Tim Hortons: sees «strong momentum» in business

Oakville / CA. (thi) Tim Hortons Inc. (THI) announced results for the third quarter ended September 28, 2014. Summary in brief: Strong same-store sales growth in both Canada and the U.S. driven primarily by gains in average cheque. Sales continued to benefit from menu innovations including the Spicy Crispy Chicken Sandwich and Dark Roast coffee. Costs of 27.3 million CAD associated with the proposed transaction with Burger King Worldwide Inc., an affiliate of 3G Capital, had a negative impact of 0.21 CAD on EPS. Adjusted EPS increased 25.2 percent to 0.95 CAD.

«We have strong momentum in our business, supported by early stage execution of our strategic plan. We are pleased with our ongoing growth and evolution which we believe is positioning our brand for long-term success», said Marc Caira, president and CEO. «With our strategic transaction announced in August, we can build on our momentum and have the opportunity to participate in the creation of a global powerhouse in the quick service restaurant sector. We expect Tim Hortons to significantly expand its reach as a strong, independent brand within the new company».

Consolidated Results

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

Systemwide sales increased 7.5 percent on a constant currency basis, as a result of same-store sales growth of 3.5 percent in Canada and 6.8 percent in the U.S., as well as new restaurant development.

Total revenues grew 10.2 percent to 909.2 million CAD compared to 825.4 million CAD last year. Systemwide sales growth was the primary driver of both a 12.8 percent increase in distribution sales and growth of 8.6 percent in rents and royalties revenue. Franchise fee revenues grew by 17.4 percent due to higher levels of restaurant development and increased renovations in Canada, which also resulted in higher associated franchise fee costs.

Cost of sales increased by 8.6 percent, due primarily to growth in distribution cost of sales driven by systemwide sales growth. Operating expenses increased by 10.2 percent, due to higher rent and depreciation costs related to new restaurant openings and increased depreciation related to renovations. G+A expenses grew by 7.5 percent due primarily to increased salaries and benefits resulting from increased performance-related accruals and fewer vacancies in the organization. G+A growth was moderated by breakage income recognized in the quarter.

In the third quarter we recognized 27.3 million CAD of costs associated with the proposed transaction with Burger King Worldwide Inc., an affiliate of 3G Capital.

Operating income was flat at 168.8 million CAD. Adjusted operating income, which excludes the impact of 27.3 million CAD of costs associated with the Transaction and 1.0 million CAD of corporate reorganization costs incurred in Q3/2013, increased 15.5 percent to 196.1 million CAD.

Net income attributable to Tim Hortons Inc. was 98.1 million CAD, a decrease of 15.7 million CAD. Net income was impacted by the full amount of the Transaction costs, as there was no tax benefit for these expenses. For the same reason, the effective tax rate increased significantly in the third quarter.

EPS of 0.74 CAD was down from 0.75 CAD in Q3/2013 due mainly to the 0.21 CAD impact of the Transaction costs. Adjusted EPS of 0.95 CAD grew by 25.2 percent as a result of strong operating performance, as well as the cumulative impact of our recapitalization and expanded share repurchase program, which resulted in a lower number of shares outstanding.

Segmented Performance Commentary

Same-store sales growth rates continued to build on the strong performance reported in the second quarter.

Canada: Same-store sales in our Canadian segment grew by 3.5 percent. The increase was driven by gains in average cheque resulting from pricing and favourable product mix, partially offset by a slight 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 both our breakfast and lunch dayparts, aided in part by the introduction of our Spicy Crispy Chicken Sandwich, as well as sales of baked goods, including new specialty doughnuts. Our new Dark Roast coffee blend, which was introduced systemwide towards the end of the quarter, also proved popular amongst our guests.

Operating income in the Canadian segment grew 9.2 percent to 196.2 million CAD. Systemwide sales growth of 6.9 percent led to increased rents and royalties income and a higher allocation of supply chain income. The Canadian segment also benefited from the recognition of breakage income. We opened 41 restaurants in Canada in the third quarter.

United States: U.S. same-store sales increased by 6.8 percent in the quarter, driven by gains in average cheque resulting from favourable product mix and pricing and, to a lesser extent, same-store transactions. The U.S. segment experienced continued momentum, benefiting from increased sales in our breakfast daypart and cold beverage category, as a result of continued product innovation. Increased sales of coffee and hot beverages also contributed to same-store sales growth. Our new Dark Roast coffee blend, which was introduced systemwide towards the end of the quarter, also proved popular amongst our guests.

The U.S. segment had operating income of 7.4 million CAD, an increase of 4.7 million CAD compared to the third quarter of 2013. Systemwide sales growth of 12.8 percent drove an increase in rents and royalties income, and same-store sales growth led to a significant reduction in relief provided to franchisees. Year-over-year results also benefited as we recognized a 2.5 million CAD asset impairment charge in Q3/2013 that was not present in the current quarter. These positive factors were partially offset by an increase in G+A expense.

We opened ten restaurants in the U.S. in the third quarter. In October 2014, we signed an area development agreement with a new partner to develop approximately ten Tim Hortons locations in New Jersey over the next five years. We have now executed seven development agreements in the U.S., representing approximately 145 new restaurants over ten years.

Corporate services: The Corporate services segment had an operating loss of 9.7 million CAD, compared to a loss of 14.3 million CAD in the third quarter of 2013. The improvement was driven by the reversal of unfavourable product margins recognized in our supply chain in the first half of the year. This was partially offset by increased corporate costs, as described above in the explanation of G+A expenses in the quarter. Six restaurants were opened in the Gulf Cooperation Council in the quarter.

Proposed Transaction with Burger King Worldwide Inc.

On August 26, 2014, the Company announced that it had entered into a definitive arrangement agreement with Burger King Worldwide Inc. and certain of its affiliates with respect to the Transaction. Pursuant to and subject to the terms and conditions of the arrangement agreement, the Transaction will result in Burger King Worldwide Inc. and Tim Hortons being indirect subsidiaries of a newly formed Canadian company, 9060669 Canada Inc. (Holdings). The Transaction has been unanimously approved by the Board of Directors of the Company as well as the Board of Directors of Burger King Worldwide Inc.

Company shareholders will receive, for each Company common share held, at the election of the holder: (a) 65.50 CAD in cash and 0.8025 common shares of Holdings (the «Arrangement Mixed Consideration»); (b) 88.50 CAD in cash (the «Arrangement Cash Consideration»); or (c) 3.0879 common shares of Holdings (the «Arrangement Share Consideration»). Common shares of the Company with respect to which no election is made will receive the Arrangement Mixed Consideration. Shareholders who elect to receive the Arrangement Cash Consideration or the Arrangement Share Consideration will be subject to proration in accordance with the Arrangement so that the total amount of cash paid and the total number of common shares of Holdings issued to the Company´s shareholders as a whole are equal to the total amount of cash and number of common shares of Holdings that would have been paid and issued if all of the Company´s shareholders received the Arrangement Mixed Consideration.

The Transaction is subject to customary closing conditions, including, among others, approval by the Company´s shareholders, approval by the Ontario Superior Court of Justice and regulatory approvals in Canada. An interim order of the Ontario Superior Court of Justice was issued on November 03, 2014. The approval of Tim Hortons shareholders will be sought at a special meeting of shareholders. The record date for determining the Company´s shareholders entitled to receive notice of and to vote at the special meeting is November 03, 2014. The special meeting is scheduled to be held on December 09, 2014 at the Tim Hortons Innovation Centre, 226 Wyecroft Road in Oakville, Ontario. The closing of the Transaction is currently anticipated to occur in late 2014 or early 2015.

Board declares dividend payment of 0.32 CAD per common share

The Board of Directors has declared a quarterly dividend of 0.32 CAD per common share, payable on December 05, 2014, to shareholders of record as of the close of business on November 20, 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.

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