Tim Hortons reports Q1 net earnings of C$90.9M, up 5.5% from year-ago period as total revenues 4.8% to C$766.4M

Nevin Barich

OAKVILLE, Ontario , May 7, 2014 (press release) – Highlights

Significantly improved same-store sales growth in both segments compared to Q1 2013

EPS growth benefited from increased operating income and the positive impact of our share repurchase program; Q1 2013 EPS was negatively impacted by a corporate reorganization charge of $0.05.

Completed $450 million private offering of senior unsecured notes

Completed targeted $1 billion of share repurchases between August 2013 and April 201

Tim Hortons Inc. (TSX: THI, NYSE: THI) today announced results for the first quarter ended March 30, 2014.

"We made continued progress in the first quarter as we focused on aspects of our business where we could make an immediate impact, including simplifying our operations, enhancing our restaurants and introducing menu innovations," said Marc Caira, president and CEO. "Our organization has mobilized quickly to begin executing on the strategic plan we announced in February. We will see further progress this year in key areas of our strategic roadmap as we seek to drive sustainable long-term growth."

Consolidated Results

All percentage increases and decreases represent year-over-year changes for the first quarter of 2014 compared to the first quarter of 2013, unless otherwise noted.

Systemwide sales(4) increased 5.1% 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 1.9% in the U.S.

Total revenues increased 4.8% to $766.4 million compared to $731.5 million last year. Distribution sales growth of 4.9% was in line with the increase in systemwide sales. Rents and royalties revenue growth of 6.4% was also driven primarily by the increase in systemwide sales. Franchise fee revenue growth of 28.1% resulted from higher levels of standard restaurant openings in the first quarter, which also led to a significant increase in associated franchise fee costs.

Operating expenses increased by 7.3%, due to increased rent and depreciation related to new restaurant openings and increased depreciation related to renovations, partially offset by lower support costs related to property maintenance. G&A expenses were relatively flat, increasing by 1.4% in the quarter. Other expense included $3.1 million of expenses related to the launch of our co-branded credit card (the Double DoubleTM Card), which is expected to be cost-neutral to operating income over fiscal 2014. We recognized $9.5 million of corporate reorganization expenses in the first quarter of 2013, and incurred none this quarter.

Operating income of $145.3 million was up 13.6% from $127.9 million a year earlier. Adjusted operating income(3), which excludes the impact of the 2013 corporate reorganization costs, increased 5.7%. (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. increased 5.5% to $90.9 million, as higher operating income was partially offset by increased interest expense and a higher effective tax rate, both of which resulted primarily from our recapitalization.

EPS of $0.66 grew by 16.9% due to the expanded share repurchase program, which led to a decrease of 15.0 million shares outstanding, on average, compared to the first quarter of 2013. Corporate reorganization expenses negatively impacted EPS by $0.05 in Q1 2013.

Segmented Performance Commentary

Same-store sales growth was significantly higher than the first quarter of 2013 in both Canada and the U.S., despite ongoing challenges relating to macro-economic and competitive environments, which have carried over from last year, and unfavourable weather conditions. The timing of statutory holidays compared to last year had a slightly favourable impact on same-store sales results in both markets.

Canada

Canadian same-store sales grew by 1.6% in the quarter due to gains in average cheque, driven by favourable product mix and pricing, partially offset by a decline in same-store transactions. Systemwide transactions grew as a result of new restaurants added to our system.

Operating income in the Canadian segment was $153.5 million, an increase of $7.6 million or 5.2%. Systemwide sales growth of 4.6% led to increased rents and royalties income and a higher allocation of supply chain income, and support costs related to property maintenance were also lower year-over-year. Partially offsetting this growth was the timing of the $3.1 million of expenses related to the launch of the Double Double Card. We opened 23 restaurants in Canada in the first quarter.

United States

Same-store sales in our U.S. segment increased by 1.9% in the quarter, driven by gains in average cheque resulting from favourable product mix and pricing, partially offset by a decline in same-store transactions. Systemwide transactions continued to grow.

The U.S. segment had operating income of $4.4 million, an increase of $3.4 million compared to the first quarter of 2013. Systemwide sales growth of 7.9% led to increased rents and royalties income and a higher allocation of supply chain income. Segment results also benefited from lower relief costs compared to the first quarter of 2013. We opened 11 restaurants in the U.S. during the quarter.

Corporate services

The Corporate services segment had an operating loss of $14.5 million, compared to a loss of $10.7 million in the first quarter of 2013. The increased loss was driven by unfavourable product margins recognized in the first quarter of 2014 compared to favourable product margins recognized a year earlier. Product margin variability is generally expected to reverse within the fiscal year.

Significant Developments & Initiatives

Private offering of $450 million Senior Notes completed

During the first quarter of 2014, we successfully completed a Canadian private placement of $450 million principal amount of senior unsecured 2.85% notes, due April 1, 2019. The debt offering was significantly oversubscribed, demonstrating strong market support for the offering. Net proceeds from the offering were used primarily to repay a bridge credit facility, which was available for general corporate purposes including share repurchases. The debt offering represented the second and final 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 declared a quarterly dividend of $0.32 per common share, payable on June 5, 2014, to shareholders of record as of the close of business on May 22, 2014. 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.

Tim Hortons conference call today at 2:30 p.m. (EDT) Wednesday, May 7, 2014

Tim Hortons will host a conference call today to discuss first quarter results, scheduled to begin at 2:30 p.m. (EDT). The dial-in number is (416) 915-3239 or (877) 881-1303. No access code is required. A simultaneous web cast of the call, including presentation material, will be available at www.timhortons-invest.com. A replay of the call will be available until May 14, 2014 and can be accessed at (800) 319-6413. The call replay reservation number is 1447#. The call and presentation material will also be archived for one year in the Events and Presentations section of our website.

Annual and Special Meeting of Shareholders

The Tim Hortons Annual and Special Meeting of Shareholders will be held on Thursday, May 8 at 10:30 a.m. (EDT) at the Metro Toronto Convention Centre, 255 Front Street West, in Toronto, Ontario. A live web cast of the meeting, including presentation material, will be available at www.timhortons-invest.com in the Events and Presentations section, where an archive of the web cast and presentation material will also be available for a period of one year.

Safe Harbor Statement

Certain information in this news release, particularly information regarding future 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 2013 Annual Report on Form 10-K filed on February 25, 2014, and our Quarterly Report on Form 10-Q expected to be filed on May 7, 2014 with the U.S. Securities and Exchange Commission and the Canadian Securities Administrators, could affect the Company's actual results and cause such results to differ materially from those expressed in, or implied by, 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: (i) prospects and execution risks concerning our growth strategy; (ii) the absence of an adverse event or condition that damages our strong brand position and reputation; (iii) the absence of a material increase in competition or in volume or type of competitive activity within the quick service restaurant segment of the food service industry; (iv) cost and availability of commodities; (v) the absence of an adverse event or condition that disrupts our distribution operations or impacts our supply chain; (vi) continuing positive working relationships with the majority of the Company's restaurant owners; (vii) the absence of any material adverse effects arising as a result of litigation; (viii) there being no significant change in the Company's ability to comply with current or future regulatory requirements; (ix) the ability to retain our senior management team or the inability to attract and retain new qualified personnel; * the Company's ability to maintain investment grade credit ratings; (xi) the Company's ability to obtain financing on favorable terms; and (xii) 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 at www.timhortons.com/ca/en/about/safeharbor.html.

(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 to better evaluate underlying operational growth rates year over year. 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. Adjusted operating income should not be considered a measure of income generated by our business. The reconciliation of operating income, a GAAP measure, to adjusted operating income, a non-GAAP measure, is set forth in the table below:

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 March 30, 2014, Tim Hortons had 4,524 systemwide restaurants, including 3,610 in Canada, 870 in the United States and 44 in the Gulf Cooperation Council. More information about the Company is available at www.timhortons.com.

Industry Intelligence Editor's Note: This press release omits select charts and/or marketing language for editorial clarity. Click here to view the full report.

* All content is copyrighted by Industry Intelligence, or the original respective author or source. You may not recirculate, redistrubte or publish the analysis and presentation included in the service without Industry Intelligence's prior written consent. Please review our terms of use.