Tim Hortons, eh THI

1
Tim Hortons, eh?(THI)

• A growth play from our northern neighbors
• April 17, 2006
• Josh Putterman and Steve Novakovic

2
What is Tim Horton?

• NHL All-Star defenseman from the 60s
• Canadas largest quick-service restaurant chain
  accounting for 22.6 of the segment
• Standard restaurant size 1,400 to 3,090sqft.
• Drive-Thru Windows
• 96.7 operated by franchisees
• 14 consecutive annual increases in SSS in CAN
• Average US SSS increased for 15 years

3
Hortons Facts

• 73 of restaurants operate 24hrs/day
• No two-hour period accounts for more than 20 of
  average daily sales
• Coffee must be served within 20 min. of brewing.
  Always Fresh
• 46 of CAN customers visit restaurant 4 times
  per week

4
Timmys Menu

• Fresh Coffee and Specialty Tea
• Donuts/ Timbits
• Other Baked Goods
• Lunch
• Soups and Chili
• Sandwiches
• Merchandise

Percentage of sales
5
Competitive Strengths(from THI Prospectus)

• Iconic brand status in Canada
• Leading market position in Canada
• Integrated and flexible business model
• Beneficial relationship with Wendys

6
Growth Key Elements(From THI Prospectus)

• Drive sales growth at existing restaurants
  through continued innovation.
• Sustain the health and viability of our
  franchisee base.
• Increase penetration of the Canadian market.
• Pursue long-term profitable expansion in the
  United States.

7
Current Locations
8
US Competition

• McDonalds
• Starbucks
• Dunkin Donuts
• Krispy Kreme
• Panera Bread
• Cosi

9
Tim in the US

• US Operations currently 9 of total revenue
• Buffalo, NY most successful to date
• Still opportunity to further penetrate current
  markets
• Goal to have 500 restaurants in US by 2008
  (Currently under 300)

10
How Successful are they?(from THI Prospectus)
11
Valuation Comparison(Yahoo! Finance)
12
Income Statement(from THI Prospectus)
13
Operating Income

• Fiscal Year 2005 Operating Income decreased by
  29 M from 2004
• Due primarily to goodwill and asset impairment
  charges totaling 53 Mil.
• Excluding those charges, FY05 Operating Income
  was 343 M, representing a 7.5 increase over
  FY04 OI

14
Interest Expense(from THI Prospectus)

• Tim Hortons borrowed 500 million from their
  credit facilities
• Tim Hortons had 900 million loan from Wendys
  and has paid off 427 million
• Their interest rates are between 4.6 and 5.1
• They are financing growth with cheap money

15
The Stock

• Estimate net proceeds from IPO 700M
• Money to be used to pay back debt to Wendys and
  general corporate purposes
• Institutional ownership
• Wendys distribution allows for greater liquidity
  for institutional purchases

16
Balance Sheet(from THI Prospectus)
17
Relationship with WEN

• Wendys will continue to own 83 of THI
• Wendys intends to spin-off this stake to its
  shareholders by 2006
• Will not dilute per-share numbers simply
  transfer of existing shares
• Wendys provides insurance and IT services
  through 2008

18
Risks

• Short-term volatility risks around Wendys
  distribution of their shares
• Wendys can choose not to distribute their shares
  (very unlikely)
• Aggressive growth strategy in US may not be
  successful
• Many current stores near Canadian border
• US Growth strategy to expand in current and
  nearby markets

19
Summary

• Solid company with significant growth opportunity
  in the US, and Canada!
• Consistently strong Same-store sales growth in
  the US, and Canada!
• Unique niche quick-servicea mix between Dunkin
  Donuts, Starbucks, and Subway
• CAD is appreciating relative to USD

20
Recommendation

• Buy 2,000 worth of THI at market
• Re-evaluate January, 2007 or if stock reaches 33
• Our holding of THI is contingent on successful US
  growth strategy execution, therefore we must
  monitor outcome consistently
• If execution does not meet expectations, may be
  time to sell
• Technical resistance at 33