Tim Hortons Executive Insights: Canadian Business, VIEs Increase

On Wednesday, Tim Hortons, Inc. (NYSE:THI) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Canadian Business

James Durran – Barclays Capital: Just wanted to look at the Canadian business, as you pointed out most of the comp store sales growth was driven by price and mix, can you give us an idea what your read is on the traffic and transaction count base since that seems to weaken materially versus the fourth quarter?

Paul D. House – Executive Chairman, Interim CEO and President: As we reported our transactions were down slightly, but I think I need to explain that a little. We are certainly seeing transactions in some areas where the economy is impacting a regional area that transactions are impacted by the consumer, quite frankly we don’t think they have stopped coming to us, but we think that in some cases they are just not coming as often as they would like to come because of the financial situation and of course, gasoline is another big contributor that is competing for share of wallet. All in all, on the contrary to that is the average quest check continues to rise with real growth and that’s come from a lot of our product innovation and so forth, and we think with some of our other initiatives coming later in the year we will see that trend continue.

Cynthia J. Devine – CFO: Jim, just to add to that, we continue to see overall transaction growth in our total system, which again is very positive in light of, as Paul mentioned, what’s going on with the consumer in some of the heavy manufacturing jobs. So, we were very pleased, and as the consumers come in, they are purchasing more from us, which is also a great thing given the value that we represent.

James Durran – Barclays Capital: I guess Q3, if I recall Paul talking about sort of felt 2008, then we got to Q4 and there was a renewal of transaction growth in that quarter and then we are now seeing a slowdown again. What is that they have – do you feel why it is so lumpy?

Paul D. House – Executive Chairman, Interim CEO and President: I think the factors that we just explained earlier. Certainly, fluctuation in gasoline prices, the economy and in the first quarter traditionally in a lot of areas seasonality of work and so forth, you see layoffs and so forth. So, there is lot of things that impact that quarter as far as consumer is concerned, especially in these trying economic times where the consumer is under such cost pressures in every venue.

VIEs Increase

Irene Nattel – RBC Capital Markets: Just sticking with the whole discussion around traffic in Canada, based on the data that you have seen, do you believe that you are or is it supportive of you maintaining your share or is it your sense that maybe you’re losing a little bit of share?

Paul D. House – Executive Chairman, Interim CEO and President: No, we’re certainly not losing any share. The data shows the reverse. As Cynthia just said earlier, our overall transactions are growing, our sales performance of 5.2% and same-store sales growth in Canada compared to our peers, I feel that we are not losing any traction at all. In fact, I feel we’re gaining traction.

Irene Nattel – RBC Capital Markets: If I might just ask another question around the whole increase in the number of VIEs, how long do you think that this phenomenon will continue? Like, is this something that we should be reflecting in our expectations on a go forward basis?

Paul D. House – Executive Chairman, Interim CEO and President: I guess I refer to them as 80-20, Irene, which is that 20% of the sales are contributed by the owner operator to the Company, then that covers the royalty advertising, rental on the equipment and the rent on the building. It’s a vehicle that quite frankly, Ron Joyce started way back then, and it’s a great way to grow our markets, especially with good operators that are traditionally undercapitalized. As we develop the U.S. and expand into new markets, we certainly plan to use the 80-20 vehicle as a vehicle to bring good people into the organization to help us grow in new markets. I mean new markets need good young people who have lots of vigor and quite often they don’t have the necessary capital purchase the store, but a great desire to own their own business and so forth. I think it’s been really the backbone of our success. We still have a couple of 100, 80-20 stores in Canada and we continue to bring new operators into the business in Canada with the 80-20 vehicle in spite of high volumes and so forth because it’s a good way to bring new blood into the business that have got great energy, but are just a little undercapitalized. So, it will certainly continue to be – I think you will see the number in the U.S. continue to rise as we go forward, so probably till we get two or three or four more years out in our growth.

Cynthia J. Devine – CFO: The goal is that we ultimately resell it back to the restaurant owner and make them a full franchisee at that point, and you’ll see our Canadian history is like that. The amount of Canadian restaurants that we have under these operator agreement kind of ebbs and flows and we added a number this quarter, but you will see that number as we get out through the year, there will be a number of those that are sold back to restaurant owners. So, you will see movements in these numbers as we’ve had before, but there is no doubt this was a larger increase than we’ve had previously as some of the stepped up developments that we done in the U.S. and in our developing markets.

Irene Nattel – RBC Capital Markets: If I just might add another question on this subject, typically what is the range of time in which someone might operate under the 80-20 before they actually become a full franchisee?

Paul D. House – Executive Chairman, Interim CEO and President: Traditionally five years Irene. We generally – when we commit and 80-20 to someone, it’s kind of a two-way street. (indiscernible) we may have to be taking a little lower income in the early parts of it and then we’ll get a higher income as we get out in time, so five years is a reasonable time that it averages itself out that we get a reasonable return. So, it’s kind of business model we’ve used for years.