Tim Hortons Inc. (THI)

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Tim Hortons Inc. (THI)

Q3 2008 Earnings Call

November 7, 2008 10:30 am ET

Executives

Scott Bonikowsky - Vice President of Investor Relations

Donald B. Schroeder - President and Chief Executive Officer

Cynthia Devine - Chief Financial Officer and Executive Vice President

Analysts

Irene Nattel - RBC

Steven Kron - Goldman Sachs

Jim Durran - National Bank Financial

Turan Quettawala - Scotia Capital

Rachael Rothman - Merrill Lynch

Winston Lee - Credit Suisse

David Hartley - BMO Capital Markets

Keith Howlett - Desjardins Securities

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Tim Hortons Third Quarter 2008 Conference Call. [Operator Instructions]. As a reminder this conference is being recorded Friday, November 07, 2008.

I would now like to turn the conference over to Mr. Scott Bonikowsky, Vice President of Investor Relations for Tim Hortons. Please go ahead sir.

Scott Bonikowsky - Vice President Investor Relations

Thanks Frank and good afternoon, everyone. Welcome to our third quarter conference call. We have prepared a presentation to support today’s presentation. You can access this and other material associated with the call on our website and if you click on the events and presentation’s tab in the Investor Relations section at timhorton.com. It will be available for a period of one year.

Joining me as usual on the call this morning are Don Schroeder, our President and CEO; and Cynthia Devine, our Chief Financial Officer. After their remarks, we’d be pleased to take questions.

Before we begin, please note that we may make forward-looking statements this morning within the meaning of the Private Securities Litigation Reform Act of 1995. And this statement includes discussions about future performance based on current expectations and information. Various risks and uncertainties could cause our company’s results to differ materially from those expressed in our forward-looking statements, which speak only as of the date and time made. More detailed information about these risks and uncertainties is contained within the Safe Harbor statement included in the earnings release issued that we issued this morning. Additional risk factors are also described in our public securities filings including our 2007 Annual Report on Form 10-K, also available on our website under the regulatory filings tab.

All Tim Hortons results, I would remind you I presented in accordance with US GAAP and reported in Canadian dollars, unless otherwise noted.

So, with that it’s now my pleasure to turn it over to Don Schroeder, President and CEO of Tim Hortons. Don.

Donald B. Schroeder - President and Chief Executive Officer

Thanks, Scott and good morning everyone. Tim Hortons has delivered another strong quarter, the entrenchment of our brand in Canada where we drive more than 90% of our revenues in the dominant position we have in the Canadian QSR sector is reflected in our positive same-store sales and earnings growth in the face of economic conditions that we’re showing clarify the weakness. In the US, our brand is less developed and consumer pressures and economic weakness are more deeply embedded than in Canada. As a result, we experienced the slight decline of 0.6% in same-store sales this quarter and a $2.1 million operating loss. Now I’ll talk about our segmented performance in a few minutes.

Our consolidated earnings performance this quarter benefited from a number of factors, most important of which was healthy system-wide sales growth in Canada, which contributed to higher rents and higher royalties. We anticipated the strength of our earnings this quarter, the combination of certain cost items that positively affected year-over-year comparisons. And the lower affective tax rate due to the reduced Canadian statutory rates, were both known factors as we entered into the quarter.

We continue to grow our consolidated business in the face of challenging economic conditions. Our Canadian business tends to be fairly resilient to economic pressures. We stand for good food and premium coffee at reasonable prices, which positions us well with customers looking for value when the number of discretionary dollars available to them is reduced.

On slide six; you can see that we delivered system-wide sales growth of 7.8% during the quarter, which includes sales from company operated and franchise restaurants. System-wide sales growth in the quarter included same-store sales of 3.8% in Canada, with the rest of the world coming from new units opened year-over-year.

This quarter as I mentioned a moment ago, we had a small same-store sales decline of 0.6% in the US. The Canadian segment lapped very robust things for a sales growth of 7.75 from the third quarter of 2007, while the US business also lapped more than respectable things towards sales growth of 4.5% from 2007. In this type of challenging environment, we intend to keep our loyal customers, because of the value we represent. But they may not come to us frequently as their ration reduced to discretionary. So, transactions can be impacted.

Historically, 40% of our customers in Canada; visit us four or more times each week. And for maintaining transactions with this high level of loyalty in this environment can indeed be a challenge. Our frequency of visits moderated in Canada, our loyal customers are still coming to us.

While pricing contributed the lion’s share of our growth in the quarter, the fact that we did experience some organic growth continues to lend credence to our price value position, given the sales climate in which we operated and the strength of sales in the comparable period last year.

One other factor we believe maybe significant, as the price of gasoline, which was quite high for much of the third quarter. Only recently declining to the levels we enjoy today. A slight decline this quarter in same-store sales in the US market shows us that our brand is still developing and not is in trench as in Canada, where we are in many respects, the de facto, number one choice for the quick service experience in good time and in bad times. Based on our year-to-date same-store sales growth of 1.2% in the US, it is unlikely that we will hit our forecasted same-store sales target of 2 to 4% growth.

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