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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

Perry Caicco - CIBC World Markets Inc., Research Division

Irene Nattel - RBC Capital Markets, LLC, Research Division

Eric Gonzalez - UBS Investment Bank, Research Division

John S. Glass - Morgan Stanley, Research Division

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Peter Sklar - BMO Capital Markets Canada

Andrew Charles

Michael Van Aelst - TD Securities Equity Research

James Durran - Barclays Capital, Research Division

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Keith Howlett - Desjardins Securities Inc., Research Division

Tim Hortons (THI) Q4 2012 Earnings Call February 21, 2013 2:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Q4 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, February 21, 2013. I would now like to turn the conference over to Scott Bonikowsky, Vice President. Please go ahead, sir.

Scott Bonikowsky

Great. Thanks, Benjamin, and thanks, everyone, for joining us for our fourth quarter and year-end 2012 conference call. We released our results earlier this morning before the market opened. To access our earnings material and presentation supporting our discussion today, please visit our Investor Relations website at timhortons-invest.com and click on the Events and Presentations tab. This material will be available there for you for a period of about 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 as always. We will 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, 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, 2012, our quarterly report on Form 10-Q filed on November 8, 2012, and our 2012 annual report on Form 10-K, expected to be filed later today. These 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.

I'll remind you that Tim Hortons' results are presented in accordance with U.S. GAAP and reported in Canadian dollars, unless we note otherwise. Today's discussion and 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 non-GAAP measure is included in the presentation.

And with that, I'm going to turn it over to Paul House. Paul?

Paul D. House

Thank you, Scott, and good afternoon, everyone. Well, we continued to see growth in the business in the fourth quarter, making progress over the third quarter in top line growth and the same-store sales growth. We successfully launched the Grilled Panini sandwiches in Canada with full advertising support, as well as our initial entry into the single-serve coffee market, which I will talk about in a few minutes. And it was a busy quarter for new restaurant openings.

The challenging economic climate and the resulting intensified competitive environment continues to pose challenges for everyone in our industry. The U.S. economy surprised most people by contracting in the fourth quarter for the first time since 2009. In Canada, we've seen volatility in jobs growth and both housing and trade activity have recently slowed. And in uncertain times, consumers can become more hesitant to spend money. And in the restaurant sector, we continue to see competitors relying more heavily than usual on promotions and discounts. And we, too, have been somewhat more promotional in a low-growth environment.

We believe the Tim Horton offering, which is built around great products at reasonable prices, positions us well even in these challenging market conditions. In the fourth quarter, we had same-store sales growth of 2.6% in Canada after a couple quarters of growth just below 2%. In the U.S., our same-store sales increased by 3.2%, which was also higher than in the previous quarter.

Nevertheless, we are working hard to adapt to current marketing conditions. We have a number of initiatives underway to help us build on our leadership position in the market. We can group these initiatives into 3 categories: menu innovation, marketing and promotion and operations. I'll review the progress we made on each of them in the fourth quarter.

On menu innovation, our first major milestone was the rollout of the Panini sandwich platform in Canada following the successful introduction of the same product in our U.S. restaurants the previous year. The Panini platform is an important part of our strategy to grow our share in the lunch daypart, which has expanded significantly over the last -- past 5 years, as well as grow our average guest check.

Our other important launch in the quarter was our initial entry into the single-serve coffee market using Kraft's TASSIMO T-Disc platform. We see this as our entry into a growing segment of the coffee market that is quickly gaining acceptance with consumers. Our strategy is to be able to offer Tim Hortons Coffee on more than 1 single-serve platform. While these are still early days for both of these new products, we are very encouraged by the favorable response of our guests. Both products made a positive contribution in the fourth quarter, and we expect them to continue to do so. We are excited by the long-term growth potential of both of these great platforms.

Now turning to the second pillar I mentioned. It was another active quarter for us in the area of marketing and promotion. In Canada in the quarter, in addition to the national advertising support for Panini sandwiches, we offered Specialty Hot Beverages for $1 in October and again beginning in late November. We also had seasonal promotions tied to products like the Peppermint Mocha Latte and Candy Cane Hot Chocolate.

In our U.S. restaurants, we promoted our Flatbread Breakfast Panini, as well as seasonal beverages and baked goods. We also extended our breakfast hours to make breakfast available from 3:00 a.m. all the way to 12 noon, similar to what we have previously done in Canada.

On the operations side, we continue to implement a number of key programs. Interior digital menu board installations across the Canadian system were substantially completed in the quarter, and we have begun the rollout of external menu boards. We have also made some progress on other drive-thru enhancements such as double lanes, double order stations and order station relocations, which are designed to improve throughput at our busier locations. This work will continue at a very -- at an accelerated pace in 2013.

We were very active in new restaurant development in the quarter, opening 74 new locations in Canada, 54 in the United States and 6 in the Gulf Cooperation Council, for a total of 134 openings. Ongoing investment in our system is the key to our success, and we will continue to expand our footprint, as well as refresh our existing locations.

I'd like to turn now to our full-year performance for 2012. Full-year same-store sales growth in our Canadian segment was 2.8%. This was slightly below our target range of 3% to 5%. As I've discussed, I believe we are pursuing the right initiatives to help address some of the headwinds we're facing from the macro-level environment. U.S. same-store sales growth of 4.6% for the year was within our targeted range of 4% to 6%. We opened a total of 159 restaurants in Canada in 2012, within our range of 155 to 175.

In the United States, we opened 85 full-serve restaurants, also within our targeted range of 80 to 100 per year. We also opened 13 self-serve kiosks in the United States, which helped to build our brand presence and increase convenience for our guests. Finally, 19 restaurants were opened under the first full year of our license agreement in the GCC, exceeding our target of approximately 15.

Now I'll turn to a couple of topics relating to our organization. As we've described in the past couple of quarters, we have gone through a corporate reorganization exercise, where we took a close look at every level of the company. We have realigned roles and responsibilities in a manner that we believe makes us more agile and better supports our future growth. And at the same time, we've taken some costs out of the organization.

We expect to have substantially completed the reorganization work by the end of the first quarter of 2013, and I'm very pleased with the results to date. We have achieved what we set out to accomplish, and I'm confident we have the team and the structure in place to take us to the next level. And at the same time, the board has made significant progress in its external CEO search. Although the process is not yet complete, the board currently anticipates appointing a new CEO by early summer.

I'll wrap up my remarks with some observations on our plans for 2013. We plan to continue to invest significantly in the business this year. We will remain active in restaurant development, both in Canada and the United States. In addition, we expect to complete more renovations than we have in recent years. We are targeting approximately 300 restaurants in Canada. We will be incorporating the contemporary new design elements that we've been using in our new restaurants to refresh the look and feel of our existing locations. At the same time, we'll look to implement the drive-thru enhancements I mentioned earlier. We expect to upgrade the drive-thrus at over 1,000 locations in 2013.

These investments in our system, which we are making alongside our franchisees, are intended to improve the overall guest experience and add capacity where it is needed. As for menu innovation, we were very active with product introductions in the latter part of 2012, and we intend to continue to build on our existing platforms and innovate through category extensions in 2013.

Cynthia will now provide details on our specific targets for the year, as well as the results we issued this morning. Cynthia, if you would, please?

Cynthia J. Devine

Thanks, Paul, and good afternoon, everyone. Systemwide sales growth was solid in the fourth quarter, increasing 6.4% year-over-year on a constant currency basis. The growth is a result of both new restaurant development over the past year and our same-store sales growth.

In the Canadian segment, same-store sales growth, as Paul mentioned, was up 2.6% and was led by gains in average check, mainly due to product mix and pricing. Panini sandwiches and single-serve coffee played an important role. Same-store transactions were down year-over-year, but total transactions were up systemwide as we grew our restaurant base. In the U.S. segment, same-store sales growth of 3.2% was also driven by average check and in particular, pricing. Also, same-store sales transactions showed slight growth during the quarter. Our total revenues for the quarter increased 4.1% compared to Q4 of last year. This growth rate was lower than that of our systemwide sales.

On Slide 13, if you refer to that, you can see that distribution sales make up the largest single component of our total revenues. And this benefited stats overall from an increase in sales volume, but its growth lagged systemwide sales, because of an overall drop in commodity costs. So coffee prices, in particular, have declined since last year. And we generally apply a fixed dollar markup to products we distribute. And as a result, we pass cost savings onto our restaurant owners. This drives the reduction in revenues related to this particular category. We currently expect that coffee prices are going to be lower in 2013 versus 2012. The overall commodity outlook remains favorable with lower coffee and marginal increases in sugar, wheat and decreases in cooking oil.

Next, sales from variable interest entities, or VIEs, increased 8.5% in the fourth quarter. This was due to a higher number of non-owned restaurants being consolidated under accounting rules, with new VIEs mainly U.S.-based. In 2012, most of our U.S. restaurants in developing markets opened under operator agreements as a means of helping owners establish their business. Rent and royalty revenue growth of 4.8% was a result of systemwide sales growth, partially offset by a nonrecurring gain on a property disposition that we recognized in Q4 of last year. Franchise fee revenue was up 1.7%. We had higher renovation activity, but we had fewer restaurant sales in the quarter versus prior year.

I'll turn now to costs and expenses, which we show on Slide 14 of our presentation. Cost of sales increased 3.6% in Q4, reflecting the growth in systemwide sales, offset by lower commodity costs, as I mentioned earlier. Operating expenses were up 11.1% year-over-year due to higher rent and depreciation, driven by new restaurant development and renovations and depreciation relating to the digital menu boards that were installed throughout the year.

Q4 G&A expense was down 6.7% from last year as a result of several factors, including lower performance-based costs, lower salary and benefits as a result of reorganization and the timing of certain other expenses. We will be selectively adding resources and capabilities in growth areas of the business throughout 2013. While those additions will narrow the savings as the year progresses, we expect that at the end of the process, we will have a reduced cost structure relative to what we otherwise would've had. This has been incorporated into our outlook for 2013. The corporate reorganization expense in the fourth quarter was $9 million. That charge was the key reason that the $5.5 million increase in total costs and expenses exceeded growth in revenues during the quarter.

I'll turn now to earnings, which you can find on Slide 15 of the presentation. So operating income of just over $150 million was down 1.6% from Q4 of last year. But when you back out the corporate reorganization expense, we had adjusted operating income growth of 4.4%, slightly exceeding our 4.1% growth in revenues. I'll remind you that adjusted operating income is a non-GAAP measure, and which we reconcile to operating income on Slides 22 and 23 of the presentation.

Net income attributable to Tim Hortons is down 2.5% from the fourth quarter of 2011 due to the reduced operating income, as well as higher net interest costs. As far as earnings per share, the decline in net income was offset by a 2.7% reduction in our share count as a result of our share repurchase program. So our EPS was flat at $0.65 in the quarter. But if you exclude $0.05 impact of the reorganization charge, EPS would've increased 7.4%. For the full year, we delivered earnings per share of $2.59. Our targeted range, if you'll recall, was $2.65 to $2.75. But that target did not include the $0.10 per share impact of our corporate reorganization.

The next slide summarizes the performance of our operating segments. In the Canadian segment, operating income grew 2.7% to $163.7 million in the fourth quarter. The increase was driven by our systemwide sales growth, which led to higher rents, royalties and distribution income. This was partially offset by reduced franchise fee income, resulting from higher support costs and fewer restaurant openings. In addition, we realized a gain on a property disposition in Q4 of last year that did not recur in Q4 of 2012. On a full year basis, operating income in the Canadian segment grew 4.9% to $637.3 million.

In the U.S. segment, Q4 operating income was $4.7 million and was down about 15.7% from year ago. Systemwide sales growth drove higher rents and royalties and distribution income, but this was offset by higher operating costs and increased relief, mostly related to newer restaurants, as well as higher G&A expenses to support growth of the business. On a full-year basis, U.S. operating income grew 9.3% to $16.5 million.

So last topic I want to cover on 2012 is our financial position, which we've summarized on Slide 17. We ended the year with about $120 million of cash and cash equivalents, and this is approximately $6 million lower than a year ago, as our cash flows were reinvested into the business or returned to shareholders. Capital expenditures totaled $77 million in the fourth quarter, reflecting a busy period of both renovations and new restaurant openings. Depreciation and amortization was approximately $35 million, up from $30 million in Q4 2011.

In fiscal 2012, we generated $559 million of cash from operations. We used a total of $543 million of the cash for 3 purposes: We invested $187 million back in the business for capital expenditures; we paid $131 million in dividends; and we repurchased $225 million of shares. It's a good illustration of the statement that our priorities are to invest in the business or to return value to our investors.

So I now want to turn to a discussion of our outlook for the year. In this morning's earnings release, we issued financial and performance targets for 2013, and you can find those summarized on Slide 18. We expect to continue to grow the chain in a healthy manner despite the current headwinds in the macro level environment. We have strategies in place designed to expand and enhance our system, strengthen our relationship with our guests and deliver high-quality, solid value menu items.

Our 2013 targets are as follows: diluted earnings per share of $2.87 to $2.97 per share, which we noted in the press release does not incorporate the expected 2013 reorganization expense of approximately $9 million nor any costs related to the transition to a new CEO, the amount and timing of which are not known. We are targeting same-store sales growth of 2% to 4% in Canada and 3% to 5% in the U.S. We noted in the release that we have seen weakness thus far in 2013, we've seen a deterioration in the industry conditions as a whole and the challenging overall economic climate, which has resulted in an intensified competitive environment. We are also facing strong comparables from Q1 of 2012, and weather conditions have also been unfavorable in recent weeks, that have also had an impact on our sales.

We expect a total of 250 to 290 restaurant openings, and that's comprised of 160 to 180 openings in Canada and 70 to 90 full-serve openings in the U.S., and approximately 20 restaurant openings in the GCC. We anticipate capital expenditures of between $250 million to $300 million. Spending will be focused on restaurant development, as well as the expanded renovation program that you will see us renovate approximately 300 locations, as Paul described. In addition, our Canadian advertising fund will be investing up to $50 million to continue the exterior menu board programs at our Canadian drive-thru locations. And finally, we expect our effective tax rate for the year to be approximately 28%.

Our solid financial position and continued strong cash flow provides the context for the 2 other announcements that we issued this morning: first, a dividend increase; and second, the renewal and increase in our share repurchase program. Our board has approved an increase in our dividend payout range to 35% to 40% of prior-year normalized net income attributable to Tim Hortons. That's up from 30% to 35% that we previously had as our policy. Accordingly, I'm very pleased to report that we have raised our quarterly dividend by 23.8% to $0.26 per share, making this the sixth consecutive year of dividend increases for us.

The board has also approved a share repurchase program of up to $250 million, representing an increase from the $200 million last year. Share buybacks have made important contributions to our EPS growth over the past 6 years. Both the share repurchases and the dividend payments are important means for us to return capital to our shareholders, and both reflect our confidence in the continued strength of our business as we begin fiscal 2013.

So with that, I'll pass it back to Scott as we begin Q&A.

Scott Bonikowsky

Great. Thanks, Cynthia. And Benjamin, if you can now begin our Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from line of Perry Caicco with CIBC World Markets.

Perry Caicco - CIBC World Markets Inc., Research Division

Paul, how much did the single-serve coffee business contribute to your same-store sales in the quarter?

Paul D. House

Well, I'm not going to really disclose that other than say that it certainly did contribute to our same-store sales growth. We won't qualify that.

Perry Caicco - CIBC World Markets Inc., Research Division

Okay. And outside of the T-Disc business, was coffee a contributor to same-store sales growth or a drag?

Paul D. House

Again, we don't really break that kind of information down. We've -- average guest check certainly went up. And certainly the Panini sandwich and TASSIMO and all that certainly helped both those in the fourth quarter, significantly.

Perry Caicco - CIBC World Markets Inc., Research Division

Okay. And from your, I guess you've done some early work on drive-thru initiatives. Do you have a sense as to how much the improved capacity can really contribute to same-store sales?

Paul D. House

It's early because we did -- the most of the ones that we did this past year, were done late in the year. And -- but I can say that it is positive, and we know that they will add capacity. And from our past experience with drive-thrus, by improving service or whatever we do, whenever we improve throughput, we certainly get an increase in sales.

Perry Caicco - CIBC World Markets Inc., Research Division

And I guess lastly, when you look at the U.S. operating income and when we look out, let's say, over the next sort of 2 or 3 years, should -- I mean are we going to have sort of a similar type of performance where growth in revenue is offset by support payments and growth in G&A? Or is there an inflection point where we could really see the operating income climb?

Paul D. House

Well, I think you can see it in certain markets as we start to get the penetration levels that we then start to get the return. But you got to get to the penetration. You got to make the investment before you get there. And we've certainly been active in those areas, as we said in our strat plan 2 or 3 years ago, that we're going to concentrate on the markets that we had already have a presence in, and continue to put new stores in there to raise the convenience of the brand in those markets. And that strategy is what we're going to continue to follow.

Operator

Our next question comes from line of Irene Nattel with RBC Capital Markets.

Irene Nattel - RBC Capital Markets, LLC, Research Division

I was wondering if you could provide a little bit more color around your thinking for the same-store sales guidance in 2013? Certainly, given the tough economic backdrop, the intensifying competition, the tough prior-year comps and Lord knows, here in Québec, lots of disruption due to weather, just wondering what you're assuming because those are actually fairly robust comps.

Paul D. House

Well, that's a good point, Irene. And certainly, the first quarter is going to be a tough quarter because of, like you say, the weather in Québec and so forth. We had probably the most unusual quarter last year from a weather point of view. I can't ever remember in my history in the business that you didn't lose days because of weather-related impact. And so we believe as a team that the goals that we have set out are achievable. Certainly, we're going to need to have a strong year as we get further into the year. But I'd remind you that we've just -- the fourth quarter last year and the first quarter of this year were very robust quarters for us. And as we get later into the year, all the quarters weren't as strong as we've been used to. And so we won't be lapping over as strong of sales. And so we're encouraged that we can regain some of that business and therefore, deliver what we've laid out as objectives.

Operator

And our next question comes from the line of David Palmer with UBS.

Eric Gonzalez - UBS Investment Bank, Research Division

This is actually Eric Gonzalez in for David Palmer. Just a quick question. Your 2013 guidance seems to suggest minimal profit leverage from your targeted sales growth. And given the recent restructuring, including supply chain, manufacturing changes and potentially increasing capacity utilization within the supply chain, could you start to see or experience better profit leverage in 2013 and beyond?

Cynthia J. Devine

That's what we're going to be looking at as we get beyond 2013. I think as Paul just outlined, we think we've set disciplined targets for our outlook for 2013 in terms of the EPS outlook that we outlined. I think one of the factors, we're expecting our tax rate to be relatively flat year-over-year. And that's contributed in the past to a fair amount of EPS growth for us, and we're expecting it to be fairly flat year-over-year at the current time. So that does impact the growth rate a little bit.

Operator

[Operator Instructions] Our next question comes from the line of John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

I'm going to start with maybe a broader question, but I want to narrow it down to how you think about CapEx in 2013. Over the last 3 years, you've increased your capital spending by 50% and your operating income growth has been more like 15%. So what is the disconnect there? Why is it that you're not really getting the flow-through and incremental profitability on all the spending you've done? And Paul, you talked about kind of the lift or the hypothetical lift you might get from the drive-thru renovations, for example. What's the hurdle rate? I mean, what's the math behind the justification for increasing the spending by this amount? Anything around that would be very helpful.

Paul D. House

Sure. Well, John, the U.S., I think, speaks for itself that we realize that we've got to put capital in into markets to get to certain penetration levels, and that's not giving us an immediate return. So that certainly impacts the return. The other improvements that we do, renovations and so forth, in the initial term, when you up the number of renovations, the restaurant effectively is not shut down, but we don't achieve 100% of the sales during a shutdown time, that we've experienced. And our experience is that after you reopen, it takes a while for that store to get back to the level. So there's a number of factors that impact that. And we believe that especially these drive-thru enhancements and so forth that we're going to put in this year, they're not as capital-intense as renovating a full restaurant. And I think that will improve our returns as we go forward.

John S. Glass - Morgan Stanley, Research Division

Could you just give an example like how much is the cost to refurbish a drive-thru and how much sales lift do you think you'll gather? What -- can you just maybe be specific about an example like that?

Cynthia J. Devine

It really varies considerably depending on what we're doing at each drive-thru location. If you're adding a double-order station, that's a pretty significant investment for both ourselves and the restaurant owner. If you're moving, relocating the speaker box, that's going to be a lot less. And then the third alternative is really just changing out the menu board at the drive-thru, which is again, a less expensive alternative. So there's a lot of variability and it really depends on the actual site work that has to be done. So it's a difficult question to pinpoint a number on, John. And as I said, this is a cost that obviously our restaurant owners are making a significant investment in these initiatives as well.

John S. Glass - Morgan Stanley, Research Division

Okay. But I guess still, they would want to know what they're spending and what they're getting for what they spend. So I would think they would still show...

Cynthia J. Devine

[indiscernible] it literally is on a site-by-site basis, depending on the amount of land that you have available and the site work that needs to be done. And as I said, when you're adding a double-order station, that's pretty significant investment, whereas some of the other ones on just relocating a speaker box are not as significant.

Operator

Our next question comes from the line of Matthew DiFrisco with Lazard Limited.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

My question is with respect to the single-serve. I guess, when you look into the U.S., there's a larger player than TASSIMO. And so I guess Green Mountain has the installed base there. Does your TASSIMO relationship north of the border preclude you from getting, signing anything or a licensing agreement with Green Mountain to go south of the border?

Paul D. House

No. As I said earlier, the market is much more fragmented in Canada. And so to the -- if you only have -- if you're only serving one platform in Canada, you're only going to get a certain percentage of the market. Our plan was from day 1, and why we're maybe as some people might see that we're a little late coming to the market, it was intentional because we wanted to come to the market with more than one platform. And you will see, as we go forward into this year, that we will announce arrangements with other players to expand our platform. So we look forward to being on the other platforms in the near future.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Excellent. And then if I could just have a follow-up. With respect to the CapEx, your store numbers look relatively in line, if not even lower in the U.S. than the initial range that you gave for 2012. Is there anything to read into that? Is there any greater closures or -- because your CapEx dollars are going up as well. So I'm wondering if, are you anticipating, given the recent slowdown, any greater activity in overall closures that might hurt the net numbers?

Cynthia J. Devine

No. There isn't -- there is nothing in the way of planned closures other than what we do in the normal course, which is generally pretty insignificant. What I would say again, there's a big portion of the capital that is associated on the Canadian side of the business with the renovations that Paul talked about. So that will step up number of renovations that we're doing of approximately 300 restaurants. That's a big component of it, as well as some of the initiatives that we have around the drive-thru.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Excellent. Have you ever given any color as far as the regional differences in Canada, as far as what you're seeing in a new store opening in Canada, in Toronto versus a new store opening in Western Canada?

Paul D. House

No. Well, we don't really break our volumes down by region for good reasons. But yes, I mean you see variations in regions given population. And if you're doing downtown Toronto, for example, your primary hours of business are probably from 7:00 in the morning until 3:00 in the afternoon. So volumes are substantial, but they have to be -- they're in a much shorter time period. So there's a lot of variables that go into sales. Just absolutely -- the top-end sales isn't really indicative of the location.

Cynthia J. Devine

A lot of it depends on box size as well, right, depending on the type of location we're going into.

Operator

Our next question comes from the line of Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

Three years ago at this time, you guys said to expect 600 additional Canadian units through the end of 2013. And you're at 420 and based on the guidance, you'll reach around the 600 by the end of this year. And so I guess, given that the guidance timeframe's coming to an end, I wanted to hear from you guys what should we expect will happen next? And how many more Canadian units can you build over what timeframe? And does the negative same-restaurant traffic influence the thought process at all?

Paul D. House

Well, no, not at all. I mean, I don't think that the amount of restaurants we've built and the difference in sales trends actions and so forth is relative to new-store development at all. In fact, when we restate our strategic plan, which we will do sometime probably in '14, we believe as a team that there's a lot more opportunity for stores in the Canadian marketplace than what we've -- that we saw when we looked out. We still identify markets like downtown Toronto, Montréal, Vancouver, development in Western Canada, Québec, we still believe there's tremendous amount of growth there. So there's a lot of growth opportunity left in Canada. And quite frankly, we talked about it on a previous call that we have restaurants with capacity issues that they are extremely high-volume restaurants. And we know that we need to, in some cases, we're probably going to have to build some form of maybe not a full restaurant but a smaller restaurant that's in the same proximity to take some pressure off of that. There will be some cannibalization on that store. But overall, the total sales that we -- that are there will be much greater than what was there before we built the location. So we purposely will do some cannibalization. But there's a lot of markets where our brand has not penetrated, and we need to get that penetration level up.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then on a separate point, given the number of units that you own or control the lease, have you guys looked at ways you can unlock shareholder value by converting and maybe even spinning out a portion of your business into a REIT or a similar vehicle like Loblaw's or Penn Gaming or CBS have recently done?

Cynthia J. Devine

Yes. I mean, over the years, we've definitely looked at various things to make sure that we're investigating ideas as they come up. I would say that we own, of our restaurant base, we own about 20% of it, and then we control about 80% of it through control of the head lease. So it's a little bit different than the circumstances of some of the other REITs that you've heard in terms of the total value of owned sites that we would have. So it is a little bit different, and some people don't recognize the distinction between controlling through control of the head lease versus outright ownership.

Michael Kelter - Goldman Sachs Group Inc., Research Division

So you've looked at it recently, and it doesn't make much sense for you guys?

Cynthia J. Devine

I have looked at it and it -- I don't believe it makes a considerable amount of sense for us given exactly as I outlined, that the percentage that we own is quite small relative to the overall portfolio.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And if you don't mind, one last one, on a different point. And maybe you said this, and I just missed it, but the CapEx that's going towards remodels, given you're almost entirely franchised. I thought I wanted -- what are you contributing to the franchisees? And are you required to aid them in this way? Or is this some form of goodwill or these remodels wouldn't otherwise get done unless you aided them? What's the amounts and thought process there?

Paul D. House

Well, a franchise agreement calls for a franchisee to renovate their locations every 10 years. We have always from day 1 contributed to renovations on basically the building construction and so forth. But we don't contribute to equipment, new equipment or finishing and things like that. So we do contribute. We do it as a good partner, and we get percentage rent, as you know. And so you would expect that we would reinvest to continue that cash flow. It won't last forever unless you refresh it. And so it's just good business.

Operator

Our next question comes from the line of Peter Sklar with BMO Capital Markets.

Peter Sklar - BMO Capital Markets Canada

In the same-store sales numbers that you reported in Canada and United States this quarter, can you let us know what price there was in those numbers, if any? And what is the outlook for menu board pricing in 2013?

Cynthia J. Devine

I can talk about what's in the numbers. There's just over 1 point of pricing, approximately, in the Canadian same-store comps. And in the U.S., there's just over 3 points of pricing in the same-store comps.

Peter Sklar - BMO Capital Markets Canada

And when did that pricing come in because I thought you'd lap the last major price increases?

Cynthia J. Devine

No. Within the U.S., it was around February of 2012. And in Canada, it varies by market. But no, we hadn't, in -- towards the end of '12, we hadn't lapped all of the pricing.

Peter Sklar - BMO Capital Markets Canada

Okay. And then the outlook for 2013?

Cynthia J. Devine

As we -- I think as we talked about the process before, we really spend a lot of time understanding the outlook for commodities and other costs in the business. We work with our restaurant owners, and it's a process that we go through. And at this point in time, there's nothing that we can report on pricing.

Peter Sklar - BMO Capital Markets Canada

But it must be something you considered because you gave same-store sales guidance?

Cynthia J. Devine

There is some carryover pricing that does exist within the system, and there were a few items that there was little bit of pricing on not core items, that did take place in the back half of 2012. And so there are some assumptions about those things that are built into the – just the future outlook.

Peter Sklar - BMO Capital Markets Canada

Okay. And just lastly, if I may. Just wanted to ask you about the Panini introduction in terms of the price point that has a $5 handle on it, which is a little bit un-Tim Hortons like to have a $5 price handle on an item. I'm just wondering how you feel that was received with the consumer, and if you had to make any amendments to your pricing strategy with it, I noticed it's bundled quite a bit?

Scott Bonikowsky

Well, first of all, it's a big sandwich. And so there's good value there, and we looked at that. We could have made it smaller and brought the price point down. But we're aiming that at the person that wants a quality sandwich, and they want some quantity attached to it. And there's high quality attached to it. And if you compare it to what's sold out in the market, it's very low price. And we have a Cheese Panini sandwich that is $3.99, so the variation is from $3.99 to $5.25 or whatever it is. And as we go forward, we'll rotate sandwiches in and out. And so there'll be some that could be below $5 as we bring out different recipes and so forth. So it'll depend on the ingredients that we put into the product. But I can tell you that we've had -- we haven't had any pushback as far as the price of the product, and we've certainly had good acceptance on the quality and so forth. So we're very pleased with the introduction of that product into the Canadian marketplace. And it continues to do well in our U.S. market, where it's been there for over a year.

Operator

Our next question comes from the line of Joe Buckley with Bank of America Merrill Lynch.

Andrew Charles

It's Andrew Charles on for Joe. I appreciate the commentary about upcoming renovation on drive-thru plans. Can you talk about what percent of your system has the remodeled image and drive-thru enhancements and what the ultimate potential could be?

Cynthia J. Devine

Right now, at the drive-thrus, it's a very small percentage of our system that actually has the enhancements. 2012 was really a year where we put a few of them in place to really understand and get some learnings out of it. And the bulk of the work in terms of the number of drive-thrus, I think we've communicated that over 1,000 drive-thrus are going to be enhanced in one of the forms that I mentioned. And so that's a significant portion that will happen in 2013. And in terms of the renovations, we typically renovate 130 to -- it varies by year. It can sometimes be slightly less than 100. We could be up to 550. So we're, as Paul said, contractually, the restaurant owners are renovating every 10 years, 9 to 10 years, but we're really stepping it up this year and doubling it to approximately 300. But it's still -- that's still going to take some time to work renovations through the entire system. So we would expect that we're going to continue to do renovations in the future as well.

Andrew Charles

Okay. And then how should we think about 2013 EPS guidance for growth of 7% to 10% versus long-term targets? Do you view 2013 as an aberration or is the secular outlook changing?

Cynthia J. Devine

2013 really represents the last year of our strategic plan. I did mention one of the factors, definitely we enjoyed, and probably the tax rate came down quicker. And so we enjoyed some of the benefits of a lower tax rate earlier on in the strategic plan. But as Paul said, we're going to be focused on setting the next stage of our strategic plan as we look to 2014 to the next 4 or 5 years out. We would be hopefully in a position to talk about that as we go out to '14. But this is really the finish of the strategic plan that we outlined in early 2010.

Operator

Our next question comes from line of Michael Van Aelst with TD Securities.

Michael Van Aelst - TD Securities Equity Research

One, in your outlook statement, you talked about making balanced and targeted investments to support growth in the tough economy. And I was wondering if that includes any absorption of franchisees' costs or making it a little easier for the franchisee?

Paul D. House

Well, we are always in working to improve franchisees' costs. Certainly, the outlook in '13 for the franchisee, given coffee and a lot of other commodities, is a lot more positive than it was a year ago. So and our franchisees historically have always had fairly good profit lines. They do vary because of the commodity and specialty coffee being such an important part of our mix, and it does fluctuate with time. And it will impact margins in certain years and so forth, as it does in our distribution business. And -- but we don't -- we do a lot more than most franchisors do with their franchise communities. So we will continue in that type of relationship.

Michael Van Aelst - TD Securities Equity Research

Okay. And when you commented on Q1 same-store sales seeing some weakness, are you talking about just growth coming in below your guidance for the first quarter, but positive? Or are you actually seeing negative trends?

Paul D. House

Well, I think all we're pointing out is, is that we were overlapping a very strong quarter from last year. And I think that everybody in the industry enjoyed the benefit of that weather that we had last year. And then this year is more normal, what I would call, more normal quarter, in that we're having storms and we are having days that we lose sales in. And so we didn't lose those days last year, so it will impact our numbers. And then you add a very difficult economy that we're experiencing, and so it's one of those situations that you find yourself in. But as I pointed out on an earlier question that as we go deeper into the year, we were positive about some of the quarters because our sales were not as strong as we are historically used to. And so we think we can regain some of that traffic as we get later into the year.

Michael Van Aelst - TD Securities Equity Research

And what gives you the confidence on -- that you'll be able to announce the CEO search in early summer? I think you've been at least seemed like you were getting close at times in the past, but then nothing came about. So are you -- if you're not -- if you haven't finalized anything, how do you get that confidence?

Paul D. House

Well, I won't comment other than that we're -- we feel good where we're at from a board search. And I don't think that we've ever set a signal that we were anywhere with the search previously, that it was ongoing. And it -- I certainly didn't come back to just keep the seat warm, so we've been doing a lot of good business initiatives and so forth. And -- but the board feels very confident in their discussions and so forth with various candidates that they can – that they're closing in on a candidate that would be available by summer.

Operator

Our next question comes from the line of Jim Durran with Barclays Capital.

James Durran - Barclays Capital, Research Division

Ye, just I know that you did increase your emphasis on meals, I guess starting back as far as September. And although the environment got difficult, I'm just wondering if you could comment on the kind of traction you got on the sharper price points in your combo meal offers?

Paul D. House

Well, I -- we did some dollar stuff on drinks and stuff like that. And certainly, in this environment, that's a positive with the consumer, it's rewarding, too. But it's not something historically that we've been used to doing. We've done some bundling in the past, but we're doing more. We did a breakfast sandwich in September at $1.99. So -- but we didn't really change a lot of our combo pricing. It's pretty much the same as it's always been. So there's been no change there, not in the Canadian market, and I don't believe there's not in the U.S. business either.

James Durran - Barclays Capital, Research Division

And in the U.S., like I know it's been a long time we've been all sort of hoping and waiting for the average unit volume to get to a point where we're into the next phase of growth in that market. Is there any market today, as you would define it, that's creeping close to the Canadian average, the way that Buffalo had managed to get to?

Paul D. House

No, but we are making progress in our other major markets. And our same-store sales growth was doing terrific. And then, like the industry, the last 6 months, we've seen that trend down. But again, we're not -- the fourth quarter was a bit stronger, but not where we had been for the last -- the previous, before the slowdown. We had 18 months or so of some really strong same-store sales growth, and we hope to get back on that basis.

Operator

Our next question comes from the line of Chris O'Cull with KeyBanc.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Cynthia, during the process of evaluating the organizational structure, did you evaluate the pros and cons of the distribution business?

Cynthia J. Devine

Of -- in what regard?

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

In just remaining in the -- I mean, in the past, we've seen you sell Maidstone Bakeries. Is there -- did you go through and just look at the alternatives of remaining in the distribution business?

Cynthia J. Devine

I would say that, that was not a primary area of focus. This was more of a corporate focus that we had. But I will say that we do, similar to other exercises we were asked about, whether we consider REITs and things like that. We're constantly looking at the business and determining what the best way for us to manage and build the business. We still believe distribution is a fundamental strength that we have in our business. It allows us, particularly in the Canadian market, we don't have a distribution center in the U.S. business. But in the Canadian landscape, we can leverage our own size, and we're able to service the restaurants. We're able to do it in a very efficient and effective manner that we think brings systemwide benefits. But it doesn't mean -- we would always continue to look at, if we're not the best ones to do that or to provide that service to our restaurant owners, then we wouldn't do it. And we also recognize that it needs to make sense from an investment standpoint and a corporate return sense as well. So we do look at the 2 things. In certain jurisdictions today, we're not delivering because it doesn't make sense for us to do so. We have third parties doing our distribution in some communities within Canada. So if it doesn't make sense to do so, we won't. And -- but again, we do believe that it has been one of the critical strengths that we've been able to bring to our owners because of the vast geography of the Canadian landscape. If you have someone else doing it, they're going to leverage your scale and help potentially some of our competitors get to lower cost to distribute. And we're able to do that given our size. We get to leverage our own scale.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

I know in the past, I mean, well, I guess today even, you look at the distribution business, too, as a way to help manage some of the cost fluctuations to the franchisees. But when you compare the business you were in with Maidstone and then the distribution business, both of those, I think, were designed to help the franchisees. Why is the distribution business better than the bakeries was in terms of supporting franchisees? Or is it?

Cynthia J. Devine

Well, I think they're 2 totally different businesses. I don't even know that you can compare them. The bakery, at the time that we went into the bakery business, it was a state-of-the-art facility that no one else could bring that technology. And so it was a major change to our system. And at that time, it really made sense for us to be in that business because we wanted to own that technology and make sure that it was only available within our restaurants. So the world has changed a fair bit from that time. But also, the reason we sold the bakery, quite frankly, was because our partners exercised the buy-sell provision of our joint venture agreement. And so we were left in a position of either buying at the price that they put forth or selling. And based on our analysis, and we believe that the right decision for the business was to sell. I can tell you today that the quality of the product and their commitment to us as a partner hasn't changed a bit. We're very pleased with the relationship we now have with the bakery as a supplier. But the technology has changed, and the world's changed. And we're going to continue to look at various options. As a supplier, they're bringing us all kinds of ideas and things. So the relationship is very good, but it was a very different decision than us just saying, we want to be out of the bakery business. It was really a joint venture decision.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

I forgot about the trigger, the option, that's right. And then just one last one. Would you remind me what portion of your sales comes from the drive-thru window?

Paul D. House

That varies by region. It's not constant, so -- and we don't break it down.

Cynthia J. Devine

Yes. I mean, it's a significant percentage. I think part of the -- what we're seeing as an opportunity, in terms of the renovations, is actually bringing people back into the restaurants. So some of the things that you're going to see in our new restaurants, as well as our newly renovated restaurants, is a much more comfortable seating inside and some of the things that we've brought in like WiFi in that because we do want to take some pressure off of the drive-thru in addition to the initiative we have in place. We want to bring more people into the restaurants. And so we believe that's absolutely an opportunity for us in the business.

Operator

Our next question comes from the line of Keith Howlett with Desjardins Capital Markets.

Keith Howlett - Desjardins Securities Inc., Research Division

Yes, just on the guidance, the 160 to 180 restaurants in Canada, are they full-serve restaurants or...

Cynthia J. Devine

Our budget is relatively the same as it has been historically. It's about 1/3 nonstandard and about 2/3 standard restaurants. But from time to time, you get an opportunity to either do a little bit more standards or a little bit more nonstandards. So that can fluctuate, but that's -- the current target is 2/3, 1/3.

Keith Howlett - Desjardins Securities Inc., Research Division

And then on the amortization of the Maidstone Bakeries supply agreement, is that in the guidance? I noticed it's in adjusted operating income, but is it -- where does it stand relative to guidance?

Cynthia J. Devine

It is in the guidance, and it has been -- it was something that was a big year-over-year change back a few years ago. It's not anymore, but we felt that it was important to keep it in the chart. It really, on a year-over-year basis, it's nothing.

Keith Howlett - Desjardins Securities Inc., Research Division

So the earnings estimate includes it?

Cynthia J. Devine

Yes, it does, the earnings and the guidance.

Keith Howlett - Desjardins Securities Inc., Research Division

Great. And then just on the investment in the U.S., when you mentioned that the franchise fee costs include support payments, is that sort of -- what does that relate to? Does that relate to postponing the capital cost of the restaurant or...

Cynthia J. Devine

No. With regards to franchise fee cost, that is more related -- so support costs on the franchise fee line of business is more costs associated with either training and startup of initial restaurants and some of those types of costs, as well as programs or initiatives that we've had with regards to our double-order station and some of the other kind of company-wide initiatives we've had, would go through that line of costs.

Keith Howlett - Desjardins Securities Inc., Research Division

Got it. And just on the investment to do a full-serve unit in the U.S., I know you work on this all the time, but do you think you can sort of push down the site size, the restaurant size, the sort of the total capital investment to get a -- to sort of reduce the time to payback? Or you've pretty much already all done that?

Cynthia J. Devine

We're working on that still, Keith, and we have -- the U.S. team has made a lot of progress over the year actually in bringing down the box size and trying to get some cost out of it. But I will tell you, it's still an area of focus for the U.S. team. We do still believe there's opportunity to bring some of the costs down.

Keith Howlett - Desjardins Securities Inc., Research Division

And then just on the hot sandwich platform, you took away some cold sandwich offerings like egg salad and tuna salad, et cetera. Is sort of the unit -- are you getting unit growth in sandwiches, and that sort of thing?

Paul D. House

Yes, we are. Sandwich mix change, too, over time. We're doing -- we're always looking to innovate in the sandwich line, and we'll bring certain sandwiches in for a period of time and take them out whether they're hot or cold. So that's kind of the strategy as we go forward.

Operator

And we are now out of time for questions. I will now turn the conference back over to Mr. Bonikowsky. Please go ahead.

Scott Bonikowsky

Okay. Thanks, Benjamin. I realize we didn't get to everybody that's queued up for the call. So if you want to chat later, feel free to reach me at 905-339-6186, or alternatively by email at investor_relations@timhortons.com Thanks, everyone, for joining the call. We really appreciate it.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask you please disconnect your lines.

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