Restaurant Brands International Inc (QSR) 2020 Q1 法說會逐字稿

Good morning, and welcome to the Restaurant Brands International First Quarter 2020 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Chris Brigleb, RBI's Head of Investor Relations.

Please go ahead.

Thank you, operator.

Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the first quarter ended March 31, 2020.

As a reminder, a live broadcast of this call may be accessed through the Investor Relations web page at investor.rbi.com, and a recording will be available for replay.

Joining me on the call today are Restaurant Brands International's CEO, José Cil; COO, Josh Kobza; and CFO, Matt Dunnigan.

Today's earnings call contains forward-looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings.

In addition, this earnings call includes 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.

José will start with some opening remarks on our company's response to the ongoing COVID-19 pandemic.

He will then discuss our results for the first quarter and provide detail around our performance at Tim Hortons, Burger King and Popeyes.

Josh will then provide an update on technology at RBI.

And to conclude, Matt will review our financial results before opening the call up for Q&A.

I'd now like to turn the call over to José.

Thanks, Chris, and good morning, everyone.

Thank you for joining us on today's call.

I hope you and your families are doing well and staying safe.

I'd like to start today's call by thanking the hundreds of thousands of people that have been working behind the scenes and on the front line 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, our franchisees, our team members, our employees, our 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 our 3 iconic global brands, and our strong and diverse network of partners around the world have underpinned our strengths 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 our millions of guests and to support our restaurant owners.

Our drive-thrus, which have, for decades, been 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 27,000 restaurants across over 100 countries and territories and 3 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 COVID-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 social distancing in the front and back of house.

As the crisis unfolded, we thoroughly reviewed our restaurant health and safety protocols and expanded our cleaning 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 front lines every day of this crisis with great admiration, so much so that 2 weeks ago, I asked our Board of Directors to redirect half of my salary over the next 6 months to funds our charitable foundations have set up for COVID-19 relief, including supporting restaurant team members that are most in need.

Our co-Chairman of the Board have joined me and are foregoing half of their board compensation for 2020.

Beginning in March, we quickly pivoted our marketing and advertising, replacing spots that emphasize 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 haven't highlighted for quite some time, in particular, the availability and utility of our drive-thrus.

In this environment, a drive-thru window is a great option for so many people who want to limit physical contact.

And for guests that can't access our drive-thrus, 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 are, both through our own app and through third-party delivery partners.

Since the onset of COVID-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 1,000 in less than 2 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 our restaurant owners.

We've established weekly and even daily communications with our advisory boards of restaurant owners and have been working constructively together on all of the decisions and changes we needed to implement.

In that context, we set out to design support programs that would move the needle for our 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 in an overall healthy and stable position.

We mobilized quickly to provide support.

Early in the crisis, we announced we were moving to 100% variable rent at about 3,700 locations where we have property control so that these expenses could flex down with the sales impact to 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 $15,000 per restaurant.

On top of these cash advance programs, we also temporarily suspended capital investment commitments for owners, including for renovations and new 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 to payment terms and by working with lenders to access new lines of credit.

We've also put mandatory capital commitments on hold and have 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 3 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 a sharp decline in comparable sales across brands and regions coinciding with the global proliferation of COVID-19.

While many of the challenges remained in April and continue as we head into May, there is optimism and renewed confidence amongst our brand teams and restaurant owners as 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 around this dynamic at each of our brands in just a few minutes.

Given the ongoing limitations to in-restaurant dining in most markets, our rapid shift to 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-thrus.

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 and China, where off-premise consumption is a very important part of the business.

We've been focused on understanding shifts in consumption patterns to guide adjustments like those I just mentioned.

As COVID-19 has spread, most of our guests have put their ordinary routines on pause and consumption has shifted accordingly.

Whether it's 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 we would typically see 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 or malls that are currently closed.

In APAC, more than 80% of our restaurants are open, which reflects a 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 LAC, around 40% and 50% of our restaurants are open, respectively.

The proportion of temporary closures in EMEA and LAC is particularly pronounced given the higher number of countries that have mandated total lockdown.

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 3/4 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 our 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 a decrease in 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 COVID-19 in March.

During the precrisis period, in January and February, our comp sales performance continued on the trajectory we noted during our February earnings call and was about 1 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 to negative mid-40s.

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-thrus.

Also, our rapid expansion of delivery to more than 1,000 stores has allowed us to drive strong and consistent sales growth in the channel.

And the launch of curbside order and 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 30s, a more than 10-point improvement from the lowest level we saw in late March.

In Q1, we also had to pivot our annual Roll Up the Rim promotion and pull 81 million paper Roll Up cups from the market as the early effects of COVID-19 were emerging.

This resulted in an unplanned shift to an all-digital Roll Up 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 contributed 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 in Canada are among the strongest in global QSR, which provides a degree of insulation, even in the face of the sales declines 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-COVID-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 are focusing our full attention on working with our franchisees to plan for a full reopening of their restaurants and adapt the business to meet all the demands of a post-COVID-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 precrisis period in January, February and the first 2 weeks of March, we posted positive comparable sales growth in the U.S. in the low single digits, driven by a continued strong contribution from the Impossible Whopper and improved performance in the value layer of our menu.

With the onset of COVID-19 across the U.S. in mid-March, our daily comparable sales growth decreased for the last 2 weeks of the quarter to negative low 30s.

The largest individual driver of this decline was the closure of our in-store dining areas.

Despite this headwind, we quickly refocused our attention on our drive-thrus and delivery as primary sales channels.

At the onset of the crisis, our dine-in business dropped essentially to 0, and even our drive-thru business went negative year-over-year as customer traffic dropped due to the stay-at-home orders enforced throughout the country.

Since then, our intense focus and modified approach to drive-thru has allowed us to improve sales in the channel each week, and our drive-thru sales for Burger King U.S. 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 of the quarter, we accelerated the rollout to several hundred restaurants so that we now have over 5,000 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 in drive-thru and delivery sales has underpinned a sequential improvement in our total comparable sales from the negative low 30s in late March to the negative teens 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 flow.

Given current conditions and available support programs, we believe our restaurant owners in the U.S. are well positioned to weather this crisis, and 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 COVID-19 in January and February.

At the peak of the 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 5 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 a positive trend.

The lower international system-wide sales in Q1 also reflected the early impact of COVID-19 across the rest of APAC, Latin America and EMEA, where several markets instituted lockdowns in late March.

As I noted earlier, many markets have remained closed throughout the month of April, and will continue into May and perhaps beyond, although governments are starting to release details around their expected time lines for reopening.

For example, Italy has communicated a time line to reopen restaurants over the coming month, while in Spain, many of our restaurants are now able to fulfill delivery orders.

And finally, at Popeyes, 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%.

Comparable sales growth was particularly strong in the U.S., rising nearly 30% for the quarter.

Performance in Popeyes varied substantially before and after the onset of COVID-19 in the U.S., but saw the least impact relative to our other brands.

In January, February and the first 2 weeks of March, comparable sales grew in the 30s, driven primarily by sustained volumes of the chicken sandwich, but also reflecting growth across other parts of the menu, including bone-in, boneless and seafood.

Following the onset of COVID-19 in the U.S. in mid-March, comparable sales declined to flat levels year-over-year for the last 2 weeks of the quarter.

In April, like the Tims and Burger King teams, the Popeyes team has moved quickly to emphasize our off-premise business, and comparable sales has substantially improved and are returning to the levels we were seeing through the second week of March before the onset of the crisis.

Popeyes' success last year was unlike anything any of us have seen in our careers, but its resilience in the face of COVID-19 with dining rooms closed across the country has been equally remarkable.

We've made many important adjustments at Popeyes since the global spread of COVID-19, rolling out contactless procedures in 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 enlarge the trade area of our stores as the brand builds on the momentum it has sustained from last year.

At Popeyes and across all 3 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 who's been instrumental in leading all of our digital efforts that have prepared us so well to lean into these channels.

Josh?

Thanks, José, and good morning, everyone.

In many ways, the COVID 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 guests' rapidly evolving needs.

And we've seen some pretty remarkable progress in just a short period of time, especially in 3 key areas.

The first is delivery.

From a base of just a couple of hundred restaurants in North America on delivery 2 years ago, we now have well over 9,000 active restaurants across our 3 brands, with most offering delivery via our own digital platforms as well as multiple aggregators.

At Tims in Canada, we brought nearly 800 additional restaurants online with delivery in just 2 months, and have seen overall delivery sales grow by more than 6x versus their pre-crisis levels.

And at Burger King and Popeyes, our delivery sales are up more than 3x versus the same time last year as we expand locations and the 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 Popeyes.

The second area of focus for us is our mobile app guest experience across all 3 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 download growth during the quarter, and has 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 10x in the past couple of quarters.

The third area I'll mention is our efforts around CRM, with particular focus on Tims Rewards.

As José 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.

To date, approximately 45% of guests using Tims Rewards are registered versus about 25% back in February, which is in line 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 Popeyes 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 in technology so that we can bring our guests digital experiences that contribute towards our dream of building the most loved restaurant brands in the world.

We are 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.

In my comments today, I'll take you through an overview of our results for the first quarter as well as some important steps we've taken to further enhance the strength of our balance sheet in light of the uncertainty surrounding COVID-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 COVID 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 an 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 in the timing of revenues and expenses, but that, in the long run, we've managed these ad funds so that total revenues equal expenses.

In this quarter, the sudden decline in sales that resulted from the spread of COVID-19 led to an especially pronounced mismatch, which we expect should normalize over time.

As José mentioned earlier, we also suspended base rent for several thousand properties in Canada and 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 the Rim program.

Taken together, these 2 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 a 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 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 million, 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 brand's strong momentum from last year, including net restaurant growth of nearly 7% and global comparable sales of over 26%, partially offset by higher segment SG&A.

On a consolidated basis, our first quarter adjusted net income was $226 million.

This compares to 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 and Q4 of last year as well as slightly lower expenses year-over-year related to stock-based compensation and D&A.

Our adjusted diluted EPS for the first quarter was $0.48 compared to $0.55 in the prior year, representing a nominal decrease of 11.8%.

Included in this decrease is 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 and can, therefore, cause some 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 COVID-19 crisis.

Our leverage remains one of the lowest in our peer group, we have no near-term maturities, and we feel very well positioned from a capital structure perspective.

Despite the impact of COVID on 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 the RBI Board of Directors declared a dividend of $0.52 per common share and partnership exchangeable unit of RBI LP payable on June 30, 2020.

In terms of investments, while we continued to make progress on key projects during the first part of the quarter, including our remodel programs at Tim Hortons and Burger King, the 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 U.S., the unprecedented impact of COVID-19 has caused us to press pause on 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 sure it is safe to do so.

In the meantime, we are continuing to move ahead with our project to expand our distribution footprint in Canada.

As of March 31, 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 4.8x and one of the lowest in our peer group.

As I mentioned, in March, we moved quickly in taking several steps to maximize our liquidity as the spread of COVID intensified.

Within the first week of COVID-19's initial spread in the U.S., we drew down substantially all of our $1 billion 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.

At the end of the quarter, we saw an opportunity to raise additional funds in the debt markets, which, up to that point, have been effectively closed for a number of weeks.

On April 7, we closed $500 million of new 5-year first lien senior secured notes.

Given the considerable uncertainty surrounding COVID-19, we are 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?

(Operator Instructions) Today's first question comes from Dennis Geiger with UBS.

José, thanks for all the insights on the recent trends and the franchisee health.

Just wondering if you could talk a bit more about unit developments, 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 folks framed is still applicable?

And I know you mentioned kind of confidence in getting back to where you left off with growth in the brands as well as, I think, the large well-capitalized international franchisees that you partner with.

So maybe you could just discuss some of the puts and takes as you think about longer-term store development?

Dennis, thanks for the question, and I hope you're doing well and staying safe.

Yes.

Look, I think in the short term, we're going to see an impact in 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 it's been -- has been evidenced by the growth over the last many years.

We have 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 be varied by region, and it's going to be varied by country as markets reopen, 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 get back on track from a development standpoint.

I was in Europe with Burger King 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 -- in Western Europe with many of our developing partners because there is tremendous opportunities, the resilience of our business and our brands, the strength of our investment model and returns on capital as well as opportunities that exist from a real estate standpoint.

So we feel very confident long term.

In the short term, we'll continue to manage and work through the current situation very closely with our partners, market by market, but we're continuing to be very excited long term about the business.

And our next question today comes from Mark Petrie at CIBC.

I actually just wanted to follow up on that question.

And specifically, with regards to the Canadian network at Tims.

We noted 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 weather the current situation.

In Q1, we tend to have closures that happen from time to time in mature markets and mature brands like we have with Tims and Burger King and Popeyes in North America.

So there was nothing specific to call out for Q1 from a closure standpoint.

And our next question today comes from Nicole Miller at Piper Sandler.

I know there's a lot to cover, but I will just keep to one question.

So mine would be this.

While 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 some things become attractive.

So as a silver lining potentially, what kind of opportunities are you seeing to expand the portfolio?

Maybe not right now, but maybe on the horizon?

Thanks, Nicole.

As we said in our comments or 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 guests, taking care of our restaurant teams in all of our restaurants.

We've got tens of thousands of restaurants open.

75% of our restaurants are open in a very complicated situation.

So we're focused on safety, well-being, taking care of our guests.

We're working with our franchise owners to make sure that they have the proper liquidity to weather the current situation.

We're working with our communities as well, giving back and making sure that we have -- that our brands are present in the communities that need us.

And we're continuing to work on the reopening plans all across the globe.

We have an attractive model, and long term, we'll be exercising flexibility around what we do with our balance sheet.

But our focus right now is on today and the near term and making sure we get out of this in a stronger position than we entered.

Our next question today comes from John Glass at Morgan Stanley.

My question is on the Tims business model.

Can you help us better understand, in both the distribution business, and then also the sub rent business for Tims, the fixed and variable costs?

So how much in distribution business delevers when you see sales decline like this?

And given that you're giving your franchisees variable rents, what proportion of the rents or other costs in that line item are fixed from your perspective?

So we can understand how that acts through this crisis.

Yes, John, thanks for the question.

It's Matt here.

I think as it relates to the distribution business, that is generally driven by level of activity and traffic and volume in the country.

And as you know, we're vertically integrated pretty much throughout Canada.

So we continue to operate, really, at full steam across our supply chain capabilities.

And as volumes go down, we do see a little bit of an impact on the fixed cost leverage.

But in general, we so far have not seen a material impact 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 trying to create some flexibility and support on the liquidity side as we work through this situation in Canada, we temporarily suspended our base rent, and we switched 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 expense side of that, for us, where we do have head leases across a number of properties in Canada, we generally have fixed contractual rents that we paid through the head lease.

And so we pointed out, as part of that adjustment in the quarter, we did see an impact to our EBITDA related to that rent -- variable rent adjustment, which was about 1 point or 2 of the EBITDA growth impact.

Our next question today comes from David Palmer of Evercore ISI.

A question on Tim Hortons.

I think coming into this year, there was a lot teed up.

You had a change in 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 Tims can do to drive improvement from here?

How much has the game plan changed?

And then in addition, I would imagine there's going to be an overlay of economic factors that you're considering.

It's an oil market up there.

How are you thinking about driving improvement beyond just the social distancing effect but the economic one?

Thanks, David.

Appreciate the question.

Look, the first thing -- we obviously had a clear plan and we were excited about the work we were doing coming into March with Tim Hortons 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 our off-premise experience, drive-thru, in particular, but also going all in to digital, which has been a big part 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 guests first, stability of our franchise base second, and then connecting with our communities and making sure that what Tims does best, which is really act as a local kind of home for most of its guests all around the country, so that we did that really well and that we communicated that we were there for Canadians during the most difficult of times.

And what we've seen 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.

We see that as we look at other competitors in our space, in the coffee, morning daypart kind of routine-based business, like Tims is, we've seen a lot more closures 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 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 they get back to their routines, going back to the offices.

This may take a little bit longer to open up completely, but we're going to be there every step of the way and trying to drive that behavior back to where it was pre-COVID-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 has a big component of one-on-one marketing as we get registrations up and get more information from our loyal guests in Canada, and continued investment in digital, continued investment in breakfast food.

And we're -- we had -- as Matt mentioned, we put every -- all of our CapEx initiatives on pause.

But we're reevaluating that as it relates to the key quality and off-premise initiatives that we talked about, fresh brewers, drive-thru.

And also looking at things like curbside being an additional element of off-premise, which was 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 and exciting for us is this idea of bringing the brand back to its roots, to its community connection, the local strength of the brand.

And we've seen some encouraging feedback through different measures that we have, that Canadians are connecting better with the brand that we -- some of the initiatives that we've done around coffee trucks to serve medical providers free coffee, free doughnuts, free Timbits.

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 optimistic 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 to work through the current situation, to get back to where we think we should be and will be, long term, with this brand.

Our next question today comes from Brian Bittner with Oppenheimer & Company.

Again, on Tims, another question here.

Can you just clarify what percentage of Tims assets in Canada have drive-thrus?

And just secondly, when you said you expect Tims 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.

Yes.

Brian, thanks for the question.

We have about 60 -- just under 65% of our restaurants in Canada have drive-thrus, so about 2,500 out of the 4,000.

And I'll pass on to Matt the question on franchisee, liquidity and cash flow that you asked, the second question.

Yes, Brian.

Thanks for the questions.

It's Matt here.

I think as we look at this, franchisee profitability has decreased, as expected, with 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.

On 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 systems, including the Burger King liquidity program we talked about.

On the Tims side, some advancement of retail profit sharing.

And then on top of that, as I mentioned, we have some 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 impact from the sales decline.

So I think through a combination of all the things that we've implemented plus these programs, we'll continue to allow the systems in the U.S. and Canada to deal with the situation and remain in a reasonably healthy position.

Our next question comes from Sara Senatore with Bernstein.

I know, obviously, your focus right now is on the pandemic and recovery.

But I did want to ask about trends at Burger King U.S. prior to the outbreak in the U.S., which is, basically, the U.S. comp, I think you said, was low single digits.

But what we heard from other large limited service restaurants were more in the mid or even high single-digit range in the sense that the whole industry seems 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 I don't think it's a question of tougher compares.

Compares were pretty easy.

So just to understand, sort of the longer term, the prospects for Burger King in the U.S., just considering what we've seen in the last couple of quarters?

Yes.

Sara, thanks for the question.

Coming into the crisis, as I mentioned in my prepared remarks, we were kind of low single digits with Burger King, slightly better, but roughly in line with what we saw in Q4.

As I mentioned in my remarks in February, we were really confident with the long-term plans for Burger King, with some of the investments we're making around Burger King of Tomorrow, some of the investments we're making on food quality and communicating that to our guests, the work we're doing on digital, which has accelerated tremendously, as Josh mentioned a few minutes ago, has accelerated tremendously, both in terms of delivery as well as in terms of the mobile app, and downloads have jumped tremendously.

So we're able now to connect directly 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 drive-thru and expanding that capability.

We've started to test and roll out in many markets, curbside, which we think is an additional opportunity from an off-premise standpoint.

So there's -- we think the plan for the long term, as I mentioned, I guess, 90 days ago, is 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 this scenario, is to make sure that our business and our franchisees and our teams are safe and well prepared to weather the storm.

We've seen good trends coming out of the lows of the end of March in terms of the comp in BK U.S., as I mentioned in my comments.

So all of the signals are -- give us confidence that we have the right plans, we have great partners and we have the right long-term potential for this business.

Our next question comes from Peter Sklar with BMO Capital Markets.

Just with what's -- everyone sees what's going on in the protein processing complex as a result of COVID-19 and with processing plants going down, 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 acutely aware of and monitoring on an hourly, daily basis.

I've got updates with my team regularly on this topic.

We haven't seen any interruptions or disruptions to our supply chain in North America, either on the beef, pork or poultry side.

What gives -- we're obviously working closely with the suppliers and our distribution partners as well to make sure 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 haven't -- and as I said, we haven't seen any issues in the near term.

Despite some of the headlines you've seen from others, our supply chain is intact and working well.

But we're monitoring closely, and we'll keep everyone posted if anything changes.

And ladies and gentlemen, this concludes the question-and-answer session.

I'd like to turn the conference back over to José Cil for any final remarks.

Thanks, everyone, and thanks for your time today.

The COVID-19 pandemic has obviously introduced a wide variety of challenges, but we feel we're well positioned and have the resources we need to come through this together with our franchisees across all 3 of our amazing and iconic brands.

Over time, we've demonstrated our ability to grow in a wide variety of macroeconomic conditions, and we believe the resilience of our business model will serve us well as we confront and, ultimately, emerge from the COVID-19 pandemic.

Once we're 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 today's conference call.

You may now disconnect your lines, and have a wonderful day.