Tim Hortons Inc. announces 2014 second quarter results:

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 /CNW/ - 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

 

 

 

 

SOURCE Tim Hortons

For further information:

Investors:  Scott Bonikowsky, (905) 339-6186 or bonikowsky_scott@timhortons.com
Media:  Olga Petrycki, (905) 339-5960 or petrycki_olga@timhortons.com