Q1 2020 Earnings Call
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Good morning, welcome to the restaurant brands International first quarter 2020 earnings Conference call.
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After todays presentation there'll be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Chris Rigless RV I was head of Investor Relations. Please go ahead. Thank you operator, good morning, everyone and welcome to restaurant brands International its earnings call for the first quarter ended March 30, Onest 2020.
As a reminder, a live broadcast of this call may be accessed through the Investor Relations Web page at Investor Day, <unk> Dot com.
And a recording will be available for replay.
Joining me on a call today, our restaurant brands International CEO Jose sell COO, Josh Kobza, and CFO, Matt done again.
Today's earnings call contains forward looking statements, which are subject to various risks set forth in the press release issued this morning and interest SEC filings.
In addition, this earnings call include non-GAAP financial measures.
Reconciliations of non-GAAP financial measures are included in the press release available on our website.
Let's quickly review the agenda for today's call.
Jose will start with some opening remarks on our company's response to the ongoing cobot 19 pandemic.
He will then discuss our results for the first quarter and provide detail around our performance at Tim Hortons Burger King and top buys.
Josh will then provide an update on technology at our <unk> and to conclude Matt will review our financial results before opening the call up for QNX.
I'd now like to turn the call over to Jose.
Thanks, Chris and good morning, everyone. Thank you for joining us on todays call I Hope you and your family's you're doing well and staying safe.
I'd like to start todays call by thanking the hundreds of thousands of people that have been working behind the scenes and on the frontline to ensure that we're continuing to serve our guests and communities in every way that we can during this time of need.
Our business partners are franchisees or team members, our employees or suppliers, everyone has been working together around the clock and has been doing an extraordinary job.
We're fortunate to have an exceptionally strong platform and network.
Our talented and dedicated teams the great business model, we've developed around or three iconic global brands and our strong in diverse network of partners around the world have underpinned our strength over the past decade and continue to act as an incredibly strong foundation in the midst of this crisis.
As we move forward, we will continue to serve or millions of guests and to support our restaurant owners.
Our drive throughs, which it for decades, but an important source of differentiation have allowed us to act as a secure and highly convenient means for our guests to get food.
Once we are safely on the other side of this crisis, we're confident we will pick up right back where we left off growing our brands in our home markets and internationally.
With over 27000 restaurants across over 100 countries and territories and three amazing iconic brands. We came into this crisis in a position of strength and we're confident we have the tools to emerge even stronger and better.
I'll start my comments today by highlighting the most important things we've done to manage through the cobot 19 pandemic before moving through our results for the quarter.
The health and safety of our guests and team members has been a critical priority from the start of the crisis.
In early March we were among the first restaurant companies in North America to close our dining room seating areas before local governments asked us to.
We moved quickly to install measures to ensure a social distancing in the front and back a house.
As a crisis unfolded, we thoroughly reviewed our restaurant health and safety protocols and expanded our clean procedures in consultation with health experts and medical professionals.
We mandated masks gloves and contactless procedures in our locations across brands.
And using our experience in Asia as a valuable guide.
We were among the first in North America to introduce temperature checks for our team members.
Early on we committed ourselves to supporting team members in our corporate restaurants in their ongoing need to adjust their day to day routines.
We also announced we will be paying all restaurant team members at our corporate restaurants $3 extra per hour for the month of April to thank them for their above and beyond service.
I personally watched our team members work the frontline's everyday of its crisis with great admiration. So much. So the two weeks ago I asked our board of directors to redirect half of my salary over the next six months to funds are charitable foundations of set up for cobot 19 relief, including supporting restaurant team members that are most in need.
Our co chairman of the board have joined me and our foregoing half of their board compensation for 2020.
Beginning in March we quickly pivoted, our marketing and advertising, replacing spots that emphasized price points and promotions with messaging around the benefits of our off premise business model as well as messaging around purpose.
We're now emphasizing features of our service model that we havent highlighted for quite some time in particular, the availability and utility of our drive throughs.
In this environment drive through window is a great option for so many people who want to limit physical contact.
And for guests that can access or drive throughs, we're rolling out new curbside pickup options on our mobile apps in North America.
We've also adjusted our recent marketing to highlight the benefits of home delivery and how accessible our products or.
Both through our own App and through third party delivery partners.
Since the onset of covered 19, we've seen a rapid rollout of home delivery across thousands of restaurants.
At Tim Hortons for example, we've gone from about 250 restaurants participating to more than 1000 in less than two months.
Offering coverage for nearly all of Canada, and we're still increasing the number of restaurants on delivery given the rising demand we're seeing in this channel.
Throughout all of these efforts we've stayed very close to a restaurant owners, we've established weekly and even daily communications with our advisory boards of restaurant owners and I've been working constructively together on all of the decisions and changes we've made it to implement.
In that context, we set out to design support programs that will move the needle for a restaurant owners and we believe the ability of our owners.
Have shown to swiftly adapt their businesses and leverage the different support programs now in place has left our networks and an overall healthy and stable position.
We mobilized quickly to provide support early in the crisis, we announced we were moving to a 100% variable rent at about 3700 locations, where we have property control. So that these expenses could flex down with the sales impact of those restaurants.
We also announced in March that we're deferring april's rent for up to 45 days to give restaurant owners more flexibility in managing their cash flow.
In addition, we looked ahead and identified a number of significant cash payments that would be due to owners and pull those forward representing more than 70 million of advanced liquidity.
For our Burger King restaurant owners in the U.S., our cash advance on rebates made immediately available up to 15000 per restaurant.
On top of these cash advanced programs, we also temporarily suspended capital investment commitments for owners, including for renovations and you development across our brands.
Across our international regions. We've similarly engaged with our restaurant owners to identify sources of immediate liquidity, including by working with suppliers to secure extensions the payment terms and by working with lenders to access new lines of credit.
We've also put mandatory capital commitments on hold and had been proactive in working with local government officials first in China, and now elsewhere in Asia, and Europe to reopen stores as soon as possible.
And despite the many challenges we face the strength of our business model continues to shine through.
Across all three of our brands. We began this first quarter performing in line with the trends. We noted for Q4 and maintained steady performance through January February and the first 12 days of March.
In mid March we saw sharp decline in comparable sales across brands and regions coinciding with the global proliferation of Cobot 19.
While many of the challenges remained in April and continue as we head into May there's optimism and renewed confidence amongst our brand teams and restaurant owners and we've seen a strong improvement in comparable sales over the course of the month of April low double digit improvements for each brand in our home markets from the lowest levels. We saw in late March.
We'll provide more detail run this dynamic at each of our brands in just a few minutes.
Given the ongoing limitations to in restaurant dining in most markets a rapid shift emphasizing off premise has been a key driver of this improvement.
In our home markets. The majority of our sales were for off premise consumption, even before the crisis and the important adjustments, we made to our marketing and operations have helped reestablish momentum in our drive throughs.
Technology has emerged as a critical differentiator in enabling delivery, which has also contributed substantially to the improvement in sales.
We've seen this internationally as well as in markets like Spain in China were off premise consumption is a very important part of the business.
We've been focused on understanding shifts and consumption patterns to guide adjustments like those I just mentioned.
As covenant team has spread most of our guests have put their ordinary routines on pause and consumption has shifted accordingly.
Whether its people on their way to work parents, taking their kids to school or students on their way to class.
We've seen normal traffic routines completely suspended while most people are staying at home.
Dayparts like breakfast and snacking that fit into these routines have seen a disproportionate decrease while lunch and dinner have shown more strength.
Also whereas you would typically sees sales pick up on Thursday, and continue at a higher clip through the weekend, we now see stronger performance on weekdays.
And while traffic has decreased we've generally seen an increase in average check sizes due to more frequent group ordering both in the drive thru and on delivery.
As we sit here today more than 95% of our U.S. restaurants are open.
In Canada around 85% of our Tim Hortons restaurants remain open with most of the temporary closures in places like universities are malls that are currently closed.
In APAC more than 80% of a restaurants are open which reflects the strong recovery in China. After a majority of the restaurants were closed during the peak of the crisis there in February.
And in EMEA, and lack around 40% and 50% of our restaurants are open respectively.
The proportion of temporary closures in EMEA and lack is particularly pronounced given the higher number of countries that have mandated total locked them.
But in both cases most of our networks are managed by large well capitalized partners that are well positioned to push through the crisis.
Many of them are already working on preparations to reopen as governments have started to communicate potential paths over the coming weeks.
So on a global basis, approximately three quarters of our restaurants are open today.
Although again, most still have limited service modes.
We know that the full reopening of all of our restaurants and service modes will take some time, yet, but we're encouraged by early signs of improvement in sales trends across many of our major markets.
With all the decisions, we've taken and with the strong working relationship we have with a restaurant owners. We believe we're well positioned to come out of this crisis, even stronger as a system.
Our supply chain operations and those of our restaurant owners have continued operating with limited disruptions and we put in place measures to minimize risk across our systems.
I'd now like to go through a few highlights for each of our brands after which I'll ask Josh to share an update on our digital progress and then Matt to take you through the financial details of the quarter.
At Tim Hortons in Q1, our system wide sales decreased negative 10% to nearly $1.4 billion driven by decreasing global comparable sales of negative, 10.3%, which was partially offset by net restaurant growth of 1.2%.
In Canada comparable sales declined.
10.8% for the quarter and were significantly impacted by the spread of covered 19 in March.
During the pre crisis period in January and February or comp sales performance continued on the trajectory. We noted during our February earnings call and was about one point better than what we saw during the fourth quarter of last year in the weeks following the onset of the crisis across Canada in March However, average daily comparable sales growth decreased the negative mid fortys as.
I mentioned earlier breakfast snacking and other routine based dayparts have been disproportionately impacted across all of our businesses and this dynamic is clearly illustrated in our results at tims and those of our coffee oriented competitors in North America.
However over the course of April we've been encouraged by early signs of momentum returning to our core coffee and breakfast platforms as well as our drive throughs.
Also our rapid expansion of delivery to more than a thousand stores has allowed us to drive strong and consistent sales growth in the channel.
And the launch of Curbside order in pickup has had a positive impact as well.
On the back of these initiatives, we spurred a positive trend in daily comparable sales growth that at the end of April had us in the negative high Thirtys a more than 10 point improvement from the lowest level. We saw in late March.
In Q1, we also had the pivot our annual roll up the rim promotion and pull 81 million paper roll up cups from the market as the early effects of Cobot 19 were emerging.
This resulted in an unplanned shift to an all digital role of promotion.
All of our teams from digital to marketing to operations and our restaurant owners reacted incredibly quickly to make the necessary adjustments in a matter of days, it's hard to quantify the final impact of the program on sales given it coincided exactly with Lockdowns beginning in Canada, but we saw a clear benefit from all digital promotion, which greatly.
Attributed to the 1.5 million, new App downloads and a significant increase in loyalty registration we saw during the quarter.
In terms of restaurant owner profitability. The decrease in sales we've seen in recent weeks has led to an expected near term decrease in profitability, but we're confident that a combination of the programs. We've made available and those launched by the Canadian government will provide the resources our owners need to weather the crisis.
You'll recall that our baseline unit economics, and Canada are among the strongest in global QSR, which provides a degree of insulation even in the face of the sales decline seen to date and means that on average our restaurants continue to be cash flow positive.
As I mentioned earlier, one of the measures we implemented to help our restaurant owners was to suspend current capital investments.
Pre covert 19, we installed fresh brewers and water filtration in thousands of restaurants and still have about 900 restaurants that will undertake these installations once we emerge from the current crisis.
Similarly.
We've slowed down the implementation of our outdoor digital menu boards.
The importance of these projects has not changed we're focusing our full attention on working with our franchisees to plan for a full reopening of the restaurants and adaptive business to meet all the demands of a post cobot 19 world.
Turning to Burger King in Q1, our system wide sales decreased 3% to nearly $5 billion driven by a decrease in global comp sales of 3.7%.
Which was partially offset by net restaurant growth of nearly 6%.
In the U.S., our comparable sales growth at Burger King for the quarter was negative 6.5%.
During the pre crisis period in January February and the first two weeks of March we posted positive comparable sales growth in the us in the low single digits driven by continued strong contribution from the impossible Whopper and improved performance in the value layer of our menu.
With the onset of covered 19 across the us in mid March our daily comparable sales growth decreased for the last two weeks of the quarter to negative low thirtys.
The largest individual driver. This decline was the closure of our in store dining areas.
Despite this headwind we quickly refocused our attention on a drive throughs and delivery as primary sales channels.
At the onset of the crisis, our dine in business dropped essentially the zero and even our drive to the business went negative year over year as customer traffic dropped due to the stay at home orders in force throughout the country.
Since then our intense focus and modified approach to drive that who has allowed us to improve sales in the channel each week and our drive through sales for Burger King US are now up over 15% year over year and have been positive since the second week of April.
And on delivery in the final weeks the quarter, we accelerated the rollout to several hundred restaurants. So that we now have over 5000 restaurants offering the service most via multiple delivery partners as well as the Burger King mobile App.
We've continued to see tremendous growth in average delivery sales per restaurant through April including on our own App and are confident the market penetration we've been building in our delivery channels will position us well as we emerge from this crisis.
On top of our other marketing initiatives, our momentum and drive through in delivery sales is underpinned a sequential improvement in our total comparable sales from the negative low thirtys in late March to the negative teams in the last few weeks of April.
In terms of restaurant profitability not surprisingly the decrease in comparable sales. We've seen since March has negatively impacted store level profitability in the U.S. However, we've been working with our restaurant owners to adapt their businesses to the current environment and access support programs. Both we and the government have made available to drive restaurant level cash.
Yes.
Given current conditions and available support programs, we believe our restaurant owners in the us are well positioned to whether this crisis as I mentioned before remain over 95% open.
In our international markets system wide sales decreased just over 1% driven by a decrease in comparable sales of 1%, which was partially offset by net restaurant growth of 9.5%. The decrease in system wide sales was in part driven by a sharp decline in system wide sales in China. During the initial spread of covered 19 in January and February at.
Peak at a crisis in China, a majority of our restaurants were temporarily closed and comparable sales for restaurants still operating were down 60%.
Over the course of five weeks between February and March restaurants steadily reopened so that today less than 10% of restaurants in China remain closed.
At the same time daily comparable sales have recovered to approximately negative 15% and maintained positive trend.
The lower international system wide sales in Q1 also reflected the early impact of covered 19 across the rest of APAC.
Latin America and EMEA.
We are several markets instituted lockdowns in late March.
As I noted earlier many markets have remained close throughout the month of April and will continue into may and perhaps beyond although governments are starting to release details around their expected timelines for reopening for example, Italy as communicated a timeline to reopen restaurants over the coming month, well in Spain. Many of our restaurants are now able to fulfill delivery orders.
And finally at Popeye's, our global system wide sales increased over 32% to $1.3 billion driven by over 26% growth in global comparable sales and unit growth of nearly 7%.
Operable sales growth was particularly strong in the U.S. rising nearly 30% for the quarter.
Performance and popeye's varied substantially before and after the onset of cobot 19 in the us but saw the least impact relative to our other brands.
In January February in the first two weeks of March comparable sales grew in the Thirtys.
Driven primarily by sustained volumes of the chicken sandwich, but also reflecting growth across other parts of the menu, including bone in the less and seafood.
Following the onset of covered 19 in the us in mid March comparable sales declined to flat levels year over year for the last two weeks of the quarter in April like to Tim's and Burger King teams. The Popeye's team has moved quickly to emphasize our off premise business and comparable sales has substantially improved and a returning to the levels. We were seeing through the second week of March.
Before the onset of the crisis.
By success last year was unlike anything any of us have seen in our careers, but its resilience in the face of covered 19 with dining rooms close across the country has been equally remarkable.
We've made many important adjustments at popeye's since the global spread of Copel 19, rolling out contactless procedures, and the drive thru and putting additional resources behind delivery and mobile order and pickup.
In these channels, we've seen an increase in average order size and ticket, especially in the dinner daypart through communication of our family meal bundles.
Comparable delivery sales are up in the triple digits year over year, and we continue to see delivery as a huge opportunity to reach new guests and in large the trade area of our stores as a brand builds on the momentum it has sustained from last year.
At Popeye's and across all three of our brands, we've seen the importance of digital sales through apps through curbside pickup at our restaurants and through our delivery partners.
I'd like to turn the call over to Josh has been instrumental leading all of our digital efforts that have prepare to so well to lean into these channels Josh.
Thanks, Jose and good morning, everyone.
In many ways. The cobot crisis has accelerated some of the behavior change that we had already seen building.
Social distancing has forced consumers to quickly change their behavior and adopt solutions with a new threshold for convenience.
For Us this has been a critical moment to leverage the infrastructure. We've been building for years to move quickly to adapt our platforms in response to our guess rapidly evolving needs and we've seen some pretty remarkable progress in just a short period of time, especially in three key areas.
The first is delivery.
From a base of just a couple of hundred restaurants in North America on delivery two years ago, we now have well over 9000 active restaurants across our three brands with most offering delivery via our own digital platforms as well as multiple aggregators and Tim's in Canada. We brought nearly 800 additional restaurants online with delivery in just two months.
And have seen overall delivery sales grew by more than six times versus their precrisis levels.
In the upper hand, popeye's, our delivery sales are up more than three times versus the same time last year as we expand locations and average sales per restaurant.
Much of this is driven by delivery through our own mobile apps, which now represent around 20% of our total delivery sales for Burger King and popeye's.
The second area of focus for US is our mobile app guest experience across all three of our mobile apps in the home markets, where we've made significant strides to incorporate guest feedback and enhance our user experience.
This has led to improvements in our App store ratings industry, leading down load growth during the quarter and is also resulted in very significant improvement in terms of guests, who visit our website or mobile apps and ultimately make a purchase.
In some cases this has improved up to 10 times in the past couple of quarters.
The third aerial mentioned is our efforts around CRM with particular focus on Tim's rewards.
As Jose mentioned earlier, we've been pleased with the transition to the new points based structure.
Which was designed to open up more of the menu to our loyal guests and increase registration.
Today, approximately 45% of guest using Tim's rewards are registered versus about 25% back in February which is inline with our expectations going in.
Progress in each of these areas is critical to achieving our overarching goal, which is to drive the digital sales across each of our brands.
As of the third week of April for our home markets digital sales represented about 9% of total sales at Burger King 15% of total sales at popeye's and more than 30% of total sales at Tim Hortons.
We believe that our future growth prospects will be increasingly tied into our digital capabilities and we will continue to build leading teams and capabilities and technology. So that we can bring our guest digital experiences that contribute towards our dream of building. The most loved restaurant brands in the world.
We're encouraged by the progress we've made this quarter and look forward to sharing more developments with you going forward.
I'll now hand things over to Matt to take us through more detail on the business results.
Thanks, Josh My comments today I will take you through an overview of our results for the first quarter as well some important steps we've taken to further enhance the strength of our balance sheet in light of the uncertainty surrounding cobot 19.
In the first quarter system wide sales performance across each of our brands led to consolidated adjusted EBITDA of $444 million down 9.6% organically year over year, reflecting the impact of covert on our results throughout the quarter.
First in Asia, then later in other regions around the world.
Our performance this quarter also reflected AD fund expenses exceeding revenues by nearly 20 million more than they did in the first quarter of last year.
Resulting in the impact of approximately negative 4% to our consolidated organic adjusted EBITDA growth rate.
We've mentioned in the past that in some quarters, there may be a mismatch and the timing of revenues and expenses, but that in the long run we manage these AD fund so that total revenues equal expenses.
In this quarter the southern decline in sales that resulted from the spread of coven 19 led to an especially pronounced mismatch, which we expect should normalize over time.
As I mentioned earlier, we also suspended base rent for several thousand properties in Canada in the U.S. and realized a onetime expense related to the write off of coffee cups that were intended for use in our roll up there in program.
Taken together these two items reduced our adjusted EBITDA growth rate by about 2%.
Now moving on to segment level performance.
At Tim Hortons, our first quarter, adjusted EBITDA was $189 million, which represents a decrease of about 19% on an organic basis.
This decrease was driven primarily by 9.9% decrease in system wide sales, which included a 10.3% decrease in global comparable sales that was partially offset by global net restaurant growth of 1.2%.
The year over year decrease in adjusted EBITDA also reflected a decrease in supply chain sales, which are primarily driven by restaurant traffic and volumes also approximately half of the AD fund related and negative impact to consolidated adjusted EBITDA was attributable to Tim Hortons, which reduced our Tim Hortons EBITDA growth rate by approximately 4%.
And finally, the base rent adjustment and onetime write off of Cups, I mentioned earlier together reduced our year over year growth rate by about 3%.
At Burger King first quarter, adjusted EBITDA was $200 billion, representing a year over year organic decrease of approximately 7%.
Driven primarily by a 3% decrease in system wide sales growth.
The evolution of our system wide sales reflected a decrease in global comparable sales over 3%, which was partially offset by global net restaurant growth of nearly 6%.
Also about half of the negative AD fund related impact to consolidated adjusted EBITDA was attributable to Burger King.
Which reduced our burger king growth rate by about 4.5%.
Finally at Popeyes. This quarter's adjusted EBITDA was over $54 million, which was up nearly 35% organically year over year.
This increase was driven by strong system wide sales growth of over 32% continuing the brands strong momentum from last year, including net restaurant growth of nearly 7% and global comparable sales of over 26%.
Partially offset by higher segment SDMA.
On a consolidated basis, our first quarter adjusted net income was $226 million.
This compares the first quarter 2019, adjusted net income of $255 million.
The year over year decrease was attributable to the decrease in adjusted EBITDA and unfavorable exchange rate movements.
Partially offset by lower interest expense, resulting from our refinancing activities in Q3 in Q4 of last year.
As well as slightly lower expenses year over year related to stock based compensation and DNA, our adjusted diluted EPS for the first quarter was 48 cents compared to 55 cents in the prior year.
Representing a nominal decrease of 11.8%.
Included in this decrease as a headwind from unfavorable foreign exchange rate movements, which reduced our EPS growth rate by approximately 2%.
Our first quarter 2020, adjusted effective income tax rate of 19.2% was approximately in line with the first quarter of 2019.
And on a full year basis, we continue to expect the rate in the low 20% range.
However, it's important to remember that the timing and amount of stock option exercises can vary materially over time.
We can therefore costs and volatility from quarter to quarter.
Now turning to our cash generation and capital allocation for the quarter.
It's worth highlighting upfront that our liquidity position continues to be very strong and we have reinforced the strength and flexibility of our balance sheet through the actions. We've taken in response to the coven 19 crisis.
Our leverage remains one of the low center peer group, we have no near term maturities and we feel very well positioned from a capital structure perspective.
Despite the impact of Covidien, our business around the world, we generated free cash flow of approximately $116 million in the first quarter.
Calculated as the sum of cash flows from operating activities less payments for property and equipment.
We also paid a total of $232 million in common dividends and partnership exchangeable unit distributions at the beginning of the quarter.
And this morning, we announced that they already I board of directors declared a dividend of 52 cents per common share and partnership exchangeable unit of our VIP payable on June Thirtyth 2020.
In terms of investments, while we continue to make progress on key projects during the first part of the quarter, including our remodel programs at Tim Hortons in Burger King.
Expansion of our Tim Hortons supply chain network in Canada, and the rollout of outdoor digital menu boards at Tim Hortons across Canada, and the US the unprecedented impact of Coven 19 has caused us to press pause or many of these initiatives.
We also suspended all capital expenditure commitments for our restaurant owners to maximize their flexibility as we navigate this crisis together.
We remain confident in the rationale behind each of our investment projects and will resume work. Once we are shared is safe to do so.
In the meantime, we're continuing to move ahead with our project to expand our distribution footprint in Canada.
As of March 30, Onest 2020, our total debt outstanding was $13.4 billion, our net debt calculated as total debt less cash and cash equivalents of $2.5 billion was $10.9 billion.
And our net debt to adjusted EBITDA leverage ratio was 4.8 times and one of the lowest in our peer group.
As I mentioned in March we move quickly and taking several steps to maximize our liquidity is the spread of covet intensified.
Within the first week of Coven Nineteens initial spread in the U.S., we drew down substantially all of our 1 billion dollar revolving line of credit.
Even though we entered the first quarter with a very healthy cash balance of $1.5 billion. We felt it was prudent to maximize our liquidity out of an abundance of caution.
We ended the quarter, we saw an opportunity to raise additional funds and the debt markets, which up to that point had been effectively close for a number of weeks.
On April seven we closed $500 million of new five year first lien senior secured notes.
Given the considerable uncertainty surrounding covert 19, we're pleased to strengthen our balance sheet. Even further on top of the nearly $2.5 billion of cash we held at the end of the first quarter.
As a result of these actions we are confident we have the resources and flexibility needed to manage through this crisis and emerge on the other side even stronger.
Thank you everyone for joining us on the call. This morning and for your continued support with that I'd now like to open the call for questions operator.
Thank you.
I'll begin the question answer session.
You asked a question and we press Star then 100 helpful.
If we look to withdraw your question. Please press Star then true and as a reminder, because limit yourself to one question.
Today's first question comes Sean Dennis Geiger was yes, let's go ahead.
Good morning, guys available as well thanks for the question I would say thanks for all the insights are on the recent trends and the franchisee health just wondering if you could talk a bit more about about unit development given some of the near term choppiness across the industry, maybe kind of the way you're thinking about longer term store development, if that long term outlook that you.
Thank you folks framed it is still applicable and I know you mentioned kind of confidence and getting back to where you left off with growth in the brands as well as I think large well capitalized international franchisees that you partner with so maybe you could just discuss some of the puts and takes you think about longer term store development. Thank you.
Hey, Dennis Thanks to the question and I Hope you are doing well and staying safe.
Look I think in the short term and we're going to see an impact in the and net restaurant growth and I think in terms of future years, it's too early to say exactly what the path is going to look like but we have amazing restaurant brands as we've said time and time again and Thats been as it has been evidenced by the growth over the last many years.
We have an amazing franchise partners all around the globe Master franchisees as well as.
Smaller operators in North America, all working hard and investing well in their businesses and we've seen.
In different markets I think it's going to its going to be varied by region and it's going to be varied by country as as markets reopened as as businesses get back to normal as consumers get back to normal behaviors, and we think there's an opportunity down the road.
With real estate and with.
Our well capitalized partners to be able to to get back on track from a from a development standpoint, I was in Europe with Burger King back in in 2000 back in 2010 about 10 years ago kind of at the height of the economic crisis and these were some of the best years, we had with the in Western Europe with many of our developing partners because there was.
Tremendous opportunities the resilient resilience of our business in our brands.
The strength of our investment model and returns on capital as well as opportunities that exist from real estate standpoint, So we feel very.
Competent long term in the short term will continue to manage and work through the current situation very closely with our partners.
The market by market, but but we're continuing to be very.
We are excited long term about the business.
Thanks for the question.
And our next question comes from Barclays. Please.
Sure.
Hey, good morning, actually just wanted to follow up on that question.
And specifically with regards to the with regards to the Canadian network at Tim.
We noted that the net restaurant closures in Q1, I'm wondering if you could just give a little bit of color.
Around that.
Yes. Thanks for the question I think on our in Canada and throughout North America, our business.
Continues to kind of whether the current situation in Q1.
We tend to have closures that that happen from time to time in mature markets and mature.
Brands like we had with that with tens and Burger King and Popeye's in North America. So there was nothing specific to call out for for Q1 from a closure standpoint.
And our next question comes from the overall are at Piper Sandler. Please go ahead.
Thank you so much I know, there's a lot to cover but I will just keep to one question. So mine would be this well there's a lot of near term disruption, there's still a lot of phenomenal brands out there and I would be very curious that perhaps something become attractive so as a silver lining potentially what kind of opportunity that you've seen good.
And the portfolio, maybe not right now, but maybe on the horizon. Thank you.
Hey, Thanks Nicole.
As we said in our comments our prepared remarks, and we've said time and time again over the last several weeks.
Publicly we're focused.
Right now on taking care of our guest taking care of our restaurant teams in in all of our restaurants, we've got.
Tens of thousands of restaurants opened 75% of a restaurants are open in a in a very complicated situation. So we're focused on safety wellbeing, taking care of our guests were working with our franchise owners to make sure that they have the proper liquidity to weather the currency situation, we're working with our communities as well, giving back and making sure.
At the that we have that our brands are present.
In the communities that needed.
And and we're continuing to work on the reopening plans all across the globe.
We have an attractive.
Model and long term will be exercising flexibility around what we do with with our balance sheet, but our focus right now is on today in the near term and making sure we get out of this in a stronger position than than we entered thanks. So much for the question.
Our next question comes from John Glass Morgan Stanley. Please go ahead.
Thanks, and good morning.
My question is on the Tim's business model can you help us better understand.
In both the distribution business and then also the sub rent business for Tim's the fixed and variable costs. So how much in the distribution business de lever is when you see sales declined like this and given that you're giving the franchisees variable rents what proportion of the rents or other costs that line item or fixed from your perspective. So we can understand how that acts through this crisis.
Yeah, John Thanks for the question.
Out here I think as it relates to the distribution business.
That is generally driven by level of activity and traffic in volume.
Country, and as you know where.
Vertically integrated.
Pretty much throughout Canada.
So we continue to operate really at full steam across across their supply chain capabilities.
And as volumes go down we do see a little bit of at impact on the fixed cost leverage.
But in general we so far I've not seen a material impact to to the margins in that business in the first quarter.
And then as it relates to the property business.
You're right, we as part of.
Our commitment to working with our partners and.
And trying to create some flexibility and support on the liquidity side as we worked through the situation in Canada, we temporarily suspended our base rents and we switched our.
Our rent over to fully variable so that rent expense would flex down with sales.
For our owners just like royalties have in this environment.
And then on the on the expense side of that for US where we do have had leases.
The number of properties in Canada.
Generally have fixed contractual.
Rents.
That we pay through the head lease and so we pointed out as part of that adjustment in the quarter, we did see.
Impact to our EBITDA related to that that rent.
Variable rent adjustment.
Which was about a point or two of.
The EBITDA growth.
Yeah.
Thanks for the question.
And our next question comes from David Palmer Evercore ISI. Please go ahead.
Thanks, and good morning.
Question on Tim Hortons, I think coming into this year. There was up a lot teed up you had change and loyalty coffee improvements better marketing and I think the concern is that the brand was trying to bend the trend and of course things are short circuited by the crisis. So I'm wondering how you're thinking about what pins can.
Due to drive improvement from here, how much of the game plan.
Change and then and then in addition, I would imagine there's going to be an overlay of economic factors that you're considering its an oil market up there how are you thinking about.
Driving improvement beyond just the social distancing effect, but the economic one thanks.
Hey, Thanks, David I appreciate the question.
The first thing, we obviously had a.
Clear plan and we were excited about the work we were doing coming into into March with within words in Canada, we had alignment.
With our restaurant owners on bringing the business back to basics focusing on coffee on breakfast.
Focusing on loyalty and then making improvements.
In in our off premise experienced directed in particular, but but also going all into digital which has been a big part of our of our plan for the last couple of years.
As we headed into the crisis in mid March.
As I mentioned in response to Nicole's question. The real focus was safety of our teams and guest first stability of our franchise base.
Second and then connecting with our communities and making sure that what tends does Beth.
Which is really act as a local kind of home for most of its guests. The all around the country that we did that really well and that we communicated that we were there for Canadians during the most difficult times.
And what we've seen over.
Over as I mentioned in my comments, what we've seen over the last several weeks through the crisis is that we obviously had a big impact at the beginning at we we see that as we look at other competitors in our space.
In the coffee morning, Daypart kind of routine based business like tends is we've seen a lot more closures than than what we've seen so our business is 85% open.
We've seen that everyone's been impacted heavily in that breakfast business.
But we've made really strong pushes over the last several weeks to expand our off premise business. We've expanded delivery we've expanded to curbside in many cases.
In addition to seeing really good progress on loyalty.
And really good progress on on mobile order and other aspects of our digital platforms, which we're really excited about as we look forward and we go into the next phase.
Obviously, there's a big component of reopening communities reopening the economy reopening our dining rooms in conjunction with that and doing it safely.
I think we're going to be working closely in each of our markets around connecting with folks as a as they get back to their routines going back to the offices. This may take a little bit longer to.
Open up completely but we are going to be there every step of the way and trying to drive that behavior back to where it was pretty cobot 19, and we're going to reactivate many of the growth drivers that I mentioned coming out of our Q4 call in February around coffee. So continued improvement on coffee continued.
Driving the next phase of loyalty, which which has a big component of one on one marketing.
As we get registrations up and get more information from from our guys are loyal guest in the in Canada and continued investment in digital continued investment in breakfast food and were we had as Matt mentioned, we put every all of our capex initiatives on pause, but were reevaluating that as it relates to.
The key quality and the off premise initiatives that we've talked about for us through or is drive through.
And also looking at things like curbside being an additional element of off premise, which.
With not a priority coming into it but we see as a big opportunity and another way to serve Canadians.
In Canada, the other piece, that's exciting and encouraging more so an exciting for US is is this idea.
Bringing the brand back to two its roots to its community connection to the local strength of the brand and we've seen some encouraging feedback through.
Different measures that we have that Canadians are are connecting better with the brand that we some of the initiatives that we've done around coffee trucks to to serve.
Medical providers free coffee for Donuts pretend that.
That's resonated really well.
And some of the other initiatives that we've done that have been completely and totally focused.
Locally and driven in many cases by our amazing restaurant owners in Canada. So, we're we're optimistic and and confident that long term, we've got a great plan for Canada, and we're going to work like Crazy in the short term too.
To work through the current situation to get to get back to where we think we should be and will be long term with sprint. Thanks for the question.
Our next question comes from Brian Bittner with Oppenheimer. Please go ahead.
Good morning, Thanks for taking the question.
Then on Thames. Another question here can you just clarify what percentage of 10 to assets in Canada have helped drive throughs.
And just secondly, when you said you expect Tim's units on average to remain cash flow positive can you just clarify what you mean by that do you mean under the current sales trends you expect them to be cash flow positive and does that include the help from the government just additional color there would be helpful. Thank you.
Yeah, Brian. Thanks for the question, we have about 60, just under 65% of our restaurants in Canada have have drive throughs. So about 2500 out of the 4000.
And now I'll pass onto the math the question on on franchisee liquidity and cash flow.
The that you asked the second question Hey, Brian Thanks for your questions Matt here.
I think as we look at this franchisee profitability as decreased as expected.
The sales decline.
But I think through a combination of both the initiatives.
That we've implemented as well as the government programs being made available in both Canada and the U.S.
We're pretty confident that a vast majority of our franchisees have runway.
To manage through the crisis and on average remain cash flow positive when our side, we as we mentioned, we flexed rents to become more variable and we also found ways to advance some additional cash into our system, including the Burger King liquidity program, we talked about on the 10 side.
Some advancement of retail profit sharing.
And then on top of that as I mentioned, we have.
And really thoughtful government programs in place.
That.
We think are very helpful in supporting our franchisees through the situation and will offset some of the profitability and cash flow in back from the sales decline.
So I think through through a combination of all of the things that we've been implemented plus these programs.
We'll continue to allow the systems in the U.S. in Canada deal with the situation and and remain in a reasonably healthy.
Position.
Thanks for the question.
Our next question comes from Sarasota, Florida was Bernstein. Please.
Thanks, and I know obviously your focus right now is on that pandemic and enter a cap rate that I did want to ask if that trend at Burger King.
Tire kidney.
Outbreak and you asked which is basically.
You had comp I think you sound like low single digit, but what we heard from other large limited service restaurants, one more in that manner, even high single digit range in in a sense that the whole industry seem to have really accelerated so I guess I'm trying to understand why Burger King didn't fully participate in that if you have a sense of where you might have lost share versus.
Some of the other big competitors, because they don't think the question of tougher compares.
Comparing pretty easy so just trying to understand you're going to longer term the prospects for Burger King in the last just considering a lot of CLS couple of quarters. Thanks.
Yes, hi, Sarah Thanks for the question.
Coming into the crisis as I mentioned in my prepared remarks, we were kind of low single digits with that with Burger King.
Slightly better, but roughly inline with what we saw in Q4.
As I mentioned in my remarks in February we were really confident with the long term plan for Burger King.
With that with some of the investments, we're making around Burger King of Tomorrow. Some of the investments, we're making on on food and food quality and communicating that to our or gas. The work, we're doing on digital which has accelerated tremendously as Josh mentioned.
A few minutes ago is accelerating tremendously.
Both in terms of delivery as well as in terms of the mobile app and downloads of have jumped tremendously. So were able now to connect directly with our with our guests and have one on one marketing. We've also made investments and continue to look at investments for the long term on.
On drive thru and expanding that capability, we've started to test and rollout in many markets.
Upside, which we think is an additional opportunity from from an off premise standpoint. So there is.
We think the plan for for the long term as I mentioned.
I guess 90 days ago.
As a strong one that has long term growth potentials breakfast continues to be an area, where we think we have.
A lot of room to grow and we've got a really strong base of.
Consumers that already know the brand and love the brand for breakfast.
And so our focus as I mentioned in the context of of this scenario is to make sure that our business.
And our franchisees and our teams are safe and well prepared to to weather. The storm, we've seen good trends coming out coming out of the lows of of the end of March in terms of the comp in Dk U.S. as I mentioned in my comments.
So all of the.
The signals or give us confidence that that we have the right plans, we have great partners and we have the right long term potential for this business. Thanks, so much for the question.
Our next question comes from Peter Sklar, with BMO capital markets.
Thanks, just with what.
You know everyone sees what's going on in the protein processing complex.
No as a result of cobot 19, and with processing plants going down.
You know, particularly well I guess it's.
Poultry beef and pork plants have gone down have you seen any issues yet in terms of supply to your banners and what are your contingency plans because obviously there is going to be interruptions.
Yes, Peter Thanks for the question. Yes. This is something we're very very acutely aware of in monitoring on a on an hourly daily basis I've got updates with my team.
Regularly on this topic.
We we haven't seen any other interruptions or disruptions to our supply chain in North America, either on the beef pork or poultry side.
What what gives we're obviously working closely with suppliers in a distribution partners as well.
To make sure. We we have all of our contingency plans in place some of that has to do with safety stock. Some of it has to do with the diversity of raw material suppliers as well as processors that we have which gives us confidence that we can manage through.
Any situation that's out there we havent that said, we haven't seen any issues.
In the near term despite some of the headlines you've seen from others are ours, our supply chain is intact and working well.
But we're monitoring closely and and we'll keep everyone posted if anything changes. Thanks, so much for the question.
And ladies and gentlemen. This includes a question answer session I'm going to turn the conference back over to Jose So for any final Walmart.
Thanks, everyone and thanks for your time today. The Cobot 19 pandemic has obviously introduced a wide variety challenges, but we feel we're well positioned and have the resources, we need to come through this together with our franchisees across all three of our amazing an iconic brands overtime weve demonstrated our ability to grow in a wide variety of.
And that we believe the resilience of our business model will serve us well as we confront and ultimately emerge from the cobot 19 pandemic once were safely on the other side of this crisis. We're confident we'll pick right back up where we left off on our plans to grow our brands all over the world. Thanks, again take care and stay safe.
Thank you. This concludes todays conference calls you may now disconnect your lines have a wonderful day.