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Executives

Paul D. House - Executive Chairman, 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

David Palmer - UBS Investment Bank, Research Division

Tim Hortons Inc. (THI) UBS Global Consumer Conference March 14, 2013 1:30 PM ET

David Palmer - UBS Investment Bank, Research Division

All right. Well, good afternoon. I'm David Palmer, UBS Restaurant and Packaged Food Analyst and very honored to have Tim Horton Senior Management with us here today. With us are Paul House, Executive Chairman, CEO and President of Tim Hortons; Cynthia Devine, CFO; and Scott Bonikowsky over there, VP of Corporate, Public and Government Affairs.

I want to say a word about these Executives before we get started. It's no overstatement to say that Paul is a titan in the restaurant industry, in the Canadian consumer landscape as well. His successful career at Tim's has spanned 27 years. He joined Tim's in 1985 as VP of Marketing. At that time, there were just over 200 Tim Hortons locations versus the over 3,000 today. Later on, he assumed leadership roles in operations, becoming President and COO in 1995, and later CEO in 2006 and Chairman in '07. Under his leadership, Tim Hortons grew from a small beloved brand to a dominant restaurant franchise that has been best-in-class in drive-thru efficiency, menu innovation, restaurant design, and with its always fresh baking. Tim Hortons is looking for a new CEO that will take over from Paul, the fourth largest publicly traded quick-service restaurant chain in North America based on market capitalization and the largest restaurant company in Canada.

Cynthia Devine joined Tim Hortons in '03 as CFO. In this role, she has executive accountability for leading the company's financial organization as well as supply chain and vertical integration strategy. Cynthia also developed the infrastructure processes and capabilities necessary to successfully lead the company through its IPO in 2006.

And Scott joins us here today. He's in charge of those functions I mentioned as well as IR. And Scott joined the company in 2007. So thank you again for joining us.

Question-and-Answer Session

David Palmer - UBS Investment Bank, Research Division

Paul, perhaps we can just start and kick off our discussion with a state of the union for Tim Hortons as you see it today, how are things going, give us a sense of your targets and your long-term vision for the brand.

Paul D. House

Okay. Well, there's no question, I'm sure you've heard it at that this conference. I mean, we're dealing with challenging economic times, that's to be sure. And Canada has got -- where a good chunk of our stories are certainly has come through these challenging economic times better than a lot of countries, but we're feeling it in Canada today. And I think that as we look at the retail sector in Canada, I think everyone is kind of relating that. It's a very competitive landscape that we deal in and when you're in an economy that's sluggish, there tends to be more discounting and stuff like that. So the general landscape is challenging. But our comps have stayed positive, and we're proud of that and are -- we do have some very high average volume numbers. So getting comps off of that is a bit challenging as well. So -- but we feel good about the business. And our U.S. business had a fairly good year last year. But like most of the industry in the United States, the first half of the year was quite good and in the back half of the year was -- we all seemed to experience some slowdown in sales growth and so -- and that's been a bit concerning. But hopefully, a lot of that's behind us, and we'll start to see some -- a lot of sunshine as we go forward, and I believe we will as we go down the road. As far as our Canadian business, we have lots of room for growth in our business. We have stated in our current strategic plan that we can exceed 4,000 units in Canada, and we still feel very positive about that. And as we rejig our strategic plan with our new CEO, we'll be more definitive about that, but I think our team feels very strongly that there's a tremendous amount of room for additional Tim Horton stores in Canada. And in our U.S. business, we're going to continue to do what we've been doing which is to concentrate on our core markets and focus our development towards those core areas and get our concentration at a higher level than it currently is. So that's kind of just a broad overview of where we're at.

David Palmer - UBS Investment Bank, Research Division

Okay. When -- one way to start to define Tim Hortons, particularly for those that are not as familiar with the company is that to compare and contrast the U.S. and Canadian parts of the business, the economics and the growth strategies for each, and clearly one's bigger than the other. But if you wouldn't mind, maybe talking a little bit about the basics, the unit growth rate targets for each and then if there's any change in thinking around the type of growth in the U.S. in particular? I think that's a question on people's minds whether it'd be more of a margin-type focus in the U.S. versus [ph] in the intermediate term than there has been.

Paul D. House

Well, I mean, the basic difference is we've got to get our average unit sales in the United States higher. I mean, we average roughly $2 million in Canada, and we're half of that in the United States, $1 million. But the positive is we have high volume stores in most of our U.S. markets that we're in. So the problem is, is that we've got some low-volume stores in all of the markets except Buffalo. So it's raising -- getting those lower stores up higher in volume is job one. And we think that with the concentration of the brand and making it more convenient, you will help those stores that are at lower volumes in those markets. And we've certainly proved that in the Canadian landscape. We struggled in Western Canada, we struggled in Québec for many years. And we didn't really start to get the brand rolling until we got to a store level concentration that people could recognize the brand, and we were somewhat convenient. And so that's why our strategy is to stay to core markets because scattering the brand, shotgunning it and not getting it with concentration, we don't believe is the way to go. So but we -- and margins in the U.S., because volumes, volumes will fix margins. There's nothing wrong with the business model. Cynthia can even answer that better than I can. But our -- we find profitability in the U.S. very similar to Canada. It's just the volumes that are the big differential.

Cynthia J. Devine

And just to reiterate that, the fundamentals of the business model are very similar between the 2 countries. So if you have a restaurant in Canada that does $1.8 million, you have a restaurant in Buffalo that does $1.8 million, the profitability from a company standpoint and from a restaurant owner's standpoint will be very similar. So the one core difference that we've pointed out, overall, obviously beyond the average unit volumes -- because that is the key, right? You need to move the average unit volumes up in the U.S. business. But the one thing is leveraging your marketing spend. So you want to be -- you want to continue to develop in the markets that we're already in because we can leverage some of the efficiencies that we get out of the marketing spend because we're already on the TV in those markets and doing a lot of marketing around it, our brand. So to add more restaurants there is a efficient way to do it. The thing about going into new markets that's a little bit different than the Canadian landscape is that when you go into a new market in the U.S, you get very little spill between DMAs. So if you're buying media in Buffalo, when you go to Rochester you need to buy a different media, a different television feed in Rochester. In Canada, we were able to get some spill, so when you bought the large urban centers -- into the rural areas, you were also getting the feed, so people knew about the brand before you arrived there. So that is a difference. And so we're trying to get smarter with our marketing spend and [indiscernible] but one of the key things about doing that is continuing to focus on the core markets that we're in, where we think there's great opportunity to continue to grow.

David Palmer - UBS Investment Bank, Research Division

One of the areas of fascination that people have with regard to your story is within Canada, that there seems to be regional differences. I know you say limited amounts about exactly how different the regions are going. But what can you say to people that wonder about the restaurant potential in Québec, Western Canada and thinking about that versus what you've experienced in Ontario?

Paul D. House

Well, Ontario is one of our primary markets, that's where the chain started. So obviously, it's had a lot longer history. We struggled in Québec for a number of years, and we only a few restaurants there. And quite frankly, Dunkin' was the dominant player in that marketplace at that point in time. And then we relooked at the market in the mid-'90s. And we developed, we decided that -- much like Pepsi, we followed Pepsi's lead of -- they treated Québec as a totally different, separate market. And they were the secondary player, and by developing a strategy specifically for Quebec, they were able to rise to be the #1 soft drink brand in that province. And they did it by separate creative, TV creative, not really -- they didn't change their product, obviously, but they changed the way they marketed it to that market. And I'd say that the biggest change that took place in the mid-'90s that led us as we started was the fact that we developed marketing specifically towards Québec. And we begin to act like a #1 brand in the province of Québec. They're very loyal to the #1 brand. And #2 doesn't pay well, so we wanted to be #1 brand, and we set out to do that. And today, we are the dominant brand in Québec, but our development has been later. The menu is relatively the same as it is. There's a couple of slight differences. But they're not significant in the overall total sales. It's just something that when -- probably we didn't really need to have, but when we were trying to find out what was the answer, we put a couple of things on the menu to try them out -- one of them being Texas toast, if you can understand that. But -- and it still sells well, but it wasn't as if -- it didn't change that overnight we became successful because of Texas toast. It was because we improved our operations, we improved our marketing and away we went. And Western Canada was very similar, it -- we didn't change the menu at all. We just had to get the brand, as I said earlier, to a concentration level and -- drive-thrus was a bit of a challenge in the early days because out in Western Canada, people like to come in the restaurant and sit down. We were building restaurants that were too small. And we realized that, and we started to increase our seating capacity. And then we started putting drive-thrus and they were slow initially as they were in Québec, but then gradually people got on to the convenience of a drive-thru, and of course, the rest is history, so...

Cynthia J. Devine

In terms -- sorry.

Paul D. House

Yes, go ahead.

Cynthia J. Devine

Okay. In terms of the outlook for growth in those markets, for example, Atlantic Canada, we're not adding a lot of restaurants so that's not an area of growth. But the 2 markets that Paul just talked about in terms of Québec and Western Canada, that's going -- we see a lot of potential for growth in those markets. And then we continue to have Ontario. We continue to add restaurants, we see that in some of the downtown locations, urban centers in -- being Toronto, Montreal, Vancouver and Calgary are good opportunities for us too. It's not too dissimilar from some of the big cities in the U.S. where you're going to have a restaurant nearly on every corner because each block is a different pattern. And you have so many people in the downtown area. So as we see those as -- from a regional perspective, that would be our areas of focus.

David Palmer - UBS Investment Bank, Research Division

There -- another area of curiosity out there is around the pricing environment. You touched on it, Paul. With regard to McDonald's, that seems to be the name that people bring up us they're pounding away with one coffee deal after another, sort of thing. Is that -- for someone that's not as close to the market, coming from the United States, is that a significantly different environment? I mean, is that much more price competitive there than what we probably are seeing here?

Paul D. House

Well, yes. I mean, we've seen in Buffalo the McDonald's did free coffee there once last year, I believe. They've done the free coffee in Canada, I think for the last 4 years. Spring and fall, generally, is the 2 seasons.

David Palmer - UBS Investment Bank, Research Division

It's a low price. Free.

Paul D. House

Yes, that's pretty low price. It's hard to compete with that, yes. Unless you go 2-for-1, but that doesn't even work either. But anyhow, so the business is -- it's competitive. It always has been. And they're not the only ones discounting coffee. Again, your convenience brands, that's pretty well the way they do business is they discount not only coffee but soft drinks and so forth. But to be frank, we don't really think that it's had a major impact on us of any significance. We've had some transaction slippage. And we attribute that more to the economy, and I guess the way we look to that is we have stores where we don't have any competition at all, and we still see that we've got some loss in transactions. So it tells us that it's not the competitive environment, it's more of the economic environment. And you've always got a strong competitor, I mean we used to have strong -- Dunkin' were in Québec and we had other regional chains that were very strong in the coffee/doughnut category. And they virtually have disappeared. But they -- like anything, one competitor disappears, a new one will appear. And McDonald's, they've been refurbishing their outlets, doing a number of things, and are getting a little bit of a bang for that right now. But they had a pretty tired chain in Canada. So it was long overdue for them to do that. And so now that's -- they're about 70% completed by a statement that we had recently. So we'll see where it plays. But I don't worry about McDonald's, I don't worry about convenient stores. I worry about us. I worry about how we operate in our restaurants, I -- what's our speed of efficiencies, what's our menu evolution. These are the things we can control, and I know very well that if would be do our job the way we can do, we can beat anyone in the world. So I'm not concerned about the other guy. I'm concerned about us. Are our franchisees getting complacent. Are they not doing what -- are they in the stores and so forth. So those are the things that we focus on.

David Palmer - UBS Investment Bank, Research Division

Yes. For those of us who may not track the overall Canadian fast food industry, I mean, do you have a sense of how the industry overall is going in Canada? How that may -- how you may be tracking versus that industry?

Paul D. House

That's the whole problem with the Canadian landscape. McDonald's for example, obviously they don't report out their Canadian numbers. So we have no sense of what they're doing. And Wendy's and all of your major players that you're familiar with that play in the Canadian landscape, they don't -- but our intelligence would say that nobody is setting the world on fire in this environment that we're in. So I suppose that's the best as I can tell you.

Cynthia J. Devine

Yes. Just from an overall category standpoint, as you look at some of the CREST data which is it's not exact, it's not like Nielsen data that you have from cash registers because it's not as accurate as that, but overall category, quarter-to-quarter, there's little movements. But one of the things that overall, just overall coffee is not growing at the pace that it did say, 5 to 10 years ago. In the last 5 years, growth hasn't been as robust across the entire coffee category. But you get quarters where you see little blips in that up and down, but overall, they're just -- there hasn't been a ton of growth in the marketplace.

David Palmer - UBS Investment Bank, Research Division

When -- TASSIMO, you did a deal with them. I have a feeling that may not be it for Tims with regard to single-serve brewing. Could you just talk about your general philosophy with regard to CPG opportunities, particularly the single-serve brewing opportunity?

Paul D. House

That's more on the supply chain side, so I'll let Cynthia address it.

Cynthia J. Devine

Sure, with regards to the single-serving and CPG, so currently, right now we have a large roast and ground business that is in grocery. Our single-serve is in our restaurants. It's like Kraft with TASSIMO through T DISCs, and it's in our restaurants. And in the short-term, the commitment is that we're going to keep in our restaurants, and look at -- we'll look at longer term, whether we move that into CPG, will be a decision that we'll make along with our owners. And we have a model set up even on our roast and ground business. We have a profit-sharing model with our restaurant owners, so we have a model that it can work in, we felt that it was a good way to launch it was through our restaurants. And as we've talked about wherein the Canadian market is kind of fragmented between the major players and there's really -- in the single-serve, there's a number of people that are in that market. But there's 2 major kind of delivery systems, I guess, Kraft system and K-Cup system. And we have said that we're looking at multiple platforms for our product. Over what time frame, not specifically out there with an exact date. But we're anxious to be -- long term would love to be universal so that when people have an opportunity regardless of what brewer they have at home that they can choose Tim Hortons to put -- to serve their coffee in at home, that's what we'd love to be. So we'll see where we take it from here.

David Palmer - UBS Investment Bank, Research Division

One of the things that strikes me is -- just even today, is seeing different companies, strong-branded companies like yours, but often times, they have different business models that -- and each have their own philosophies that are quite different. I mean, your business model is different, and in some ways, Jack in the Box's business model is similar to yours, and they can collect rent and franchise fee, but you are vertically integrated. And so some people that may be new to your story would wonder, how did they get here, with this business model and strategy? Could you talk about why you vertically integrate? Why you supply the system? And why do you think that these things are strategically right for Tims?

Cynthia J. Devine

Okay, go ahead.

Paul D. House

Yes. [indiscernible]. Well, I'll go back to Ron's time and Tim's time. They felt that getting in the distribution business was very important to what they wanted to do and how they wanted to develop the business. So right from the founders, distribution was probably within about the second or third year they started distributing to 10 or 15 stores, with a tiny little warehouse. And so our distribution business grew from that. But I think why we're vertically integrated in Canada is really you don't have as many alternate sources of supply as you do in the U.S. market where it's very competitive and so forth. And we found through coffee, for example, that's it's our key product, that it was essential that we understand the business better than we do. And so if we're going to do the expense of going to the fields and making sure we're getting the right quality in that, then if we're doing all the leg work, why not manufacture it and ensure that the quality is there? When we did the always fresh baking, we found a partner and we built a brand new $200 million bakery, because if we'd have given it to a supplier, we would have had to sign a long-term contract, and so why do that? You might as well be involved as an investor in it and get the fruits of your investment. And so that's kind of the way we look at things. More so in the Canadian landscape. Rochester was an opportunity when we bought that coffee plant. It was a closed facility, we were able to acquire it at a very low capital cost. And we wanted to get into manufacturing. And so that's kind of how we got into it in the U.S. We were in the cup business for a period of time because the best cup company in Canada was about go bankrupt, and so if we put some volume there and helped them out, and we did so and they produced the best cup in the system. And then we decided that as the industry get better in Canada, we no longer needed it, so we just disposed of it. So those are kind of the reasons why we're vertically integrated the way we are. It was out of business necessity in a lot of cases.

David Palmer - UBS Investment Bank, Research Division

One of the -- and just as a reminder for anyone that wants to ask a question, we can have -- we have cards around here, please do write them down, and we'll work in your questions into our Q&A here. Your -- Cynthia, I think this one's for you. A question about the balance sheet, obviously, you have a very stable franchise business model, some have said, why don't ask -- the curiosity is why not more debt is the question that I often get. Perhaps you can respond to that.

Cynthia J. Devine

Sure. Yes, we do have a very strong balance sheet, which I think we're pretty pleased with. And we've publicly said that our goal is to be investment grade. And -- but from where we are today, to investment grade, there's still capacity in that. We set out a strategic plan that we developed in 2009, and we outlined that to the market in early 2010, and we had a capital allocation strategy and a business strategy that made sense for that 4-year time period. We are in year 4 of that with 2013, and we've been fairly consistent in our approach from a capital allocation standpoint. As we've talked about in several meetings that we've had and several other things that we're in the process of now the next leg of our strategic plan and in the context of that, as we develop that strategic plan, we would look at capital allocation as a part of it and tie it in with the business strategies and have alignment in that in terms of going forward the next 3 to 4 years. I do think the one thing that is important when you compare us to other companies is making sure you're comparing similar business models, right? Because we are a bit more of a capital-intense business model than some of our peer group's more similar to others. There are others that are more like us. But when you look at, you do have to look at the adjusted debt to EBITDAR because we do have high rental expense component that goes through our business model as well. So it is important to kind of line up the metrics. But having said that, we do have a lot of flexibility in our balance sheet, and we'll consider that in -- as we look out our strategic plan going forward.

David Palmer - UBS Investment Bank, Research Division

One of the things that I was looking at to try to get my hands around your model is just thinking about the leverage on new sales that you're getting and thinking about the last year or 2 versus what's coming. I -- when I piece it together, it feels like you might get better earnings leverage -- it feels like because you had some restructuring, you had some capacity come on steam, there's maybe some other factors. I realized there's other things that limit the leverage, for instance, floating rent, rents that adjust with you -- so it's easy for me to maybe get carried away on this theme, but it does feel like perhaps the leverage can accelerate from here. Is that -- am I going down the right path with that hunch? Perhaps you can just speak to that a little bit.

Cynthia J. Devine

In terms of getting better leverage out of [indiscernible] now?

David Palmer - UBS Investment Bank, Research Division

Yes. Like on a same-store-to-same-store sales and the unit growth, but yet you might get a little bit better margin on the new sales going forward, given the fact that you had a restructuring, you had some capacity that you built, and now maybe that you get better capacity utilization in the supply chain. And -- am I thinking about that right or...

Cynthia J. Devine

Yes. I mean, I think in general, as a result of the reorganization, we feel that we built an organization that's more scalable for future growth. And so that we can long term get some efficiencies out of the new structure. 2013 is still going to be a little bit of a transitional year in terms of that. We talked about the fact that we're going to have -- we're going to continue -- we've incurred cost in the first quarter, and we'll have a charge associated with that in the first quarter. And -- but on the other side of that, we have some vacancies that we're still filling, which represents some favorability in the short term, but those positions need to be staffed. As it relates to the other parts of the business in terms of leverage, I think the area that -- as you look at our operating expenses and that's probably been, there's been some volatility in that line item, and really if you stop developing all restaurants and stayed exactly in the footprint that you were in today, you'd get a lot of leverage out of the P&L because as you grow same-store sales, your rents that you pay for the most part are fixed. We do have some contingent rent that we pay that would go up with same-store sales but you also have depreciation and that, that is obviously fairly straight lined. But as you're renovating restaurants and you're adding new restaurants, those costs are -- continue to go up. And as you look at our U.S. business, we have -- we've really stepped up our development in the U.S. in the past few years. So as those restaurants come on online, they're going to represent more from a cost standpoint that they necessarily are driving from a profit standpoint because they're still in developing markets. The average unit volumes that Paul referred to earlier are not as high as they need to be, so they're not necessarily paying their -- the same freight that the others are in terms of driving profitability. So that acts as a bit of a counter to some of the natural leverage that you would see from just growing same-store sales. So it's just kind of a balancing it a little bit from the opposite standpoint.

David Palmer - UBS Investment Bank, Research Division

I remember from the old days when Wendy's and Tims were together, we would hear these metrics from Tims that were just unbelievable in terms of the throughput on drive-thru. Just some of the best in the world, if not the best. You were talking about the big average unit volumes, Paul, I mean to some degree that brings with it the burden that you're probably cranking in that morning day part at full speed and you also have a pretty healthy lunch business, I mean, for people that are from United States and may be surprised to know how big that business is. Is there anything that you can do that really -- and from a throughput perspective, that you're working on, and even a day part perspective that could really give a jolt to the AUVs from here that you're working or thinking about?

Paul D. House

Well, we are renovating our drive-thrus, which we've never done before. And that was driven by the fact that we're developing a whole new menu board system for the drive-thrus, where we can change -- our existing drive-thru panels are pretty antiquated. They were developed -- the menu board system was developed when we had a much smaller menu than we have today. And people really just already knew what they were going to order before they came through the window, but -- through the drive-thru lane. But today, that's changed. And so in these renovations of the drive-thru lanes, we're going to move a lot of our drive-thrus from a 4-car order station to a 5, which means when you place you order, you're 5 cars away from where you pick your product up. What does that mean? Well we have a car in the morning pulling away depending on the area, anywhere between 20 and 28 seconds. So that gives us another 20 to 28 seconds to prepare multiple orders or whatever. So that time is very beneficial for us that we believe that we'll pick up speed of service with that, and we've seen some indication of that, and a better menu board system will make ordering simpler. Hopefully, we can suggest and sell some more things out of there to continue to raise average guest checks, because that's another way to get there. And so I think those kinds of initiatives. And then quite frankly, in some cases, when I talk -- when we talked about the expansion capabilities of the chain, we're going to just simply, in some of these markets, have to put in another store. And in those cases, we're blessed because pretty every major oil company in Canada wants to work with us would like to be -- have us on their site with a drive-thru. And they're very low-capital investments for us. And they're very lucrative for the franchisee. So to go up the road a ways where if there's a gas bar nearby and put a drive-thru there, is another way that you can take care of it. Double lane drive-thrus will help us in some cases. But that's only for our extremely high-volume stores and where we have the real estate that you can do that and you can get over the community and so forth. The double drive-thru lane, of course, for us, in some cases, is just to get cars off the road to help us from a municipality point of view that we're not a friendly neighbor, so if we can get the double lane. And I don't think that we'll get the efficiencies that McDonald's and other people will get because it's a different offer. We've got cars pulling away much quicker. We've never asked anybody to pull over to the side there and we'll run your order out to you. But I can see in that type of environment when you have huge lunch business that's in multiple orders, that the double drive-thru lane can help you there because when one lane slowed down, the other lane can move through. So those are the types of things that will help us in the short term.

David Palmer - UBS Investment Bank, Research Division

Do you -- and then thinking about those throughput things, are -- how big of an initiative is that this year? I mean, how many of those types of adjustments are being made?

Paul D. House

Well, we have said that we hope to do over 1,000 of our drive-thrus this year. And this will be a -- probably a 2-year program. And the only thing that will slow us down from doing them is we have to go in a lot of municipalities and get permits even just to move the station back one position. And that's not an easy -- that used to be a pretty routine. Nothing's routine in that area any longer, it can be time-consuming.

David Palmer - UBS Investment Bank, Research Division

And with regard to day parts and just sales layers in general, in terms of your innovation focus beyond the productivity, what are some things you're working on there?

Paul D. House

Well, the Panini sandwich is relatively new, and it's a whole new platform for us. And you'll see us doing a lot of marketing around that for the near future. The first phase is to get people to understand what a Panini sandwich is and identify it. And it's at a much higher price point than people are used to us selling something at. But it's a large sandwich, it's got great value. So it does help us in that perspective. We've got a lot of new varieties with it that we can bring to market. So we foresee that we'll probably add maybe a new type of sandwich that will come in and go out within a given period of time. I would also have a breakfast Panini sandwich that goes off that grill, and we'll be marketing that as -- it's in our stores as we speak today. And I think we're on air and with TV starting this weekend or the following weekend for a month-long promotion against that particular product. And so -- but we brought a lot of menu innovation in the last 24 months. So the thing now is to make sure that we market it properly and we get the potential out of all these new products that we've brought it. So that's going to be where our focus is. There's no question we're going to be more aggressive with price points because the market demands it today. So those are kind of the things that we're going to change, but I think we'll have the some very positive results. Especially as we get deeper into this year, this is -- we had a great first quarter last year, and there's no question we called it out last year, that the weather was unbelievable. We -- I don't think we lost a snow day anywhere in the country last year for the winter. This is more of a normal winter. So -- but as we go forward in the second and third quarter, we're not rolling over the type of comps that we had in the first quarter of last year. So we see some -- we feel very positive as we get into the second and third quarter that we should be able to put some decent numbers up.

David Palmer - UBS Investment Bank, Research Division

And how do -- how does Tims express value in -- do you -- I assume that there is a value message and you certainly have that scale to advertise that. What is your version of that?

Paul D. House

Well, I think almost like Walmart: Every day good prices. I think that, that's what we're known as. I have many friends and many -- big comment we get back is I can't believe how much food I could buy in your stores for $10. And we hear that time and time again, I took my family, we each had a beverage and we each had a treat of some type and I got change from $10. And that's what sells is word-of-mouth. I don't think a Canadian wouldn't say to you that you don't get good value at Tim Hortons. And that's a great equity that we own and we need to protect, but not take for granted and reinforce that with the consumer, that we do offer great value everyday and great quality. Value is only as good as the quality of the product that you're selling. And I would put our product line up against anybody that we compete against. So I think it's -- our breakfast offering. We weren't in the breakfast sandwich prior to '06. We own that category today in Canada because of the quality of the product that we brought to the marketplace.

David Palmer - UBS Investment Bank, Research Division

When you mentioned the economy in Canada. In the U.S., there seems to be maybe people are being brave, but there's a lot of -- there's certainly a sentiment that the first quarter has not been good. But there's still a belief that it's temporarily not good, that it would generally get better. And again, they might -- it might be people being brave. Do you -- how do you -- do you think or do you share that sort of general feeling that things are improving? Or does it feel that there's a different trajectory at play in Canada?

Paul D. House

There's a lot of things working against the economy in Canada. But I'm very optimistic. I guess Warren Buffett said it best: that business leaders need to be positive and act positively. And I think that's what we'd like to be. We're a leader in the Canadian landscape. I believe things will get better. And I think we will see that happen. As we get into the second and third quarter, we get into more better seasonal employment. There's a lot of good things that will start to happen. For Canada, our dollar is -- was at par or slightly better than par, and now it's slipped back a bit. Well that's -- for the province of Ontario, we're manufacturing province in a lot of areas, that's very favorable because we export a lot of products that we sell. So our dollar declining in value a bit is a very positive economic stimulant. So I don't want the dollar to go to $0.90, but a dollar at $0.95 or something like that helps immensely as well to the economy so...

David Palmer - UBS Investment Bank, Research Division

That's helpful. With regard to your pricing, how do you set your pricing and think about what price increases are possible?

Paul D. House

Yes. I don't think we ever looked at price increasing "what's possible" -- is we look at what do we need? And we like to think that we're very responsible in the pricing area. And have been, and in fact, there was a period we went 6 or 7 years, never had any major price increases at all, and we were still growing the business in high single-digit because we were gaining market share. And so that's the name of the game is to get share, but we've got a huge share. So that gets harder to build on. But as I look at pricing this year, I would hope that our menu pricing would be very stable that we'd take very little because consumer certainly isn't as healthy as they once were. And you to take care of your consumer and your customer will take care of you. If you try to get greedy, you'll pay the price. And we have a very responsible franchise group. And we probably are the only chain -- that I know of -- we have regional pricing. And when I say regional pricing, we have the same menu pricing in Ontario for the whole province. So 1,500 stores have basically the same price with the exception of one product in one little area, it's a -- one area. Coffee is a nickel higher, and that's been there traditionally, we just can't seem to get rid of that. But everywhere else in the country, each province has its own price zone. And they price there. We work -- we go through the economics of what do we need to adjust pricing to keep our margins where we need to. And what can we expect to get out of that? And if we don't think -- sometimes, you can put your prices up, but you'll get less than what you had before because you drive the consumer away. So there's a lot of thought process goes into establishing the menu pricing.

David Palmer - UBS Investment Bank, Research Division

Is -- can you just -- can you tell us what you're looking for, what -- with -- you're in a CEO search. I think you said you were close. Is that -- was that a comment that I remember reading? I mean, could you perhaps give us an update there? And will this CEO have the latitude to really implement a new strategic vision for the company? Or is it something where you're looking for the right fit within the boundaries of the strategic vision that you already have in place?

Paul D. House

Well, the first criteria for the new CEO is he's got to be younger than I am. So that should be a high fence to get over. I've said it at numerous meetings here at this conference that we've got a great management team. We've got a lot of longevity and a great skill set. So it gives us great ability to go out and pick a CEO from a -- varied backgrounds because we've got the experience within the business. Probably the only area in our company that we lack a lot of experience in is international. People that think we don't have any experience in the United States, but we've been here 20 years or plus, so we pretty much know the markets we're in today. So -- and I would say that the Board, in looking for a CEO, they want a CEO that's compatible to the strategy and the culture of this great company. We are not looking at -- this is not broken, this company's working very well, we want somebody to come in and complement that. And continue and accelerate the great success that we've had. So that's really what we're looking for in a CEO.

David Palmer - UBS Investment Bank, Research Division

Is a -- we are getting towards the end here. And you've seen investors recently, do you sense that there's misconceptions or things that will be particularly useful for you to bring up here as we get close to a closing comment time?

Paul D. House

I think the conception that -- perception that our slow down in same store sales growth is because we're cannibalizing stores and we reached saturation -- I think that if we could correct one thought at this conference, I think we'd like to do that. Because we don't believe for a second that it's cannibalization or that we're anywhere near saturation. We've always had a heavy concentration of stores in markets when we're putting up good sales increases. And the more we put in, the better the increases we got. So I would say that's the biggest thing that I think the economy is the biggest reason of why we're experiencing what we are. And capacity issues. Capacity side of it is a good problem to have, I guess. But we don't like having that problem. But we would be the first to admit that we have locations that are at their limit and that spill is going somewhere and sometimes it's not necessarily going to us. And so we got to fix that.

David Palmer - UBS Investment Bank, Research Division

One last follow-up on that drive-thru. The drive-thru improvements that you're doing in 1,000, have you -- is there any -- can you tell us exactly what that has done for those units? Are they -- I'm sure you've tested this. Is there any thing you can tell us about what that does to unbottleneck them?

Paul D. House

It certainly helps. It certainly helps. But if you're doing $3 million plus that you're -- you've got a steady line up of that drive-thru all the time. You can't do those kinds of volumes without doing that. Cynthia, is there anything you'd like to correct?

Cynthia J. Devine

No, no, no.

David Palmer - UBS Investment Bank, Research Division

Well thank you very much.

Paul D. House

Okay, thank you.

David Palmer - UBS Investment Bank, Research Division

Great to have you here. Thank you, Tims.

Paul D. House

Okay, thanks.

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