Tim Hortons Inc. Announces 2011 Second Quarter Results

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

Financial & Sales Highlights

	Q2 2011	Q2 2010	% Year-over Year Change	YTD 2011
Total revenues	$     702.8	$    639.9	9.8%	$  1,346.2
Operating income	$     143.2	$    149.9	(4.4)%	$     263.8
Operating income attributable to THI(1)	$     142.1	$    142.1	-	$     261.8
Effective tax rate	29.4%	29.5%		29.3%
Net income attributable to THI	$       95.5	$      94.1	1.5%	$     176.2
Diluted earnings per share (EPS) (2)	$       0.58	$      0.54	8.3%	$       1.06
Fully diluted shares	164.0	174.9	(6.2)%	166.0

(All numbers in millions, except EPS and effective tax rate.  All numbers rounded.)

(1)	Operating income attributable to THI is a non-GAAP measure.  Please refer to "Information on non-GAAP Measure" at the end of this release for further details.
(2)	EPS includes a charge of $0.03 per share for the separation related costs and expenses pertaining to the former president and CEO.

 

Same-Store Sales(3)	Q2 2011	Q2 2010	YTD 2011
Canada	3.8%	6.4%	2.9%
U.S.	6.6%	3.1%	5.7%

(3)	Includes average sales at Franchised and Company-operated restaurants open for 13 months or more.
	Substantially all of our restaurants are franchised.

Highlights

• Strengthened same-store sales performance in Canada and robust performance in the U.S. market
  • Canadian same-store sales grew 3.8%, strengthening during the quarter and delivering two-year cumulative growth of more than 10%
  • U.S. strategy execution continues to demonstrate momentum, strong same-store sales growth of 6.6%, two-year cumulative growth up close to 10%
• Total revenues increased 9.8%, driven by systemwide sales growth and higher distribution sales due to commodity pricing
• Operating income continued to be affected as expected by lost contribution due to Maidstone Bakeries joint venture disposition, however EPS up 8.3% due to significantly higher share repurchases
• EPS impacted by $0.03 from separation charge pertaining to former president and CEO, up 13.5% absent this charge

Tim Hortons Inc. (TSX: THI) (NYSE: THI) today announced results for the second quarter ended July 3^rd, 2011.

"Our business performed well in the second quarter with strong top-line results in both Canada and the U.S.  We overcame softness early in the quarter in Canada and delivered strong same-store sales growth in both Canada and the U.S.  We continue to focus on executing our strategic plan, taking advantage of market opportunities and our strengths, to grow our business and respond to our guests' needs," said Paul House, executive chairman, and president and CEO.

Consolidated Results

All percentage increases and decreases represent year-over-year changes for the second quarter of 2011 compared to the second quarter of 2010, unless otherwise noted.

Systemwide sales⁽⁴⁾ grew 7.2% on a constant currency basis in the second quarter.  Total revenues grew 9.8% to $702.8 millioncompared to $639.9 million last year.  Our total revenue growth was driven by distribution sales that outpaced systemwide sales growth, due to higher commodity pricing primarily related to coffee.  Rents and royalties benefited from same-store sales growth and new restaurant growth.  Franchise fees were slightly lower, down 1.7% during the quarter.

Costs and expenses were higher year-over-year primarily due to two factors.  Increased cost of sales reflected the impacts of the bakery disposition and the significantly higher underlying cost of coffee.  General and administrative expenses were negatively impacted by the $6.3 million charge, including advisory and other related costs and expenses pertaining to the separation agreement with the former president and CEO.

Second quarter operating income declined 4.4% to $143.2 million compared to $149.9 million last year, due primarily to the lost contribution from Maidstone Bakeries in the comparable period results and the impact of the separation agreement previously noted.  Systemwide sales growth benefited higher rents and royalties and distribution income in both Canada and the U.S.  Absent costs related to the separation agreement and the net $12.4 million negative year-over-year impact of the sale of Maidstone Bakeries, operating income would have increased 8.9%.

Net income attributable to Tim Hortons increased by 1.5% to $95.5 million in the second quarter, compared to $94.1 million last year, benefiting from a slightly lower effective tax rate during the quarter.

In the second quarter EPS rose 8.3% to $0.58, compared to $0.54 last year.  Our EPS benefited from higher share repurchases related to net proceeds used from our Maidstone Bakeries joint venture sale.  We spent approximately $206 million to repurchase 4.6 million shares in the second quarter, contributing to the cumulative reduction of our average diluted outstanding shares by 6.2% from the comparable period. The separation agreement relating to the former president and CEO negatively impacted EPS by $0.03. Absent this charge, EPS would have increased by 13.5%.

Segmented Performance Commentary

Canada

Same-store sales in the Canadian segment grew by 3.8% as a result of average cheque growth, which benefited from favourable pricing and product mix, resulting in two-year cumulative same-store sales growth of more than 10%. Successful menu initiatives such as Real Fruit Smoothies, which helped grow our cold beverage category, contributed to product mix changes in the quarter.  Same-store sales were softer in April reflecting the partial shift of the Easter holiday, but strengthened sequentially as the quarter progressed.

During the second quarter we opened 24 restaurants in Canada, the majority of which were standard restaurants.

Canadian segment operating income in the second quarter grew 3.8% to $156.4 million compared to $150.7 million last year.  Higher systemwide sales growth and higher distribution income were partially offset by the lost earnings contribution from Maidstone Bakeries.  Higher distribution income was due in part to the temporary positive impact from the timing of coffee pricing and underlying costs in our supply chain, which we expect will reverse in the second half of 2011 and have a neutral effect on the year.

United States

Our U.S. segment continued its same-store sales performance momentum with year-over-year growth of 6.6%, and two-year cumulative growth of just under 10%.  Higher average cheque drove much of our growth, benefiting from pricing in the system, and to a lesser extent, from favourable product mix.  Targeted advertising and promotional efforts to increase brand awareness contributed to this strong performance.

We continue to focus restaurant development and enhanced advertising in our core growth markets.  During the second quarter, we opened 10 new locations in the U.S., including a mix of standard, non-standard and self-serve kiosks.

The U.S. segment had second quarter operating income of $4.0 million, growing 12.0% compared to $3.6 million last year.  Continued profitability improvement reflects higher rents and royalties and distribution income from continued systemwide sales growth.  Planned incremental investments in advertising and marketing, and leveraging savings from previous closures in the New England region, also contributed to our overall U.S. segment performance.

Corporate Developments

Board declares dividend payment of $0.17 per common share 

A quarterly dividend of $0.17 per common share has been declared by the Board of Directors, payable on September 7^th, 2011 to shareholders of record as of August 22^nd, 2011.  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.

	Second quarter ended				Change from prior year
	July 3, 2011		July 4, 2010		$		%
Operating income*	$ 143.2		$ 149.9		$ (6.6)		(4.4)%
Operating income attributable to noncontrolling interests	1.1		7.7		(6.6)		(85.2)%
Operating income attributable to Tim Hortons Inc.	$ 142.1		$ 142.1		$ —		—%
	Year-to-date period ended				Change from prior year
	July 3, 2011		July 4, 2010		$		%
Operating income*	$ 263.8		$ 277.6		$ (13.8)		(5.0)%
Operating income attributable to noncontrolling interests	2.0		14.2		(12.2)		(85.7)%
Operating income attributable to Tim Hortons Inc.	$ 261.8		$ 263.4		$ (1.6)		(0.6)%

* Operating income for the second quarter of 2010 includes $14.4 million related to Maidstone Bakeries ($27.4 million year-to-date 2010), of which 50% is reflected in operating income attributable to Tim Hortons Inc., with the remaining 50% attributable to noncontrolling interests.

Safe Harbor Statement

Certain information in this news release, particularly information regarding future economic performance, finances, and plans, expectations and objectives of management, and other information, constitutes forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  We refer to all of these as forward-looking statements. Various factors including competition in the quick service segment of the food service industry, general economic conditions and others described as "risk factors" in the Company's Annual Report on Form 10-K filed February 25^th, 2011 with the U.S. Securities and Exchange Commission and Canadian Securities Administrators, could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements.

As such, readers are cautioned not to place undue reliance on forward-looking statements contained in this news release, which speak only as to management's expectations as of the date hereof.  Forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: the absence of an adverse event or condition that damages our strong brand position and reputation; the absence of a material increase in competition within the quick service restaurant segment of the food service industry; commodity costs; continuing positive working relationships with the majority of the Company's restaurant owners; the absence of any material adverse effects arising as a result of litigation; there being no significant change in the Company's ability to comply with current or future regulatory requirements; and general worldwide economic conditions.

We are presenting this information for the purpose of informing you of management's current expectations regarding these matters, and this information may not be appropriate for any other purpose.  We assume no obligation to update or alter any forward-looking statements after they are made, whether as a result of new information, future events, or otherwise, except as required by applicable law.  Please review the Company's Safe Harbor Statement atwww.timhortons.com/en/about/safeharbor.html.

⁽⁴⁾ Total systemwide sales growth includes restaurant level sales at both Company-operated and Franchised restaurants. Approximately 99.4% of our consolidated system is franchised as at July 3^rd, 2011. Systemwide sales growth is determined using a constant exchange rate to exclude the effects of foreign currency translation. U.S. dollar sales are converted to Canadian dollar amounts using the average exchange rate of the base quarter for the period covered. Systemwide sales growth excludes sales from our Republic of Ireland and United Kingdom licensed locations. Systemwide sales growth in Canadian dollars, including the effects of foreign currency translation, was 6.7% for the second quarter ended 2011 and 8.1% for the same period in 2010.

Tim Hortons Inc. Overview

Tim Hortons is one of the largest publicly-traded restaurant chains in North America based on market capitalization, and the largest in Canada. Operating in the quick service segment of the restaurant industry, Tim Hortons appeals to a broad range of consumer tastes, with a menu that includes premium coffee, flavored cappuccinos, specialty teas, home-style soups, fresh sandwiches, wraps, hot breakfast sandwiches and fresh baked goods, including our trademark donuts. As of July 3^rd, 2011, Tim Hortons had 3,811 systemwide restaurants, including 3,189 in Canada and 622 in the United States. More information about the Company is available at www.timhortons.com.

 

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands of Canadian dollars, except share and per share data)

(Unaudited)

		Second Quarter Ended
		July 3, 2011		July 4, 2010		$ Change		% Change
REVENUES
Sales		$498,058		$444,344		$53,714		12.1%
Franchise revenues:
	Rents and royalties	185,389		175,879		9,510		5.4%
	Franchise fees	19,313		19,639		(326)		(1.7%)
		204,702		195,518		9,184		4.7%
TOTAL REVENUES		702,760		639,862		62,898		9.8%
COSTS AND EXPENSES
Cost of sales		434,051		375,347		58,704		15.6%
Operating expenses		65,102		61,560		3,542		5.8%
Franchise fee costs		20,419		20,379		40		0.2%
General and administrative expenses		43,969		36,745		7,224		19.7%
Equity (income)		(3,820)		(3,760)		(60)		1.6%
Other expense (income), net		(179)		(260)		81		n/m
TOTAL COSTS AND EXPENSES, NET		559,542		490,011		69,531		14.2%
OPERATING INCOME		143,218		149,851		(6,633)		(4.4%)
Interest (expense)		(7,427)		(6,878)		(549)		8.0%
Interest income		851		113		738		n/m
INCOME BEFORE INCOME TAXES		136,642		143,086		(6,444)		(4.5%)
INCOME TAXES		40,202		42,161		(1,959)		(4.6%)
Net Income		96,440		100,925		(4,485)		(4.4%)
Net income attributable to noncontrolling interests		891		6,804		(5,913)		n/m
NET INCOME ATTRIBUTABLE TO TIM HORTONS INC.		$95,549		$94,121		$1,428		1.5%
Basic earnings per common share attributable to Tim Hortons Inc.		$0.58		$0.54		$0.04		8.4%
Diluted earnings per common share attributable to Tim Hortons Inc.		$0.58		$0.54		$0.04		8.3%
Weighted average number of common shares outstanding - Basic (in thousands)		163,448		174,586		(11,138)		(6.4%)
Weighted average number of common shares outstanding - Diluted (in thousands)		163,961		174,873		(10,912)		(6.2%)
Dividend per common share		$0.17		$0.13		$0.04

 n/m - not meaningful

(all numbers rounded)

 

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands of Canadian dollars, except share and per share data)

(Unaudited)

 

		Year-to-date Period Ended
		July 3, 2011		July 4, 2010		$ Change		% Change
REVENUES
Sales		$952,535		$850,292		$102,243		12.0%
Franchise revenues:
	Rents and royalties	353,219		335,839		17,380		5.2%
	Franchise fees	40,493		36,343		4,150		11.4%
		393,712		372,182		21,530		5.8%
TOTAL REVENUES		1,346,247		1,222,474		123,773		10.1%
COSTS AND EXPENSES
Cost of sales		836,383		722,394		113,989		15.8%
Operating expenses		127,256		120,285		6,971		5.8%
Franchise fee costs		41,736		38,205		3,531		9.2%
General and administrative expenses		83,965		71,417		12,548		17.6%
Equity (income)		(6,933)		(7,017)		84		(1.2%)
Other expense (income), net		19		(397)		416		n/m
TOTAL COSTS AND EXPENSES, NET		1,082,426		944,887		137,539		14.6%
OPERATING INCOME		263,821		277,587		(13,766)		(5.0%)
Interest (expense)		(14,803)		(12,325)		(2,478)		20.1%
Interest income		2,527		460		2,067		n/m
INCOME BEFORE INCOME TAXES		251,545		265,722		(14,177)		(5.3%)
INCOME TAXES		73,691		80,224		(6,533)		(8.1%)
Net Income		177,854		185,498		(7,644)		(4.1%)
Net income attributable to noncontrolling interests		1,626		12,488		(10,862)		n/m
NET INCOME ATTRIBUTABLE TO TIM HORTONS INC.		$176,228		$173,010		$3,218		1.9%
Basic earnings per common share attributable to Tim Hortons Inc.		$1.06		$0.99		$0.07		7.9%
Diluted earnings per common share attributable to Tim Hortons Inc.		$1.06		$0.99		$0.07		7.7%
Weighted average number of common shares outstanding - Basic (in thousands)		165,555		175,318		(9,763)		(5.6%)
Weighted average number of common shares outstanding - Diluted (in thousands)		166,014		175,571		(9,557)		(5.4%)
Dividend per common share		$0.34		$0.26		$0.08

 

 

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands of Canadian dollars)

		As at
		July 3,  2011		January 2, 2011
		(Unaudited)
ASSETS
Current assets
	Cash and cash equivalents	$96,177		$574,354
	Restricted cash and cash equivalents	72,786		67,110
	Restricted investments	-		37,970
	Accounts receivable, net	257,363		182,005
	Notes receivable, net	12,064		12,543
	Deferred income taxes	7,681		7,025
	Inventories and other, net	137,948		100,712
	Advertising fund restricted assets	27,287		27,402
Total current assets		611,306		1,009,121
Property and equipment, net		1,370,234		1,373,670
Notes receivable, net		4,376		3,811
Deferred income taxes		12,161		13,730
Intangible assets, net		4,820		5,270
Equity investments		44,879		44,767
Other assets		53,782		31,147
Total assets		$2,101,558		$2,481,516

 

 

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands of Canadian dollars, except share data)

 

				As at
				July 3, 2011		January 2, 2011
				(Unaudited)
LIABILITIES AND EQUITY
Current liabilities
	Accounts payable			$158,331		$142,444
	Accrued liabilities:
		Salaries and wages		13,878		20,567
		Taxes		32,744		65,654
		Other		142,255		209,663
	Deferred income taxes			330		2,205
	Advertising fund restricted liabilities			40,082		41,026
	Current portion of long-term obligations			10,385		9,937
Total current liabilities				398,005		491,496
Long-term obligations
	Long-term debt			346,425		344,726
	Advertising fund restricted debt			491		468
	Capital leases			86,765		82,217
	Deferred income taxes			6,171		8,237
	Other long-term liabilities			115,972		111,930
Total long-term obligations				555,824		547,578
Equity
	Equity of Tim Hortons Inc.
		Common shares
			$2.84 stated value per share, Authorized:  unlimited shares,
			Issued:  161,437,040 and 170,664,295 shares, respectively	457,845		484,050
		Contributed surplus		4,798		-
		Common shares held in trust, at cost: 314,653 and 278,082 shares, respectively		(11,506)		(9,542)
		Retained earnings		847,645		1,105,882
		Accumulated other comprehensive loss		(157,823)		(143,589)
	Total equity of Tim Hortons Inc.			1,140,959		1,436,801
	Noncontrolling interests			6,770		5,641
Total equity				1,147,729		1,442,442
Total liabilities and equity				$2,101,558		$2,481,516

 

 

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of Canadian dollars)

 

		Year-to-date Period Ended
		July 3, 2011		July 4, 2010
		(Unaudited)
CASH FLOWS PROVIDED FROM (USED IN) OPERATING ACTIVITIES
Net income		$177,854		$185,498
Adjustments to reconcile net income to net cash provided by operating activities
	Depreciation and amortization	56,564		57,874
	Stock-based compensation expense	11,162		5,447
	Amortization of Maidstone Bakeries' supply agreement	(4,127)		-
	Deferred income taxes	(2,695)		1,493
Changes in operating assets and liabilities
	Restricted cash and cash equivalents	(5,886)		10,697
	Accounts and notes receivable	(77,506)		19,835
	Inventories and other	(37,996)		(27,206)
	Accounts payable and accrued liabilities

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