Tim Hortons Inc. Announces 2013 Fourth Quarter Results:

2014-02-24
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  • Tim Hortons Same-store sales growth finished ahead of full year - Quarterly dividend increased 23.1% to $0.32 per common share

    Same-store sales growth finished ahead of full year

    Quarterly dividend increased 23.1% to $0.32 per common share;

    New share repurchase program of up to $440 million announced

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

    Financial & Sales Highlights  
    Performance Q4 2013

    Q4 2012

    %

    Change

    2013

    Full Year

    2012

    Full Year

    %

    Change

    Total revenues  $ 898.5   $ 811.6   10.7% $ 3,255.5   $ 3,120.5   4.3 %
    Operating income $ 147.8   $ 150.4   (1.8)% $ 621.1   $ 594.5   4.5 %
    Adjusted operating income(1) $ 167.5   $ 159.4   5.1% $ 651.9   $ 613.4   6.3 %
    Effective tax rate 25.2

    % 28.9

    %   26.8

    % 27.7

    %  
    Net income attributable to THI $ 100.6   $ 100.3   0.3% $ 424.4   $ 402.9   5.3 %
    Diluted earnings per share

    attributable to THI ("EPS")

    $ 0.69   $ 0.65   6.2% $ 2.82   $ 2.59   8.9 %
    Fully diluted shares 145.5

      154.1

      (5.6)% 150.6

      155.7

      (3.2) %

     

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

     

    (1) Adjusted operating income is a non-GAAP measure, and excludes corporate reorganization expenses of $0.7 million in Q4 2013 ($11.8 million in fiscal 2013), Cold Stone Creamery de-branding costs of $19.0 million in Q4 2013 ($19.0 million in fiscal 2013), and corporate reorganization expenses of $9.0 million in Q4 2012 ($18.9 million in fiscal 2012).  Please refer to "Information on non-GAAP Measure" and the reconciliation information in footnote (3) of this release for details of reconciling items.

     

                     
    Same-Store Sales(2)   Q4 2013   Q4 2012   2013 

    Full Year

      2012 

    Full Year

    Canada   1.6%   2.6%   1.1%   2.8%
    U.S.   3.1%   3.2%   1.8%   4.6%

     

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

    Highlights

    • In Q4 both the Canadian and U.S. segments delivered same-store sales growth ahead of full year
    • Q4 operating income affected by decisions to de-brand Cold Stone Creamery within Tim Hortons locations in Canada, and to close certain underperforming restaurants in the U.S.
    • Completed 139 restaurant renovations and 639 drive-thru enhancements in Canada in Q4
    • Completed $450 million private offering of senior unsecured notes during the fourth quarter
    • Quarterly dividend increased 23.1% to $0.32 per common share
    • Announced new share repurchase program of up to $440 million
    • 2014 performance and financial targets announced

    Tim Hortons Inc. (TSX: THI, NYSE: THI) announced results for the fourth quarter and fiscal year ended December 29, 2013.

    "During the fourth quarter, we made important strides to position the Company for further success," said Marc Caira, president and CEO.  "We have worked to enhance our capital structure, as well as simplify our operations, strengthen our menu, and refresh our restaurants, all to provide the ultimate guest experience.  I believe the choices we are making today and the strategic roadmap we are developing will set the stage for continued long-term growth and profitability."

    Consolidated Results

    All percentage increases and decreases represent year-over-year changes for the fourth quarter of 2013 compared to the fourth quarter of 2012, unless otherwise noted.

    Systemwide sales(4) increased 5.4% on a constant currency basis.  This growth resulted from new restaurant development in Canada and the U.S., and from same-store sales growth of 1.6% in Canada and 3.1% in the U.S.

    Total revenues increased 10.7% to $898.5 million compared to $811.6 million last year.  The revenue growth rate outpaced that of systemwide sales due to a significant increase in franchise fees, primarily resulting from higher levels of renovations and standard restaurant development, which also led to a significant increase in franchise fee costs.  Increases of 6.0% in rents and royalties revenues and 5.2% in distribution sales were more in line with the growth in systemwide sales.

    Variable interest entities ("VIEs") sales increased 5.0%, as higher sales more than offset a slight decline in the number of non-owned restaurants consolidated for accounting purposes compared to the fourth quarter of 2012.

    Cost of sales increased by 3.7%, which was below the growth rate of sales due to lower underlying commodity costs. Franchise fee costs grew significantly due to increased renovation and development activity.  G&A expenses increased by 6.7%, resulting primarily from higher professional fees.  We recognized corporate reorganization expenses of $0.7 million, compared to $9.0 million in the fourth quarter of 2012.  Operating expenses increased by 24.6%, which includes U.S. restaurant closure costs, as described below.

    Operating income of $147.8 million was down 1.8% from $150.4 million a year earlier.  Two key decisions impacted operating income during the fourth quarter.  The first decision was to remove Cold Stone Creamery from Tim Hortons locations in Canada, following an evaluation of strategic considerations and the overall performance of the Cold Stone Creamery business in Tim Hortons restaurants in Canada.  This decision, which will allow our restaurant owners to simplify their operations and focus entirely on their core business, resulted in de-branding costs of $19.0 million in the fourth quarter.  This decision does not affect our U.S. Cold Stone Creamery co-branded operations, as the nature of the business, and the support required by the Company, is significantly different than in Canada.  The second decision was to close a small number of underperforming restaurants in various U.S. markets in the fourth quarter, resulting in a $6.6 million charge, which has been included in operating expenses.

    Adjusted operating income(3) of $167.5 million, which excludes the impact of the corporate reorganization and Cold Stone Creamery de-branding costs, increased 5.1%, in line with systemwide sales growth.  (Please refer to "Information on non-GAAP Measure" below for a reconciliation of adjusted operating income to operating income, the most directly comparable GAAP measure).

    Net income attributable to Tim Hortons Inc. was $100.6 million, a slight increase from $100.3 million a year earlier, as the impact of a lower effective tax rate, due to certain discrete items recognized in Q4 2013, was offset by reduced operating income.

    EPS of $0.69 grew by $0.04 or 6.2% due to the expanded share repurchase program, which led to a decrease of 8.6 million shares outstanding year-over-year.  The Cold Stone Creamery de-branding costs and corporate reorganization expenses negatively impacted EPS by $0.11 in Q4 2013, and corporate reorganization expenses negatively impacted EPS by $0.04 in Q4 2012.

    For the full year, systemwide sales(4) increased 4.7% in 2013, on a constant currency basis.  Total revenues rose 4.3% to $3.3 billion compared to $3.1 billion last year.  Operating income was $621.1 million, up 4.5% from $594.5 million in 2012.  Adjusted operating income(3) grew 6.3% to $651.9 million.  (Please refer to "Information on Non-GAAP Measure" below for a reconciliation of adjusted operating income to operating income, the nearest GAAP measure.)  Net income attributable to THI in 2013 was up 5.3% to $424.4 million.

    EPS for the full year was $2.82, representing growth of 8.9%.  The 2013 earnings outlook we communicated in February 2013 of $2.87 to $2.97 per share did not include the $0.06 per share corporate reorganization charge taken during the fiscal year, and did not contemplate the $0.10 per share impact of the Cold Stone Creamery de-branding.  Full-year EPS benefited from 3.2% fewer shares in 2013, due to our share repurchase program, which was expanded mid-year.  EPS also benefited from an effective tax rate of 26.8% for the full year, compared to the 28% rate assumed in our earnings outlook, and 27.7% in 2012.

    Segmented Performance Commentary

    We have reclassified the segment data for 2012 to conform to the current period's presentation, consistent with changes to our reportable segments announced in 2013.

    We grew same-store sales in both Canada and the U.S. in the fourth quarter, in the face of ongoing challenges relating to macro-economic conditions, weak consumer confidence and  persistent competitive intensity in the quick service restaurant sector.

    Canada

    Same-store sales in our Canadian segment grew by 1.6%, due to gains in average cheque, driven by favourable product mix and pricing.  Same-store transactions were lower year-over-year, while systemwide transactions grew as a result of new restaurants added to our system.

    Operating income in the Canadian segment was $165.5 million, a decrease of $3.8 million or 2.3%.  The $19.0 million charge related to the removal of Cold Stone Creamery from Canadian Tim Hortons locations had the effect of reducing segment operating income growth by 11.2%.  A higher allocation of supply chain income and increased rents and royalties income, both resulting from systemwide sales growth of 4.7%, and increased franchise fee income due to additional restaurant sales and renovations, contributed positively to operating income.  We opened 89 restaurants in Canada in the fourth quarter.

    On a full-year basis, 2013 same-store sales growth of 1.1% in the Canadian segment was  below our original target range of 2% to 4%; we believe this was due to ongoing challenging economic conditions and increased competitive intensity in our industry.  We opened 168 restaurants in 2013, within our targeted range of 160-180 openings, and we closed 16 locations.  The Canadian segment delivered operating income of $665.7 million, an increase of 1.8% over 2012.

    United States

    U.S. same-store sales increased by 3.1% in the quarter, driven primarily by favourable product mix and pricing.

    The U.S. segment had an operating loss of $1.1 million, compared to operating income of $2.4 million in the fourth quarter of 2012.  Operating income was negatively affected by $6.6 million of restaurant closure costs.  The segment benefited from increased franchise fee income due to a higher number of franchised restaurant openings, and from systemwide sales growth of 10.7%, which led to increased rents and royalties income.  We opened 53 restaurants in the U.S. during the quarter.

    On a full-year basis, same-store sales growth of 1.8% in the U.S. segment was below our targeted range of 3% to 5% growth.  We opened 79 new locations in the U.S. in 2013, comprised of 74 standard and non-standard full-serve restaurants and five self-serve kiosks.  Our targeted range was 70 to 90 full-serve restaurants.  We also closed 20 full-serve and four self-serve locations during the year.  Operating income for the segment was $5.1 million in 2013, compared to $9.6 million in 2012.

    Corporate services

    The operating loss in the Corporate services segment was $18.1 million, compared to a loss of $14.1 million in the fourth quarter of 2012.  The increased loss was driven by higher G&A expenses associated with strategic activities, and by reduced distribution income due to the reversal of favourability from commodity cost changes recognized earlier in the year, as anticipated.  The full-year operating loss in the segment was $44.5 million, compared to a loss of $57.0 million in 2012.

    Our international partner, Apparel FZCO, opened five restaurants in the Gulf Cooperation Council (GCC) during the fourth quarter, and 14 locations for the full year.  At year-end, we had 38 restaurants in the GCC.

    Significant Developments & Initiatives

    Private offering of $450 million Senior Notes completed

    During the fourth quarter of 2013, we successfully completed a Canadian private placement of $450 million principal amount of senior unsecured 4.52% notes, due December 1, 2023. The debt offering was significantly oversubscribed, indicating strong market support for the Company.  Net proceeds from the offering were used primarily to repay a bridge credit facility, which is available for general corporate purposes including share repurchases.  The debt offering represented the first phase of our plan to raise up to $900 million in additional debt, as approved by our Board of Directors in August 2013.

    Board declares dividend payment of $0.32 per common share

    The Board of Directors has approved an increase in the quarterly dividend of approximately 23.1%, to $0.32 per common share, payable on March 18, 2014, to shareholders of record as of the close of business on March 3, 2014. The payment of future dividends remains subject to Board approval. Dividends declared will be 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 CDS Clearing and Depository Services Inc. for beneficial shareholders.

    New share repurchase program of up to $440 million announced

    Tim Hortons has obtained regulatory approval from the Toronto Stock Exchange (TSX) to commence a new share repurchase program for up to $440 million in common shares, not to exceed the regulatory maximum of 13,726,219 shares, representing 10% of the Company's public float as of February 14th, 2014, as defined under TSX rules. This normal course issuer bid is planned to commence on February 28th, 2014 and to expire on February 27th, 2015.  The new program reflects the amount required to complete our expanded share repurchase, as approved by the Board in August 2013, in addition to our traditional annual program.

    We have provided additional details on our new share repurchase program in a separate press release issued February 20, 2014.

    Expanding single-serve coffee to retail channels

    The Company announced that it will begin selling its single-serve coffee through the grocery channel this summer.  We currently sell premium Tim Hortons coffee in the TASSIMO® and Tim Hortons RealCupTM formats exclusively through our network of nearly 4,500 restaurants, online through our website, and in the U.S. through selective other channels.  By adding the grocery channel, through which we already distribute our canned coffee, we will increase the convenience for consumers who wish to purchase and enjoy Tim Hortons products.  We anticipate that responding to this unmet consumer need will benefit both the Company and our restaurant owners.

    2014 Outlook

    In 2014 we anticipate continued growth, but we will also be investing in key drivers intended to facilitate accelerated growth beyond 2014, which will be outlined at the Investor Conference.  The Company has established the following 2014 performance targets:

    • Diluted earnings per share (EPS) of $3.17 to $3.27
    • 2014 same-store sales growth of 1% to 3% in Canada and 2% to 4% in the U.S.
    • A total of 215 to 255 restaurant openings in Canada, the U.S. and the Gulf Cooperation Council, including:
      • 140 to 160 restaurant openings in Canada, approximately evenly split between standard and non-standard format restaurants
      • 40 to 60 full-serve restaurant openings in the U.S., approximately evenly split between standard and non-standard format restaurants
    • Capital expenditures between $180 million to $220 million, including approximately US$30 million in the U.S.
    • Effective tax rate of approximately 29%.

    The operational objectives and financial outlook (collectively, targets) set forth above are for 2014 only, are forward-looking, and are based on our expectations and outlook and shall be effective only as of the date the targets were originally issued. The targets established for 2014 are based on accounting, tax and/or other regulatory or legislative rules in place at the time the targets were issued. The impact of future changes in accounting, tax and/or other regulatory or legislative rules that may or may not become effective in fiscal 2014, changes to our share repurchase activities, and accounting, tax, audit or other matters not contemplated at the time the targets were established, could affect our business and are not included in the determination of these targets.

    Except as required by applicable securities laws, we do not intend to update our annual targets. These targets and our performance generally are subject to various risks and uncertainties ("risk factors") which may impact future performance and our achievement of these targets. Refer to our safe harbor statement, which incorporates by reference our "risk factors," set forth at the end of this release, and our Annual Report on Form 10-K for 2012 filed on February 21st, 2013, our Quarterly Report on Form 10-Q filed on November 7th, 2013, and our Annual Report on Form 10-K for 2013 (expected to be filed on or about February 25th, 2014).

    Annual Meeting of Shareholders

    The Board of Directors has set a record date of March 11th, 2014 for the annual meeting of shareholders. The meeting will be held on Thursday, May 8th at 10:30 a.m. EDT at the Metro Toronto Convention Centre, 255 Front Street West, in Toronto, Ontario.

     

    (3)Information on non-GAAP Measure

    Adjusted operating income is a non-GAAP measure. Management uses adjusted operating income to assist in the evaluation of year-over-year performance and believes that it will be helpful to investors as a measure of underlying operational growth rates. This non-GAAP measure is not intended to replace the presentation of our financial results in accordance with GAAP. The Company's use of the term adjusted operating income may differ from similar measures reported by other companies. The reconciliation of operating income, a GAAP measure, to adjusted operating income, a non-GAAP measure, is set forth in the table below:

    Reconciliation of Adjusted Operating Income

     

    Q4 2013

     

    Q4 2012

     

    YTD 2013

    YTD 2012

      (in millions)

    (in millions)

    Operating income  $ 147.8   $ 150.4   $ 621.1   $ 594.5  
    Add: Corporate reorganization expenses  0.7

      9.0

      11.8

      18.9

     
    Add: Cold Stone Creamery de-branding costs  19.0

      0.0

      19.0

      0.0

     
    Adjusted operating income  $ 167.5   $ 159.4   $ 651.9   $ 613.4  

    ______________

    All numbers rounded

     

    (4)Total systemwide sales growth includes restaurant level sales at both Company-operated and franchised restaurants. Approximately 99.6% of our systemwide restaurants were franchised as at December 29, 2013. Systemwide sales growth is determined using a constant exchange rate where noted, 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 year for the period covered.  For the fourth quarter of 2013, systemwide sales on a constant currency basis increased 5.4% compared to the fourth quarter of 2012.  Systemwide sales growth in Canadian dollars, including the effects of foreign currency translation, was 5.9% in the fourth quarter of 2013.  Full-year systemwide sales increased 4.7% on a constant currency basis in 2013, and 5.0% in Canadian dollars.  Systemwide sales are important to understanding our business performance as they impact our franchise royalties and rental income, as well as our distribution income. Changes in systemwide sales are driven by changes in average same-store sales and changes in the number of systemwide restaurants, and are ultimately driven by consumer demand.

    We believe systemwide sales and same-store sales growth provide meaningful information to investors regarding the size of our system, the overall health and financial performance of the system, and the strength of our brand and restaurant owner base, which ultimately impacts our consolidated and segmented financial performance. Franchised restaurant sales are not generally included in our Condensed Consolidated Financial Statements (except for certain non-owned restaurants consolidated in accordance with applicable accounting rules).  The amount of systemwide sales impacts our rental and royalties revenues, as well as distribution revenues.

    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, hot and cold specialty drinks (including lattes, cappuccinos and espresso shots), specialty teas and fruit smoothies, fresh baked goods, grilled Panini and classic sandwiches, wraps, soups, prepared foods and other food products.  As of December 29, 2013, Tim Hortons had 4,485 systemwide restaurants, including 3,588 in Canada, 859 in the United States and 38 in the Gulf Cooperation Council. 

    TIM HORTONS INC. AND SUBSIDIARIES
    CONSOLIDATED STATEMENT OF OPERATIONS
    (in thousands of Canadian dollars, except share and per share data)
    (Unaudited)
                                   
          Fourth quarter ended                
          December 29,

    2013

      December 30,

    2012

      $ Change   % Change
    Revenues                              
      Sales     $ 597,655   $ 570,044   $   27,611       4.8 %
      Franchise revenues                              
        Rents and royalties        212,364      200,277        12,087       6.0 %
        Franchise fees        88,485      41,278        47,207       n/m
             300,849      241,555        59,294       24.5 %
    Total revenues        898,504      811,599        86,905       10.7 %
    Costs and expenses                              
      Cost of sales        520,601      501,901        18,700       3.7 %
      Operating expenses        90,810      72,877        17,933       24.6 %
      Franchise fee costs        78,862      39,485        39,377       n/m
      General and administrative expenses        44,030      41,277        2,753       6.7 %
      Equity (income)        (3,830)      (3,637)        (193)       5.3 %
      Corporate reorganization expenses        729      9,032        (8,303)       n/m
      De-branding costs        19,016      —        19,016       n/m
      Other (income) expense, net        515      260        255       n/m
    Total costs and expenses, net        750,733      661,195        89,538       13.5 %
    Operating income        147,771      150,404        (2,633)       (1.8)%
      Interest (expense)        (12,087)      (8,652)        (3,435)       39.7 %
      Interest income        974      1,102        (128)       (11.6)%
    Income before income taxes        136,658      142,854        (6,196)       (4.3)%
    Income taxes        34,449      41,258        (6,809)       (16.5)%
    Net income        102,209      101,596        613       0.6 %
    Net income attributable to non controlling 

    interests

           1,610      1,255        355       28.3 %
    Net income attributable to Tim Hortons Inc.     $ 100,599   $ 100,341   $   258       0.3 %
    Basic earnings per common share attributable 

    to Tim Hortons Inc.

        $ 0.69   $ 0.65        0.04       6.2 %
    Diluted earnings per common share 

    attributable to Tim Hortons Inc.

        $ 0.69   $ 0.65        0.04       6.2 %
    Weighted average number of common shares 

    outstanding (in thousands) - Basic

           145,083      153,713        (8,630)       (5.6)%
    Weighted average number of common shares 

    outstanding (in thousands) - Diluted

           145,533      154,142        (8,609)       (5.6)%
    Dividends per common share     $ 0.26   $ 0.21        0.05
                   

                                   
    TIM HORTONS INC. AND SUBSIDIARIES
    CONSOLIDATED STATEMENT OF OPERATIONS
    (in thousands of Canadian dollars, except share and per share data)
    (Unaudited)
                                   
          Year-ended                
          December 29,

    2013

      December 30,

    2012

      $ Change   % Change
    Revenues                              
      Sales     $ 2,265,884   $ 2,225,659   $   40,225       1.8 %
      Franchise revenues                              
        Rents and royalties        821,221      780,992        40,229       5.2 %
        Franchise fees        168,428      113,853        54,575       47.9 %
             989,649      894,845        94,804       10.6 %
    Total revenues        3,255,533      3,120,504        135,029       4.3 %
    Costs and expenses                              
      Cost of sales        1,972,903      1,957,338        15,565       0.8 %
      Operating expenses        321,836      284,321        37,515       13.2 %
      Franchise fee costs        162,605      116,644        45,961       39.4 %
      General and administrative expenses        159,523      163,885        (4,362)       (2.7)%
      Equity (income)        (15,170)      (14,693)        (477)       3.2 %
      Corporate reorganization expenses    



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