EX-99.1 2 l22942aexv99w1.htm EX-99.1 EX-99.1
 

Exhibit 99.1
FOR IMMEDIATE RELEASE
(All amounts in Canadian dollars)
Tim Hortons Inc. Announces Third-Quarter Results;
Declares Second Quarterly Dividend
OAKVILLE, ONTARIO, October 26 — Tim Hortons Inc. (NYSE:THI, TSX: THI) today announced its results for the third quarter ended October 1, 2006.
Total revenues were $413.6 million in the third quarter, up 7.1% compared to $386.1 million in the third quarter of 2005. Rent and royalties revenues were up 10.5%, in-line with systemwide sales growth of 11.5%(1). Same-store sales growth momentum continued in the third quarter with Canada increasing by 5.9% and the U.S. increasing by 9.2%.
The same store sales growth was driven by a strong promotional calendar throughout the summer including a chunky chicken salad wrap, iced cappuccino with flavour shots of butter caramel, french vanilla, hazelnut or raspberry, a toasted chicken club sandwich, a 12 grain bagel and the breakfast sandwich in the U.S.
Offsetting the strong rent and royalties revenue was lower franchisee fee revenues associated with the timing of new store openings. Tim Hortons opened a total of 29 restaurants in the quarter compared to 48 restaurants in the third quarter last year. Year to date the company has opened 86 stores and expects to achieve its target of 180-200 stores by year-end 2006. The company presently anticipates increased franchise fee revenue in the fourth quarter from the scheduled opening of 100 new stores.
“We are very pleased with the strength in our same store sales growth in both Canada and the U.S.,” said Chief Executive Officer and President Paul House. “Growth throughout the year has exceeded our long-term targets as we continue to benefit from our focus on providing customers with quality products at a reasonable price. In late September, we began the rollout of our hot breakfast sandwich in Canada. We expect that the breakfast sandwich will contribute to continued sales growth in the fourth quarter as early indications suggest that customers are enjoying our entry into the hot breakfast sandwich category.”
 
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Operating income in the third quarter was $91.3 million compared to $95.9 million for the same period in 2005. Operating margins were 22.1% compared to 24.8% in the third quarter last year. The decline in operating margin was primarily a result of 3 key items:
•   G&A increase of $8.5 million or 36.4% over the same period last year primarily related to:
  •   Compensation expense related to restricted stock units (RSUs) in the third quarter of 2006 was $5.1 million higher than the third quarter of 2005 primarily as a result of the accelerated vesting and settlement by the Company of the remaining portion of the Wendy’s 2005 grant, coupled with the immediate expensing of the portion of the Company’s August 1, 2006 RSU grant to retirement eligible employees in accordance with SFAS No. 123R. Fourth quarter expense related to these RSUs is expected to be significantly lower than the 3rd quarter of 2006 (approximately $0.8 million — $1.0 million and flat to fourth quarter in 2005); and
  •   A run-off director and officer insurance policy, representing a one-time payment of $2.3 million, resulting from the separation from Wendy’s.
•   Other income declined $6.1 million due to foreign exchange gains in the third quarter last year. This non-operating gain mainly resulted from a one-time mark-to-market gain on cross border intercompany notes in the third quarter last year; and
•   Additional ramp-up costs related to the Guelph distribution facility reduced operating income by approximately $3 million for the quarter (approximately $8 million year-to-date). As a result of the delayed rollout, the company did not have the full benefit of incremental revenue. We expect to service more stores with frozen product from this facility in the fourth quarter.
Net income was $51.8 million compared to $66.3 million last year. The effective tax rate in the third quarter of 2006 was 41.0% compared to 29.3% in the same period last year. This increase is due primarily to a valuation allowance recorded on previously recognized tax benefits associated with foreign tax credits as a result of the spin-off from Wendy’s completed in the quarter. The Company is currently estimating an effective tax rate of approximately 34% for the fourth quarter.
Reported diluted earnings per share (EPS) was $0.27 compared to $0.41 in the third quarter of 2005. EPS was impacted by a 21% year over year increase in the weighted average number of shares outstanding as a result of the Tim Hortons IPO in March, 2006. Diluted weighted average shares outstanding in the third quarter of 2006 were 193.5 million compared to 160.0 million in the same period last year.
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“At the end of the third quarter the Company successfully completed its separation from Wendy’s,” said Cynthia Devine, Executive Vice President and Chief Financial Officer. “Although the Company experienced additional costs associated with the transition and certain other expenses and adjustments outlined above, we are now well positioned to operate as a stand-alone public company.”
Wendy’s completes distribution of Tim Hortons shares
As announced on September 29, Wendy’s International, Inc. completed the distribution of the 160.0 million shares of Tim Hortons that it previously owned. The shares represented the remaining 82.75% stake in Tim Hortons that Wendy’s had owned subsequent to Tim Hortons initial public offering in March.
Wendy’s recently received a favourable tax ruling from Canada Revenue Agency under section 86.1 of the Income Tax Act (Canada) in connection with the tax effect of the distribution of the Company’s shares to Wendy’s Canadian shareholders. Confirmation regarding this ruling is posted on Wendy’s and the Company’s websites. It is also the practice of Canada Revenue Agency to post details on their website at www.cra-arc.gc.ca.
Investors with questions about Wendy’s distribution of Tim Hortons shares can visit the investor websites of Wendy’s (www.wendys-invest.com) or Tim Hortons (www.timhortons.com) where you will find a list of frequently asked questions. Alternatively, you can call Computershare Investor Services at 800-697-8078, or the Investor Relations department at either Wendy’s (614-764-3138) or Tim Hortons (905-339-6186).
Share repurchase program announced in the third quarter
In the third quarter, Tim Hortons announced a share repurchase program of $200 million, not to exceed 5% of outstanding shares. The program is expected to be in place until September 28, 2007, but may terminate earlier if either the $200 million maximum or the 5% of outstanding shares limit is reached. The Company intends to execute the repurchase program through the facilities of the New York Stock Exchange or the Toronto Stock Exchange, subject to compliance with regulatory requirements.
Tim Hortons added to the S&P60
Tim Hortons was added to the S&P 60 index. The S&P 60 is an equity index featuring large public companies listed on the Toronto Stock Exchange.
 
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Board approves quarterly dividend
The Board of Directors has approved the Company’s second consecutive quarterly dividend of $0.07, payable on November 21, to shareholders of record as of November 7. The dividend is based on the annual payout ratio announced and described in the Company’s press release of July 27, 2006. The Company currently anticipates that the payout ratio will be recalculated on an annual basis after year-end results are available. However, the declaration and payment of future dividends remains subject to the discretion of our Board of Directors.
Consistent with the first dividend, on the payment date, Tim Hortons will pay its dividend in Canadian dollars to all shareholders with Canadian resident addresses whose shares are registered with Computershare (the Company’s transfer agent). For all other shareholders, including all shareholders who hold their shares indirectly (i.e. through their broker) and regardless of country of residence, the dividend will be converted to U.S. dollars on November 14 at the daily noon rate established by the Bank of Canada and paid in U.S. dollars on November 21.
Tim Hortons to host conference call at 3 p.m. today, October 26
Tim Hortons will host a conference call beginning at 3 p.m. (Eastern) today. Investors and the public may listen to the conference call in either one of the following ways:
  •   Phone Call: The dial-in number is 1-877-446-3210 (Canada and U.S.). A replay of the call can be accessed at 416-626-4100 or 1-800-558-5253. Enter reservation #: 21307851. The replay will be available from October 26 at 5:00 pm until November 2 at 11:59 pm.
  •   Simultaneous Web Cast is available at www.timhortons-invest.com. The call will also be archived at that site.
(1) Systemwide Sales Growth
Systemwide sales impact our franchise royalties and rental income, as well as our distribution sales. Changes in systemwide sales are driven by changes in average same store sales and changes in the number of restaurants. Total systemwide sales growth includes restaurant level sales at both company and franchise restaurants. Approximately 96.5% of our system is franchised as at October 1, 2006. Systemwide sales growth is determined using a constant exchange rate 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 third quarter of 2006, systemwide sales growth was 11.5% vs 9.6% in the third quarter of 2005.
 
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Tim Hortons Inc. overview
Tim Hortons Inc. is Canada’s largest quick service restaurant chain. Founded in 1964 as a coffee and donut shop, Tim Hortons has evolved to meet consumer tastes, with a menu that now includes premium coffee, flavored cappuccinos, specialty teas, home-style soups, fresh sandwiches and fresh baked goods. As of October 1, 2006, Tim Hortons system-wide restaurants numbered 2,637 in Canada and 305 in the United States. More information about the Company is available at www.timhortons.com.
CONTACTS:
INVESTORS: Paul Carpino: (905) 339-6186 or carpino_paul@timhortons.com
MEDIA: Nick Javor: (905) 339-6176 or javor_nick@timhortons.com

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TIM HORTONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of Canadian dollars, except per share data)
(Unaudited)
                                 
    Third Quarter Ended              
    10/1/2006     10/2/2005     $ Change     % Change  
REVENUES
                                
Sales
   $ 271,534     $ 251,766     $ 19,768       7.9 %
Franchise revenues
                               
Rents and royalties
     127,912       115,730       12,182       10.5 %
Franchise fees
     14,117       18,563       (4,446 )     (24.0 %)
 
                        
 
     142,029       134,293       7,736       5.8 %
 
                        
TOTAL REVENUES
     413,563       386,059       27,504       7.1 %
 
                        
COSTS AND EXPENSES
                                
Cost of sales
     240,161       221,239       18,922       8.6 %
Operating expenses
     45,532       40,204       5,328       13.3 %
Franchise fee costs
     13,579       18,712       (5,133 )     (27.4 %)
General & administrative expenses
     31,647       23,196       8,451       36.4 %
Equity (income)
     (9,082 )     (7,482 )     (1,600 )     21.4 %
Other (income) expense, net
     431       (5,678 )     6,109       N/M  
 
                        
TOTAL COSTS & EXPENSES, NET
     322,268       290,191       32,077       11.1 %
 
                        
 
                                
OPERATING INCOME
     91,295       95,868       (4,573 )     (4.8 %)
 
                                
Interest (expense)
     (5,707 )     (1,295 )     (4,412 )     N/M  
Interest income
     2,333       891       1,442       N/M  
Affiliated interest (expense), net
     0       (1,718 )     1,718       (100.0 %)
 
                        
 
                                
INCOME BEFORE INCOME TAXES
     87,921       93,746       (5,825 )     (6.2 %)
 
                                
INCOME TAXES
     36,080       27,485       8,595       31.3 %
 
                        
 
                                
NET INCOME
   $ 51,841     $ 66,261       ($14,420 )     (21.8 %)
 
                        
Basic earnings per share of common stock
   $ 0.27     $ 0.41       ($0.14 )     (34.1 %)
 
                        
Fully diluted earnings per share of common stock
   $ 0.27     $ 0.41       ($0.14 )     (34.1 %)
 
                        
Basic shares of common stock (in thousands)
     193,303       159,953       33,350       20.8 %
 
                        
Fully diluted shares of common stock (in thousands)
     193,486       159,953       33,533       21.0 %
 
                        
N/M — not meaningful
                                

 

 

TIM HORTONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of Canadian dollars, except per share data)
(Unaudited)
                                 
    Year-to-Date Ended              
    10/1/2006     10/2/2005     $ Change     % Change  
REVENUES
                                
Sales
   $ 777,638     $ 703,484     $ 74,154       10.5 %
Franchise revenues
                               
Rents and royalties
     370,279       333,026       37,253       11.2 %
Franchise fees
     45,175       41,658       3,517       8.4 %
 
                        
 
     415,454       374,684       40,770       10.9 %
 
                        
TOTAL REVENUES
     1,193,092       1,078,168       114,924       10.7 %
 
                        
COSTS AND EXPENSES
                                
Cost of sales
     683,351       613,245       70,106       11.4 %
Operating expenses
     132,275       119,479       12,796       10.7 %
Franchise fee costs
     44,507       43,206       1,301       3.0 %
General & administrative expenses
     87,426       73,728       13,698       18.6 %
Equity (income)
     (26,679 )     (23,281 )     (3,398 )     14.6 %
Other (income) expense, net
     (702 )     (7,530 )     6,828       N/M  
 
                        
TOTAL COSTS & EXPENSES, NET
     920,178       818,847       101,331       12.4 %
 
                        
 
                                
OPERATING INCOME
     272,914       259,321       13,593       5.2 %
 
                                
Interest (expense)
     (16,475 )     (3,283 )     (13,192 )     N/M  
Interest income
     9,195       2,300       6,895       N/M  
Affiliated interest (expense), net
     (7,876 )     (4,910 )     (2,966 )     N/M  
 
                        
 
                                
INCOME BEFORE INCOME TAXES
     257,758       253,428       4,330       1.7 %
 
                                
INCOME TAXES
     66,017       78,767       (12,750 )     (16.2 %)
 
                        
 
                                
NET INCOME
   $ 191,741     $ 174,661     $ 17,080       9.8 %
 
                        
Basic earnings per share of common stock
   $ 1.05     $ 1.09       ($0.04 )     (3.7 %)
 
                        
Fully diluted earnings per share of common stock
   $ 1.05     $ 1.09       ($0.04 )     (3.7 %)
 
                        
Basic shares of common stock (in thousands)
     182,797       159,953       22,844       14.3 %
 
                        
Fully diluted shares of common stock (in thousands)
     183,073       159,953       23,120       14.5 %
 
                        
N/M — not meaningful
                                

 

 

TIM HORTONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars)
                 
    October 1,     January 1,  
    2006     2006  
    (Unaudited)  
ASSETS
                
Current assets
                
Cash and cash equivalents
   $ 185,567     $ 186,182  
Accounts receivable, net
     92,491       85,695  
Notes receivable, net
     15,953       11,545  
Deferred income taxes
     6,019       4,273  
Inventories and other, net
     58,487       39,322  
Advertising fund restricted assets
     21,170       17,055  
 
            
 
     379,687       344,072  
 
            
 
Property and equipment, net
     1,104,812       1,061,646  
Notes receivable, net
     11,451       15,042  
Deferred income taxes
     12,157       17,913  
Intangible assets, net
     3,818       4,221  
Equity investments
     140,448       141,257  
Other assets
     10,001       12,712  
 
            
 
   $ 1,662,374     $ 1,596,863  
 
            

 

 

TIM HORTONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars)
                 
    October 1,     January 1,  
    2006     2006  
    (Unaudited)  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
 
                
Current liabilities
                
Accounts payable
   $ 88,335     $ 110,086  
Accrued expenses:
                
Salaries and wages
     13,127       15,033  
Taxes
     21,352       62,952  
Other
     38,696       61,944  
Deferred income taxes
     1,384       349  
Advertising fund restricted liabilities
     36,560       34,571  
Amounts payable to Wendy’s
     243       10,585  
Notes payable to Wendy’s
     —       1,116,288  
Current portion of long-term obligations
     7,883       7,985  
 
            
 
     207,580       1,419,793  
 
            
Long-term obligations
                
Term debt
     324,038       21,254  
Advertising fund restricted debt
     25,594       22,064  
Capital leases
     43,406       44,652  
 
            
 
     393,038       87,970  
 
            
 
Deferred income taxes
     4,317       15,159  
Other long-term liabilities
     37,541       34,563  
 
                
Shareholders’ equity
                
Common stock, (US$0.001 par value per share), Authorized: 1,000,000,000 shares, Issued: 193,302,977 and 159,952,977 shares, respectively
     289       239  
Capital in excess of stated value
     917,703       81,249  
Retained earnings
     194,640       16,430  
Accumulated other comprehensive income (expense):
                
Cumulative translation adjustments and other
     (92,734 )     (52,911 )
 
            
 
     1,019,898       45,007  
Unearned compensation — restricted stock
     —       (5,629 )
 
            
 
     1,019,898       39,378  
 
            
 
   $ 1,662,374     $ 1,596,863  
 
            

 

 

TIM HORTONS INC. AND SUBSIDIARIES
SYSTEMWIDE RESTAURANTS
                                         
                    Increase/             Increase/  
    As of     As of     (Decrease)     As of     (Decrease)  
    October 1, 2006     July 1, 2006     From Prior Quarter     October 2, 2005     From Prior Year  
Tim Hortons
                                        
U.S.
                                        
Company
     61       62       (1 )     65       (4 )
Franchise
     244       235       9       207       37  
 
                              
 
     305       297       8       272       33  
Canada
                                        
Company
     41       40       1       31       10  
Franchise
     2,596       2,585       11       2,498       98  
 
                              
 
     2,637       2,625       12       2,529       108  
Total Tim Hortons
                                        
Company
     102       102       0       96       6  
Franchise
     2,840       2,820       20       2,705       135  
 
                              
 
     2,942       2,922       20       2,801       141  
 
                              

 

 

     
 
    
   
TIM HORTONS INC. AND SUBSIDIARIES
Income Statement Definitions
 
Sales
  Primarily includes sales of products, supplies and restaurant equipment (except for initial equipment packages sold to franchisees as part of the establishment of their restaurant’s business - see “Franchise Fees”) that are shipped directly from our warehouses or by third party distributors to the restaurants, which we refer to as warehouse or distribution sales. Sales also include sales from company-operated restaurants and sales from franchise restaurants that are consolidated in accordance with FIN 46R.
 
    
Rents and Royalties
  Includes franchisee royalties and rental revenues.
 
    
Franchise Fees
  Includes fees for various costs and expenses related to establishing a franchisee’s business and include the sales revenue from initial equipment packages.
 
    
Cost of Sales
  Includes costs associated with our distribution warehouses, including cost of goods, direct labour and depreciation as well as the cost of goods delivered by third party distributors to the restaurants and for canned coffee sold through grocery stores. It also includes food, paper and labour costs for company-operated restaurants and franchise restaurants that are consolidated in accordance with FIN 46R.
 
    
Operating Expenses
  Includes rent expense related to properties leased to franchisees and other property-related costs (including depreciation).
 
    
Franchise fee costs
  Includes costs of equipment sold to franchisees as part of the initiation of their restaurant business, as well as training and other costs necessary to ensure a successful restaurant opening.
 
    
General and Administrative
  Includes costs that cannot be directly related to generating revenue, including expenses associated with our corporate and administrative functions, allocation of expenses related to corporate functions and services historically provided to us by Wendy’s and depreciation of office equipment, information technology systems and head office real estate.
 
    
Equity Income
  Includes income from equity investments in joint ventures and other minority investments over which we exercise significant influence. Equity income from these investments is considered to be an integrated part of our business operations and is therefore included in operating income. Income amounts are shown as reductions to total costs and expenses.
 
    
Other Income and Expense
  Includes expenses (income) that are not directly derived from the Company’s primary businesses. Items include restaurant closures, currency adjustments, real estate sales and other asset write-offs.

 

 

Third-Quarter Same-Store Sales Summary
                       
 
        3Q 2006     3Q 2005     2006 YTD  
 
Tim Hortons Canada
     5.9%     3.6%     6.8%  
 
Tim Hortons U.S.
     9.2%     4.7%     9.1%  
 
* As of October 1, 2006, 98% of the Company’s stores in Canada — and 80% of the stores in the U.S. — were franchised .
Monthly Same-Store Sales Summary for July, August, and September
                                         
 
        July 2006     July 2005     August 2006     August 2005     September 2006     September 2005  
 
Tim Hortons Canada
     4.8%     4.0%     5.6%     3.4%     7.6%     3.5%  
 
Tim Hortons U.S.
     8.2%     4.1%     10.1%     5.3%     9.6%     4.8%