Tim Hortons Inc. announces 2014 second quarter results:

News provided by

Aug 06, 2014, 07:30 ET

Significant top-line momentum in both Canada and the U.S. and strong operating performance contributes to 13.6% EPS increase

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

Financial & Sales Highlights


Performance	Q2 2014			Q2 2013			% Change	YTD 2014
Total revenues	$	874.3		$	800.1		9.3%	$	1,640.7
Operating income	$	192.4		$	176.6		8.9%	$	337.7
Effective tax rate		28.3	%		26.1	%			28.5	%
Net income attributable to THI	$	123.8		$	123.7		0.0%	$	214.7
Diluted earnings per share attributable to THI ("EPS")	$	0.92		$	0.81		13.6%	$	1.57
Fully diluted shares (weighted average)		134.4			152.6		(12.0)%		136.5

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


Same-Store Sales⁽¹⁾	Q2 2014	Q2 2013	YTD 2014
Canada	2.6%	1.5%	2.1%
U.S.	5.9%	1.4%	3.9%

(1)	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

Acceleration in same-store sales growth contributed to strong operating performance
Successful product innovation and launches, including the Crispy Chicken Sandwich in Canada and Frozen Hot Chocolate in the U.S., resulted in strong sales growth
Significant advancements made in mobile technology introduced in the quarter, including new mobile payment capabilities
Company expects 2014 EPS and U.S. same-store sales growth to be at the high end or slightly above target ranges

OAKVILLE, ON, Aug. 6, 2014 /PRNewswire/ - Tim Hortons Inc. (TSX: THI, NYSE: THI) today announced results for the second quarter ended June 29, 2014.

"Guests have been responding favourably to our menu and technology innovation, resulting in good momentum in our business. Our second quarter results reflect strong organizational alignment and execution of our Winning in the New Era strategic plan," said Marc Caira, president and CEO.

Consolidated Results

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

Systemwide sales⁽²⁾ increased 6.5% 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 2.6% in Canada and 5.9% in the U.S.

Total revenues grew 9.3% to $874.3 million compared to $800.1 million last year. Systemwide sales growth was the primary driver of both a 9.2% increase in distribution sales and a 7.5% increase in rents and royalties revenue. Franchise fee revenues were significantly higher due to increased levels of restaurant renovations and development in Canada, which also resulted in a significant increase in associated franchise fee costs.

Cost of sales increased by 7.8%, due primarily to growth in distribution cost of sales. Operating expenses increased by 9.6%, due to higher rent and depreciation costs related to new restaurant openings and increased depreciation related to renovations. G&A expenses grew by 5.8% due to increased salaries and benefits resulting primarily from fewer vacancies in the organization this year, and higher professional fees related to initiatives to support the execution of our strategic plan. The comparable quarter of 2013 included $0.6 million of corporate reorganization expenses which did not recur this quarter.

Operating income increased 8.9% to $192.4 million, compared to $176.6 million a year earlier.

Net income attributable to Tim Hortons Inc. was flat at $123.8 million, as growth in operating income was offset by the effects of our recent recapitalization, which resulted in increased interest expense and a higher effective tax rate. The effective tax rate in the second quarter of 2013 was also favourably impacted by a change in reserve balances.

EPS of $0.92 grew by 13.6% due to our strong operating performance, as well as the recent recapitalization and resulting expanded share repurchase program, which led to a decrease of 18.3 million shares outstanding, on average, compared to the second quarter of 2013.

Given our strong sales progression and momentum going into the second half of the year, we expect our EPS for fiscal 2014 to be at the high end, or slightly above, our targeted range of $3.17 to $3.27.

Segmented Performance Commentary

Same-store sales growth rates strengthened considerably in comparison to recent quarters including the second quarter of 2013.

Canada

Canadian same-store sales growth of 2.6% was driven by gains in average cheque resulting from 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. Average cheque benefited from increased sales in the lunch daypart, led by the recent successful introduction of our Crispy Chicken Sandwich, as well as increased sales in the breakfast daypart, driven by new product introductions such as the Turkey Sausage Hot Breakfast Sandwich and our enhanced Hash Brown.

Operating income in the Canadian segment grew 8.1% to $188.9 million. Systemwide sales growth of 5.8% resulted in increased rents and royalties income and a higher allocation of supply chain income. The Canadian segment also benefited from increased franchise fee income. We opened 29 restaurants in Canada in the second quarter.

United States

U.S. same-store sales grew considerably year-over-year, up 5.9% in the quarter, driven by gains in average cheque resulting from favourable product mix and pricing. Cold beverage sales made a positive contribution due to successful new product introductions such as Frozen Hot Chocolate and ongoing innovation around our Iced Capp platform. Continued growth in the breakfast daypart also contributed to same-store sales growth.

On the basis of our significant sales progression year-to-date, we expect that same-store sales growth in the U.S. for 2014 will be at the high end, or slightly above, our targeted range of 2% to 4%.

Operating income in the U.S. segment was $9.3 million, an increase of $6.7 million compared to the second quarter of 2013. Systemwide sales growth of 12.3% resulted in growth in rents and royalties income and a higher allocation of supply chain income. U.S. operating income also benefited from the favourable timing of certain expenses. Our operating momentum in the U.S. has resulted in increasing operating income and continued cash flow contributions from that segment over the first half of 2014.

We opened one restaurant in the U.S. in the second quarter. Subsequent to the quarter, we signed a development agreement with a new partner to add 25 Tim Hortons locations in Richmond County, New York, and Middlesex County, New Jersey over the next 10 years. We have now completed six development agreements in the U.S. representing approximately 135 new restaurants over 10 years.

Corporate services

The Corporate services segment had an operating loss of $8.0 million, compared to a loss of $1.4 million in the second quarter of 2013. The increased loss was driven by increased corporate costs, and unfavourable product margins in our supply chain recognized in the second quarter of 2014 compared to favourable product margins recognized a year earlier. We expect product margin variability to generally reverse within the fiscal year.

Our international partner, Apparel FZCO, opened six restaurants in the Gulf Cooperation Council in the quarter.

Significant Developments & Initiatives

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 September 3, 2014, to shareholders of record as of the close of business on August 18, 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, August 6, 2014

Tim Hortons will host a conference call today to discuss second quarter results, scheduled to begin at 2:30 p.m. (EDT). The dial-in number is (416) 915-3239 or (800) 319-4610. 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 August 13, 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.

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 August 6, 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/corporate/safe-harbor.php.

⁽²⁾ 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 June 29, 2014. 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 second quarter of 2014, systemwide sales on a constant currency basis increased 6.5% compared to the second quarter of 2013. Systemwide sales growth in Canadian dollars, including the effects of foreign currency translation, was 7.2% in the second quarter of 2014. 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 June 29, 2014, Tim Hortons had 4,546 systemwide restaurants, including 3,630 in Canada, 866 in the United States and 50 in the Gulf Cooperation Council. 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
			June 29, 2014		June 30, 2013		$ Change		% Change
Revenues
	Sales		$	613,829	$	568,562	$	45,267		8.0	%
	Franchise revenues
		Rents and royalties		224,953		209,289		15,664		7.5	%
		Franchise fees		35,565		22,288		13,277		59.6	%
				260,518		231,577		28,941		12.5	%
Total revenues				874,347		800,139		74,208		9.3	%
Costs and expenses
	Cost of sales			527,132		489,092		38,040		7.8	%
	Operating expenses			84,411		76,986		7,425		9.6	%
	Franchise fee costs			34,906		23,326		11,580		49.6	%
	General and administrative expenses			40,241		38,038		2,203		5.8	%
	Equity (income)			(3,975)		(3,916)		(59)		1.5	%
	Corporate reorganization expenses			—		604		(604)	n/m
	Other (income) expense, net			(735)		(570)		(165)		28.9	%
Total costs and expenses, net				681,980		623,560		58,420		9.4	%
Operating income				192,367		176,579		15,788		8.9	%
	Interest (expense)			(18,648)		(8,922)		(9,726)	n/m
	Interest income			1,138		791		347		43.9	%
Income before income taxes				174,857		168,448		6,409		3.8	%
Income taxes				49,425		43,886		5,539		12.6	%
Net income				125,432		124,562		870		0.7	%
Net income attributable to noncontrolling interests				1,682		826		856	n/m
Net income attributable to Tim Hortons Inc.			$	123,750	$	123,736	$	14		0.0	%
Basic earnings per common share attributable to Tim Hortons Inc.			$	0.92	$	0.81	$	0.11		13.6	%
Diluted earnings per common share attributable to Tim Hortons Inc.			$	0.92	$	0.81	$	0.11		13.6	%
Weighted average number of common shares outstanding (in thousands) - Basic				133,899		152,083		(18,184)		(12.0)	%
Weighted average number of common shares outstanding (in thousands) - Diluted				134,367		152,637		(18,270)		(12.0)	%
Dividends per common share			$	0.32	$	0.26	$	0.06

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
			June 29, 2014		June 30, 2013		$ Change		% Change
Revenues
	Sales		$	1,154,859	$	1,092,449	$	62,410		5.7	%
	Franchise revenues
		Rents and royalties		424,462		396,743		27,719		7.0	%
		Franchise fees		61,428		42,484		18,944		44.6	%
				485,890		439,227		46,663		10.6	%
Total revenues				1,640,749		1,531,676		109,073		7.1	%
Costs and expenses
	Cost of sales			1,000,715		950,446		50,269		5.3	%
	Operating expenses			165,669		152,719		12,950		8.5	%
	Franchise fee costs			62,589		45,878		16,711		36.4	%
	General and administrative expenses			79,460		76,706		2,754		3.6	%
	Equity (income)			(7,321)		(7,265)		(56)		0.8	%
	Corporate reorganization expenses			—		10,079		(10,079)		n/m
	Other (income) expense, net			1,983		(1,383)		3,366		n/m
Total costs and expenses, net				1,303,095		1,227,180		75,915		6.2	%
Operating income				337,654		304,496		33,158		10.9	%
	Interest (expense)			(35,324)		(17,585)		(17,739)		n/m
	Interest income			2,115		1,719		396		23.0	%
Income before income taxes				304,445		288,630		15,815		5.5	%
Income taxes				86,658		77,145		9,513		12.3	%
Net income				217,787		211,485		6,302		3.0	%
Net income attributable to noncontrolling interests				3,128		1,578		1,550		n/m
Net income attributable to Tim Hortons Inc.			$	214,659	$	209,907	$	4,752		2.3	%
Basic earnings per common share attributable to Tim Hortons Inc.			$	1.58	$	1.38	$	0.20		14.7	%
Diluted earnings per common share attributable to Tim Hortons Inc.			$	1.57	$	1.37	$	0.20		14.7	%
Weighted average number of common shares outstanding (in thousands) - Basic				136,007		152,597		(16,590)		(10.9)	%
Weighted average number of common shares outstanding (in thousands) - Diluted				136,477		153,133		(16,656)		(10.9)	%
Dividends per common share			$	0.64	$	0.52	$	0.12

TIM HORTONS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (in thousands of Canadian dollars, except share and per share data) (Unaudited)

		As at
		June 29, 2014		December 29, 2013
Assets
	Current assets
	Cash and cash equivalents	$	25,087	$	50,414
	Restricted cash and cash equivalents		85,926		155,006
	Accounts receivable, net		220,157		210,664
	Notes receivable, net		7,619		4,631
	Deferred income taxes		9,985		10,165
	Inventories and other, net		117,776		104,326
	Advertising fund restricted assets		39,078		39,783
Total current assets			505,628		574,989
Property and equipment, net			1,681,010		1,685,043
Notes receivable, net			598		4,483
Deferred income taxes			11,693		11,018
Equity investments			40,372		40,738
Other assets			117,452		117,552
Total assets		$	2,356,753	$	2,433,823
Liabilities and equity
	Current liabilities
	Accounts payable	$	171,118	$	204,514
	Tim Card obligation		128,517		184,443
	Accrued liabilities		65,835		89,565
	Advertising fund liabilities		38,782		59,912
	Short-term borrowings		15,000		30,000
	Current portion of long-term obligations		18,336		17,782
Total current liabilities			437,588		586,216
	Long-term obligations
	Long-term debt		1,293,035		843,020
	Capital leases		125,048		121,049
	Deferred income taxes		8,123		9,929
	Other long-term liabilities		108,557		112,090
Total long-term obligations			1,534,763		1,086,088
Commitments and contingencies
Equity
	Equity of Tim Hortons Inc.
	Common shares ($2.84 stated value per share), Authorized: unlimited shares. Issued: 133,126,058 and 141,329,010 shares, respectively		377,442		400,738
	Common shares held in Trust, at cost: 329,089 and 293,816 shares, respectively		(15,422)		(12,924)
	Contributed surplus		11,914		11,033
	Retained earnings		131,926		474,409
	Accumulated other comprehensive loss		(123,066)		(112,102)
Total equity of Tim Hortons Inc.			382,794		761,154
Noncontrolling interests			1,608		365
Total equity			384,402		761,519
Total liabilities and equity		$	2,356,753	$	2,433,823

TIM HORTONS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands of Canadian dollars) (Unaudited)

		Year-to-date period ended
		June 29, 2014		June 30, 2013
Cash flows provided from (used in) operating activities
Net income		$	217,787	$	211,485
Adjustments to reconcile net income to net cash provided from operating activities
	Depreciation and amortization		79,774		72,368
	Stock-based compensation expense		886		12,535
	Deferred income taxes		2,149		(2,539)
Changes in operating assets and liabilities
	Restricted cash and cash equivalents		69,141		46,356
	Accounts receivable		(16,667)		(8,254)
	Inventories and other		(13,593)		(5,218)
	Accounts payable and accrued liabilities		(81,678)		(75,262)
	Taxes		(9,230)		4,144
Settlement of interest rate forwards			(4,851)		—
Deposit with tax authorities			(1,721)		—
Other			(14,274)		2,714
Net cash provided from operating activities			227,723		258,329
Cash flows (used in) provided from investing activities
	Capital expenditures		(94,442)		(88,272)
	Capital expenditures - Advertising fund		(4,438)		(5,224)
	Other investing activities		3,038		6,125
Net cash (used in) investing activities			(95,842)		(87,371)
Cash flows (used in) provided from financing activities
	Repurchase of common shares		(493,476)		(113,803)
	Dividend payments to common shareholders		(86,910)		(79,348)
	Net proceeds from issue of debt		448,299		—
	Short-term (repayments) borrowings, net		(15,000)		—
	Principal payments on long-term debt obligations		(8,280)		(8,543)
	Other financing activities		(1,980)		(5,001)
Net cash (used in) financing activities			(157,347)		(206,695)
Effect of exchange rate changes on cash			139		2,201
(Decrease) in cash and cash equivalents			(25,327)		(33,536)
Cash and cash equivalents at beginning of period			50,414		120,139
Cash and cash equivalents at end of period		$	25,087	$	86,603
Supplemental disclosures of cash flow information:
	Interest paid	$	30,712	$	17,131
	Income taxes paid	$	102,946	$	77,540
Non-cash investing and financing activities:
	Capital lease obligations incurred	$	14,173	$	19,219

TIM HORTONS INC. AND SUBSIDIARIES SEGMENT REPORTING (in thousands of Canadian dollars) (Unaudited)

		Second quarter ended				Year-to-date period ended
		June 29, 2014		June 30, 2013		June 29, 2014		June 30, 2013
Revenues⁽¹⁾
	Canada	$	721,599	$	657,682	$	1,344,784	$	1,251,355
	U.S.		51,878		41,220		103,053		85,668
	Corporate services		3,636		5,204		9,305		9,329
Total reportable segments			777,113		704,106		1,457,142		1,346,352
VIEs⁽²⁾			97,234		96,033		183,607		185,324
Total		$	874,347	$	800,139	$	1,640,749	$	1,531,676
Operating Income (Loss)
	Canada	$	188,866	$	174,760	$	342,332	$	320,581
	U.S.		9,254		2,587		13,611		3,497
	Corporate services		(8,041)		(1,424)		(22,575)		(12,089)
Total reportable segments			190,079		175,923		333,368		311,989
VIEs⁽²⁾			2,288		1,260		4,286		2,586
Corporate reorganization expenses			—		(604)		—		(10,079)
Consolidated Operating Income			192,367		176,579		337,654		304,496
Interest, net			(17,510)		(8,131)		(33,209)		(15,866)
Income before income taxes		$	174,857	$	168,448	$	304,445	$	288,630

________________
⁽¹⁾	There are no inter-segment revenues included in the above table.
⁽²⁾	Variable interest entities.

Consolidated Sales comprise the following:

		Second quarter ended				Year-to-date period ended
		June 29, 2014		June 30, 2013		June 29, 2014		June 30, 2013
Sales
	Distribution sales	$	511,762	$	468,597	$	964,115	$	899,748
	Company-operated restaurant sales		7,739		6,501		13,035		12,477
	Sales from VIEs		94,328		93,464		177,709		180,224
Total Sales		$	613,829	$	568,562	$	1,154,859	$	1,092,449