Tim Hortons’ (THI) CEO Marc Caira on Q2 2014 Results – Earnings Call Transcript

Source: Seeking Alpha

Tim Hortons (NYSE:THI)

Q2 2014 Earnings Call

August 06, 2014 2:30 pm ET


Scott Bonikowsky – Senior Vice President of Corporate, Public & Government Affairs

Marc Caira – Executive Chairman, Chief Executive Officer, President and Director

Cynthia Jane Devine – Chief Financial Officer and Principal Accounting Officer


Andrew Michael Charles – BofA Merrill Lynch, Research Division

Irene Nattel – RBC Capital Markets, LLC, Research Division

Perry Eugene Caicco – CIBC World Markets Inc., Research Division

David Hartley – Crédit Suisse AG, Research Division

James Durran – Barclays Capital, Research Division

Michael Van Aelst – TD Securities Equity Research

John S. Glass – Morgan Stanley, Research Division

Peter Sklar – BMO Capital Markets Canada

David Carlson – KeyBanc Capital Markets Inc., Research Division

Derek Dley – Canaccord Genuity, Research Division

Keith Howlett – Desjardins Securities Inc., Research Division

Stephen Anderson – Miller Tabak + Co., LLC, Research Division


Ladies and gentlemen, thank you for standing by and welcome to the Tim Hortons’ Second Quarter 2014 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, Senior Vice President of Corporate Affairs and Investor Relations at Tim Hortons. Please go ahead.

Scott Bonikowsky – Senior Vice President of Corporate, Public & Government Affairs

Thanks, operator, and welcome everyone to the Tim Hortons’ second quarter 2014 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 a period of about 1 year.

Marc Caira, our President and Chief Executive Officer; along with Cynthia Devine, our Chief Financial Officer, will be joining the call this afternoon. We will be pleased to take questions after our prepared remarks [Operator Instructions].

Please note that we may provide forward-looking information this afternoon including: discussions about planned initiatives; our strategic plan; future performance; results and outlook based on our current expectations; assumptions and information, including information about our restaurant development plans, same-store sales expectations, earnings performance, 2014 outlook and targets and operational initiatives.

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Forward-looking statements are based on a number of assumptions that contain risks and uncertainties, and our actual results and activities could differ materially from these statements. Please refer to the Safe Harbor statement on our website and on Slide 3 of today’s supporting presentation and refer to the risks and assumptions on our public disclosures.

All Tim Hortons’ results are presented in accordance with U.S. GAAP, and I’ll remind you we report in Canadian dollars unless otherwise noted.

I will now turn it over to Marc Caira. Marc?

Marc Caira – Executive Chairman, Chief Executive Officer, President and Director

Thank you, Scott, and good afternoon, everyone. I am pleased to report very positive progress in several key areas of our business in the second quarter. We are seeing momentum in both major markets supported by the early stage execution of our strategic roadmap. I have been particularly pleased with our success in growing average check, delivering menu innovation and implementing new technology.

Our same-store sales growth in the second quarter was 2.6% in Canada and 5.9% in the U.S. These growth rates are significantly better than we have seen in recent quarters. In fact, in both markets, this was the best growth we have reported since 2012.

Strong sales performance contributed to a solid growth and profitability. Operating income was up 8.9% and earnings per share increased 13.6%. Our share repurchase program also contributed to our strong EPS growth.

It is encouraging to see momentum in our business in an environment that remains very competitive. We outlined a new strategic plan in February of this year. We knew we needed to work hard to establish additional traction in the business, especially in this new era of low growth, competitive intensity, evolving consumer demands and changing technology. Achieving the goals we set out in the strategic plan will be a long-term process. We are less than 6 months into our 5-year plan, so naturally there’s still much work to be done. However, as we clearly focus on the long term; it is imperative that we also deliver short-term results to help us to lay the foundation for long-term sustainable profitable growth. I believe we are seeing some positive early progress on the initiatives we are focused on to this point.

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The centerpiece of our strategic roadmap is menu innovation. We have identified some key trends we are seeing in the market, including changing demographics, increased emphasis on nutrition, health and wellness and a desire for bold flavors along with fresh quality ingredients. Many of our products already resonate well with our guests on these criteria, which will continue to be a focus for us in our new product development. Menu innovation is also an important part of our strategy to grow average check. We plan to introduce more value-added premium products, as well as appealing side dishes that will encourage our guests to purchase combos. At the same time, any decisions on menu items must take into account the ability of our restaurant teams to execute flawlessly, though simplicity remains important. There is a long list of criteria we need to satisfy, and our R&D team has been doing a great job of developing our innovation pipeline.

Our new Frozen Hot Chocolate beverage was a driver of same-store sales growth in the U.S. this quarter, and a great addition to our cold beverage line up. In Canada, we continued to benefit from products launched in the previous quarter: the Crispy Chicken Sandwich, which is a premium item for us; the Turkey Sausage Hot Breakfast Sandwich; and our improved Hash Browns.

Hash Browns, along with our brand-new Kettle chips, are side dishes we are promoting as part of our combo options. We want our guests, who currently purchase 1 item from us, to buy 2 and those who buy 2 items to buy 3. In order to accomplish this goal, we first need the right menu items, and we have other great products in the pipeline besides the ones I’ve mentioned.

Effective promotion and communication of our combos is also a key enabler, and we are doing this through our menu boards and other activities. With all of these initiatives now in place, we have begun to see an increase in our combo penetration rates, particularly at breakfast.

Other innovations in the second quarter included Frozen Green Tea, made with real green tea; our new Greek Yogurt Parfaits; and our smoothies, now being made with standard Greek yogurt. These items also deliver enhanced product benefits that our guests are looking for.

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We also introduced the OREO Iced Capp Supreme Pineapple Mango Smoothies, Ultimate Cinnamon Buns, and a line of strawberry baked goods.

Menu innovation was a key element of our strong sales results in the quarter, and they will continue to be a major focus for us. We know we still have significant opportunities ahead of us. For example in the U.S., we continue to grow the breakfast daypart, which is great. It’s what we are known for in that market. And now we are focusing on extending that momentum into other dayparts, such as lunch. This is a key priority for our U.S. team as identified in our strategic plan, where one of the key strategic priorities is to grow our AUVs by extending our success beyond breakfast.

There are a number of other important developments that I would like to highlight. We’ve recently begun our first large-scale pilot of Dark Roast coffee in our restaurants across the province of Québec. Innovation is an important part of our overall coffee leadership strategy. We believe a new blend, like Dark Roast, is a good start in expanding our appeal to the full spectrum of coffee drinkers.

Also, on the topic of coffee leadership, as previously announced, we have begun selling our Single Serve coffee platforms through the retail grocery channel. Our products will soon be available at most of the major grocery sellers in Canada. With the grocery segment representing approximately 40% of the Single Serve market, it is important for us to be in that channel.

On the technology side, our key accomplishment in the second quarter was the launch of new mobile payment capabilities. We now have barcode scanners in our restaurants across North America allowing our guests to pay by scanning their smartphones. We are one of the first in our industry to support payment on all 4 of the major mobile platforms: Android, iOS, Windows and BlackBerry. Our mobile payment platform is designed to improve speed of service and enhance guest experience.

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