Tim Hortons Inc. (THI)

THI 
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Industry: Consumer Services
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Tim Hortons (THI)

Q3 2012 Earnings Call

November 08, 2012 2:30 pm ET

Executives

Scott Bonikowsky - Vice President of Investor Relations

Paul D. House - Executive Chairman, Interim Chief Executive Officer, President and Member of Executive Committee

Cynthia J. Devine - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Analysts

Phillip Huang - UBS Investment Bank, Research Division

Irene Nattel - RBC Capital Markets, LLC, Research Division

Perry Caicco - CIBC World Markets Inc., Research Division

John S. Glass - Morgan Stanley, Research Division

Keith Howlett - Desjardins Securities Inc., Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Patricia A. Baker - Scotiabank Global Banking and Markets, Research Division

Peter Sklar - BMO Capital Markets Canada

James Durran - Barclays Capital, Research Division

Michael Van Aelst - TD Securities Equity Research

David Hartley - Crédit Suisse AG, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Tim Hortons Q3 2012 Earnings Conference Call. [Operator Instructions] Please be advised, this conference is being recorded, Thursday, November 8, 2012. I would now like to turn the conference over to Scott Bonikowsky, Vice President of Corporate, Public and Government Affairs at Tim Hortons. Please go ahead.

Scott Bonikowsky

Thanks, operator, and welcome, everyone, to Tim Hortons' 2012 Third Quarter Conference Call. We released our results earlier this morning before the market opened. And to access our earnings material and the presentation supporting today's discussion, visit our Investor Relations website at timhortons-invest.com and click on the Investor Presentations tab. And we'll have this material up on the site for approximately 1 year.

Paul House, our Executive Chairman, President and CEO; along with Cynthia Devine, our Chief Financial Officer, will be joining the call this afternoon. We'll be pleased to take questions after our prepared remarks.

Please note that we may provide forward-looking statements or information this afternoon within the meaning of the Private Securities Litigation Reform Act of 1995 and Canadian securities laws, which include discussions about future performance, results and outlook based on our current expectations and information. Forward-looking statements are based on a number of assumptions. They contain risks and uncertainties, and our actual results could differ materially from these statements.

Please refer to the company's 2011 annual report on Form 10-K filed on February 28 this year and our quarterly report on Form 10-Q expected to be filed later today, which will include detailed information regarding risks and uncertainties which could impact our ability to perform as expected, as well as material assumptions underlying the expectations described in our forward-looking statements. Please read our full Safe Harbor statement on our Investor website and in our presentation supporting today's call.

All Tim Hortons results, I'll remind you, are presented in accordance with U.S. GAAP and reported in Canadian dollars unless we note otherwise. Today's discussion and the supporting presentation include a non-GAAP financial measure, adjusted operating income. Reconciliation of the non-GAAP measure and its most directly comparable GAAP financial measure and other information relating to our use of the non-GAAP measure is included in the presentation.

So with that, I'm going to turn the call over to Paul House, Executive Chairman, President and CEO of Tim Hortons. Paul?

Paul D. House

Well, thank you, Scott, and good afternoon, everyone. In the third quarter, we continue to execute our strategies to drive growth. While we faced significant macro-level challenges, we've made good progress in a number of key areas.

We continued our long-term track record of delivering growth in the quarter, including growth in earnings per share.

Our same-store sales growth for the third quarter was 1.9% in the Canadian segment and 2.3% in the U.S. segment. Growth was driven by gains in average check, resulting from a series of menu, marketing and operational initiatives and pricing that was previously in the system. While we were pleased to see the continuation of our long-standing track record of increasing same-store sales, our growth rates were below those we have typically delivered in recent years.

Moderate growth was seen across many of our peers in the North American restaurant industry who have reported in recent weeks, reflecting sluggish economic recovery and fragile consumer confidence. To illustrate, among many challenging economic indicators, recent data indicates that Canada experienced a slight GDP contraction in August. In times like these, a couple of things happen. Consumers tend to be more cautious in their discretionary spending and competition intensifies as everyone seeks to grow in a low-growth environment.

One result we saw this quarter was an increase in promotional activity by a number of companies. We also had a busy promotional calendar during the quarter. Greater emphasis have been placed on value to enhance our appeal to price-conscious consumers. I believe Tim Hortons is well positioned to compete and succeed in this environment. We are not standing still. We are pursuing several initiatives to adapt to the circumstances and to continue to grow sales.

First and foremost, we continue to execute on the guest experience, which means providing great value. For example, we recently promoted Café Mocha, lattes and French Vanilla for $1. We are also rolling out new menu items. We're taking steps to improve existing restaurant capacity, including selectively targeting restaurant development where there are capacity constraints. We expect some of these initiatives will begin contributing in the short-term, while others are longer-term in nature.

As far as restaurant openings, we had a productive quarter, opening 44 new restaurants in Canada and 22 in the USA. Our master licensee in the Gulf Cooperative Council, Apparel Group, opened 7 new restaurants, taking us to 18 in that market by the end of the quarter. We expect, as always, the fourth quarter to be another busy period for restaurant development. Together with our restaurant owners, we have also been investing significantly in our existing restaurants. The installation of WiFi in our Canadian locations is substantially completed. We now offer our guests free Internet access at more than 2,000 restaurants, allowing them to stay connected when they visit.

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