Tim Hortons Inc. Announces Strong 2010 Third Quarter Underlying Operating Performance and Provides Update on Important Strategic Developments

(Unaudited. All amounts in Canadian dollars and presented in accordance with U.S. GAAP)

    Highlights



    -   Strength of underlying operations reflected in continued sales and

        revenue momentum in Canada and the U.S.

    -   Same-store sales up 4.3% in Canada and 3.3% in the U.S.

    -   Total revenues up 9.8%

    -   Management to focus on its core growth markets in the Northeast and

        Midwest U.S.; Company takes $20.9 million asset impairment charge and

        will close its locations in two markets in the New England region

    -   Approximately $400 million in after-tax cash proceeds from sale of

        interest in Maidstone Bakeries planned to be deployed to repurchase

        shares and $30 million committed with the intent of helping

        franchisees to mitigate anticipated rising operating costs





                         Financial & Sales Highlights

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                                                            %

                                                        Year-over

                                                           Year

                                   Q3 2010    Q3 2009     Change    YTD 2010

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    Total revenues                $   670.5  $   610.7       9.8%  $ 1,893.0

    Operating income              $   133.0  $   136.8     (2.8)%  $   410.6

    Adjusted operating income

     attributable to THI(1)       $   144.9  $   129.9      11.5%  $   408.2

    Effective tax rate                35.7%      49.3%                 32.0%

    Net income attributable to

     THI                          $    73.8  $    61.2      20.7%  $   246.8

    Diluted earnings per share

     (EPS)                        $    0.42  $    0.34      25.6%  $    1.41

    Fully diluted shares              173.7      180.9     (3.9)%      175.0

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    ($ in millions, except EPS. Fully diluted shares in millions. All

    numbers rounded.)



    (1) Adjusted operating income attributable to THI is a non-GAAP measure.

        Please refer to "Disclosure of Non-GAAP Measure" at the end of this

        release for further information.



    Results for 2010, and retroactively for 2009, incorporate adoption of new

    accounting standard SFAS # 167. This standard relates to consolidation

    of certain variable interest entities.  Please refer to the Company's

    Form 10-Q for additional information.





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             Same-Store Sales(2)              Q3 2010    Q3 2009    YTD 2010

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    Canada                                        4.3%       3.1%       5.3%

    U.S.                                          3.3%       4.3%       3.1%

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    (2) Includes sales at Franchised and Company-operated locations. As of

        October 3rd, 2010, 99.4% of our restaurants in Canada and 99.7% in

        the U.S. were franchised.

OAKVILLE, ON, Nov. 10 /PRNewswire-FirstCall/ - Tim Hortons Inc. (TSX: THI, NYSE: THI) today announced strong underlying operating results for the third quarter ended October 3rd, 2010. Earnings growth in the third quarter was negatively impacted by an asset impairment charge the Company took pertaining to three markets in the New England region.

Following a comprehensive review, we have decided to close 36 restaurants, 34 of which are located in the Providence and Hartford markets, in the fourth quarter in order to focus on and reinvest in our core growth markets in the Northeast and Midwest U.S. where the brand continues to demonstrate strengthening average unit volumes, cash flows and brand progression.

The Company has decided to deploy approximately $400 million of the $430 million in after-tax cash proceeds from the sale of its joint venture interest in Maidstone Bakeries to repurchase shares through an amended 2010 program, and through a 2011 share repurchase program, subject to receipt of regulatory approval. The Company has also committed the remaining $30 million from the sale with the intent of supporting our key relationship with restaurant owners to help to partially mitigate anticipated rising operating costs.

"We continued to create sales momentum in the third quarter with strong operating performances in both our Canadian and U.S. segments," said Don Schroeder, president and CEO. "However, at the same time, we incurred an asset impairment charge and subsequently made the decision to close all of our underperforming restaurants in two markets in the New England region. We expect this decision to have a positive impact on our U.S. business in terms of our continued business progression and management focus," added Schroeder. "We plan to reinvest a portion of the expected earnings improvement from these closures to increase our brand profile in our U.S. core growth markets where we are building critical mass."

Consolidated Results

All percentage increases and decreases represent year-over-year changes for the third quarter of 2010 compared to the third quarter of 2009, unless otherwise noted.

Systemwide sales(3) increased 7.4% on a constant currency basis in the third quarter. During the quarter total revenues were $670.5 million, an increase of 9.8% compared to $610.7 million last year.

Operating income declined 2.8% in the third quarter to $133.0 million compared to $136.8 million last year. Operating income was impacted by a $20.9 million asset impairment charge. Excluding this item, adjusted operating income attributable to THI(1) increased by 11.5% to $144.9 million.

Operating income benefited in the third quarter from higher systemwide sales which drove higher revenues and higher distribution income. Lower franchise fee income and higher general and administrative expenses in the quarter, primarily relating to strategic initiatives, partially offset these positive factors. Last year's operating income results in the third quarter were negatively impacted by $3.2 million for professional advisory fees and shareholder-related transaction costs pertaining to our reorganization as a Canadian public company.

Net income attributable to Tim Hortons, which excludes the impact of non-controlling interests, was $73.8 million, growing 20.7% from the $61.2 million recorded in the third quarter last year. The effective tax rate was 35.7% this quarter compared to 49.3% in the third quarter of last year. The year-over-year decrease in the effective tax rate was due primarily to discrete items pertaining to the public company reorganization in the third quarter of 2009 that did not recur in 2010. The tax rate in the third quarter this year was higher than earlier in the year due to the impact of the asset impairment charge for which no tax benefit was recorded. Interest expense increased year-over-year, resulting primarily from higher interest rates on our long-term debt, which also impacted net income.

In the third quarter diluted earnings per share (EPS) were $0.42, an increase of 25.6% compared to last year, with the significant increase due primarily to the change in the effective tax rate compared to last year. Our EPS growth rate benefited from 3.9% fewer shares outstanding compared to last year due to our share repurchase programs. The effect of the asset impairment charge taken in the third quarter this year negatively impacted EPS by approximately $0.12 per share.

The asset impairment and costs associated with the subsequent decision to close certain restaurants in the New England region, as well as the Maidstone Bakeries sale, were not contemplated as part of Management's 2010 guidance.

Segmented Performance Commentary

The strength of our underlying operations was again demonstrated through robust operating performance overall in both Canada and the U.S.

    Canada

    ------

Our Canadian business had a 4.3% increase in same-store sales. We grew transactions again in the third quarter, as a result of continued traction from menu initiatives, promotions and operational strategies such as our hospitality program. Average cheque also increased this quarter, although there was reduced benefit from previous pricing in the system compared to earlier in the year.

In Canada, a total of 44 new locations were opened in the third quarter. We had 85 co-branded Cold Stone Creamery(C) locations in Canada at the end of the quarter, which contributed slightly to same-store sales growth in the segment.

Operating income in the Canadian segment was $148.2 million, an increase of 4.5% compared to $141.9 million last year. Our ongoing restaurant development program and continued strength of same-store sales growth contributed to the higher operating income from increased rents, royalties and distribution income. The new coffee roasting facility, which began operations in the fourth quarter of 2009, also contributed to manufacturing income growth in the quarter. The Canadian segment also benefited from higher earnings from our joint ventures, including the bakery. These positive contributors were partially offset by other factors such as higher general and administrative costs including professional advisory fees and increased salaries and benefits reflecting growth in the business as well as investments in our hospitality and co-branding strategies. Lower franchise fees also impacted Canadian segment operating income due to fewer resales and a shift in mix of restaurant types opened during the quarter. On a year-to-date basis Canadian segment operating income was up a solid 10.3% compared to 2009.

    United States

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The U.S. segment experienced growth of 3.3% in same-store sales in the third quarter, amid continued challenging economic circumstances in our core markets. Following a slower start in the quarter due to the significant positive sales impact of Cold Stone Creamery grand openings last year, same store-sales significantly strengthened later in the quarter in our core markets, with September delivering notably improved same-store sales growth.

Our U.S. business grew transactions slightly this quarter, benefiting from continued menu innovation, marketing programs designed to distinguish our quality and value position and ongoing operational programs. Average cheque benefited from pricing introduced early in the second quarter of 2010.

A total of 35 locations were opened this quarter in the U.S. These sites include 4 standard restaurants, 7 non-standard restaurants and 24 self-serve kiosks designed to build upon our strategy of pursuing strategic alliances and partnerships to deliver increased brand penetration to complement standard restaurant development. At the end of the third quarter there were 80 co-branded Tim Hortons and Cold Stone Creamery locations, with 77 of those sites being in Tim Hortons restaurants.

The U.S. segment had an operating loss of $17.5 million in the third quarter due to the $20.9 million asset impairment charge related to three markets in the New England region, described in further detail under Strategic Developments below. Absent this charge, the U.S. segment would have recorded operating income of $3.4 million. This underlying operating performance demonstrates the continued progress and development of our U.S. business.

The underlying operating income improvement was mainly due to increased systemwide sales, resulting in higher distribution income and higher rents and royalties. Operating income improvements from our U.S. coffee roasting operations and fewer Company-operated restaurants also contributed to performance improvements. Currency translation negatively impacted U.S. segment revenues by approximately 6.1% during the quarter and operating income by approximately 5.8% excluding the asset impairment charge.

Strategic Developments

    Company records asset impairment charge, plans to close all of its

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    restaurants in two New England markets in order to focus on core growth

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    markets in Northeast and Midwest U.S.

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Following a comprehensive review and analysis, as noted under segmented performance commentary, the Company has taken a non-cash $20.9 million asset impairment charge in the New England region.

Subsequent to the quarter, the Company has also decided to close all of its locations in the Providence and Hartford market areas, as well as two restaurants in the Portland market. A total of 36 restaurants and 18 self-serve kiosks will be closed in the fourth quarter, and we expect to take an additional charge, which is not expected to exceed $30 million, in the fourth quarter relating to lease and other location closing costs. This charge will be primarily cash.

"We are profitably growing our U.S. business in our core Northeast and Midwest U.S. markets and overall we are seeing sales develop consistent with our expectations and long-term views of success. The restaurants we are closing in the New England region have detracted from that performance and our overall development in the U.S. We believe this step removes a significant impediment to our long-term growth and development," said Don Schroeder, president and CEO. "These restaurants represent a small portion of our overall system in the U.S, but had a disproportionately large negative impact on earnings, average unit volumes and same-store sales growth in the segment," Schroeder added.

Average annual unit volumes for standard restaurants in the Providence and Hartford markets were approximately half of other core markets in the U.S. Collectively, the restaurants that are closing had a negative impact of about $4.4 million on operating income year-to-date to the end of the third quarter in the U.S. segment, excluding the asset impairment charge. We expect this decision to contribute directly to earnings improvement in the U.S. segment in 2011 and we also plan on reinvesting a portion of our savings from these closed restaurants into core growth markets to increase our advertising and marketing scale.

    Up to $400 million in after-tax cash proceeds from sale of interest in

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    Maidstone Bakeries to be deployed in share repurchases and $30 million

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    committed to support franchisees with the intent of partially mitigating

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    anticipated rising operating costs

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The Company realized after-tax cash proceeds of approximately $430 million from the sale of its interest in Maidstone Bakeries, which closed October 29th, 2010.

We expect to record an accounting gain on the sale of Maidstone Bakeries in the fourth quarter of 2010 of between $355 million and $365 million before taxes, and between $310 million and $320 million after-taxes. For accounting purposes, approximately $40 million to $45 million of the pre-tax gain on sale will be deferred and amortized over the remaining term of the supply agreement.

The Company plans to distribute the net cash proceeds through an amended 2010 share repurchase program, and through a 2011 program that will be subject to receipt of regulatory approval.

In order to facilitate distribution of the bakery proceeds, regulatory approval has been obtained from the Toronto Stock Exchange (TSX) to amend our 2010 share repurchase program to increase the number of shares that may be purchased under the program effective November 16th, 2010. Under the amended normal course issuer bid, which will terminate March 2nd, 2011, the Company plans to spend the $200 million originally contemplated in the 2010 normal course issuer bid, along with up to $200 million from proceeds from the Maidstone Bakeries transaction, with the final amount dependent upon average daily trading limits and share price.

It is our intention, subject to regulatory approval and in parallel with our capital allocation process, to distribute the remaining after-tax cash proceeds through a new 2011 share repurchase program, with the proceeds expected to be distributed in their entirety by the end of the third quarter of 2011.

The Company's common shares have been, and will continue to be, purchased through a combination of an automatic trading plan as well as at Management's discretion in compliance with regulatory requirements, and given market, cost and other considerations. There can be no assurance as to the precise number of shares that will be repurchased under share repurchase programs, or the aggregate dollar amount of the shares purchased. Tim Hortons may discontinue purchases at any time, subject to compliance with applicable regulatory requirements. Shares purchased pursuant to share repurchase programs will be cancelled.

The Company has also committed the remaining $30 million from the sale with the intent of supporting our key relationship with restaurant owners to help to partially mitigate anticipated rising operating costs.

    Board declares dividend payment of $0.13 per common share

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A quarterly dividend of $0.13 per common share has been declared by the Board of Directors, payable on December 14th, 2010 to shareholders of record as of December 1st, 2010. Dividends are declared and paid in Canadian dollars to all shareholders with Canadian resident addresses. For U.S. shareholders, dividends paid will be converted to U.S. dollars based on prevailing exchange rates at the time of conversion by Tim Hortons for registered shareholders and by Clearing and Depository Services Inc. for beneficial shareholders.

    Board of Directors Adopts Majority Voting Policy for Election of

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    Directors

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The Board of Directors has adopted a majority voting standard in its Governance Guidelines for the election of directors in uncontested elections. Under the new policy, if a nominee does not receive the affirmative vote of at least the majority of votes cast, the Director shall promptly tender a resignation for consideration by the Nominating and Corporate Governance Committee and the Board. A copy of the amended Governance Guidelines, with additional information on the policy, is available under the Corporate Governance section of the Company's investor relations website at www.timhortons-invest.com


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