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Tim Hortons (NYSE:THI)

Q4 2013 Earnings Call

February 20, 2014 10:00 am ET

Executives

Scott Bonikowsky - Vice President of Corporate, Public & Government Affairs

Marc Caira - Chief Executive Officer, President and Director

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

Analysts

Perry Caicco - CIBC World Markets Inc., Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Irene Nattel - RBC Capital Markets, LLC, Research Division

Ivan Holman - Goldman Sachs Group Inc., Research Division

David Hartley - Crédit Suisse AG, Research Division

Michael Van Aelst - TD Securities Equity Research

James Durran - Barclays Capital, Research Division

John S. Glass - Morgan Stanley, Research Division

Kenric S. Tyghe - Raymond James Ltd., Research Division

Stephen Anderson

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Derek Dley - Canaccord Genuity, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Tim Hortons Fourth Quarter and 2013 Year-End Analyst Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and will be available on the Investor Relations section of the Tim Hortons website following the call. It is now my pleasure to turn the conference over to Scott Bonikowsky, Vice President and Corporate Affairs and Investor Relations at Tim Hortons. Please go ahead, sir.

Scott Bonikowsky

Thanks, operator, and welcome, everyone to the Tim Hortons Fourth Quarter and 2013 Year-End Analyst Call. We released our results earlier this morning before the market opened. To access our earnings material and the presentation supporting today's discussion, please visit the Investor Relations section of our website and click on the Events and Presentations tab. This material will be available for about 1 year. Marc Caira, our President and CEO; along with Cynthia Divine, our Chief Financial Officer, will be joining the call this morning. We'll be pleased to take questions after our prepared remarks. [Operator Instructions] Please note that we may provide forward-looking information this morning including discussions about planned initiatives, future performance, results and outlook based on our current expectations, assumptions and information, including information about our restaurant development plans, same-store sales expectations, earning performance, capitalization alternatives, 2014 outlook and targets and operational initiatives. Forward-looking statements are based on a number of assumptions that contain risks and uncertainties and our actual results could differ materially from these statements. Please refer to the Safe Harbor statement on our investor website and of Slide 3 of today's supporting presentation, and refer to the risk and assumptions outlined in our public disclosures with security regulators in Canada and the U.S. All 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 reference adjusted operating income, which is a non-GAAP financial measure. Reconciliation of adjusted operating income to its most directly comparable GAAP financial measure and other information relating to the use of adjusted operating income is included in the presentation. I would also like to advise everyone that we'll be holding an investor conference next week in Toronto, on Tuesday, February 25. A live webcast of the conference will be accessible from our website. Hopefully, you're able to join us for it. At the conference, we'll be discussing our longer-term strategic roadmap and reviewing our 2014 outlook for the company and longer-term targets. On today's call, we will also discuss our 2014 targets. I will now turn the call over to Marc Caira. Marc?

Marc Caira

Thank you, Scott, and good morning, everyone. I am pleased to speak with you today about our business, our fourth quarter and our full year performance. In previous investor calls, I've spoken about the new era of low growth and increased competitive intensity that has been affecting consumer companies for some time including many restaurant chains and Canadian retailers. I've also talked about the active strategic agenda we have been pursuing to reposition the company to succeed in this environment. We made good progress on that agenda in the fourth quarter. To start, we have been very focused on simplifying our operations, refreshing and renovating our restaurants, improving throughput and capacity, delivering menu renovations and embracing technology. We have done all of this with a sense of urgency to get things done. We continue to make progress on all these fronts with key foundational elements in place and we've been making important choices that we feel are right for our business. While it will take some time to see the full impact of these initiatives, I am pleased with the direction we are taking and the speed at which we are moving. I will touch on all these points but first, let me address our fourth quarter and full year performance. Same-store sales growth was 1.6% in Canada and 3.1% in the U.S. in the fourth quarter. That's similar to our third quarter results and above our full year growth rates. While we saw same-store sales growth strengthening somewhat during the year, we are not where we need to be and work continues in this area. For the full year, same-store sales growth of 1% in Canada was below our forecast range of 2% to 4% as we have indicated previously it would be. Similarly, U.S. same-store sales growth of 1.8% was under our established target range of 3% to 5% as we had also indicated previously. Having said this, I believe we are putting the right initiatives in place to help position the company for longer-term success in the low growth, highly competitive, and volatile environment, in which we continue to operate. As far as new restaurant development, we were within our targeted range of 160 to 180 restaurants openings in Canada and 70 to 90 full serve restaurants openings in the U.S. Internationally, we opened 14 new restaurants in the GCC. Finally, our earnings per share was $2.82 for the year. The performance was impacted both positively and negatively by various factors and Cynthia will walk you through this in detail. In terms of our performance, the business is still facing the effects of a challenging operating conditions including some instances, weather related. But we are focused on competing effectively in this environment, which I believe has become the norm. At the same time, our team is doing a good job adapting to the changing needs of our guests through a number of marketing and operational initiatives. One of our focus areas has been simplification in our restaurant. This is a vital focus for us to help deliver the ultimate guest experience. I spoke last quarter about redesigning our digital menu boards. Our experience and research has shown the simplified and easy to navigate menu boards can influence guest behavior, speed up order times, improve the overall guest experience, and in some cases, increase the average check. We are pleased to complete the redesign of the breakfast menus for our interior digital menu boards during the fourth quarter and this work will continue to other parts of the menu. We also undertook some select menu rationalization, addressing items that are no longer optimal for our restaurants. In the fourth quarter, we delisted 24 items, which is significant progress in terms of our ongoing simplification efforts. Another example of our simplification efforts is a new pilot for standard bills for our lunch sandwiches. We believe standard bills will help speed up the ordering process and enable our team members to execute more quickly. We've identified this area as a key opportunity to improve the speed of service for our guests, who continue to be time pressured throughout the day. Our simplification efforts extend beyond product areas. For example, we are looking at packaging SKUs, an area which certainly can be both standardized and streamlined. There are other aspects of our operations that are benefiting from our simplification efforts. We have migrated much of our management reporting to an online tool as streamline of management of our restaurants for our owners. We've created an online app for the on-boarding process to reduce the administrative procedures associated with hiring new team members. And we are testing a redesigned soup and sandwich station to maximize throughput and increase speed of service while using less labor. Incremental improvements like these can make a big impact. Any time, you make it easier for your guests to order, reduce complexity for the restaurant team members, or decrease the time required to execute an order, it makes a difference when you mock a play[ph] across millions of transactions we complete every day. Simplification also helps clear the way for innovation. Without the ongoing rationalization of our menu and operating systems, we wouldn't have the capacity to roll out new products. These concepts are not mutually exclusive. Both simplification and menu innovation will continue to be core themes for us. New innovations that made an impact in the fourth quarter included the Grilled Steak & Cheese Panini, the Jalapeño Biscuit Breakfast Sandwich in Canada and the Steak & Egg Breakfast Sandwich in the U.S. We also created some excitement with the pilot of Dark Roast Coffee in London, Ontario and Columbus, Ohio during the quarter. Our Dark Roast pilot is a prime example of how we need to think differently. As the undisputed coffee leader, we want to be strategically positioned in all aspects of how consumers consume their coffee. Most recently, we extended our single-serve offering and now we have an exciting potential growth lever through Dark Roast, which we know is a roast profile that appeals to a meaningful segment of the Canadian coffee market. We are very encouraged by the guest response to this pilot, which serves as motivation to look at other unique blends that consumers may be seeking. We also brought back popular items, including Beef Lasagna Casserole, and of course, the Extreme Italian Sandwich. And as always, we feature holiday flavors like Gingerbread Latte and Candy Cane Hot Chocolate during the fourth quarter. Like our simplification efforts, innovation extends beyond new menu items. In December, we launched a new mobile payment option that enables guests to pay more quickly and conveniently using their smartphone. In the past few weeks, we announced that we are launching a proprietary digital programming network called TimsTV to enhance the in-restaurant experience of our guests. Earlier today, we made an important announcement about a new differentiated dual payment, loyalty rewards card that we will be bringing to the market that is co-branded under the CIBC and Tim Hortons banners. This card acts as both a traditional no fee VISA card and a stored value Tim Card. The cardholder makes a selection at the point of sale. Regardless of where they make their purchase, when cardholders use their co-branded VISA card, they will accumulate value on their Tim Card balance, which they can spend at Tim Hortons restaurants. This is a unique, innovative development in Canada, and we are excited about it. We think it will be popular with our guests, especially the millions of Canadians who visit our restaurants multiple times each week or even daily. It will also drive loyalty by providing an incentive for guests to return. We plan to demonstrate this unique initiative at our conference next week. This is another early example of how we plan to embrace new technologies in the way that will resonate with our guests, while at the same time, allowing us to better leverage and aggregate consumer insights. Another area, in which we are very active in the fourth quarter, was restaurant renovations and enhancements, an area that is key for us to remain relevant in our very competitive industry. Our team has established new records for Tim Hortons in Canada with 139 restaurant renovations in the fourth quarter and nearly 300 for the year. In fact, as of the end of 2013, half our chain has been either newly built or renovated within the past 5 years. We also completed enhancements to over 600 drive-thru locations in the quarter and over 1,400 in the full year. 90% of our Canadian drive-thrus have now been enhanced. We will continue to pursue these renovations initiatives in 2014 to further solidify the foundation for growth and continued relevancy with our consumers. These activities are all an important part of our ongoing strategy to reposition our business. New restaurants help us to capture additional business in areas where we are underrepresented. Renovations keep our restaurants relevant, and in some cases, help improve capacity and throughput. We were behind in these areas, but we are urgently addressing this issue. In our U.S. business, I have shared with you our team's commitment to the U.S. market as a must win battle. Our dual focus has been concentration of our resources and development in our core and priority markets and to reduce our capital intensity, working with other potential partners to selectively leverage their capabilities to complement our brand development. This strategy is designed to enhance profitability and returns while allowing us to continue to scale the business. We are making progress, and we'll have more to share with you on this initiative during our investor conference. I would shift gears now to discuss a couple of important decisions we made in the fourth quarter. But first, was the decision to close a number of underperforming restaurants in various U.S. markets. We have many restaurants in the U.S. that are doing quite well and many others where we can see a path to profitability, but there were a small number of underperforming restaurants where we felt the best course of action was to close them and focus on continuing to drive AUVs at our other locations. The second decision was to remove the Cold Stone Creamery brand from Tim Hortons locations in Canada. While this is an excellent brand and a very high-quality product offering, we have determined that the fit was not ideal with our strategy of price value and speed in the Canadian restaurants. We have participated in the ice cream category for several seasons, reaching approximately 150 co-branded locations in Canada and performance has been below our expectations. By de-branding Cold Stone Creamery from our restaurants in Canada, our restaurant owners can simplify their operations and focus entirely on our core business. This is consistent with our goal of improving capacity, reducing lineups and driving for more simplicity by focusing on our core business. Many of the restaurants will now be able to add express beverage lines that we have discussed in the past, which also addresses capacity and shortens lines. This decision does not affect our U.S. Cold Stone Creamery co-branded locations. In the U.S. market, Cold Stone Creamery brand is more established and plays a role as our destination point for our restaurants. As I said in the past, in this new era, you need to make tough choices. Oftenly, if an aspect of our operations does not meet to the needs of our guests in a profitable manner and we do not foresee that situation changing, then we will need to move and concentrate on the things that will deliver favorable returns and provide avenues for future growth. We will continue to act decisively and make tough decisions where necessary to position our company for profitable growth. Before I wrap up, I would like to touch on our announcement this morning in our earnings release that we will be entering the grocery channel this summer with our 2 single-serve coffee platforms. As the coffee leader, we believe fundamentally that we need to position our brand when and where consumers wish to purchase coffee. The grocery segment represents approximately 40% of the overall single-serve market dollars. By extending our participation to the grocery channel, we are meeting unmet needs for loyal Tim Hortons guests and we believe we can grow our share of the overall grocery coffee sales benefiting the restaurant owners and the company. This is consistent with the position I stated very early, that we will take the Tim Hortons brand into new channels of distribution, so that it becomes available to consumers whenever and wherever they want to enjoy a Tim Hortons product. Asserting our coffee leadership and having a different mindset on these types of opportunities, such as a Dark Roast pilot and extending single-serve to the grocery channel is consistent with our strategic direction. I joined Tim Hortons as CEO halfway through 2013. I said from the start that this is a very strong company with brand strength and loyalty that are unmatched in the industry at the same time we needed to adapt and make changes to reposition ourselves in order to sustain our track record of success. And we need to do this with a sense of urgency. I believe we've begun to do this. However, our success in this industry will simply always come down to our ability to execute flawlessly in giving our guests the ultimate in service experience. We will accomplish this with the excellent partnership that we enjoy with our franchise community. I am confident that we are reestablishing the foundation to do this, and I look forward to sharing more information next week, when we will have the opportunity to outline our strategic roadmap for our next 5 years at our investor conference. I will now ask Cynthia to provide more details on our financial performance. Cynthia.

Cynthia Jane Devine

Thanks, Marc, and good morning, everyone. Systemwide sales grew by 5.4% in the fourth quarter on a constant-currency basis as a result of both new restaurant development and same-store sales growth in each of our key markets. In Canada, a 4.7% increase in systemwide sales was supported by same-store sales growth of 1.6%. The growth was driven by favorable product mix and pricing. We had positive contributions from our RealCup single-serve coffee products in both the lunch and breakfast dayparts due to new products like Steak & Cheese Panini and the Jalapeño Breakfast Sandwich. This growth was partially offset by same-store sales transaction declines in Canada although we did continue to grow systemwide transactions as we added new restaurants. In the U.S., Q4 same-store sales growth was the strongest of the year at 3.1% and helped us post systemwide sales growth of 10.7%. Same-store sales growth was driven by favorable product mix and pricing, with same-store transactions essentially flat. Biggest contributors to U.S. growth were the breakfast dayparts, which benefited from success of our premium-priced Bacon Egg Breakfast Sandwich as well as gains from the cold beverage and take-home categories. Total revenues for the fourth quarter grew by 10.7%. On Slide 15, we show the breakdown of the various components of revenue. You'll see the most significant line item grew as very similar to systemwide sales. The one exception is franchisee revenue, which more than doubled in the quarter. This was due to a high level of activity in restaurant sales and renovations during the quarter, as Marc discussed earlier. If you look at our cost and expenses on Slide 16, you'll see that franchisee fee cost doubled for the same reason. But the revenue increase was greater, so the net result was a favorable impact on profitability during the quarter. Another notable increase was in the operating expenses line, which was impacted by a $6.6 million charge related to our U.S. restaurant closure cost. On the same slide, you'll see that we incurred $19 million of Cold Stone Creamery de-branding cost, the largest part of this expense is the accelerated amortization. The rest is mainly the cost of assisting our owners in restoring its effective portions of their restaurant space back into Tim Hortons operations. I will also note that the corporate reorganization costs were minimal in comparison to Q4 of last year. So let's turn now to operating income, which we show on Slide 17. Our operating income was down by 1.8% in the fourth quarter as a result of the factors I've discussed. When we adjust for the impact of the Cold Stone de-branding costs and the corporate reorganization expense, adjusted operating income grew by 5.1% for the quarter versus prior year. Now I'll remind you that adjusted operating income is a non-GAAP measure, which we reconciled to operating income on Slide 24 and 25 of your presentation. The same factors also affected operating income in the segment. With Canada, our operating income was down by 2.3% to $165.5 million in the fourth quarter, with the Cold Stone expense reducing our growth by 11.3%. U.S. segment had an operating loss of $1.1 million, that's a decrease of $3.5 million from Q4 of last year, with the $6.6 million charge from the restaurant closure cost driving the decrease. Despite the decrease in operating income, net income attributable to THI increased slightly by 0.3%. This is a result of a decrease in our effective tax rate to 25.2% from 28.9% in Q4 of 2012 due to certain discrete items recognized this past quarter. Earnings per share increased by $0.04 to $0.69. The 6.2% year-over-year growth in EPS outpaced growth in net income because of the reduction in share count due to our share repurchase program. We had 8.6 million fewer shares outstanding on average in Q4 of 2013 compared to Q4 of 2012. For the full year, EPS grew 8.9% from $2.59 to $2.82, which was below our target range. As Marc mentioned, our EPS was impacted both positively and negatively by some unanticipated items. For example, the target range did not include $0.06 per share of corporate reorganization cost that we incurred in 2013, nor did it include the $0.10 per share impact of the Cold Stone Creamery decision. EPS did benefit however, from a lower-than-expected effective tax rate and an accelerated share repurchase program, which were also not contemplated as part of our 2013 EPS guidance. We've been very active in our share repurchases ever since we announced in August of 2013 that we were targeting $1 billion of share repurchases over the 12-month period ending August 2014. We are on track to meet that target. We repurchased 583 million of shares between August and December and another 192 million of shares in the early part of 2014. Today, we announced that our board has approved a new normal course share repurchase program for the next 12 months up to a maximum of 440 million. The program is comprised of the remaining portion of the previously approved target of up to $1 billion, plus an additional amount of approximately $200 million. The financing we put in place in the fourth quarter, particularly the $450 million of 10-year senior unsecured notes has been key to funding our share repurchases. Our plan, as announced last August, was to obtain $900 million of new long-term debt financing with the remainder of the repurchases funded through cash flows. Accordingly, we anticipate obtaining an additional $450 million of long-term financing in the coming month. Our top priority in terms of returning capital to shareholders is our dividend payment. Today, we announced that our board has increased our quarterly dividend by 23% to $0.32 per share. This marks our seventh consecutive year of dividend increases, reflecting the ongoing strength of our business model and our continued confidence in our ability to generate solid cash flow. Now the final topic I want to cover is our outlook for the 2014 fiscal year. We outlined our financial and performance targets for the year in this morning's press release, along with the description of certain factors that may impact the achievement of our target, and we summarized those for you on Slide 20. We expect the competitive intensity and low growth environment we have experienced in our industry over the past few years to continue into 2014. We have described this situation as the new era, and it serves as a backdrop for our 2014 performance target. Despite the challenges in the industry environment, we still see opportunities to grow the chain in all our markets. The expected growth rates are lower than we've seen in the past. We have been developing a strategic plan that we believe will offer exciting growth opportunities. But 2014 will be a year of investment, in which we build on the work that we did last year and we continue to put in place key drivers that we believe will build sustainable longer-term growth closer to our historical growth rate. We believe this to be both a pragmatic and responsible way to evolve our business. Our 2014 targets are as follows: we expect same-store sales growth of 1% to 3% in Canada and 2% to 4% in the U.S.; we plan to open a total of 215 to 255 restaurants. This total includes 140 to 160 locations in Canada and 40 to 60 full serve restaurant locations in the U.S. We also expect to add approximately 35 international locations; we are targeting our diluted EPS to be in the range of $3.17 to $3.27; we anticipate capital expenditures of $180 million to $220 million, which is below our $221 million of CapEx spending in 2013. In this 2014 target, we expect to invest approximately USD 30 million in our U.S. business, which is down significantly from the USD 48 million we invested in 2013. Our 2014 CapEx will fund new restaurant developments as well as a continued program of renovation, primarily in Canada. And finally, we are estimating our effective tax rate of approximately 29% in 2014. To conclude, we see continued growth in 2014 and equally important, we will establish a playbook for accelerated growth through our strategic plan period beyond 2014, and we will discuss that in greater detail next week. With that, I will turn the call back over to Scott.

Scott Bonikowsky

Thanks, Cynthia. We're now ready for the Q&A portion of the call. It's important that we give all the analysts on the call an opportunity to ask questions [Operator Instructions] Operator, please proceed with the first question.

Operator

[Operator Instructions] The first question today comes from Perry Caicco of CIBC.

Perry Caicco - CIBC World Markets Inc., Research Division

Marc, your 2014 outlook, you referred to the year as one of which being -- investing in key drivers to accelerate growth. I don't want to undermine your Investor Day, but when you think specifically about 2014, what do we need to understand about the year? How will we know if you're actually making any progress?

Marc Caira

Look, let me go back to -- when I first joined the company in July, one of the first things that we said was that we would embark on a strategic plan. And we did that. We completed that, we presented it to the board yesterday. It was unanimously approved by the board. To complete a strategic plan for the size of this company in that period of time is quite a challenge. So we're happy that we've done that. Now this is the start of a 5-year plan that we will share with you. And 2014 is the first year obviously of that plan. And in all the plans -- and you've done the same thing in your role -- in all the plans that we've developed in our careers, you don’t go from a certain business model climate into the new reality overnight, it's just not realistic. So we're going to have to continue to do a lot of the heavy lifting that's already been started. We're going to -- you have to start to invest in certain things in 2014, things like people, products, the systems, technology, all those things that we know will position us for where we need to be in the future. So I know it's difficult to talk about 2014 in isolation, but 2014 is really the first year of the journey for this company. So we laid out some expectations for 2014. I believe those expectations to be realistic in the current environment, which as I mentioned in my little talk continues to be. My old boss describe this environment as a VUCA, volatile, uncertain, complex, ambiguous. And that's exactly what it is. So for us to perform in this environment the way they've outlined, to me that would be a success. At the same time, working very, very hard, very diligently with a great sense of urgency to get those things in place that we need to put in place to make sure that we're positioned for success, not only for the next 5 years, but for the next 50 years. And we look forward to share that with you next week.

Perry Caicco - CIBC World Markets Inc., Research Division

And Marc, specific to 2014. What are you assuming in terms of the level of competition, the relationship with the franchisees? And in issues like rising coffee cost?

Marc Caira

Look, I mean, we have a fantastic relationship with our franchisees. We've always had a very good relationship, it's a partnership, it works really, really well. In fact, we just completed our advisory board meeting to which again, we're completely aligned working on the same goals and same aspirations. So from that end, I'm very pleased. They also understand the environment because they live with it every day. So I don't have to convince them how challenging it this. They're the frontline, and they're the people that we need to support here. But I don't see the climate changing. Again, there's very little to no growth in this industry. We happen to be the biggest player in this industry. What usually happens is, the tallest tree gets the most wind, so we're certainly underfocused. But you know what, the consumers are getting a good deal. Some really good value and that's good for the consumer. I think it's also good for us because competition makes us better, and instills a very high degree of urgency to get things done. So I don't think it's necessarily a negative, I think it's a good thing and we’ll work hard to continue to succeed in this environment. In terms of the commodity, I mean, look, you know it is commodities are what they are. They're up and they're down, but I think we have pretty good visibility in the coffee market. I think we're in good shape for the foreseeable future. And we're going to monitor it very, very closely because at the end of the day, that is our business.

Operator

The next question comes from Joe Buckley of Bank of America.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

A question somewhere along the same lines. I think since you used the phrase a year of investment with reference to 2014. So should we expect that for 2014 is the first year of a 5-year plan is a higher-than-usual level of cost and expenses as you position the company for the future?

Cynthia Jane Devine

Thanks for the question, Joe. I mean, we're going to talk a lot more about the outlying years at the investor conference next week. But in terms of some of the things, absolutely, and we've talked about our stepped-up renovation program and some of the works that we're doing around, our drive-thrus and things like that, that we have said is going to continue into the 2014, so there's no doubt about that. We also -- in 2013, as you recall, our G&A was down about 2.7% and we think that our G&A in 2014 is obviously -- we have lot vacancies that existed as a result of some of the reorganization work that we have done. We filled those vacancies, and we're now working off of a fully staffed organization, so we would expect some G&A cost to get back to more moderate growth that we've seen in the past. So that's a part of it as well. And we're really focused -- our development targets are a little bit lower than they were in 2013. If, we really are focused on renovations and trying to get some of the innovation and initiatives that we need to get that top line growth back to some of the historical levels that we've seen.

Marc Caira

And I think it's an important point -- to make sure that are, again, it's having to make choices. Because the easy answer, is we're going to build new restaurants and we're going to renovate. Well, you cannot do that in those environments. So the choice for us is clearly for the -- certainly for the next couple of years is to focus on completing these renovations that will continue to make us relevant, fresh, crisp to our consumers. And then, there's a lot, lots of room for us to build new restaurants and we'll get into that discussion also next week.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay, just one follow-up. Just the drive-thru enhancements, are you pleased with the speed of service results of that effort?

Marc Caira

.Yes. It's been great. I mean, again, we have done 1,400 of these in 2013, which is in itself amazing, the degree of work that's entailed in this area. That's all again -- this shows the sense of urgency that we're bringing to the organization. We're seeing an improvement, absolutely. But you know what, people love their cars for some reason. I don't know -- I guess when you look at the weather this year I can understand why because although we improve, more people going to want to use the drive-thru. So that's a good thing. But we'd also like more people to walk-in to our restaurants. So we'll be working on that too.

Operator

The next question comes from Irene Nattel of RBC Capital markets.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Just focusing for a moment or continuing to focus on 2014. The 1% to 3% same-store sales guidance, certainly the upper end of that range would be quite the acceleration from the recent trend. Just wondering what conditions need to be in place to get closer to the 3% and the 1%?

Marc Caira

Well, again, that's -- you're predicting the future here. That's why we have ranges because we really, we can't pretty predict the future. We have more snow storms or ice storms and that isn't helpful, impact your transactions. But I think the more -- I think to answer your question, the more that we can quickly bring out the new innovations, the more that we can quickly bring out this more focus on nutrition, health and wellness. The more we can get into this new technology to drive behavior, the more that we can get into these new points of distribution like we have with our single-serve. You know -- so it's there, things that we can control we can certainly try and expedite and go faster. But then, it's going to be done within the context of the overall environment. So and all of the assurance from our end, is we're going to look at everything possible to climb just a little to the upper end and with a higher degree of urgency.

Irene Nattel - RBC Capital Markets, LLC, Research Division

That's great. And just one other question, if I might. The loyalty program that you announced this morning, if you could please walk us through a little bit some of the benefits you see coming through from that. And also what incremental cost you may be incurring in 2014 as a result?

Marc Caira

Well, it's a dual card. It's a CIBC Visa, Tim Hortons loyalty card. And it's the first kind, the first of its kind that I'm aware of anyways. It's also consistent with the state of objective that we will be a bit more aggressive when it comes to technology. The wonderful thing about this card is that you can either choose it to purchase at a particular retail outlet or you can use it at a Tim Hortons restaurant. The beauty of it is that whenever you use it, you generate 1% in cash value that you can use at Tim Hortons restaurants. So to give you an example, Irene, you can go into, you can yourself a nice high-definition television for $1,000 and then go next-door to Tim Hortons and spend $10 on your favorite coffee.

Operator

The next question comes from Michael Kelter of Goldman Sachs.

Ivan Holman - Goldman Sachs Group Inc., Research Division

This is Ivan Holman sitting in for Michael. You guided to same-store sales of 1% to 3% to Canada in 2014, almost as a significant amount of price that you might imply flat to down traffic. So can you help us understand what levers you have at your disposal to drive an inflection in traffic specifically? And do you think that there might be a natural ceiling to your AUVs? And if so, how close might you be to it?

Cynthia Jane Devine

We think there's a lot of opportunity to continue to grow same-store sales in Canada. And I mean, it's everything from the work that we're doing at restaurants to improve throughput and to simplify the operations at restaurants. We think that's going to help us contribute its menu innovation, the promotional activities that we have going on. That's a number of things that we think are going to contribute to our same-store sales growth in 2014. In terms of the natural limit, I mean, we have some restaurants who do significant AUVs, well above what our average is. And so we don't feel that we’re close to a ceiling on our AUVs in any's stretch. We know we have a lot more capacity that we can do in the restaurants. And I will tell you, our operations team is very focused on continuing to look for ways to simplify operations so we can move a more people through the restaurant quickly.

Marc Caira

And just to add to that, one of the focus areas for us has clearly been on what we call this as flawless execution. And I know that there's a lot of franchisees listening. So I'm also speaking to you. I guess, we really believe that in the future, there's no question that innovation will play a role differentiate in innovation. There's no question, technology will play a role. But at the end of the day, it's all about how we execute at the store level and how we execute flawlessly at the store level. And how we can give that consumer -- at the point of sale, that really that ultimate experience. So we can do all of those other things, but it really comes down to what we do at the store level with that consumer though I think we have the opportunity to even drive additional store sales growth.

Operator

The next question comes from David Hartley of Crédit Suisse.

David Hartley - Crédit Suisse AG, Research Division

Just questions on some of the initiatives you have. And just want to understand how should I think about things like the advertising deal, the credit card, selling single-serve in the grocery, perhaps innovations around dark coffee, et cetera? How does that affect your sales and as we go through the year? And how would it all these kind of items get accounted for in your P&L?

Marc Caira

I'll let Cynthia answer how they get account within the P&L because I don't know. I'm sure she can answer that. But look, all those initiatives, I mean, first of all, as leaders in this country, we're going to lead in innovation. We're going to catch up and pass on technology. We're going to look at alternative channels. We're going to look at more nutrition, health and wellness. We're going to do all these things. So hopefully at the end of the day, when you add them all up, the equal incremental volume within a very, very difficult environment. So if we can do a good job of that, then I'm sure that Cynthia will find a way to catch all that in the P&L.

Cynthia Jane Devine

Yes. David, in terms of -- you mentioned a lot of different things there, and I can tell you they are all treated differently on the financial statements depending on whether it's something that's happening at restaurant level or our retail coffee sales through grocery would go through the sales line of business and cost of sales. So it depends on the certain, which ever item you're talking about as the co-branded credit card is not on a net basis, is not expected to have a significant impact on our P&L from an expense standpoint. There could be some timing from quarter-to-quarter where we have some expenses and then, recover those costs in the later quarter. But not expected to have a big impact there. But it is -- is one of the drivers, as Marc talked about, in terms of helping us drive the same-store sales as people are collecting Tim Hortons dollars on as a result of credit card purchases. We think that's going to be one of the initiatives that helps us in the long-term driving same-store sales growth.

David Hartley - Crédit Suisse AG, Research Division

Okay, and just a follow-up. I'm just trying to really get the cadence of the impact on the P&L as the year goes on. Will there be in Q1, Q2 up for investments around perhaps advertising for the credit cards, investments and distribution gets in the service to grocery, et cetera, et cetera. I just want to kind of get a sense of how that impacts P&L over the course of the year, where do you see the biggest impact?

Cynthia Jane Devine

You've mentioned, I wouldn't see those as big impacts on quarterly. Our advertising typically goes through the ad fund, which you don't see the ad fund go through the P&L on a gross basis, it goes through on a net basis. So you don't really see those fluctuations for the most part through our P&L. So I wouldn't expect variation as a result of advertising-related to some of these programs. And as it relates to the single-serve in grocery, again, that's not something that I would expect to see a significant kind of quarterly impact on. But as always, our business tends to have fluctuation quarter-to-quarter from other things that you haven't necessarily referenced and I don't think that 2014 is going to be any different than it's been in the past. We have some variations from quarter-to-quarter.

Marc Caira

And also as we get in more into these alternative channels, it will also be important for us to support our brands because these are becoming new challenge to distribution and you can't just launch them and leave them. There'll have to be some support but Cynthia's right, in the context, I think it's under control.

Operator

Your next question comes from Michael Van Aelst of TD Securities.

Michael Van Aelst - TD Securities Equity Research

I just want to go back to the 2014 outlook comments. And yes, you're talking about adjusted EPS growth of roughly 6% to 10%, but the share count should be down around what, 8% to 10% or 8% or 9%, by my estimates. So despite increasing store sales and store count, looks like you've got 0 operating profit improvement scheduled for forecast for 2014. And the question I have is what the franchise is having to do with any operating -- with some operating cost inflation in the form of labor, and energy and things like that? Is Tim Hortons is planning on subsidizing franchises in any way and also will you share the profit of sales in the grocery channel as well?

Cynthia Jane Devine

Well, that's a lot of long questions. Why don't I start with the first part. No. That is not a correct assumption about our operating income growth. Our operating income is continuing to grow in 2014. I think some of the things in terms of the 2014 target is really the tax rate year-over-year. So our tax rate in 2014 was lower than we anticipated. There was on a full year -- sorry, in 2013 -- sorry about that, was 26.8%, which we had said that we expected our tax rate to be approximately 28% in 2013. And as we're outlining for '14, we expect it to be about 29%. And we've called this out all along as the part of the recapitalization. There is some tax leakage that occurs as a result of -- a portion of the interest on the debt not being deductible. So that's going to have an impact on the target. But I'm wondering if you're also -- you have to take in to account that as we add to the $900 million in debt, we're going to have a significant increase in our interest line. Now again, on an EPS basis, we expect it to be accretive, but I think when you talk about 8% or 9% benefit from share repurchase, I think you may be up in that [ph] with the interest cost. I'm not sure if you did that in your calculation. I'd say the other things that I commented on before in terms of G&A, we had an exceptional kind of exceptionally low year in 2013. And we're expecting it to increased more moderately as we've seen in the past in 2014, as well. Just from a development standpoint, as a said, the franchise sales line of business for us in terms of our new restaurant sales, we had a very strong fourth quarter. We opened a lot of standard restaurants and we had a lot of, so it was unusually high for us in the fourth quarter of 2013. And as we've said for 2014, that our restaurant development is going to be a little bit lower than it was in '13, so that's the factor. But again, I'd like to stress that we are expecting our operating income to grow in -- across the board in our market.

Operator

The next question comes from Jim Durran of Barclays.

James Durran - Barclays Capital, Research Division

And I just want to know with respect to the U.S. new store growth plans and your CapEx spending. Does this reflect and incorporate an administered franchising that you might be intending to do in 2014, or is this still normal state?

Marc Caira

It's consistent with what I said, the last couple of calls, where our focus in the U.S. will clearly be on increasing AUVs in our existing priority market. We also said that we have a desire to grow with the right types of partners in what's been deemed as this capital light scenario. And we'll be in the position to share more information with these specifically on that point next week. So I don't want to take anything away from Mike [indiscernible] who would like to talk on behalf of the U.S. finance on the zone.

Cynthia Jane Devine

But it is in terms of the outlook for '14, it is more of a normal state type outlook that we have in there as we targeted our restaurant growth consistent with the capital that we have in there as opposed to what other people may invest in on a go forward basis.

Marc Caira

Normal state, but you have to -- an improvement in the operations within 2014. So it's the start of what we stated would come over the next 5 years.

Operator

The next question comes from John Glass of Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

Cynthia, you talked about increasing the dividend, well above what the earnings growth was for 2013 as well as increasing the buyback versus the original contemplated amount. What were the driving principles behind that? For example, do you -- have you now upped your target payout ratio and if so, what is that? Does this also suggest kind of a lower Capex period that '13 might have been a peak. And if you feel more comfortable that the cash flow in the business can support these high levels and grow them from here? Can you talk about that? And also, if you've been thinking about re-examining the debt levels from here and maybe that's one of the reasons you can up.

Cynthia Jane Devine

Sure. Just to respond to the first one with regards to dividend. The increase, yes. We've had a track record for the last few years of increasing our dividend, which outpaced our earnings a little bit in the past as well. This is still within our range of 35% to 40% of prior year normalized net income, so it still is within that range, that's the recent increase. And I think it really does demonstrate our confidence in our cash flow generation. In terms of the share repurchase, let me just make sure that we've been clear on it, the new program of $440 million is really -- if you will, approximately $240 million of that, still relates to the previous announcement of the $1 billion of share repurchases that we were going to do. Our programs typically go from February to February. So as a result of that, some of what we already announced last year in the $1 billion of share repurchases is included in that $440 million that we've targeted for this year. And then on top of that, we've added, which we -- which is pretty consistent with what we've done historically as the $200 million purchase. So hopefully, that makes it a bit clearer. In terms of your comment with regards to what you're seeing on capital, I think we have seen and we'll talk about it more at the investor conference coming up, but we're expecting to spend a little bit more -- a little bit less capital in 2014 across the board and that does give us obviously a stronger cash flow, which we can then use it to redeploy either through dividends or share repurchases. So I think it's reflective of those combination of things.

Marc Caira

And I think also, we still have some renovations that we need to complete in Canada. And we put a lot of urgency behind that for the reasons that I mentioned before. But also these renovations come to a conclusion and then you can also see what the capital figure we'll have.

Operator

The next question comes from Kenric Tyghe of Raymond James.

Kenric S. Tyghe - Raymond James Ltd., Research Division

Single-serve in retail has been a sticking point to franchises for a while. Marc, I wonder if you could frame up for us, what's changed in that discussion? I mean, the environment certainly now more competitive than it has been. What's changed in the discussion that allowed you to sort of onboard the franchisees and got them to buy into single-serve and retail? And then, perhaps, given the size of the opportunity, just as a follow-up, if you could frame up you're thinking as it relates to single-serve in grocery through '14 or the evolution of that through '14 and into '15?

Cynthia Jane Devine

Look, a single-serve is a phenomena here in North America. I'm very familiar with single-serve because it originated in Europe and in fact, has performed extremely well in Europe. As a coffee leader in this country, we have a responsibility to ensure that in these types of trends that we are at the forefront. So we are clearly in the single-serve in our restaurants. We're really, very happy with the results. But we also -- we can't be naïve and then I guess, more importantly, we need to be realistic. There are people that will go into supermarkets to buy coffee. And when they go into the supermarket to buy coffee, why shouldn't they be buying Tim Hortons? That's the question. So when you have a discussion with your franchisees who have been our partners for 49 years and you lay out the logic, it's not that difficult to see. That as a leading coffee brand, Tim Hortons needs to be where the consumer is. I think Cynthia used the term where ever, whenever, which for me works extremely well. We need to be there. And so we will. So again, this is not about dictating anything, this is about looking at the business in a rational manner, looking at the growth opportunities, looking at our leadership position and the conclusion was very evident by everybody that we will be there. So but I think Cynthia wants to add to that.

Cynthia Jane Devine

Yes, just one of the things that we've had in the past because we've had a strong kind of canned coffee business in retail already, we have revenue sharing program with our restaurant owners, so that they participate in those revenues that we earn in grocery and that will continue into the single-serve model so that we have aligned our interest on growth in that area, which I think is absolutely fair in the type of relationship that we have with our restaurant owners.

Operator

The next question comes from Steve Anderson of Miller Tabak.

Stephen Anderson

Just a quick question off of you've broken out some of the sales that you may have a lost due to weather and certainly, you can say fourth quarter phenomenon, and I think it's going to be, may be more likely a first quarter phenomenon, but so I just want to see do you have any breakdown of how much the Polynesian winter has affected your sales?

Marc Caira

I made a personal commitment on that, I wouldn't talk about the weather. But since you asked the question, I think Cynthia would [indiscernible]

Cynthia Jane Devine

I mean, we've looked at it. But to call out the number on weather, it's definitely a factor, we lost some restaurant days towards the end of the year. We had ice storms that existed in parts of the country where we had restaurants that were closed. But again, when you're in climates like we are, the weather is going to be a factor, sometimes it's favorable for you, sometimes it's unfavorable for you. But it was definitely a factor in the fourth quarter. And -- but the good news is, the restaurants that were closed, we had them up and running and were probably a go-to place during some of the power outages that existed. But again, it's something that you have to just get used to, I think –

Marc Caira

And hopefully in the future, and this will happen again, given our new reality and new era. In the future when this happens our consumers can enjoy their Timmy's in their home with our single-serve.

Operator

The next question comes from John Ivankoe of JPMorgan.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Just a follow-up, if I may, regarding the sale of the single-serve in the grocery store. Firstly, have you -- you said your single-serve packaged coffee as a percentage of sales at the store, and I think, the question I would have and many franchisees would have is how you might handle some new cannibalization that may happen from the store level to the grocery as some of the sales -- that sales may shift to the grocery? And secondly, and I apologize if you said this, will there be any direct financial consideration for the franchisees in sales and groceries and whether it's through some kind of rebate or maybe contribution of an ad fund as a percentage of sales, for example, that you've committed to be in grocery.

Cynthia Jane Devine

Yes. I mean, we've modeled that and said a lot of times thinking about the move-in to grocery. And there's no doubt, you expect some cannibalization to your restaurant sales, but as Marc said, there's still much volume out there that's happening through grocery that we're not participating in today, but we just need to be as a part of. But as I did mention before, that we have developed a revenue sharing program with our restaurant owners, so that they can enjoy some of the benefits of being in the grocery channel as well. And so that is absolutely in place, not only for our roast and ground kind of canned coffee business, but as well, we've taken that forward and set up what we believe is a good model of sharing on the single-serve side of the business as well.

Operator

Our last question today comes from Derek Dley from Canaccord Genuity.

Derek Dley - Canaccord Genuity, Research Division

Did you guys break out how much of your same-store sales guidance for 2014 is pricing, like what percentage of pricing do you guys plan on passing through?

Cynthia Jane Devine

We haven't broken that out specifically. I mean, I think we believe that we're going to that our same-store sales growth is going to come from a number of different sources. Pricing is something that we look at across the chain with our restaurant owners. We look at underlying cost in the business and all those types of things before we determine where we're going to go on pricing. And there's obviously there's a little bit of carryover pricing that's left over in the system from pricing that we took in 2013. But nothing at this point that, that's significant. But again, we'll work that out as we get further into 2014.

Operator

There are no further questions at this time. I will now hand the call back over to Scott Bonikowsky for closing remarks.

Scott Bonikowsky

Great. Thanks, operator, and thanks, everyone, for joining our fourth quarter and 2013 year-end analyst conference call. We do hope that many of you will be able to join us next week for our investor conference, Tuesday of next week, either live in Toronto or via the webcast. In the meantime, if you have any additional questions or topics that you wish to address, feel free as always to call me at (905) 339-6186 or alternatively by email. Thanks, and have a great day, everyone. Thank you.

Operator

This concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.

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