Tim Hortons Inc. Q4 2007 Earnings Call Transcript

Feb.21.08 | About: Restaurant Brands (QSR)

Tim Hortons Inc. (THI) Q4 2007 Earnings Call February 20, 2008 10:30 AM ET

Executives

Scott Bonikowsky – IR

Honorable Frank Iacabucci – Lead Director

Donald Schroeder – Executive VP

Paul House – President & CEO

Cynthia Devine – CFO

Analysts

Irene Nattel – RBC Capital Markets

Glen Petraglia – Citigroup Investment Research

Jim Durran – National Bank Financial

Adina Bloom – TD Newcrest

Turan Quettawala – Scotia Capital

Steve Kron – Goldman Sachs

Richard Piticcco – CIBC World Markets

Stuart Morrow – Research Capital

John Ivankoe – JP Morgan

Rachael Rothman – Merrill Lynch

Winston Lee – Credit Suisse

Keith Howlett – Desjardins Securities

[Analyst] – Raymond James

Operator

Welcome to the Tim Hortons fourth quarter conference call. (Operator Instructions) I now have the pleasure of turning the conference over to Mr. Scott Bonikowsky, Vice President of Investor Relations at Tim Hortons. Please go ahead sir.

Scott Bonikowsky

Good morning everyone. It’s my pleasure to welcome you to our fourth quarter and year end 2007 conference call. Earlier this morning you will know that we announced our fourth quarter and year end results and in those results we included our financial outlook and targets for 2008 as well. Yesterday after the markets closed we also a Senior Executive transition in which Paul House has been appointed full time Executive Chairman and Don Schroeder has been appointed President and Chief Executive Officer. Both appointments are affective March 1st and I would note that Don has also been appointed to the Board of Directors affected immediately. As always joining me on the call to discuss the results this morning are Paul House and Cynthia Devine, our Chief Financial Officer. However, before we discuss the substance of the quarter and our outlook for 2008, we will also be joined for a few minutes at the start of the call only by the Honorable Frank Iacabucci our Lead Director. In addition to Frank joining us we also will have a few comments at the start of the conference call by Don Schroeder, soon to be President and Chief Executive Officer to make a few remarks about the announcement yesterday.

On a housekeeping note, we have posted slides on our website at timhortons.com under the Investor section than click on the Presentations tab, in connection with today’s call. This presentation will be archived on the site for a period of one year. This discussion is also being webcast and will be available on our website under the Audio Archives tab. After our remarks as always we’ll be pleased to take some questions.

Before we begin the formal presentation, please do refer to the Safe Harbor statement included in the earnings release issued today. This is found on the second slide of our presentation. Certain information that we discuss today will be forward-looking including discussions about future performance such as financial expectations, goals, plans and developments. Various factors could affect the company’s results and cause those results to differ materially from those expressed in our forward-looking statements. Some of those factors are set forth in the Safe Harbor statement that’s included in the earnings release and additional factors are set forth in our Public Securities filings and in our 2006 end report on Form 10-K. You may access the full text of our Safe Harbor statement on our Form 10-K available on our website under the SEC filings tab.

All Tim Hortons results are presented in accordance with US GAAP and I’d remind you are reported in Canadian dollars. In the event we reference non-GAAP financial information that we’ve not already reconciled in the press release issued earlier today, we will post a reconciliation to the most directly comparable GAAP financial measure on our website as mandated by regulation G. Finally on a disclosure housekeeping note, I want to draw your attention to a same-store sales section of the earnings release and we are making a change to be more consistent with industry practice as well as our US market in the calculation of same-store sales starting in Q1 of 2008. So going forward starting in January the Canadian same-store calculation will include restaurants beginning the 13th month of operations. This change in method will have very little impact on historical growth rates, but we believe is more consistent and brings our two markets together in terms of consistency. So with that we will discuss the senior executive transition for a few minutes and then turn to the fourth quarter. I will now turn the call over to our Lead Director, Frank Iacabucci. Frank?

Frank Iacabucci

Thank you very much Scott and good morning everyone. Yesterday as Scott mentioned the Board of Directors announced a Senior Executive transition at Tim Hortons that represents the culmination of several months of planning and work. The Board has appointed Paul House full time Executive Chairman and Don Schroeder as President and CEO. Don has also been appointed to the Board of Directors.

I would like to be very clear at the outset that Paul will continue to be actively involved in the business going forward. He approached me several months ago indicating that he wanted to begin focusing more on corporate strategy and Board leadership as well as franchisee relations and less on the day-to-day operations. Knowing Paul as I do, I understand what a tough decision he reached to evolve his role with the company because he literally throws himself completely into his role as CEO. I know, and observe that it can be all consuming. This is an important decision for Paul and the company but the Board also believes strongly that the timing for a transition and executive responsibilities is good because of the incredible depth that we have within the executive team. It also means that all of us associated with Tim Hortons will continue to benefit from Paul’s legendary instincts and experience in charting our goal strategies for the future. The Board initiated a rigorous CEO succession planning process over recent months and working with Paul and other advisors we reached the definitive conclusion that the new structure provides the best means to ensure continuity, continued growth of the organization and the team.

This process also validated the Board’s view that Don was ideally suited to take on the critical executive leadership role of President and CEO. He has an outstanding strategic leadership skills, in depth knowledge of the sector and the business and commands respect and trust among our employees and the franchisee community.

It was unanimous Board support for Paul’s role as full time Executive Chairman and Don’s appointment as President and CEO. I will continue to serve as Lead Director which is an independent position responsible for governance and Board oversight and in his role as full time Executive Chairman Paul will be responsible for overall strategic direction and working with the CEO as well as Paul being responsible for leadership of the Board. Don will report to Paul and will be responsible for operational leadership and the day-to-day running of the business, strategic development in collaboration with Paul and strategy implementation. These are important changes and I say on behalf of the Board all of us are greatly looking forward to working closely with Paul and Don in their new roles.

Scott Bonikowsky

Thank you very much for joining us this morning Frank, we appreciate that and before we begin discussing the quarter and our results we also have asked Don Schroeder as I mentioned, to make a few comments as well. So Don I’ll turn it over to you.

Don Schroeder

Thanks Scott. It’s a pleasure to be here this morning. The first thing I would like to say is that I am truly honored and privileged to assume such a critical leadership role for what I believe to be the very best quick service restaurant chain in North America. We have a deep connection with our customers and a long standing and mutually beneficial partnership with our franchisees. We also have exceptionally loyal and committed employees. Our strategies to grow our business are sound and clear and I believe the future is full of promise for Tim Hortons, our customers, our store owners, our staff and our shareholders.

While I may be new to some of you, I can assure you that I am not new to our business or to the restaurant business. My connection to Tim Hortons and the Tim Horton Children’s Foundation dates back to the 1970s when I was a franchise owner of several stores giving me a clear perspective on store operations and the franchisor/franchisee relationship as seen through the eyes of the franchisee. As a practicing lawyer in the 70s and 80s, I also had the opportunity to act as an advisor to the company’s leadership and to a number of Tim Hortons franchisees. I joined the corporate team in 1991 and have had a variety of leadership roles that involve virtually all of the functional areas of the company. Currently my accountabilities include distribution, manufacturing, real estate and construction, legal, human resources, our coffee buying operations and the Tim Horton Children’s Foundation. I’m looking forward to working even closer with Paul and am delighted that we will continue to benefit from his wisdom and experience. We have a management team that is second to none in our industry and I have a great deal of confidence in our organization and it’s ability to execute our strategies for growth. I also look forward to getting to meet many of your over the weeks and months ahead.

Scott Bonikowsky

Thank you very much Don, we appreciate you coming on the call as well this morning with us and with that I’m going to turn it over to our Executive Chairman, Paul House. Paul?

Paul House

Thanks Scott. Well this is a day of mixed emotions for me to be perfectly candid. Because for more than 20 years I have come into work every day to roll up my sleeves and dive into the work of building this great business. This has been a work of pride and joy for me. However, let there be no misunderstanding. I will continue to be actively involved in the business but at a different level. I will be focusing my energies on our strategies to grow the company, on Board leadership and on continuing to build on our relationship with our franchisees and other key stakeholders.

Don is an exceptional leader and individual. I have worked side-by-side with Don literally for most of the past two decades. I have complete confidence in his ability to take on increased responsibility for the overall operational leadership of this company. And as you heard from Frank, the rest of the Board does as well. I think that is probably enough on the topic of executive transition, now let’s turn our attention to the fourth quarter and the full year 2007 results.

We had a very good year in our first full year as a stand alone public company. For the year our operating income grew 12.1% ahead of our target and revenues grew at 14.2%. For the fourth quarter we delivered an increase of 9.3% in operating income and 10.5% in revenues. EPS was up 14.3% in the quarter. Fourth quarter sales in Canada were softer in the quarter than the trend for the full year. This was due mostly to a combination of factors including strong comparables from 2006, heavy snowfalls and a shift on TimCard promotion away from seasonal merchandise.

Same store sales for the full year grew 5.9% in Canada and 4.1% in the United States. For the fourth quarter same store sales increased 3.4% in Canada and 4.2% in the US. Now I’ll spend a minute talking about sales in both our markets before moving on to the rest of the quarter.

As any of you living in the north east US or Canada can probably attest to, in December we had some really heavy snowfall in core markets. Weather impacted our customers’ ability to get out to our restaurants. This did impact our sales in both Canada and the US. In the Canadian market we lapped growth of 9.3% in the fourth quarter of 2006 which included the successful launch of the Breakfast Sandwich. So our growth was on a much higher base. Over the past two years we have grown in total Canadian same-store sales by close to 13%.

In the US market we delivered healthy same-store sales growth of 4.2% which was among the highest in the sector for the quarter. We were pleased with this performance given the economic climate and the snowfall challenges that faced most of our US markets as well. Some price increases supported our sales growth in the quarter as well. Pricing accounted for about 2% of Canadian same-store sales growth and less than half a percent of US same store sales. So while we faced some sales softness, we feel pretty good about our overall results.

I know questions about the US economy are on many people’s minds and Cynthia will talk about our 2008 outlook in a minute but let me say this. Our company is 44 years old. We have lots of experience in managing in good times and in bad. When you track our growth, we have been able to perform well over a very long period of time even when the economy is challenged. Having said that, no company is recession proof but we do feel we are fairly resilient. Our customers know us for our excellent quality and great value and we believe that positions us well when things are more challenging.

To add some additional color to the fourth quarter, I’ll talk for a moment about our promotional programs. Please refer to page 7 of the presentation for examples of our promotional programs during the quarter. As you can see we actively promoted Fajita Wraps, Cream of Broccoli Soup with a Toasted Ham and Swiss Sandwich, Pumpkin Spice Muffins and Smoothees as well as Lemon theme products. We also actively supported the launch of TimCard and as a result there was less focus on our traditional holiday season merchandise. Sales from TimCard are recognized at the time of product sale and are more likely to show up in system wide sales in later periods as redeemed.

The TimCard cashless payment system was rolled out across 2,100 Canadian restaurants by Q4 with plans to rollout to our US operations in early 2008. It is still very early in the life of this rollout but we continue to be pleased with our customer acceptance of and usage of this platform.

Now turning to page 8 on the restaurant development front, you can see that as always we had a very busy fourth quarter. We opened a total of 119 units of which 71 were in Canada and 48 were in the United States. We opened a total of 198 units for the year meeting our targets in both markets. Of these units, 15 were self-serve kiosks in the US. These kiosks leverage a platform we have in place in about 140 locations in the convenience channel in Ireland and the UK.

The MasterCard payment platform rolled out earlier in 2007 and established the technology highway for us to deliver the TimCard and gives us a good platform to continue to innovate. Finally I would like to highlight an important announcement we made this morning reinforcing our commitment to creating value for our shareholders. The Board has approved a 28.6% increase in the quarterly dividend to $0.09 per share affective with a dividend payable on March 17th.

Our strong performance allows us to continue to invest in the growth of our business while also delivering value to our shareholders through dividends and our share repurchase program. And with that I’d like to turn it over to Cynthia, Cynthia?

Cynthia Devine

Thanks Paul and good morning everyone. As Paul mentioned we had solid sales performance this quarter given the many factors that we faced. On page 12 of the presentation we outlined revenues for the quarter. You can see the total revenues climbed 10.5% for the quarter to $515 million, and increased 14.2% for the full year. Revenue growth outpaced system wide sales growth again this quarter reflecting the increased warehouse sales from our Guelph Distribution Center compared to the same period in 2006. Our Guelph CD now provides three channels delivery to about 85% of our Ontario stores and the team did a great job in bringing stores online as the ramp up progressed throughout 2007.

The sales component of revenue was up 13.7% for the quarter. The sales line represents primarily distribution sales. The increase in our warehouse sales was partially offset by a reduction in corporate store counts compared to year ago as we moved more restaurants to either franchised operations or operator agreements.

For the fourth quarter rent and royalties revenue grew 7.2% fairly consistent with our system wide sales. Franchise fees decreased 2.6% due primarily to lower resales versus the prior year. Below the revenue line, turning to page 13, you can see that cost of sales rose 13.6% compared to the fourth quarter of 2006. The increase was driven primarily by growth in system wide sales, higher distribution costs associated with three channel delivery and a change in mix in the number of corporate stores and stores consolidated under FIN 46R.

Operating expenses increased 4.4% year over year mainly due to a larger number of restaurants in the system with corresponding operational depreciation and lease costs. General and administrative costs were up by about 11.5% in the fourth quarter. The largest contributor to this increase was higher public company stand alone costs compared to the same period in 2006 particularly relating to financial systems and professional fees. Increased marketing programs in the US segment and higher equity bases compensation costs also contributed to higher G&A costs this quarter.

On page 14 you can see that operating income for the quarter increased 9.3% ahead of system wide sales due to higher warehouse sales from distribution, higher equity income and lower other expense. This was offset somewhat by the increased G&A costs. Net income climbed 11.5% to $75.5 million and reported diluted EPS was $0.40 per share compared to $0.35 in the fourth quarter of 2006. The diluted weighted shares outstanding in the fourth quarter were 187 million compared to 192.4 million at the same point last year.

Net interest expense was $4 million compared to $3.3 million last year. Higher net interest expense continues to reflect the lower cash on hand due to share repurchase and dividend activities and higher interest expense year over year. On a segmented basis as Paul mentioned, both Canada and the US delivered very respectable sales performances in fairly challenging circumstances. The Canadian segment had operating income of $126.2 million up 11.7% year over year supported by higher same store sales growth and a slight improvement in our operating margins. The US segment which also sustained sales growth had a loss of $0.5 million also in the segment currency translation negatively affected revenues by 16% and lowered expenses by about the same amount.

Shifting to the balance sheet on slide 15 we had $157.6 million of cash on hand at the end of 2007. As you will note a new item on our balance sheet this quarter called restricted cash with $37.8 million in cash on hand. This amount represents the float from our TimCard program. Please note that the interest from these funds will be allocated to the company’s advertising fund to help pay for operational costs of the program.

We spent a total of about $171 million for the year on share repurchases and approximately $53 million in dividend payments. We spent approximately $176 million on capital expenditures for the full year with the majority of that on store development and renovations of existing restaurants. Depreciation and amortization for the quarter were $21.1 million and $83.6 million for the full year. We spent $35.6 million to purchase 953,700 shares in the fourth quarter as part of our new share repurchase program.

Long term debt and capital leases on our balance sheet stand at about $380 million at the end of the quarter and we continue to enjoy good liquidity including $300 million between two revolver lines of credit in Canada and the US.

The last topic I would like to cover before we turn it over to Q&A is our outlook and targets for 2008. Paul gave you a feel for the economic challenges and competitive activities we faced particularly in the US business. Offsetting those challenges we have confidence in our value proposition, our new product pipeline, and our promotional strategies. We have proven to be fairly resilient in tough economic circumstances and we believe we are well positioned to support customers looking for value without trading off quality.

We do expect overall to see more volatility quarter to quarter in the QSR sector and more likely a stronger back half than first half particularly given the weather that persisted into January and early February and the economic concerns.

Please turn to page 16 where we outline our 2008 targets as follows. Our budget forecast and targeted for operating income growth of 10%. Our same store sales target is 4% to 6% in Canada and 2% to 4% in the US. We believe these targets acknowledge the current operating environment but also balance our positive views about our menu innovation, our marketing and our operational programs.

We plan to open between 120 to 140 restaurants in Canada and 90 to 110 units in the US. Of these units some may leverage the self-serve kiosk platform that we employ in Ireland and the UK convenience channel to drive brand awareness with limited capital outlays. We are planning to spend between $200 million and $250 million in capital expenditures primarily devoted to unit growth and renovations. We are targeting an affective tax rate of 33% to 35%. I would note that these targets replace all previously discussed targets with the exception of long term store development activities which remain unchanged. We expect challenges in 2008 but on balance remain optimistic that we are well positioned to achieve our established targets for 2008. With that I will turn it back over to Scott.

Scott Bonikowsky

Thanks Cynthia. We will now begin our Q&A session with Paul and Cynthia. I would remind you we have a fair number of people on the call today and I’m sure there’s a few questions so what I’d like to do is ask you to please respect the idea of one question per participant. You’re certainly welcomed to get back into the queue after you’ve asked your question. So operator with that I will turn it over to you to start the Q&A session.

Question-and-Answer Session

Operator

Your first question comes from Irene Nattel – RBC Capital Markets

Irene Nattel – RBC Capital Markets

Thank you and good morning everyone. Paul I think its very intriguing that with this change in structure you’re going to be spending more time as you put it focusing on strategic issues and some other subjects. From someone who is sitting and listening to this I’m thinking, hmm, I wonder what kind of strategic issues Paul has wished that he could spend more time on but hasn’t been able to. Can you provide us with any color on that?

Paul House

Well Irene I think just to say that we have a wonderful company in Tim Hortons and I think we have a tremendous amount of opportunity for us with this organization and there are many avenues that I think that I will have time to explore. We have lots of interest in the chain expanding to various countries around the world and so forth and not that we’re going to do that overnight but it will give me time to reflect on some of those things and meet with appropriate people and do some of that type of work. And also work closely with Don on the overall strategy of growing the sales and the company. That’s the lifeblood of the organization. But as I said in my presentation I’m not going home to sit in a rocking chair. I’ll be around here; they’ll know I’m here.

Irene Nattel – RBC Capital Markets

I have no doubt, thank you Paul.

Operator

Your next question comes from Glen Petraglia – Citigroup Investment Research

Glen Petraglia – Citigroup Investment Research

Good morning, just a quick question of clarification first, the 210 to 250 restaurant openings for 2008, is that a gross number or a net number and then in terms of US same stores sales guidance, I think previously the long term target was 6-7%, I was wondering if the 2-4% is the new long term target and if so, what’s changed or is it strictly a function of where you’re currently seeing in terms of discounting and perhaps some nearer term challenges.

Cynthia Devine

Glen with respect to the store openings that is a gross number. That’s the way we always provide our restaurant counts for the year and what we’ve typically said is in our markets we close between 20, 30 to 40 restaurants a year, that type of range and its normally in the normal course of business. With respect, as we mentioned in the script, with respect to the growth targets, we no longer have long term targets so this is a 2008 target for us in our US business and we continue to feel very good about the US business but recognizing that there are some challenges that everyone is facing in the US right now and we felt that it was appropriate to reflect those in the targets.

Operator

Your next question comes from Jim Durran – National Bank Financial

Jim Durran – National Bank Financial

I just wanted to talk about the electronic payment systems and the TimCard specifically. The $38 million that’s booked on the balance sheet is that purely cash dollars from customers ready to be spent?

Cynthia Devine

Yes that was the net balance that had been loaded, net of redemptions obviously, as at the end of the year.

Jim Durran – National Bank Financial

And are you prepared to give us any other color on how the card worked in the fourth quarter with respect to acceptance, penetration or average booking per customer.

Paul House

Well it’s early and that’s information that we’re not ready to disclose at this time because we don’t have enough history but we can tell you that it has been great acceptance of the card and it went relatively smooth into the system and we’re very pleased that we were able to get it in for the Christmas season.

Jim Durran – National Bank Financial

I don’t know if you can answer this in the context but on average, how long does it take for customers to typically use the cash they put onto those cards?

Paul House

We need to do some fine tuning on our systems but it is about as fast as cash or a little faster than cash at this point in time, but it will get better as we get into integration on our cash register systems and some of the other things that we are doing as we speak and so and you’ve got to appreciate as well that we have staff that this is a whole new system of payment for them so we’ve had issues, not issues, but we’ve had to deal with that as well. But all in all, I’m very pleased with the job that our franchisees and our employees at our store level have done with the execution of TimCard.

Jim Durran – National Bank Financial

And just for the team at hand, can you give us the depreciation numbers for the quarter this year, last year.

Scott Bonikowsky

Jim, why don’t I give you a call after and I can confirm those for you.

Operator

Your next question comes from Adina Bloom – TD Newcrest

Adina Bloom – TD Newcrest

I know coupon promotions isn’t something that Tim Hortons has practiced in the past but given the current market and the increased couponing we’re seeing by some of your competitors, is this something you would consider going forward?

Paul House

We have not done couponing in Canada for many, many years and there’s nothing in our marketing plans to do couponing. We offer good value everyday and we don’t believe in discounting when we’re offering the consumer great value and we do do some couponing in new markets to get people to know where we are and get it out into the neighborhood but it’s a short term marketing vehicle that we use and we are using that currently in some US markets, get trial in our restaurants but that’s what we use it for, is trial. Not for a long term marketing strategy.

Operator

Your next question comes from Turan Quettawala – Scotia Capital

Turan Quettawala – Scotia Capital

Just looking at the guidance for the next year, I guess if I put in sort of the middle of the SSSG numbers for both countries and to my model it still implies a little bit of margin compression I guess. Is this mainly due to your expectations on the US business as you are increasing the number of stores or is there another piece of the puzzle that I’m not looking at here?

Cynthia Devine

No I don’t think that we’re expecting as we said before with our US business that sometimes on a quarter to quarter basis we can have some volatility. I think one of the things that we’ve said before Turan is that equity income doesn’t necessarily grow at the same rate as the overall chain because it has two components in it. One is our Tim Win Combos and the other one is our bakery operations and those two items may not necessarily grow at the same rate as the chain so sometimes you’ll see in some years those grow faster and then some years they don’t grow as quickly and so that can sometimes affect the overall margin if you will.

Operator

Your next question comes from Steve Kron – Goldman Sachs

Steve Kron – Goldman Sachs

Hi, Paul, Don good luck in your new roles. Couple of quick follow-ups, back on the US same store sales discussion, you mentioned in your press release competitive discounting, just curious has that intensified as we got into this new calendar year here or it seems as though competitive discounting has been an issue for the past couple of quarters.

Paul House

Yes, I think there’s more couponing going on today than there ever has been. I guess its reflective of the competitive set that’s out there so we don’t see any decline in it that’s for sure as we’ve got into 2008. [inaudible] said that in Canada we don’t see the same level of discounting. You see McDonald’s doing couponing which has become a regular part of their marketing program but other than that you don’t see a tremendous amount of couponing. So there’s a vast difference in the two markets.

Steve Kron – Goldman Sachs

Okay and then a follow-up on the margin question, certainly Cynthia I think in the past making year over year margin comparisons has been difficult and clouded by public company costs and restricted stock grant changes, general ledger issue—transformations, more recently the ramp of the Guelph Distribution, as we sit here today and as we look forward are those kind of year over year impairments to comparability, have we kind of put that behind us and as we think about lapping and cycling Guelph, which I believe is a negative mix to the margin structure, is there any way to kind of put that in perspective for us and recognizing its margin dollar accretive, but margin percentage dilutive, can you maybe contextualize that for us a bit?

Cynthia Devine

Steve as you know that’s hard for me to do because not only with the Guelph Distribution Center but you have other changes in underlying commodity costs that are again and I know I repeat this every conference call but they do impact your margin percentages and so that’s why as a company we really do focus on margin dollars because the penny, the fixed penny profit on certain products can really change your margins. So that’s typically why we stay away from that a bit. The other thing that you’ll see is we are trying to move corporate stores out. So that affects your sales levels as well and you’ll see, obviously we hope that that’s a positive in the long run but it does bring down your sales growth versus your prior year when you have fewer corporate stores in it. So there’s going to continue to be things like that in it, but again I think we feel very positive about out target for 2008 and that we’re continuing to grow the business and we’re seeing the right things happen in the business as we move forward into 2008.

Operator

Your next question comes from Richard Piticcco – CIBC World Markets

Richard Piticcco – CIBC World Markets

I wanted to follow-up on the TimCard and the restricted cash and I guess my question is, is it correct to assume that some of that restricted cash relates to sales that probably would have otherwise been generated from holiday type merchandise which would have been included in the P&L of course because there’s no forward [buy] and if that is the case, could you quantify what that impacted the sales or the same store sales in the quarter?

Cynthia Devine

We absolutely believe that we traded off some of the holiday merchandise sales for TimCard load ups in December primarily. We typically had gift certificate programs and so we would have probably had some growth in our gift certificate program had we not launched the TimCard so it was definitely a factor in December. It’s not something we’re prepared to quantify. I think you can get a pretty good sense based on the balance that’s sitting on the balance sheet of $38 million. It’s not all of that because we would have expected a continuation of growth in gift certificates but its probably the lion share of it that would have gone into Christmas merchandise.

Paul House

We anticipated and we reduced our inventories on merchandise at our store levels so we figured that with the introduction of TimCard that there would be less hardware sales this season versus last year and we were prepared for that.

Richard Piticcco – CIBC World Markets

Right, no it makes complete sense. Maybe just another way to phrase that could you talk about how much your holiday type merchandise was down this quarter versus last year?

Paul House

We don’t disclose that information for competitive reasons.

Operator

Your next question comes from Stuart Morrow – Research Capital

Stuart Morrow – Research Capital

Just looking at your US store guidance for next year, I know you’ve introduced the concept of non standard in the US, is that considered a change in strategy because you’ve always said that the US build out will be based on standard locations first then non standard. So I wonder if you could just talk to that.

Paul House

Well if you take our Michigan market and our New York market, Buffalo in particular, they’re at a growth cycle where non standard is an appropriate time to bring that brand in. In addition because we have been doing this self serve introduction into the UK market we were intrigued by it and by the great acceptance we’ve had of that type of model and so it led us to put 15 stores in test into some Shell’s convenience stores in the New England markets so, it’s something that you may see an increase on in the future. We’re not sure. We’re in test right now but we’re looking at all vehicles as to how we can grow the business in the US.

Stuart Morrow – Research Capital

And just on that if I may, hearing beyond the 500 US store target, can we expect to hear more throughout the year or do we have to wait for Christmas next year to hear more about that?

Paul House

We all need good things to look forward to and Christmas is one of those things that I like looking forward to so at this point I guess the answer is yes.

Operator

Your next question comes from John Ivankoe – JP Morgan

John Ivankoe – JP Morgan

A question on the US business, its beginning to get to be a fairly big business in terms of number of stores and especially number of franchised stores for it to be basically break even, my question is as we look into 2008 especially with the store growth targets that you have presumable franchised, would you expect the US business to be a meaningful contributor to operating income growth and if not what would be constraining that?

Cynthia Devine

It’s a fair comment with respect to the size of the business now in the US. I think we’ve talked about it before in the southern New England market where we’re running corporate stores, those continue to be in a loss position and so that offsets some of the gains we have in other areas of the business. I don’t think in 2008 that we’ll see it as a significant contributor to income. I think we’ve said that all along that its still in development phase for us and that we’ll see volatility quarter to quarter and year to year. We’re obviously with our same store sales growth we hope to see improvements in the US business so we are optimistic about that. But it’s not expected to be a significant contributor.

Paul House

I think the only thing is if we were talking of globally North America we have markets in the US that are profitable and it’s very similar to what we had in Canada but as you continue to break out into newer markets you’ve got to be prepared that they’re going to take awhile before you get a return on investments. We’re very pleased with where our US business is positioned today and with the strong performance of the Canadian market and that’s some of our US markets, we think the company is in very good shape.

Operator

Your next question comes from Rachael Rothman – Merrill Lynch

Rachael Rothman – Merrill Lynch

Can you just kind of conceptually remind us how different commodity costs impact your margin line items and your ability to pass through costs to the franchisees maybe in terms of a delay as a result of wheat price increases or how would we see that flow through the P&L and what would the timing of different increases be and just conceptually, I mean I don’t need specific numbers, that would be great.

Paul House

We buy forward in the market our most commodities and so take coffee for example, we’re covered to the summer. We’re usually out about six months and so we usually can put a price position in with our franchisees as to what that buy is and that they can enjoy the positives of that purchase during that period of time. And then at the end of, as we buy forward contracts that price will change for the next period of time. And other commodities that go into ingredients and so forth, wheat and a number of other commodities, we’re usually covered out 12 months or so. When we look at the overall commodity market as most people are, we’re concerned in the long term. We’re fairly in good shape in the near term. The coffee market in the back half of this year at the current trading values is much higher than what we experienced during ’07 but we’re not overly concerned about it at this point in time because it’s early and we are well covered in the near term.

Cynthia Devine

And just following up Racheal, conceptually as we’ve talked about before with respect to both cost increases and decreases, because of our franchise model we typically pass those increases and decreases on to our store owners because we are a franchise model so I don’t know if that’s the conceptual discussion that you were looking for as well.

Rachael Rothman – Merrill Lynch

I guess is there just ever a time when you choose not to pass it through entirely where you take the hit because you feel it’s a short term event or how do you guys think about when is the appropriate time to pass through increases.

Paul House

We take care of our business and at times we do the things that are necessary to protect the overall company which includes our franchise partners and they are our partners, and so we do the right things for the business at the time.

Cynthia Devine

And it’s typically a portfolio of goods and so often times we’ll see increases in one area, we’ll see decreases in the other area and we’re very mindful of how that impacts the store owners’ P&L.

Scott Bonikowsky

One additional comment, there is some commodities difference between the Canadian and US markets as well. So you can’t extrapolate necessarily one commodity on either side of the border, there is some differences there as well.

Rachael Rothman – Merrill Lynch

Great and for wheat are you purchasing that in Europe as a result of the JV, would that be correct?

Cynthia Devine

No. That’s not correct.

Operator

Your next question comes from Winston Lee – Credit Suisse

Winston Lee – Credit Suisse

I want to get some color on Canada regionally. I wondered if you could talk about areas of strength and where it was weak if you could comment on that, that would be great.

Paul House

We don’t break it out by region as far as what our sales performance in Canada; we give it as a whole.

Winston Lee – Credit Suisse

Okay, and in terms of your same store sales guidance in the long term why did you decide to withdraw that?

Cynthia Devine

We felt that it was just more appropriate to focus on targets that are consistent with our budge for 2008 and just felt that it was more meaningful for both the company and for investors and shareholders to understand what we’re aiming at in 2008.

Operator

Your next question is a follow-up from Irene Nattel – RBC Capital Markets

Irene Nattel – RBC Capital Markets

Paul in your opening remarks you did reference the fact that Tim has been around for a long time here in Canada and certainly through that period you’ve seen many ups and downs in the economy. I was wondering if you could share with us what historically has been the experience in terms of consumer behavior. Do we see same frequency of purchase but a lower ticket; do we see any changes that you can speak to?

Paul House

Well Irene historically, and I’ll speak in the 90s as you well know, Canada was in recessionary times. Our same store sales growth was positive but it wasn’t as positive as it was in the late 90s and into the 2000s. But we are resilient against it. I would say that anytime the economy goes that you sometimes maybe lose your repeat customer instead of coming to you seven, eight, 10 times a week maybe comes to you five or six times a week. But with our great price value we’ve been able to weather the storm if you like, very well during those times and in fact we grew the business substantially during those periods of time by acting responsibly and delivering good value to our consumers and it was a great opportunity for us. I’m very, in the midst of all this doom and gloom in the various economies that we read about, I see this as a great opportunity for the Tim Hortons chain to grow because real estate costs are coming off, hopefully building costs will follow. And there’s lots of people around that have, especially in the US, have been displaced out of jobs that are looking for franchises and so forth and so I view it as a, it is a very good time for our business. Our brand is well positioned as anyone to take on a tough economy.

Operator

Your next question is a follow-up from Stuart Morrow – Research Capital

Stuart Morrow – Research Capital

Paul following up on the last point you made there, you said in a slowdown you see a little bit of an increase in franchisee interest, just wondering if we look to ’08 and maybe beyond that, what the economics of the US model might look like in terms of franchisee forgiveness or delay in royalties or that sort of thing.

Paul House

Each store depends on its sales volume and so forth as you go forward so I don’t see anything different from what’s taken place in the past as we go forward. I’m not sure if I’m answering your question the way you would like.

Stuart Morrow – Research Capital

Just thinking about, you’re saying that in terms of a slowdown in the economy you do see more franchisee interest but are you having to, maybe I said it wrong, but are the incentives still having to be there to capture franchisee maybe in new markets.

Cynthia Devine

We’ve always had a…

Paul House

I think you have that whether the economy is good or bad. If you’re breaking into a new market where it’s a little more difficult to find franchisees then you have to do what’s ever appropriate to get the brand started.

Cynthia Devine

And we have a program that’s well established. Our franchise incentive program in the US that really helps us bring in new franchisees and it’s a program that within the US but very similar things were done in the early days in Canada as well and we’ve just established it as a formalized program in the US to really encourage new franchisees in new and developing markets.

Operator

Your next question is a follow-up from Glen Petraglia – Citigroup Investment Research

Glen Petraglia – Citigroup Investment Research

Just regarding the convenience store locations in gas stations and a test in your New England markets, I guess maybe if you could talk about how it could potentially work against the brand. Does it cheapen the brand that you’re in gas stations, does it send the wrong message to customers such that at some point down the road they wouldn’t necessarily be as inclined to go to a Tim Hortons stand alone unit, but perhaps if you could share some of your experiences over seas with that and what you expect or hope to see coming out of this initiative in the US.

Paul House

I think first of all you’re dealing with two different markets. Over seas and the Irish and UK markets self serve types of concepts are very common and the perception of quality is much different than what you might find in the US. Now having said in our test in our stores in our Shell locations in New England, I have not been there yet personally but our Head of Operations, Roland Walton has been and he’s said that he is very pleased with the execution of our partners down there and the compliment that is it giving to our brand. Our operators of the locations down there are very pleased with the offerings. So in the early stages we’re very pleased. Your points are very valid and that’s why we’re testing and we’re not rolling it out. We’re just looking at it and seeing whether it’s going to compliment the brand or as you indicated possibly hurt the brand and we’ll do the appropriate thing once we get those learnings.

Cynthia Devine

And the quality of the coffee in the self serve equipment that we now have in place there is very different if you experienced self serve within the Canadian where you were actually pouring your own cup of coffee in that self serve vehicle. This one is automated so you push a button and the quality of it’s from bean to cup in a very short period of time.

Glen Petraglia – Citigroup Investment Research

Okay and in terms of what other markets you may have such sort of offerings in the US that would be helpful to understand.

Paul House

Are you referring to self serve?

Glen Petraglia – Citigroup Investment Research

Yes.

Paul House

It’s only in the New England market and it’s only in the 15 stores and tested at this point in time.

Operator

Your next question comes from Keith Howlett – Desjardins Securities

Keith Howlett – Desjardins Securities

I had a question about the Breakfast day part, there’s been a lot of entry of competitors into that segment either with breakfast sandwiches or branded coffee alternatives or Arabica bean alternatives, so I’m just wondering how broadly the breakfast day part is performing for you in that context.

Paul House

Well you know the breakfast sandwiches were a very successful launch for a product for us and we are still very, very pleased with its acceptance. We’ve now added a variation to it called the BLT Sandwich and we’re looking at some other products. So we’re very, very…I mean it’s always been a strength of this chain is the morning day part and for us to expand our offering into that day part is probably the easiest entry for us of anything. So we’re very comfortable where we are with the breakfast sandwich and competitive set that we’re in.

Operator

Your next question comes from [Analyst] – Raymond James

[Analyst] – Raymond James

Just a quick question about the TimCard and particularly with regard to the credit interest balances apparently are being used to go towards the marketing of the TimCard. Ultimately will that change? Will those credit balances find their way to the bottom line?

Paul House

No they will not. It is designed that anything that is earned off of interest or whatever is to be returned to the marketing pool to fund the expansion of the TimCard. We have fully disclosed to our franchised owners that there will be no income from interest or such from TimCard that will go to the corporate coffers if you like.

[Analyst] – Raymond James

That number though in time could grow to be a quite an enormous number. Regardless of that your plan is ….

Paul House

I repeat, they will not go to corporate funds, they are committed, and they are the franchisees’ funds.

Cynthia Devine

To offset the cost of the program.

Paul House

Offset the cost of the program. The benefit to the corporation is the convenience and speed of service and that’s where the win is for both franchisees and in turn the corporation.

Operator

Your next question is a follow-up from Adina Bloom – TD Newcrest

Adina Bloom – TD Newcrest

Just to touch on something that was talked about earlier, given the current economic environment in the US are you finding it any more difficult to find suitable credit worthy franchisees or are you having to help them more with financing?

Paul House

No we don’t see any change from that perspective.

Cynthia Devine

It really comes back to the FIP program, or the Franchise Incentive Program that we have in place. We still feel that that is the right vehicle to bring new franchisees into the business and it has been successful in the past and will continue to be a great way to bring people in.

Paul House

You’ll note in the fourth quarter there’s actually a reduction of corporate stores Adina as well.

Operator

Your next question is a follow-up from Jim Durran – National Bank Financial

Jim Durran – National Bank Financial

Cynthia I was just wondering if you could give me a refresher course on price increases that you took last year and when those are going to start to fall off the table as we head into ’08. Don’t know if you’re willing to comment on future price increases.

Cynthia Devine

We don’t talk about future price increases but I can remind you of some of the pricing that we had in the marketplace last year or 2007. We had pricing in most markets other than Quebec but for only a period of time so in July we had pricing in the east and in Ontario. Not significant pricing, fairly minor especially in Ontario. And then in late November around mid November we had some pricing in Alberta, BC and Saskatchewan. So those prices will carry over into 2008 to some extent until obviously they’re lapped later in the year.

Jim Durran – National Bank Financial

Okay and just going on the Ontario comment, if I recall correctly there was no increase on coffee in Ontario last time through.

Paul House

Just on some selected baked goods.

Jim Durran – National Bank Financial

Okay and last question just on your systems’ upgrades with respect to transition from the Wendy’s platform to your own, are those complete now? Do you expect any additional costs if its not complete coming into 2008?

Cynthia Devine

That’s a good question Jim. Yes the initial implementation which was really a general ledger package and a fixed asset repository for our US business, those were the two that I’ll call burning platforms because those were the ones that we were leveraging from Wendy’s so those two were successfully, I’m pleased to say, implemented in the fourth quarter. However what we talked about is that we are implementing an ERP which has additional modules that we will continue to implement through 2008 and into early 2009 so we will see additional capital associated with those projects and probably some G&A costs as well. And you asked the question on depreciation right? It was 21.4 in the quarter and 83.6 full year, just to give you that it was in the script as well.

Operator

You next question is a follow-up from Richard Piticcco – CIBC World Markets

Richard Piticcco – CIBC World Markets

Just a couple of quick follow-ups, first the drive through, the talk in certain Canadian areas about banning drive thrus. Can you talk about your thoughts on if that went through what the impact would be to those particular stores that would feel that and second just a follow-up on the breakfast day part, can you talk about market share for the breakfast sandwich, is that continuing to increase in the Canadian market or has that plateaued?

Paul House

I’ll answer the last question first, as I said we’re very pleased with the performance of the breakfast sandwich and that’s as much as we’re going to disclose about it.

Cynthia Devine

And the expansion of the line as Paul talked about into BLT, we’ve added a hash brown so really the hot breakfast sandwich has allowed us to do a lot in the morning day part and so we’re pleased with the latitude now with which we have to work within for the morning day part in hot offerings. I think it’s very positive.

Paul House

Oh drive thrus sorry, first of all there is a lot of activity in various communities across the country as far as bans and restrictions on drive thrus, but I think it’s important to note though that if there was a ban on drive thrus in a given area the ones that are in place will stay in place. There’s no discussion on taking those out of business so they would be grandfathered with time. And given the fact that in many of these areas we are well penetrated already but anytime that there’s something such as a ban on anything, it could materially affect your business it is concerning for future growth and that’s where we’re more concerned than anything. And we’re doing a number of things in the marketplace to try to educate communities about what drive thru really means, what the emission factors are and so forth and I won’t get into it on the conference call but we’re very active with the industry in trying to educate legislators that this isn’t necessarily the target that they should be after.

Operator

Your next question is a follow-up from Turan Quettawala – Scotia Capital

Turan Quettawala – Scotia Capital

I’m wondering if you can help us understand what the length of the redemption cycle is for the TimCard. Is there any date on that yet?

Cynthia Devine

It’s too early. You’ll see I mean obviously you’ll be able to track it with the restricted cash balance when it comes out in the quarter but the good news is we’re seeing people coming in and using the cards right away and that’s great because that means we have a lot of consumer acceptance right away and so we’ve seen the balance come down as people redeem them and we’re seeing that people are reloading their cards and we have a number of people that have registered online so we feel very good but again it’s early stages of the rollout and I think we believe there’s a lot of opportunity with what we can still do with the card and with the technology that exists now.

Turan Quettawala – Scotia Capital

I guess what you’re saying is that it’s kind of lower than three months I would assume right for the redemption cycle?

Cynthia Devine

Really it varies. Its hard to say I mean some people used their card, they received it on Christmas and used it on Boxing Day. But then you’re going to have people, those people are probably the ones that reloaded it as well so its very hard to track individual behavior through this because we had a lot of cards that were purchased during the holiday season.

Operator

Your final question comes from the line of Winston Lee – Credit Suisse

Winston Lee – Credit Suisse

Your operating expenses for the US business is that in your operating expense line primarily or G&A or it is split across different lines?

Cynthia Devine

Its split across all the line items similar to our Canadian business so operating expenses would include your property costs and what not associated with both Canada and the US and your G&A would include general and admin expenses related to both those markets too.

Winston Lee – Credit Suisse

Okay and on the G&A side do you feel that we’re at a reasonable run rate for the professional services that you talked about and the other driver for the increase, I think it was sale on public costs?

Cynthia Devine

Obviously now we’ve been out of the public company for, the IPO was done in March of 2006 so we’ve considered the full year cycle now, but we’ll continue, I talked about it before with respect to volatility in G&A. I mean there are some items that profession fees and whatnot that occur in a quarter but on a year to date basis I think you’ll note that we had about a 5.2% growth in our year to date G&A and I think that was very respectable growth rate given the top line growth that we had so again we’re disciplined in our G&A spend but continue to experience costs associated with growing business.

Winston Lee – Credit Suisse

Just lastly if I may, your operating expenses when I take out your D&A was up maybe 2.6% year over year and I’m just wondering what’s keeping that down? I mean it’s good, I like it. I’m just wondering how is it below...

Cynthia Devine

I think sometimes you have to focus on the full year numbers because again you’re going to have certain timing items and in particular in that line item there were certain expenses that were occurred in the fourth quarter of 2006 actually lapping over now but I think it’s more appropriate to look at that on a year to date basis and you’ll get a better, a sense of the run rate for operating expenses. Our business, you do have things that hit in a particular quarter and are expensed in that particular quarter but on a full year basis are pretty reasonably in line with our overall growth.

Operator

We‘ll return the presentation back to you once again to continue or for your concluding remarks.

Scott Bonikowsky

Just a quick note to thank everybody for joining us today for our fourth quarter conference call. Appreciate your attendance. If you have any additional questions or topics that you want to address please feel free to contact me, you can reach me at 905-339-6186. Or alternatively by email at bonikowsky_scott@timhortons.com. Thanks everyone.

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