Tim Hortons Inc. Announces 2008 Fourth Quarter and Year End Results

Tim Hortons Inc. (NYSE: THI) (NYSE:TSX:) (NYSE:THI) announced its results for the fourth quarter and fiscal year ended December 28, 2008.

"Sales growth in our core Canadian business was quite strong in the fourth quarter considering the challenging economic circumstances. At the same time, we took decisive steps to improve profitability in our developing U.S. business by closing a number of underperforming restaurants in southern New England, as announced late last year. For the full year, we had consolidated operating income growth of close to 10% excluding non-comparable items and we are pleased with this overall performance. We continue to focus on executing our growth agenda," said Don Schroeder, president and CEO.

Consolidated Results

In the fourth quarter systemwide sales(3) grew 8.2% on a constant currency basis and 9.5% including the impact of currency. Same-store sales increased 4.4% in Canada and were down 0.1% in the U.S. for the same period. Total revenues were up 9.4% to $563.7 million in the fourth quarter, compared to $515.4 million in the same period of 2007.

Same-store sales were driven by an active promotional program that included Chili and Garlic Toast and the return of Chicken Fajita wraps in Quebec. Candy Cane Donuts and Candy Cane hot chocolate were promoted in December, when we were also promoting our holiday merchandise program which included branded Tim Hortons china mugs, ceramic/steel coffee scoops, TimCards(R)and chocolate bark (Candy Cane and Milk Chocolate Almond). We also introduced combo programs in Canada and the U.S during the fourth quarter. In Canada, we offered Pumpkin Spice Donuts and Muffins with Tea. We also bundled Creamy Field Mushroom Soup with Ham and Swiss sandwiches. In the U.S., our combo programs included Pumpkin Spice Donuts with medium Coffee at an attractive price point and we also promoted Turkey Bacon Club sandwiches with Hearty Potato Bacon soup.

Sales growth in the fourth quarter of 11.0%, primarily consisting of warehouse sales, reflects strong systemwide sales during the fourth quarter and the impact of currency translation, partially offset by fewer Company-operated restaurants. New products managed through our supply chain also contributed to sales growth. Rents and royalties increased 10.2% for the same period, consistent with systemwide sales growth. Franchise fees decreased 8.5% year-over-year, primarily due to the timing of revenue recognition from our franchise incentive program, a higher mix of non-standard units in the fourth quarter versus full-serve restaurants compared to the previous year, and fewer replacements and renovations. These factors were partially offset by higher resales of restaurants to franchisees.

Fourth quarter cost of sales were up 9.8%, mainly driven by sales growth. Operating expenses rose by 11.7% in the fourth quarter. The largest components of the operating expense increase were the higher number of units opened in 2008, percentage rent increases on variable rent contracts, and the impact of foreign exchange on U.S. currency translation. Franchise fee costs were down 11.2%, consistent with lower franchise fee revenues described previously.

Operating income for the fourth quarter was $107.9 million, a decline of 7.2% from $116.2 million in the same period last year. The benefit of strong systemwide sales growth and higher warehouse sales partially offset the impact of restaurant closure costs and a related asset impairment charge. Excluding these costs, adjusted operating income(1) growth for the quarter was solid, up 11.1% year-over year. A total of 11 underperforming restaurants were closed in southern New England, 10 of which were Company-operated locations. In conjunction with its decision to close certain underperforming restaurants, the Company undertook an asset impairment review in the affected markets. As a result of these activities, $7.6 million in restaurant closure costs and a related market impairment charge of $13.7 million were recorded in the fourth quarter, for a total of $21.3 million.

Operating income was also affected by a 16.3% increase in fourth quarter general and administrative costs compared to the same period last year. These increased costs reflect significantly higher professional fees, the timing of franchisee meetings and related travel costs compared to last year, and the impact of foreign exchange translation from our U.S. segment. Higher professional fees in the quarter were due mainly to a feasibility assessment undertaken relating to the Company's corporate structure (see Corporate Developments for further information).

Equity income increased during the quarter to $10.5 million compared to $9.6 million last year, an increase of 9.4%. Equity income benefited from an asset sale in one of our joint ventures in the fourth quarter and sales growth helped drive higher income contributions from the Company's two largest joint ventures.

Net interest expense was $5.0 million in the fourth quarter compared to $4.0 million in the same period last year. The increase is the result of lower interest income and higher interest expense on capital leases offset partially by lower interest costs on external debt.

Fourth quarter net income was $69.1 million, decreasing 8.6% from $75.7 million last year. The decrease in net income was the result of $15.4 million in after tax costs associated with previously announced restaurant closures, and the related asset impairment charge. The effective tax rate for the fourth quarter of 2008 was 32.8%, slightly higher than 32.6% in the prior year comparable period.

Diluted earnings per share (EPS) were $0.38, down 5.9% compared to $0.40 in the fourth quarter of 2007, and includes a $0.08 impact from the asset impairment and related closure costs.

For the fiscal year ended December 28, 2008, total revenues were approximately $2.0 billion, increasing 7.8% from the approximately $1.9 billion recorded in 2007. Operating income for 2008 was $443.6 million, up 4.3% compared to $425.1 million last year. Excluding the asset impairment and related closure costs, and a previous management restructuring charge of $3.1 million ($2.5 million net of savings), adjusted operating income for the full year increased 9.9% to $467.4 million. The effective tax rate was 32.8% in 2008 compared to 34.0% in 2007, slightly below the targeted rate of 33% to 35%. Net income for the full year increased by 5.6% to $284.7 million, compared to $269.6 million in 2007. Net income includes a $17.1 million after-tax impact from the asset impairment and related closure costs described previously and the management restructuring charge announced in the second quarter. Diluted earnings per share were $1.55 in 2008 compared to $1.43 in 2007.

Segmented Performance Commentary

Canada
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Canadian same-store sales in the fourth quarter rose 4.4%, of which approximately 3.1% was due to pricing. A strong menu promotional program, advertising and focus on holiday merchandise contributed to the sales performance in a challenging economic climate.

The Canadian segment experienced slightly higher margins due to higher sales and distribution efficiencies, partially offset by higher general and administrative costs, during the quarter. Operating income in the Canadian segment was $137.1 million, an increase of 8.7% compared to $126.2 million in the fourth quarter of 2007. A total of 55 restaurants were opened in Canada during the quarter.

For the full year, Canadian same-store sales growth also rose 4.4%, of which pricing contributed about 3.4%. Operating income in 2008 was $507.0 million, an increase of 8.4% compared to $467.9 million in 2007. A total of 130 restaurants were opened in Canada during 2008.

United States
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Same-store sales in the fourth quarter in the U.S. segment had a slight decline of 0.1%. A rapid deterioration of the macro-economic climate and consumer confidence in the U.S. contributed to another challenging quarter in terms of the sales environment for our U.S. business, where the Tim Hortons brand is not as developed. Proactive changes in menu promotional activities made during the quarter, including offering product combos and bundles with attractive price points, helped offset the impact of a challenging environment. We experienced a decline in transactions in the fourth quarter in the U.S. segment as pricing increases did not fully translate into sales growth. Previous pricing contributed approximately 3.2% to fourth quarter sales.

The U.S. segment had an operating loss of $21.3 million in the fourth quarter, which was driven entirely by the $21.3 million in asset impairment and related closure costs. Currency translation raised U.S. segment revenues and costs by approximately 15% respectively during the quarter compared to the same period in 2007. A total of 106 locations were opened in the U.S. during the quarter.

For the full year, same-store sales increased 0.8% in the U.S. business. Pricing accounted for approximately 2.2% of same-store sales. The U.S. segment had an operating loss of $26.5 million in 2008, which includes the $21.3 million asset impairment and related restaurant closure charges. Management is targeting 2009 break-even operating income performance on a full-year basis in its U.S. segment (see 2009 Outlook and Targets).

A total of 136 locations were opened in the U.S. for the full year. Of this full-year total, 87 were non-standard units, including 73 self-serve locations. We entered into an agreement with Tops Friendly Markets that resulted in approximately 80 predominantly self-serve and some full-serve units being opened in New York and Pennsylvania. The Company intends to complement its ongoing standard restaurant expansion with increased penetration of non-standard units and strategic alliances. In December of 2008 we held grand opening celebrations in Detroit, Michigan for the Company's 500th restaurant in the U.S., a significant milestone in our ongoing brand growth and development. The Company also recently announced a co-branding test with Cold Stone Creamery which will see up to 50 locations from each chain transition to offer branded products of the other company.

Internationally, in Ireland and the U.K., there are now 293 licensed locations primarily under the Tim Hortons brand, in the convenience store channel.

Corporate Developments

Corporate Structure
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The Company commenced a review in the fourth quarter, with the support of external advisors, to assess various opportunities related to our corporate structure. This review is focused on tax and operational efficiencies and also addresses changes to the Canada-U.S. tax treaty ratified in December of 2008 which, if not addressed, could negatively affect our effective tax rate.

This review was undertaken as a result of the expiry of time constraints under U.S. tax rules and the tax sharing agreement we entered into at the time of our IPO that limited our ability to engage in certain acquisitions, reorganizations and other transactions that could have affected the tax-free nature of the spin-off from Wendy's. Now that the time constraints have expired, we believe that opportunities may exist for us to achieve significant financial and other benefits from reorganizing our corporate structure, including potentially converting our parent company from a U.S. to a Canadian corporation. Tim Hortons has its roots and heritage in Canada. Based on the evaluations that we have conducted thus far, and which are ongoing, we believe that such an event would be in the best interests of our shareholders, driving long-term value by bringing our effective tax rates closer to Canadian statutory rates. We would also expect to incur certain charges for discrete items, the majority of which would be non-cash, and transactional costs in the year of implementation. If we were to implement such a transaction in 2009, the impact of the charges and costs would result in our 2009 targeted tax rate exceeding the identified range (see 2009 Outlook and Targets) and, potentially, could cause our targeted operating income to fall below the expected range. There can be no assurance that we will be able to complete a reorganization of our Company or any other transaction for that matter or that the expected benefits will ultimately be realized, given the various assessments, conditions, and approvals that remain outstanding in connection with the initiatives described above.

Board of Directors Appointment
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The Board has appointed Catherine L. Williams as a director of the Company effective March 1, 2009. Ms. Williams has been a Managing Director of Options Capital Limited, a private investment company, since 2007. From 2003 to 2007, Ms. Williams was Chief Financial Officer for Shell Canada Limited, a subsidiary of Royal Dutch Shell. From 1984 to 2003, Ms. Williams held various positions with Shell Canada Limited, Shell Europe Oil Products, Shell Canada Oil Products and Shell International. Prior to 1984, Ms. Williams was a financial analyst for Nova Corporation and held various positions with the Bank of Canada prior to joining the Shell companies. Ms. Williams currently serves as a director for Enbridge Inc. where she is a member of the Audit, Financial and Risk Committee and the Corporate Social Responsibility Committee. She is also the Chair of the Board of Governors of Mount Royal College, and she serves on the Advisory board for the Dean of the Business School at Queen's University. In 2008, she served as a member of the Federal Government Advisory Panel on Canada's System of International Taxation. She is a graduate of the University of Western Ontario and Queen's University.

$200 million Share Repurchase Program
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The Company plans to implement its previously announced 12-month share repurchase program, starting in March 2009. The share repurchase program reflects the Company's focus of creating value for shareholders, and our strong cash flow and financial position. The new program is subject to receipt of final regulatory approval, and represents a planned allocation of up to $200 million, or a maximum of 5% of the Company's outstanding shares. For details on the new program, please refer to the news release issued today in conjunction with this earnings release. Shares purchased under the program will be at management's discretion, in compliance with regulatory requirements, given prevailing market conditions and cost considerations, unlike the previous program which included a 10b5-1 program. If a subsequent decision is made to proceed with changes to the Company's corporate structure, timing of share repurchases could be affected, including potentially deferring future purchases subsequent to the first quarter until after a transaction is implemented.

Dividend declared, and 11.1% increase to quarterly dividend approved to
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$0.10 per share
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The Board of Directors has approved an increase in the quarterly dividend to $0.10 per share and the first payment of a dividend at the new rate is payable on March 17th, 2009 to shareholders of record as of March 3rd, 2009. The Company's current dividend policy is to pay a total of 20-25% of prior year, normalized annual net earnings in dividends each year, returning value to shareholders based on the Company's earnings growth.

Dividends are paid in Canadian dollars to all shareholders with Canadian resident addresses whose shares are registered with Computershare (the Company's transfer agent). For all other shareholders, including all shareholders who hold their shares indirectly (i.e., through their broker) and regardless of country of residence, the dividend will be converted to U.S. dollars on March 10th, 2009 at the daily noon rate established by the Bank of Canada and paid in U.S. dollars on March 17th, 2009.

2009 Outlook & Targets

"In 2009 we plan to maximize opportunities presented in the current economic conditions to expand our Canadian restaurant footprint in successful growth markets while we take a prudent approach to U.S. development given the significant economic challenges. We are focusing our efforts on more established U.S. markets and complementing our approach with strategic opportunities to create additional brand penetration and scale with reduced capital requirements. We have created a menu and marketing program responsive to the economic realities of our customers and we continue to be relatively well positioned overall due to our price and value brand position," said Don Schroeder, president and CEO.

The Company has established the following 2009 performance targets*:

• Operating income growth of 11% to 13% (targeted rate of growth is 6% to 8% excluding the impact of the asset impairment and related closure costs in 2008) - Includes approximately 1% positive impact of 53rd week in 2009 - Break-even operating income performance in U.S. segment on a full-year basis

• 2009 same-store sales growth of 3% to 5% in Canada and 0% to 2% in the U.S.

• 150 to 180 restaurant openings: - 120 to 140 restaurants in Canadian segment - 30 to 40 full-serve restaurants in the U.S. segment, complemented by non-standard locations and sites from strategic alliances

• Capital expenditures between $180 million to $200 million

• Effective tax rate of 32% to 34%.

* Note: If implemented in 2009, a new corporate structure could have a significant negative impact on the 2009 effective tax rate due to discrete items, the majority of which are expected to be non-cash, and our operating income growth could be affected by transaction costs. However, our effective tax rate would be positively impacted in 2010 and beyond as our effective tax rate approaches Canadian statutory rates. Implications of changes to the tax treaty between Canada and the United States could negatively impact our effective tax rate for 2010 and future years if not addressed through reorganization or other means.

These financial targets are for 2009 only.

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