UPDATE 3-Tim Hortons acts on investor pressures, CEO calls for new strategy

Thu Aug 8, 2013 5:38pm EDT

* Announces C$900 mln recapitalization and share buyback plan

* Commits to U.S. market, focused on working with well-funded franchisees

* Cuts growth forecast even though quarterly profit tops estimates

* Appoints Encana CFO and BMO Capital Markets CEO to board of directors

By Solarina Ho and Bhaswati Mukhopadhyay

Aug 8 (Reuters) - Tim Hortons Inc, the Canadian coffee and doughnut chain under shareholder pressure to boost returns, said on Thursday it was expanding its buyback plan by C$900 million ($863.4 million) and its new CEO called the challenging environment the "new reality."

The company, led since July 2 by long-time Nestle SA executive Marc Caira, also announced plans for its business in the United States that are in line with demands of activist investors who want the company to cut back on the investment of its own cash in the United States and turn to well-capitalized franchisees.

Hedge funds Scout Capital Management and Highfields Capital, owners of almost 10 percent of Tim Hortons stock, have urged Tim Hortons to increase debt levels to fund a share buyback, as well as address concerns about the U.S. expansion, and to name directors to the board who have more financial expertise.

"Clearly, we are operating in a very challenging, competitive and volatile environment," Caira told analysts during a conference call. "We need to accept this new reality and effectively compete in it."

He said sales in newer U.S. markets were not generating strong returns, pointing to the need for changes to the financial model and performance there.

FINANCIAL EXPERTISE ON BOARD

The company also named two new directors: Sherri Brillon, chief financial officer at Encana Corporation, and Thomas Milroy, chief executive of BMO Capital Markets.

Shares of Tim's, which says it sells eight of every 10 cups of coffee sold in Canada, have risen about 10 percent since the hedge funds went public with their concerns three months ago. Shares rose 0.7 percent to close at C$59.90 on Thursday.

The company said it was targeting a total of C$1 billion in share buybacks over the next 12 months, funded by bank debt and/or newly issued bonds. This includes C$100 million under its existing share buyback plan.

Executives said the company has repurchased about C$1.7 billion in shares since its 2006 initial public offering, and raised its dividend by an average of nearly 21 percent a year.

'NO SACRED COWS'

Tim Hortons reported a 14 percent rise in second-quarter profit but said it expects same-store sales growth for the year to come in below earlier targeted ranges of 2 to 4 percent in Canada, and 3 to 5 percent in the United States.

Some possible changes included a "tough look" at operations and at what products it might consider discontinuing. "There's no sacred cows here," said Caira.

Tim Hortons' competitors range from McDonald's Corp to Starbucks Corp.

Net income in the quarter rose to C$123.7 million, or 81 Canadian cents per share, compared with C$108.1 million or 69 Canadian cents per share a year earlier.

Analysts had expected earnings of 75 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Total revenue rose 2 percent to C$800.1 million ($767.5 million).

Same-store sales grew 1.5 percent in Canada and 1.4 percent in the United States. That is down from 1.8 percent growth in Canada and 4.9 percent growth in the United States a year ago, but up from 0.3 percent and 0.5 percent declines in the first quarter.

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