their home.

We see this is the next step in or digital evolution and another way that we can enhance our connection with customers in store. We also see it as a key differentiator that will help us drive comp sales growth today and into the future.

I talked a lot today about the great execution that we are seeing at Canadian Tire. But before I turn the call over to Dean I want to reiterate how please I am with the quarter’s performance and the strength I’m seeing in the retail fundamentals across all of our businesses.

Now we just need a little cold and snow, we like that. Dean?

Thanks Michael and good afternoon everyone. Before I discuss our performance for this quarter.

I’ll touch on a couple of announcements that we made earlier today, which support our balanced approached capital allocation. First we increased our annual dividend 9.5% from $2.10 to $2.30 in line with our dividend policy of paying out 25% to 30% of the prior year’s normalized earnings.

This is the sixth time in the last five years that we have increased our dividend. We also announced our intention to buy back $550 million of our class A non-voting shares by the end of 2016.

Including today’s announcement our buyback program will reach over $1.3 billion of our shares since 2013. Now moving to the quarter.

Our Q3 results are largely a retail driven story, so my comments today will be centered around a few key areas. Topline results were strong this quarter with retail revenue up 2% or 5.9% excluding petroleum.

Retail gross margin rate was up 89 basis points which included a very strong margin performance by petroleum. Excluding petroleum’s results overall retail gross margin was down 33% basis points which is entirely attributable to Mark’s owing to the impacts highlighted on our previous quarter, FX and Alberta and the resulting shift in sales mix away from higher margin industrial products.

[Backing at] Mark’s our retail margin actually expanded in the quarter, on exceptional performance by Canadian Tire; we continue to embrace initiatives today and more than offset in the effects of higher FX cost, net of the benefits of our hedging program. We look forward to these efforts continuing going forward.

You will note that other income was up significantly in the quarter, the result of a real estate pre-tax gain of 29.2 million from the sales of surplus property sold to a third party. This was a unique situation for us and part of our continuous review of our real estate portfolio to identify opportunities to realize or surface value.

In this case, the property is in urban market where we already are well stored and this particularly property is more suited to residential use. Hence was not a strategic fit for CT REIT, so we took advantage of a very hot real estate market to realize the optimal value for this property.

We have many more opportunities like this one in the portfolio and we’ll continue to identify the highest and best use for them going forward. Our operating expenses were once again well managed during the quarter.

Our consolidated OpEx ratio ex-depreciation and amortization and ex-petroleum as a percentage of revenue was down 86 basis points versus the prior year. So we’ve made good progress this quarter and year-to-date, we are down 48 basis points.

Financial services had another solid quarter despite planned lower [indiscernible] growth and as Michael mentioned they were up against a very strong result in Q3 last year. Our consolidated inventory position is higher year-over-year but continues to be very clean across all categories.

The increase can be largely attributed to planned efforts to increase inventory positions at Pro Hockey Life and to support the relaunch of our ecommerce website at Sport Chek as well as new store openings coming up. In addition Mark’s has invested in inventory to support its new casual and casual footwear assortments.

Third quarter retail ROIC was up to 8.26%, up 63 basis points over Q3 ‘14, largely due to higher retail segment income before taxes which also includes the boost from the real estate gain. But even if we back that out, we are still making progress on this metric.

Compared to Q2 2015 the retail ROIC metric was up 20 basis points for the same reasons I just mentioned as well as higher accounts payable to support increased inventory levels. Today, we're reaffirming our guidance to the estimated 2015 effective tax rate of 27.5% and our 2016 effective tax rate estimates for planning purposes will also remain at 27.5%.

We remain on track to be at the lower end of our previously stated range for 2015 operating CapEx of 600 million and 625 million. Capital expenditures for additional DC capacity may come in below the low end of our previously announced range of 175 million to 200 million for 2015, due to some planned cost that have shifted to 2016 related to the DC we're constructing in Bolton.

With that said, the project is on track and on budget and we expect to be fully operational in 2017. Looking ahead, we forecast operating CapEx of 625 million to 650 million for 2016.

Primarily due to increased spending on the retail network expansion including the cost to open 12 former Target locations in 2016 as well as the continuation of the FGL Sports growth strategy as well as for continued investments in digital and technology initiatives although at a somewhat slower pace than we seen in the past few years. This range does not reflect spending for additional [BC] capacity which we expect will land in the range of 150 million to 175 million or for the company's support of third party acquisitions by [CTV].

And finally I'll remind you with the couple of items that will impact our Q4 numbers. Q3 in the last quarter where our prior year results reflect a 100% of financial services business.

So beginning in Q4, year-over-year comparisons will be aligned. And because of 2014 results included a 53rd week, our Q4 2015 numbers will reflect one less week of activity on a year-over-year basis.

And with that I'll turn things back over to the operator for the Q&A session. Operator?

Thanks and good afternoon everyone. I was wondering if you could just give us some intangible examples on some of the SG&A and OpEx -- that you couldn't -- Canadian Tire retail and you assessment at this point around sustainability or perhaps whether there is more to come

Yes, there is a number of things that we have going on right, I characterized the overriding opportunity is just a general sense in this place to put more rigor into the amount that we're spending on overhead and that make sound of [motherhoodish] but the reality is across the executive team there is a recognition that controlling overheads over the long term to get more leverage out of this business is the right thing to be doing, so that's one. Two, then there is just a myriad of various things, everything from looking at how we purchase from a -- in terms of like our non-merged procurement practices having more rigor in those doing more consolidation of suppliers those types of things was nothing particularly [sexy] about it, but it's effective in terms of keeping a lid on overhead cost and keeping certainly a lid on any growth in them and frankly driving them down overtime which is associated with revenue growth is going to give us nice leverage over the long-term in our view.

That's very helpful. Thank you.

And in your assessment, if we were to use a baseball analogy, what innings do you think we are in on these initiatives?

I know, what you're trying to do to me, I think the realty is we'd like the trend that we're on here and we said all long here, we're not going to overpromise, we're going to try to over deliver. There are always be fluctuations in if you will that OpEx rate from quarter to quarter as decisions are made around levels on marketing and all those kinds of things but I think in general, as we look forward, what we're really trying to do is increase that leverage rate.

So I'd say we're still in the early stages of where we'd like to be over the long-term but we're definitely on the verge of a double here.

I think, you got to look across the different portions of the business, so I think [CTR] is because it had to and because it's really got its business going on, is I think further ahead than anywhere else in terms of really taking concept of the business and running the business even more efficiently and you can see that. I would say in terms of the overhead and that's just behind [CTR] but as Dean just said for the first time probably in our history we're taking down much of overhead cost and now, there's other place in the company that we talked about in productivity and those other divisions that we're going to go at it in a smart way as well.

So, I think its different timing in different areas, but overall early innings, and we got a lot more to do but our starting picture looks pretty good.

And just one more question if I make, and what from the demand side, could you talk about the cadence of demands as you went through Q3 and into Q4 on a regional basis and really how're you feeling about what we're liking to see with key winter season -- winter holiday season?

Let me talk about the regions for a second, because I think -- I'm sure people are getting it overall, maybe they're not getting it for us, and let me preface my comments because you're going to say it’s a little harsh at some point by saying that we have two divisions and lots of friends and I worked three years in Calgary, it is clear that Alberta is -- is just connect to hard times right now and I'm not the expert but I probably think there's a little bit more to come in Alberta before it starts to get better. So, far that away and let me sound a little bit cold which is a different points in a cycle, different regions do better than others.

And I'll talk about the divisions in a second. What we are seeing in the province of Ontario through consumer behavior and also I think taking some market share but a lot of consumer behavior, our extraordinary results out of Ontario that I'm seeing and I don’t remember I've ever seen.

Quebec which had been lagging is doing very well, not quite up to Ontario for what we're seeing across all divisions and I'd think anyone sees across as many divisions as we do, but Quebec is strong and [BC] is booming. Taken together and put away the dollar for a second, I am going [park Mark's] for second, for CTR and FGL and I wish Alberta was doing better but the rest of Canada is more than making up for what's going in Alberta and just think about it, we have four provinces which generate the lion's share of our revenue and lion's share of our profits and you know which four they are.

Three of them are doing better and this isn't just last quarter I'm talking about a number of quarters now in a row, three are doing better, we have -- to be cold about it, we have more stores and more population in Ontario and especially in those three provinces than you see in the one province, I'd love to see Alberta better from the business and personal reasons but I don't -- that'll happen in due quarters, but the rest of Canada is doing that so, I think people are getting a little overwrought maybe and when I hear what some of the other retailers are saying or how people are looking at other retailers and they may be saying about us but like just take into consideration Alberta is going to be weak for long, what we're seeing is great strength by that place, the only difference is from our great but smallest division into [indiscernible] which is most hit by Alberta because it has bigger portion of their business and it has -- it's an industrial business which is being hurt by the oil sands, so the bit of a [indiscernible] there and Mark's is as Dean has said is having [indiscernible] sales and margin challenges, which are -- but it's our smallest division and the other divisions we expect will be another -- we'll done that as we go forward in time. So, as we see are going through these quarters we're seeing the exact same kind of behavior over quite a while now.

And I expect to see that behavior for some time going forward. How much now is us stealing market share from others and how much is consumer confidence I think the numbers we're seeing in Ontario and Quebec and BC are showing some consumer confidence as well as our spend.

So, we can talk to other retailers as well. So, the long answer to a very -- it's not an easy answer, it's not a recession we go oh, yes, everybody is suffering, this is very different by retailer, by division and by province and where your business is and right now as you saw from this quarter -- it turned out on the whole very well.

Michael and Dean most of the comments you just made regarding cost savings initiatives at the company I got the sense that they're more related to corporate overheads SG&A but also you've made reference this quarter and the previous quarter as well that in terms of your cost of goods sold that you've been able to take quite a bit out of the cost structure to the effect that, that actually offset the foreign exchange impact. So, I'm just wondering if you can give us some specific examples of what you're on your COGS to save costs.

So, Peter I don't want people to think that I was ignoring what's going on in COGS and margin because that is absolutely the most exciting thing going on with respect to the productivity initiative without question so, people are kind of focusing on the SG&A because we had a good solid performance there and that's great. The reality is the most exciting work is what Allan and his team are doing in terms of driving productivity to preserve margin and you are absolutely right in this quarter Mark’s aside, and Mark’s for the reasons Michael has talked and I talk about in terms of challenges there, but in terms of the CTR margin, we had positive margin growth this quarter, so margins were up despite, a significant variance year-over-year in the cost of foreign exchange and that's only happening because of what Allan and team are doing in terms of driving productivity, there is a number of things that are going into that.

I don't know Allan if you want to comment on a couple of them. But…

Hey Peter its Allan. The team's doing a great job and to be honest retail is a skew by skew fight.

We’re looking at it from if you break down your procurement cycle speaking in this case in terms of COGS management, you’ve got -- we are managing our vendors right in terms of how many vendors we have and are we consolidating the buyers, are we consolidating our purchase orders, so that we’re getting good clean run, we're optimizing production runs, are we getting rid of vendors that have odd terms, are we managing currency between the RMB and the Canadian dollar and U.S. dollar appropriately are we managing our contracts well, are we eliminating products that on a fully allocated basis aren't just profitable as they could be.

And you go through this very methodically and I think really the productivity component in that is less the decisions we’re making in terms of each individual product and more the decisions we’re making around changing the process across the organization so all of our buying teams are using this kind of analysis and making their decisions and that's where we’re really seeing them bear fruit. So it's skew by skew but it's really just at are buying from start to finish.

That's helpful and in terms of your gross margin performance during the quarter at Canadian Tire, would there have also been some price in there, are you still holding back on price increases?

Yes, hi its Michael. No, as I said last quarter, we are trying not to pass price increases on, which I know some retailers are now doing, we haven't had to so far and we’ve had other ways to attack the business which are more sustainable honestly.

And so in our comps there is little if no inflation in those comps and we went all the way through it and we went through the categories and sometimes skew by skew to look at that so there is no inflation in that. Now we’ll have to continue as retailers are doing and some are choosing to raise prices across the board as much as they can, we’ll continue to look that, we haven't had to do that yet and I’d like to take some market share if we can hold off during that approval.

Okay. And it's my last question if I can just switch the financial services business and you just -- its update on the back drop I mean you have indicated that you have slowed growth in receivables but I mean how we support portfolio performing in terms of write-off rates et cetera?

Hi Peter, its Mary. So as you know we purposely slowdown our GAR growth about a year ago, I guess little less in that because of our concerns over the economy and we did that primarily by tightening our requirements for new customers.

So we are starting to carefully take our foot off the break as we continue to see signs of improvement in the economy but I think -- it's going to be a couple of quarters at least I would think before you are going to see return to levels that we’ve been delivering in recent years. On the write-off rate, let me just say that there is two things going on, one is we’re seeing some increase in write-offs which we would expect over the last few quarters, because the economy has been a bit soft, so that has raise the rate a bit, but you are also seeing the impact of reduced growth.

So when growth slows down your denominators start to slow down more quickly than the write-offs that are coming into that number. Because write-offs are still coming in on a lag basis from previous growth, so some of the reason the write-off rate is going up is just because this slow down growth.

So I hope that helps you understand -- better what’s going on in our business.

Thank you. And good afternoon.

I wanted take a slightly different attack on Mark’s discussion, could you give us some color on how the store within store Mark’s are performing relative to the standalone and I think what if I am trying to get out there, or get to is whether there is any sort of halo effect from being a store within store versus standalone and to the extent there is whether that Mark's have an impact on your thinking for that footprint going forward?

Hi its Rick White here, I'll filed that question. We’re certainly having very positive results on the store within store concept and primarily we’re referring to two areas, one is the [Dan Maria], where we’ve added some national brands specifically, really Levis, [Silver] and buffalo and in the footwear area, where we’ve added approximately 19 different national brands to augment our private label selection there and we've done that -- in the footwear we've done that in approximately 300 stores across the chain, actually 315.

And in the denim area, we've done about 235 stores and it's really just been more about size of the stores and actually being able to fit in the fixtures and in every case where we have done that we have experienced essentially double-digit increases in all those areas so it's been very solid for us.

And what about where we located [Canadian Tire] store?

Where we're located within the Canadian Tire store, in generally we're in 5,000 to 6,000 square feet so, mainly in those locations we've not been able to put the for shop and shop, we have shared some of the assortment within the stores but we actually physically have not put in the fixtures for it, so we still seen increases in those stores but not to the same extend where we put actual fixtures in shops and called that out we've been able to put in, [shift] guys and for the consumers.

Michael, I like the baseball analogy and I can picked to you guys doing back lifts in the office after this presentation. I just wanted a follow up on the COGS savings.

Could you just talk about your attitude towards the promotional strategies? I know that's in area where you guys have invested resources, how was the progress been there and how material is the contribution to gross margin and what's the outlook?

Our promo, I wouldn't say that our promo strategy has really changed it all. Whenever you introduce a productivity initiative in that way of thinking that I outlined while I was talking about procurement, you adopt that every aspect of your business whether it be operating expense, procurement or promo for that matter, so we've been looking at optimizing our promo as a matter of just good business practice.

What that means is looking at the implications in terms of the cost of promo from start to finish and of course the benefit -- in terms of its appeal to our customers and the growth categories that we're focused on, I consider, I think we have a much better balance today and we've had historically, so we're being much more considered, when putting products for promo, we're obviously trying to optimize in terms of profitability and scale back in terms of breath whenever we can. So, you are seeing some contribution there but that's a less of pricing discussion more of on optimizations discussion going on so

Thanks and just broadly, I know, marketing and advertising spends was something that are planned for some of that -- you invested in historically, it's kind of been flat this year, what's the attitude on that going into 2016?

For CTR, in terms of our spend -- we're happy with where we were and of course we're coming out of an Olympic year in to a non-Olympic year so we've made some adjustments in terms of where we're putting our focus, we're going to continue with the balance that we have right now and I'm really happy with our branding work which is a really important part of our overall growth at the Canadian Tire level and then with our product level between tested for life and Canada, other innovation platform. So I think what you're going to see is the continued about the same level we're at now what you may or may not have seen is we're starting to shift more of our advertising to digital.

So the launch of the [woods] campaign this year was 100% digital, we didn't use TV for that and that was a great learning experience for the first time we launched the major brand without traditional media and we really -- it was very successful from a learning standpoint and I'm very, very pleased with performance of the brand as well. So you will see next year more of transition to away from the traditional media and to new media.

Thanks and then just my last question, just if you could comment on dealer inventory levels. I know, it's pretty clean coming out of winter last year and so I imagine there was some restocking to an appropriate level in the Q3 numbers, but just a comment on dealer inventories would be great.

Yes, I'm feeling very, very comfortable in terms of inventory levels. Third transitioning in to fourth quarter as you know is always a tricky one because we're loading in for Q4, that's really largely where the variance is that you're seeing are coming from and overall very happy with the fact that's very clean.

Good afternoon. I just want a follow up again on the gross margin performance.

So, as I listen that the initiatives that are mentioned by Allan, are you seeing items that you -- CTR that can be implemented across other banner within the organization and generally you seen opportunities greater than what you though when you announced the initiatives back in 2014 and also I don't know if you go into this detail, but can you provide a breakdown or composition of the Mark's decline relative to CTR's gain within that 33 basis point [ex-petroleum].

Hi, Brian, it's Dean. So, I think in general, yes, I think we're at some of the learnings out of where we're getting with the work that we're doing with Allan's team.

I think are applicable in other areas of the business for sure and we'll look for those opportunities as we go forward. I think we're -- as we said all long we're not putting numbers to this but wanted the actual results to speak for themselves here and I think you're seeing some of that with respect to CTR.

So, we're very happy with that. So, when we talked about this initially, I think we had high hopes and I think some of those hopes have come to fruition, so that's encouraging and I think as I said that, I think we can take this on the road.

The second part of the question around kind of getting a sense with respect to the Mark's relativity versus kind of the rest of the margin as I think as I said the CTR margin, the entire retail margins were net positive were up nicely. So, impact on overall retail segment margin was negative 33 basis points was more than 33 basis points related to Mark's.

So, in other words we had a greater decline associated with just Mark's if you isolate it than 33 basis points offset to the tune of the net of 33 basis points with the positive performance of the CTR. So, very encouraging and we all know -- and we know what's going on with Mark's I mean the guys are doing what they can there to offset the impact of FX on oil and on industrial but the performance of the CTR particular very-very encouraging.

Dean, one more question if I can, when I look at the renewed buyback if I think well over $0.5 billion share. What was the thought process be coming up with the thought process behind coming up with this figure as opposed to the $400 million that you announced last year?

So, Brian, that's been an exercise that has been ongoing as we sort of work through what our capital allocation priorities are for 2016 as part of our overall planning process and we walked the board through all of those exercises as we go through the year. I think the reality is it reflects basically the same things we've always been saying that our priorities have not changed first and foremost invest in the business, protect our credit rating which is very important to us in order to preserve flexibility.

We're committed to our dividend policy, the 25% to 30% and we want to have flexibility to grow and ensure that we have the resources and capital to be able to continue to grow, but the share buyback is part of that analysis and we landed where we landed this year with that approach

There's a lot of ways to look at it, but four of the ways I look at it is that we are generating more cash than are generating before, that we have more confidence on our underlying business fundamentals that we have before, that I believe that we understand the financial flexibility and enhanced strength of this company financially better than we did before and last to me is to do this sort of thing and to put 550 in -- I believe we're undervalued and that our retail businesses are not trading at a multiple and you got to invest in new company in a significant way when you think that, so I think that the balanced approach that Dean talked about is right and then to get to a number you have to look at factors -- many-many factors but before I just pointed out especially the last one, really have a lot of weight.

Just a few questions, first of all, we haven't heard much talk about M&A for a while, can you just update us on where you headed at with respect to that initiative?

I probably will never update you [what we are going to do] but I guess where my head is, we've been incredibly successful on our two big acquisitions we made in Mark's and Forzani Group which is now FGL Sports, we think we have even more capabilities today to bring to an acquired business and we certainly have under our balanced financial approach more than the financial flexibility if we feel like it to make an acquisition. We will not be forced to make an acquisition I said before, because we're in a hurry, because we have [indiscernible] or people just want to go make acquisitions so, I know how tough it is to make a good acquisition and then integrate it and make it successful I don't like a lot of evaluations that are out there.

I'm concerned that a lot of store equity attractive targets are not moving as fast as we are and the new other retail, now don’t want to buy their headaches and I think that there are possibly through acquisitions out there, but you know how picky we are -- core businesses are all firing along and the fundamentals are good so, as we said we are looking for acquisitions, we're always looking for them and they got to be good and we have no promise, you saw today returning the cash to our shareholders which is our cash, when that's appropriate as well.

Second question out of [Technical Difficulty] so, once the new IT platform got put in place on the auto side, we were all eagerly awaiting an improvement in terms of the auto service expands and the growth of that business, sounds like I've heard at least this quarter and maybe a couple of quarters in a row now a bit of a positive undertone about the auto service contribution to the business, can you sort of tell us where you think that's at -- to use the baseball analogy what ending are you at in terms of…

We're in early innings so we have a big lead. The auto service, the auto team and the dealers have done an amazing jobs, but to your point, we probably undersold it, not meaning to be subtle, just with so much going on in the business, [you obvious probably capture] everything.

Auto services as really turn to corner the auto team has spent tireless hours working with their dealers to really bring this part of our business to life, as you know it's very, very complex, it's not just about systems, it's about people, it's about service, it's about tires, it's about loop, managing auto parts and we’ve seen across the board substantial [indiscernible] so I’m very, very pleased and we’re seeing it in our customer satisfaction result as well as that Canadians are responding so I couldn’t be happier and smack the baseball, do we have lots of runway left? Absolutely.

So we’re in by no means stopping this is a new way of life for us.

That's great. Ecommerce any contribution the Canadian Tires comp store sales number and can you give us any idea how much its help drive for [indiscernible] numbers?

Its Michael, I talk across the board, which is -- I believe that in both cases, this is driving our numbers in more than what we are selling online, let say Canadian Tire for a second, if you go on our site today, and we’re going to keep make it a better, this is a very good site, which I believe the most visited site in Canada, you might not know that. And it is becoming better and better from a customer interaction, especially because they can have trip assurance knowing that we have the products in store.

So I’m happy in terms of what its driving the business, the dollar value of our straight ecommerce sale is small and growing by a percentage that I guess you wouldn’t believe, but its incredible percentages and we’re going to get that number pretty big in the next two to three years in terms of ecommerce sales in all of our divisions. So as a percentage of our sales right now, small and isn’t driving our comps, I mean I wish it was driving, we'd be seeing some real good comps but we’re driving these comps the old fashioned hard way right now just basically out of the stores.

Okay. That's great and last question just with the target stores on the horizon in terms of ones you bought, I assume you'll end-up with some of redundant properties.

Can you give us any idea as to whether your intention would be to send them into REIT or to sell them as you did with this recent property?

Any of those decisions Jim are situational, but clearly there will be opportunities with the REIT for those properties, some of those properties but we’re just working through all that analysis but I would expect that some of them are -- we’re going into REIT as redevelopment opportunities but we just got to work that all through.

Hi good afternoon. Over a last few years there has been a focus within CTR to deemphasize the low margin products like electronics and appliances to high margin products like automotive, fixing and plane categories and if I’m looking at the numbers correctly that mix shift has definitely contributed to the retail gross margin improvements since 2011 and so and either risk of over using the base for analogy what inning are as shift and if you would hold everything else equal do you expect this shift to continue to have a positive impact on gross margins in over mix number of years?

Hi Chris, Allan here. I think that you are absolutely right, but I think if it is slightly, differently in terms of motivation, what we were doing is looking at the active families and how well our assortment was resonating with active families.

And because we have lots of low margin products you can probably guess a few in the household consumables division for example that are very, very relevant to our target customers and we’re going to continue sell them for a long time. In other areas, we perhaps were guilty in the past of chasing revenue in low margin products that have a lot of velocity, and we evaluate those on a regular basis to say this is a business we should still be and it's still relevant to our customers and a period of growth like the one we’re enjoying right now, that's when you want to be making those tough decisions to wean yourself off of those products.

So when I look at our assortment, I’m very, very happy with the track that its taking, I don't see as much high velocity low margin products that were opportunistic as we had in the past, so I’d say in terms of where we are on the journey we’re quite a ways down the path, but you are going to continue to see our assortment evolve and it won’t be based on margins decisions although we always try to maximize those, but if we base more on making sure that was relevant to [indiscernible] possible be to our active families and our target customers.

Okay. Great that's helpful and may be just a couple of questions for Dean.

The revenue growth to the dealers that CTR were quite strong this quarter up 5% compared to retail sales growth of only 1.5%. I recognize there are some timing differences.

Was anything else that you want to highlight or is anything that explains that big GAAP?

No, I just [started and throw another rose] to Allan’s team I think that reflects basically very strong take up of the programs that the guys have in place for things like Christmas and that kind of things, so nothing unusual other than it's a good thing.

Okay. And then just lastly on depreciation, I think you answered last quarter about its going higher because of CapEx, but there is still quite a meaningful gap between G&A versus the CapEx level, at what point, do you expect that gap to narrow materially, is it make sure or is it going to takes to a few years before the -- match where your CapEx levels?

We probably should take that one offline but I think overtime right, everything rationalizes that but rather than just given out -- so we probably just do that offline.

I have three questions. My first one is for you Dean.

And just twice, two or three times on the call you did makes the important point that the declining gross margin at Mark's more than accounted for the 33 basis points that we saw overall. And I understand that you may not want to tell us what the Mark's number was but can you share that with us or would you prefer not too

I would prefer not to, but really prefer, I mean not to.

Fair enough. I just thought I would ask, okay.

Now you really have to answer this -- I want to come back to productivity and the SG&A and that really was nice to see the progress that we saw in Q3 there [indiscernible] get real sense maybe for philosophically about how you're thinking about this business probably two ways to think about it and it seems to me that people seem to be approaching this and thinking about it as if some finite amount or some target number that you want to get to whereas I'm wondering what it really, is a big changing culture and essentially what you are really hoping to accomplish is that a -- almost a permanent focus on just always trying to do what you can to take cost down?

Thank you, Patricia the check is in the mail but that is exactly what -- if we're successful, it's like Allan talking about the systemic change in CTR around reporting COGS, we need a systemic change in this organization around how we approach overheads and how we think about it and a continuous cycle of challenging what we do and what we do make our people do every day to reach -- we still make you to keep doing that because of the same time this pressure to do different payments more important thing that support becoming the world's most innovative retailer. So, that's a motivation if you will that I think around the executive table of everybody is on the same page now to how do we continuously dry down that cost as an overall percentage of our revenue as we go forward and something that I mean, let's call where it is, we haven't been very successful of that over the years, is that [indiscernible] but I think that cultural change that you referenced is terrific, that's a great way to put that.

Okay. Thank you and when we look at Michael love to talk about innovation and I love listening to that and it's a fundamental shift in the business but I think that this whole culture shift there on the cost side, is equally as important then if you look at the way I look at Canadian Tire retail and what I'm seeing and what I'm hearing from you guys, all the little projects and things that Allan can doing to focus on the COGS and everything else that's also seems to be a very different approaches business and really doing everything he can to run that dealer based business as a real retail operations, so that wasn’t a question that was a statement.

I do have a question for Allan. And my question for Allan is following, do you want to share with us what's your thinking, is Allan behind this sprint program that you have, what the skews are and what we can expect to see there and how that will contribute to margin and how you hope that will drive, I guess the top line or little bit as well?

Hi, Patricia. Well, what we do with frankly, we're really [lining] in wholesale consumable that's really important category for our key, our Target customers for active family, [indiscernible] and our private labor brands were not performing well, the quality was terrible, quite frankly in lot of cases.

So, we drew a line in the sand and understand that Canadian Tire is going to be the destination for national brand, quality, household consumables and we've come up with this frank which is really about being frank, being honest, which is one of our core attributes at CTR and at CTC. So, we started down that path, it was going to be an [EDLP] strategy, what we found that there were some areas, where that didn't resonate as much with Canadians but I can promise you, I can tell you that the frank products have been performing very, very well, they're a hit with our most of loyal customers and the quality, the lengths we're going through to make sure the quality is right and to your point earlier, it signals a cultural shift, when we chose the frank coffee for the coffee pods, we had everybody at Canadian Tire go down through our cafeteria in the course of a couple of days and test it and we had a vote.

I can tell you that there are two people in this room who personally chose the flavor of the potato chips; I'm one of them, when it comes to barbecue and I'll let the other person decide if he wants to talk about his role.

I got to hit the gym Patricia.

And for everybody who doesn't know Michael chose the salt and vinegar ones.

And we're having the lot of fun with that brand. I think it's an interesting commentary on the state of CTR right now, I mean, we've got a -- it's a nice brand, it's making a really bold statement about quality and I think the engagement we've had internally is [indiscernible] we got a cultural change to.

I have no closing remarks. Have a great day guys.