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CFO’s Message

We grew our business and our bottom line in 2012 despite difficult economic conditions and the resulting intensified competitive environment. Our strong cash flow enables us to continue to reinvest in the Company and return value to our shareholders through increased dividends and share repurchase programs.

We delivered same-store sales growth of 2.8% in Canada and 4.6% in the U.S., marking more than 20 years of positive results in this measure. While the Canadian growth rate was below our target range of 3% to 5%, we are pleased with the guest response to menu innovations that helped us increase average cheque. Same-store sales growth and system development led to a 6.9% increase in systemwide sales.

We grew our revenues by 9.4% to $3.1 billion. Our top line continues to benefit from a unique business model that includes revenue streams from distribution sales, rent and royalties, and franchise fees.

We delivered operating income of $594.5 million and diluted earnings per share (EPS) of $2.59. Despite growing by nearly 10%, EPS fell short of our targeted range of $2.65 to $2.75. Our EPS guidance did not contemplate the $0.10 per share reduction related to Corporate reorganization expenses. We believe our new structure will streamline decision-making and create more scalability for future growth.

It was another solid year for restaurant development. We opened 159 locations in Canada and 85 full-serve restaurants in the U.S., both totals being within our respective targeted ranges. Investment in our restaurant system, through both restaurant development and renovations, remained a top priority for us. We also added 19 restaurants in the Gulf Cooperation Council in the first full year of our agreement with Apparel FZCO, our master licensee in that market.

Our consistently strong cash flow helped fund our significant growth initiatives. Our operations generated $559 million of cash in 2012, and we reinvested $187 million for capital expenditures. Importantly, we also returned a total of $356 million to our shareholders in the form of dividends and share repurchases.

Early in 2013, the Board of Directors approved an increase in our dividend payout range to 35% to 40% of prior year, normalized net income attributable to Tim Hortons, up from 30% to 35% previously, and at the same time we increased our quarterly dividend by 23.8% to $0.26 per share. This was our sixth consecutive year of dividend increases. The Board also renewed and approved an increase in the size of our share repurchase program by $50 million to a maximum of $250 million.

The fundamentals of our business remain solid. Our balance sheet is strong, and our unique business model delivers multiple, high-quality income streams. We believe our prudent and disciplined approach to financial management will enable us to continue to fund our growth and create value for our shareholders.

Cynthia J. Devine
Chief Financial Officer