Good morning, and welcome to the Restaurant Brands International First Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Marcus Sturm, Head of Investor Relations.
Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the Q1 ended March 31, 2018. A live broadcast of this call may be accessed through the Investor Relations webpage at investor. Rbi.com and a recording will be available for replay. Joining me on the call today are Restaurant Brands International's CEO, Daniel Schwartz and CFO, Matt Dunnigan.
The team will be available to answer questions during the Q and A portion of today's call. 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. Before outlining the agenda for today's call, we wanted to briefly highlight the recent implementation of 2 new accounting standards since both of them impacted our Q1 2018 results.
Specifically, the two new standards are revenue recognition and hedge accounting. As previously indicated on our Q4 2017 earnings call, we followed a transition method for the new revenue recognition accounting standards under which a retained earnings adjustment was recorded at the beginning of 2018 to reflect the cumulative impact of transitioning to the new standards as if the standard had always been in place. Under this transition method, we will not be restating results prior to 2018 to reflect the new accounting standards. The most significant changes of this adoption that affect comparability of our results of operations between 2018 and 2017 include a change in the timing of franchise fee revenue recognition and the reflection of advertising fund contributions and expenses on a gross basis. To allow for comparability with 2017 results, we have provided in the earnings release a reconciliation of 2018 results under previous accounting standards and will continue to do so for the remainder of the year.
Also for comparability purposes, organic revenue and organic adjusted EBITDA growth are calculated based on 2017 2018 results under previous accounting standards. The results presented in our earnings release indicate which revenue recognition methodology applies in each respective period. Additionally, in the Q1 of 2018, we adopted new guidance related to hedge accounting. Under the new guidance, certain amounts pertaining to our cross currency rate swaps that were previously recorded in other comprehensive income will now be included in net interest expense. As a result, we expect to recognize a benefit in net interest expense in our consolidated statement of operations, which primarily reflects the positive interest rate differentials on our Canadian dollar and euro cross currency rate swaps.
Additional details about these new accounting standards can be found in our Form 10 Q, which will be subsequently filed. Now, let's quickly review the agenda for today's call. Daniel will start by discussing highlights for the Q1 and our 2018 priorities at Restaurant Brands International and will then discuss the performance of Tim Hortons, Burger King and Popeyes Louisiana Kitchen. Matt will then review consolidated financial results for the quarter, following which Daniel will share some concluding remarks before opening the call up for Q and A. I'd now like to turn the call over to Daniel.
Thanks, Marcus, and good morning, everyone. Thanks for joining us on today's call. I am pleased to provide an update today on our Q1 2018 results. This quarter, we were pleased with the double digit system wide sales and adjusted EBITDA growth that we achieved for our Burger King and Popeyes brands. However, we are not happy with our sales growth and overall financial results at Tim Hortons.
On a consolidated basis, this quarter we grew our adjusted EBITDA to $498,000,000 or $506,000,000 under prior revenue recognition standards, which represents 5% organic growth versus the prior year's combined results of RBI including Popeyes. As Marcus highlighted, for year on year comparability purposes, we're presenting organic growth both on a constant currency basis as well as under previous accounting standards in both periods. Continued growth in our top line combined with the redemption of our preferred shares in 2017 and a favorable tax rate due to stock option exercises in the quarter led to adjusted diluted EPS of $0.66 per share for the quarter, up from $0.36 per share in the prior year period. Continued momentum at Burger King in the Q1 led to system wide sales growth of 11%, which was a result of net restaurant growth of nearly 7% and comparable sales of 3.8%. Our BK comparable sales results this quarter were driven by notable strength in the U.
S. And continued growth in many of our larger international markets. At Popeyes, system wide sales grew by 11%, driven by net restaurant growth of nearly 7% and comparable sales of 3.2%. Comparable sales this quarter were driven by improved results in the U. S.
And continued sales momentum internationally. At TIM HORTONS, system wide sales grew by 2%, driven by net restaurant growth of 2.8% and flat comparable sales. Our Tim's comparable sales this quarter reflect flat results in Canada and softness in the U. S. Today, we're going to share with you much more detail than we've provided historically about our plans to improve our overall results at Tim's.
This is one of the most important focus areas for me personally and for my team. But before diving into the details of our results across the 3 brands, we thought it would be helpful to first highlight aspects of our business that we believe uniquely position us for long term growth and then to outline our priorities for 2018. We know and openly admit that we operate our business a little different than other companies. For example, we do not provide forward looking guidance. This stems from our view that as true owners of the business with a long term mindset, focusing on quarterly forecast is not a priority for us.
Instead, we believe that time is more efficiently spent when it is focused on executing against sound strategic priorities, which will in turn produce favorable results. Another thing that's a little different about us is that even when things are going well, we don't like to promote our results. We keep our heads down and we focus on driving strong sustained growth. Because of that, we have not historically dedicated much time to media relations to tell our story. Unfortunately, this has resulted in the publication of several articles, particularly related to Tim Hortons in Canada that mischaracterize our intentions, that often cite inaccurate information and that usually reflect a purposely negative tone dictated by a group of dissident franchisees.
Needless to say, we're not pleased with the narrative in the media. These misrepresentations undermine the good, honest intentions of our franchise restaurant owners, their team members and our employees, all of whom work tirelessly every day to do their best for our guests and for our great Tim Hortons brand. We've already made changes to our communication strategy and we're committed to doing a better job of communicating our story based on observable facts.
We should have done
a better job communicating with our Tim Hortons franchisees in the past and there certainly opportunities for us to improve going forward. But we're proud that since acquiring the Tim Hortons brand, we, in partnership with our franchisees, have been successful in increasing average revenue per store, unit economics and overall system wide sales in Canada. The brand remains very strong and we think it will only get stronger as we continue to work even more closely together. While our approach to Investor and Media Relations may be a little different, we firmly believe that we are uniquely positioned to create long term sustainable value for all of our stakeholders and would like to outline why we believe that and what our key priorities are to accomplish that. First, we own 3 iconic brands, each of which we believe has a rich heritage, a unique value proposition and significant growth potential.
The strength of each brand is demonstrated by the average returns our franchisees are experiencing and the correspondingly high demand that we see from franchisees to grow our brands all around the world. And on that point of growth, we have a very large opportunity to grow each of our brands for many, many years to come. Burger King is not number 1 globally in the burger category. Popeyes is not number 1 globally in chicken. And while Tim Hortons is number 1 in Canada, it too is not number 1 globally in coffee.
But this positions us as a strong challenger with a very large opportunity to grow each of these great brands all around the world for many years. It will take a lot of hard work and dedication, but we are long term oriented and are willing to work tirelessly toward our bold growth ambitions. A second unique aspect of our business is our people. Each of our brands benefits from great franchisees who together with their team members are the true heroes of the business, working hard day in and day out to deliver the best possible experience for our guests. Over the years, we focused heavily on building a team of employees comprised of top talent.
Our culture resonates well with employees who are hungry, who are humble, who are extremely hardworking and who have a true ownership mindset, particularly since our compensation structure is highly indexed to long term performance and the ultimate achievement of our bold growth ambitions. Most of the senior leaders of our business are large equity owners in Restaurant Brands International and over the past few quarters you've witnessed these leaders converting their options largely to shares in lieu of cash reflecting their long term confidence in our business. We believe that the combination of our great franchisees and our great employees who are both committed to working together to achieve our shared growth objectives uniquely positions our business for long term success. Leveraging our foundation of great brands and great people, late last year we worked closely with our partners around the world to develop our priority initiatives for 20 18. Our resulting priorities for this year are as follows: number 1, improve comparable sales for Tim Hortons, particularly in our home market of Canada Number 2, build on our system wide sales momentum at Burger King and further accelerate growth of the brand all around the world.
Number 3, establish partnerships to meaningfully accelerate net restaurant growth for Popeyes, including through new international master franchise arrangements. Number 4, leverage technology to enhance our guest experiences for all three of our brands and number 5, maintain a balanced approach to capital allocation to maximize value creation for all of our stakeholders. When discussing our quarterly results this year, we intend to provide you updates on our efforts to achieve these priorities. We have already made good progress on priorities 2 through 5, but we will spend more time now talking about how we intend to achieve priority number 1. In the Q1, Tim Hortons adjusted EBITDA was $245,000,000 or $251,000,000 under prior accounting standards, which represents a year on year organic decrease of 6%.
The year on year decrease is largely driven by our supply chain business, including lapping of last year's rollout of espresso based beverage equipment and related espresso inventory, which benefited our results in the first half of twenty seventeen. The supply chain decreases were partially offset by continued growth in our franchise business driven by system wide sales growth. 1st quarter comparable sales at TIM HORTONS were negative 0.3% driven by relatively flat comparable sales in Canada and softness in the U. S. Our first quarter results in Canada reflect softness in coffee, partially offset by growth in breakfast foods.
Softness in coffee was a result of heightened competitive activity during the quarter, as well as a weaker execution of our Roll Up the Rim promotion. We are encouraged by the results of some of our new lunch products introduced this quarter, including our Turkey Bacon Club, our Bacon Artisan Grilled Cheese and more recently our Tim's Signature Melts platform. As you would have observed over the last year, our relationship with our restaurant owners hasn't been as strong as we would like it to be. Over the last few quarters, we have significantly improved the dialogue and the relationship with many of our franchisees, but we realized that we still have more work to do. To be clear, the small group of dissident franchisees who have been the driving force behind negative media coverage does not represent the voice of the whole franchise system or of the company.
Unfortunately, this continued media coverage has negatively impacted our guests perception of our brand and our community roots. The elected franchisee Advisory Board and most Canadian franchisees are engaged and they are working with us to drive the business forward. In fact, just last week, the elected franchisee advisory board openly spoke out to their fellow franchisees with their support of the Tim Hortons management team we have put in place to drive long term growth. To be clear, we are not pleased with how our Tim Hortons business is performing. As a result, we have developed and begun to implement decisive and urgent actions and created a long term plan to address the causes of our underperformance.
Recently, you saw us appoint a new Tim Hortons brand President, Alex Macedo, who was previously the President of our Burger King North America Business. At Burger King, Alex led the successful turnaround of the brand in the U. S. After we acquired it in 2010. Alex brought with him additional talented team members to oversee the Tim Hortons brand, including Axel Schwan.
In Axel's former role as CMO responsible for rolling out an improved Burger King brand positioning, including new restaurant designs, menu layouts, packaging and creative marketing campaigns, which have each contributed to Burger King's success over the last several years. We also just announced a relocation of our head office to downtown Toronto for a number of reasons, including our belief that this will help us attract even more top talent. However, while we believe these decisions will help position Tim's for the future success, it's clear that things will not be fixed overnight and that's why together with our restaurant owners, we have developed the Winning Together plan, which is focused on 3 key pillars, restaurant experience, product excellence and brand communications. Restaurant experience encompasses interactions with our guests, both inside and outside of our restaurants and includes key priorities such as becoming increasingly more digital through our Tim's mobile app and modernizing our restaurant image. In March, we announced a new Tim Hortons restaurant design called the Welcome Image, which entails a redesigned natural, more modern and more inviting image, while staying true to our Tim Hortons values and heritage.
We and our restaurant owners have set a bold target of rolling out our new welcome image to a majority of restaurants across Canada over the next 4 years. Our new international restaurants and 10 restaurants in Canada are under this new image already and we've been testing the effectiveness of the image using both quantitative and qualitative research. Through that research, we gathered feedback directly from our guests in Canada and here is what they told us. Approximately 95% of our guests said they completely agree that the new interior design looks modern and up to date as compared to less than 60% in our prior image. Approximately 85% of our guests said that they perceive our new image as better than that of our competitors in Canada and approximately 75% of our guests said that they were more likely to become repeat customers of a restaurant designed in the new image.
What most excites us is that just in the 1st few weeks of announcing the new welcome image to our system, our franchisee partners in Canada have shown their support for the initiative and have already signed up hundreds of restaurants for renovation within the next 2 years. The current pace of sign ups puts us in line with our bold target to have most of the restaurants in Canada with a new image by 2021. We still have a lot of work do and we normally wouldn't communicate statistics like these this early on, but we felt it was necessary to share the level of support we are receiving from our restaurant owners and our guests on this key pillar of our Winning Together plan. The second pillar of our plan, product excellence, involves a focus on offering products that our guests love. One component of this is furthering our coffee leadership in Canada, including through our Vespresso based beverage platform that we rolled out last year.
A second component is improving the quality of our lunch products, which we already started including through our Turkey Bacon Club, our Artisan Grilled Cheese and our new Signature Melts platform. We also plan to improve our product packaging and other visual cues which we will roll out in Canada later this year. We will have more progress to share with you on that front in the coming quarters. On the 3rd pillar, brand communications, we are focused on launching impactful marketing campaigns, which highlight the great values that define our Tim Hortons brand. We recently launched our Neighbors campaign in which we encouraged guests throughout Canada to go out and meet their neighbors over a cup of Tim Hortons coffee.
We've already heard some great stories from our guests about how they've used this campaign as an excuse to meet a new neighbor if they've just moved in or otherwise to simply say thank you to neighbors for helping to shovel their side of the driveway. A sense of community is an integral aspect of the Tim's brand and bringing Canadians closer together over Tim Hortons coffee is something we are proud of. We also recently launched a new musical advertising campaign, which highlights the quality and production process of a cup of Tim Hortons coffee, all the way from the farms where we hand select our beans to the fresh cup of coffee served to our guests in our restaurants. Together with our franchisees, we continue to invest in the local communities that we serve, including through our Tim Hortons Children's Foundation, which raised nearly C31 $1,000,000 last year. Regional community spend on initiatives such as Timbit's minor sports programs has also increased significantly since we acquired the brand.
This pillar also encompasses having our brand team more openly and more proactively speaking with the media to tell the great story that Tim Hortons has to offer. We admittedly should have done more of this in the past and are committed to being more proactive in our communications in the future because we believe that we have a great story to tell. We believe that focusing on each of these three pillars restaurant experience, product excellence and brand communications will help us drive our core strategy of enhancing guest satisfaction and franchisee profitability for the long term. We are confident that this plan will help us achieve long term sustainable comparable sales growth for Tim's, particularly in the home market of Canada. Our priorities continue to center around driving enhanced guest satisfaction and franchisee profitability.
Working together with our restaurant owners, we have managed to increase average franchisee profitability in Canada by a significant amount since we first acquired TIM HORTONS. The strong franchisee profitability and returns for the TIM HORTONS franchisees in Canada speaks to the strength of the brand and the hard work of our franchise partners. Although our franchisees are facing headwinds this year, we are committed to successfully delivering on our Winning Together plan with our partners and continuing on this path of long term franchisee profitability growth. Now in terms of development, we grew our Tim Hortons restaurant count by 2.8% year on year, which reflects growth in Canada as well as growth in our new international markets. Our partners in each of the Philippines, the UK, Spain and Mexico continue to open great looking restaurants under our new modern welcome image.
Our Tim's international growth story is still in its early days, but we remain encouraged by the results and by the guest feedback that we are seeing all around the world. We are also making good progress with other partners to grow the brand in additional international markets and hope to provide updates on this later this year. Before I move on, I want to reemphasize that we don't think the current challenges at Tim Hortons can be addressed with a series of short easy fixes. Like our restaurant owners, we are focused on the long term and on executing with excellence on our 3 pillar Winning Together plan. Simply put, we are as passionate about this iconic brand as our franchisees and our guests and we know we're accountable for its success.
That's why you have my commitment, it will continue moving with speed and determination to improve its performance. Let's now review the results for our Burger King business. System wide sales growth of 11% during the Q1 was driven by continued momentum in both net restaurant growth of nearly 7% and comparable sales of 3.8%. Growth in the top line resulted in BK adjusted EBITDA of $214,000,000 for the quarter or $215,000,000 under prior accounting standards, which represents a year on year organic increase of roughly 12%. Our comparable sales was driven by continued momentum in the U.
S. With 1st quarter U. S. Comparable sales of 4.2% and continued strength in our large international markets. In the U.
S, our sales growth was a result of impactful marketing, product innovation and our consistent strategy of maintaining a menu that is balanced across price points. Innovation included the launch of our Double Quarter Pound King and the launch of our Spicy Crispy Chicken Sandwich, an evolution of our improved quality Crispy Chicken platform that we launched last year. Both products contributed positively to our sales growth this quarter. Internationally, our comparable sales were strong in many of our largest markets around the world, including Brazil, Russia, Spain and the UK, which was driven by a balance of compelling value offerings as well as innovative limited time offers that resonated well with our guests. This was partially offset by continued softness in Australia and Korea, both a result of broader industry softness as well as not having the right balance between value and premium offerings, which we're working with our partners to improve upon.
On the development front, we grew restaurant count by roughly 7% year on year, which reflects continued growth from our partners all around the world. As highlighted earlier, having the best franchise partners is a critical success factor to our long term growth. Our acceleration of net restaurant growth under a franchisee led development model from approximately 170 net stores in 2010 when we first acquired Burger King to nearly 1100 in the last 12 months is proof of that. Our accelerated store growth also highlights the power of our master franchise development model, which we have also been deploying at Tim's and more recently at Popeyes. As demonstrated over the past few years at our Burger King business, we believe that the establishment of these partnerships will set the foundation for meaningful growth in the top line of each of our brands for many, many years.
We've stayed true to our 2018 priority of building on our system wide sales momentum at BK and further accelerating growth of the brand all around the world. We have also made good progress on our priority to leverage technology to enhance the guest experience for BK. This quarter, we began testing delivery in the U. S. Across several 100 restaurants and numerous markets.
We're encouraged by the results so far, though it is still early. Delivery has been successful for us in many of our international markets, including places like China and Spain, and we intend to further expand our test in the U. S. Over the coming months. Now let's review our results for Popeyes.
System wide sales growth for the Q1 was 11%, which was driven by net restaurant growth of nearly 7% and improved comparable sales of 3.2%. Growth in our top line combined with integration synergies resulted in Popeyes adjusted EBITDA of $39,000,000 or $41,000,000 under prior accounting standards, up 81% organically versus the prior year period. Comparable sales for the quarter were driven by an improvement in U. S. Comparable sales to 2.3%, combined with significant strength in comparable sales in international markets.
Our results in the U. S. Reflect a better balance between value and premium offers than we had during prior quarters. Consistent with our priority to use technology to enhance guest experience, we are also testing delivery at Popeyes in the U. S.
And currently have several 100 restaurants in various markets across the country that are participating in the test. Our results thus far have shown that consumers have particularly enjoyed using the delivery channel to purchase Popeyes products for the dinner and for the late night dayparts, which are dayparts that typically involve larger check sizes. As with BK, it's still early, but the results have been encouraging so far and we intend to meaningfully broaden our test in the coming months. In terms of development, we grew Popeyes restaurant count by nearly 7% year on year, primarily driven by growth in the U. S.
Our continued growth in North America will be further supported by several multi year development agreements that we signed in the Q1. We also announced our 1st master franchise agreement to grow the Popeyes brand in Brazil. We are very excited to be working with our partners in Brazil who are also our partners responsible for successfully growing our Burger King brand in the country. Through their understanding of local taste and preferences in the market, as well as many years of of experience in the QSR industry, we are confident that we have the right partner to bring Popeyes to this exciting new market. Brazil is a strong market for chicken consumption, which has grown to be the leading protein in the country and we look forward to introducing guests all over the country to our unique menu offerings in the coming months.
We are also in discussions with several other partners to accelerate the development of our all around the world and we look forward to updating you on our future progress. With that, I'd now like to turn the call over to Matt.
Thanks, Daniel. System wide sales growth across each of our brands, combined with the inclusion of Popeyes in our results, partially offset by declines in Tim Hortons supply chain related revenues and expenses, led to adjusted EBITDA of $498,000,000 or $506,000,000 under prior accounting standards, up 5% organically versus the prior year combined results of RBI, including Popeyes. Our first quarter adjusted net income increased to approximately $313,000,000 or $319,000,000 under prior accounting standards. This compares to prior year results of $171,000,000 and the year over year increase is attributable to adjusted EBITDA growth, the redemption of our preferred shares in 2017 and a favorable tax rate due to stock option exercises in the quarter. This led to adjusted diluted EPS for the quarter of $0.66 up over 80% from $0.36 in the prior year period.
As a reminder, neither adjusted net income nor adjusted diluted EPS include Popeyes for the prior year results since we acquired the business in March of 2017. Before discussing capital allocation, we thought it might be helpful to point out 3 relevant considerations for investors looking to update their forecasts based on Q1 results. First, as Marcus highlighted at the beginning of the call, starting in the Q1 of 2018, we implemented new revenue recognition accounting standards. It is important to note that the impact of the new standards on our first quarter results is not necessarily an indication of the expected impact to the remaining quarters in 2018 for two main reasons. Shifting from previous accounting standards where franchise fees fully recognized at the time of opening to instead amortizing them over the life of the contract means that the impact of revenue recognition for franchise fees will implicitly have a larger impact on periods in which more openings occur.
Since we tend to open a majority of our restaurants in the second half of the year, this means that we anticipate the impact of the new accounting standards will be larger in the back half of the year. Additionally, our advertising fund contributions and related expenditures tend to be seasonal, especially given these revenues are structured as a percentage of sales. 2nd, Marcus also highlighted at the beginning of call that this quarter we implemented new hedge accounting standards. The adoption of the new standard resulted in a $3,600,000 positive impact on our net interest expense for the Q1 of 2018. Since our redesignation date was in March, we only recognized the partial benefit in the Q1.
And accordingly, we expect the benefit to be larger in the remaining quarters of 2018. However, the ultimate amount is subject to foreign exchange rate movements. And finally, our Q1 2018 adjusted effective income tax rate was materially lower than the range we had provided earlier this year, But it is important to remember that the timing and amount of stock option exercises can vary materially quarter to quarter and can thus have a much more material impact on a particular quarter's rate than the full year rate. Investors should accordingly expect meaningful quarter to quarter volatility in tax rate related to the unpredictability of stock option exercises. Now let's discuss our cash generation and capital allocation during the quarter.
In the Q1, we had net free cash outflow of approximately $109,000,000 calculated as the sum of cash flows from operating activities and cash flows from investing activities. This free cash outflow includes sizable one time cash tax payments, including taxes accrued in the Q4 of 2017 related to the redemption of our preferred shares, as well as seasonal timing of working capital outflows such as gift card redemptions. We also paid a total of approximately $97,000,000 in common dividends and partnership exchangeable unit distributions this quarter. As of March 31, 2018, our ending cash balance was approximately $850,000,000 Our total debt balance was $12,300,000,000 and our net debt was $11,400,000,000 This quarter, we announced that together with our franchisees, we plan to invest a combined total of roughly CAD700 1,000,000 over the next 4 years in relation to our important rollout of the Tim Hortons welcome image. While we have not disclosed exactly how this amount is split between us and our franchisees, consistent with our long standing practice for the Tim Hortons brand, For restaurants where we either own or lease the real estate, we contribute 50% of the front of house renovation costs.
While this represents a very important investment for our business and stays true to our balanced approach to capital allocation, our rollout of the welcome image represents a relatively 24, 2018, the RBI Board of Directors declared a dividend of $0.45 per common share and partnership exchangeable unit of RBI LP payable on July 3, 2018, which is consistent with our previously announced target of $1.80 in total dividends to be declared in 2018 and with our strategic priority of maintaining a balanced approach to capital allocation. I'd now like to hand the call back to Daniel for concluding remarks. Thanks, Matt.
We continue to grow system wide sales all around the world for each of our 3 iconic brands, Tim Hortons, Burger King and Popeyes Louisiana Kitchen, which drove adjusted EBITDA growth for the quarter. We have established our primary priorities for 2018 and developed strong plans with our partners all around the world to deliver on those priorities. At Tim's, we have absolute confidence that our 3 pillar Winning Together plan will allow us to overcome the challenges that we face and to improve sales growth in Canada. For Burger King, we have plans in place to build on our comparable sales momentum in the U. S.
And internationally and to also further our net restaurant growth. At Popeyes, we are highly focused on continuing to sign impactful development agreements both in the U. S. And internationally to fuel significant acceleration of net restaurant growth and long term system wide sales growth. Our great franchisees and employees all around the world are working hard to deliver against these priorities in 2018 and we look forward to providing you another update in the Q2.
Let me close by reiterating that our top priority system wide is to deliver the absolute best experience for our guests and to drive profitability for our franchise partners. I want to thank everyone for joining us this morning and for your ongoing support. We will now open up the call for Q and A. Operator?
Thank you. We will now begin the question and answer session. The first question comes from Nicole Miller with Piper Jaffray. Please go ahead.
Thank you. Good morning and thanks for the comments on the call today. My question is in regards to TIM HORTONS. In conjunction with the remodels, would it be possible that they might be extending the terms, the lease terms that they have? So I was just wondering on average, maybe where does the system sit in the term?
Would they extend that? And then what impact or contribution would that have to revenue or cash? And then just the second part to Tim's, in the U. S. Specifically, their peer group is suffering in terms of PM business.
So AM comps are up and PM comps are down. Are they seeing the same types of trends or is something different going on? Thanks.
Yes. Thanks, Nicole. It's Daniel. We're excited about the restaurant experience of the 3 pillar plan and we're really excited to roll out the welcome image in Canada. As you know and as is typical at the time of renovation, we would look to extend property control and we would look to enter into a new or extended franchise agreement.
So that's typical across our brands and that's generally how our Tim's brand works. And with respect to the business in the U. S, I think we saw a bit of a softer results. It was a little bit more competitive. And I think it's on us to make sure that we bring back the right balance between value, premium and limited time offers, which I think we had done a better job with in prior quarters.
Our next question comes from John Glass of Morgan Stanley. Please go ahead.
Thanks very much. Daniel, and just in the spirit of talking about sort of investments in the business, when you talked about the Canadian Tim's business needing some remodel CapEx, how do you see the overall need for investment though at the business? And I'm talking about it, I guess, on a global basis across all three brands. You've talked about technology and delivery, and that's sort of something newer to you. Your competitive brands have been investing longer term in some of those initiatives.
Do you see a need to step up investment across the brands to compete more in technology? Do you see other brands needing to, for example, go through some of the reimaging that you're seeing at Tim's? Can you talk about that holistically as you think about the business over the next year or 2?
Yes. Sure, John. Thanks for the question. I mean, you know the way our business operates is a little different than some of our peers in that we're structured with we're largely a fully franchised system with master franchise operators in our largest markets around the world. And And while we might have not been talking about it all that much, we've been renovating and our franchise owners have been renovating their restaurants every year for the past many years, both in the U.
S. And all around the world. And the fact that we're building a whole lot of restaurants relative to the base of restaurants that we have, that put us in a position where we have a pretty good image globally with our brands. With respect to technology, we have made this a bigger priority. And I think that the first thing that you saw us do earlier this year is when we appointed Josh Cobbs, who was our previous CFO, to oversee in addition to his role of overseeing development, to oversee all of technology.
And we are building out a team and we are more actively working with vendors all around the world to help accelerate our use of technology to enhance our guest experience. We don't see this as something that's going to require meaningful amount of capital. And I think we see opportunities to better leverage technology like we're already doing around the world. So in places like China and in Spain, where delivery is a really big portion of our business, we talked about testing delivery across the Burger King system in the U. S, which we're already doing.
We're testing delivery in the Popeyes system and we're looking at a whole different variety of things and we are already investing in the most important element, which is having the best people working on this project internally.
The next question will be from Dennis Geiger of UBS. Please go ahead.
Great, thanks. And thanks for all the details on the Winning Together plan, very helpful. Can you talk a little more though about how much of the plan perhaps is currently in place and rolled out? And then how much perhaps is coming just so we can think about maybe the timing of some of the benefits from the initiatives, if that's possible? And then kind of following up on John's question, is it fair to think then that this plan beyond what you've already kind of announced with remodels that it doesn't really require any kind of significant step up in CapEx, G and A spend, etcetera?
And then if I could just related to that sneak one more in, anything that this does for you from a development perspective within Canada? Maybe it's too early, but just how you're thinking about that as this becomes a success? Thanks.
Yes. Thanks for the question. I think with respect to the kind of what's in place and the benefits, we just announced this quarter. I mean, just within recent weeks, we just we crafted this plan together with our restaurant owners that Tim's winning together plan that centers around restaurant experience, product excellence and brand communication. And restaurant experience, we talked about the fact that we really want to work with our owners to accelerate the pace and the quality of the rest the pace of renovations and the quality of the restaurant image in qualitative testing with our guests.
We're also encouraged by the support and the feedback that we've already gotten from our restaurant owners. Just a few weeks into having announced the welcome image, we have several 100 restaurants who have already indicated to us that they plan to renovate their restaurants. And as Matt had mentioned in his prepared remarks, we were already renovating our restaurants. And while the cost of the welcome image is slightly more expensive than the previous image. We were already contributing to renovations in Canada.
So the incremental component in the scheme of things won't be material for us, but we do believe it will materially or it will positively impact the guest experience. With respect to product excellence, this means analyzing every single one of our products to make sure that they're absolute best in their categories and that's our commitment. And we've already started doing this by elevating the quality of the launch platform with some of the new products that we've launched, including Turkey Bacon Club, Artisan Grilled Cheese, the new Signature Meltz. And lastly, on brand communications, which is launching impactful marketing campaigns. We just started doing this with the Neighbors campaign that we launched, the musical campaign that we launched that highlights the quality of the cup of coffee that we offer at Tim Hortons all the way from bean to cup.
And lastly, as I mentioned, it means being way more proactive with the media going forward and telling our own story, our own positive story. And it's early, it's still very early and there's no like we've said this before and you probably heard me saying this before 5 years ago with Burger King, there's no silver bullet. But we think that the focus on restaurant experience, product excellence, brand communications together with our restaurant owners. If we do this, we execute on this and we will, we're confident that this is going to drive the brand in the right direction.
The next question comes from John Zamparo of CIBC.
I appreciate the color at the top of the call. I wanted to ask about the Tim's mobile app. You've got a few quarters with it under your belt now. What can you share with us about the pace of customer sign ups or frequency of use and potentially higher checks? And you mentioned the goal of furthering your coffee leadership in Canada.
Do you view the app as being meaningful part of that? Thanks.
Yes. We're still excited about the potential for the Tim's mobile app and how our guests are interacting with us digitally. We've now included this as kind of more broadly part of our overall restaurant We're making changes and we We're making changes and we're evolving the app to kind of be better tailored to what our guests are or how our guests are using it. We see this longer term as a tool that will enable us to do all sorts of things, including direct marketing, and a variety of other ways to ultimately just improve our guests' access to the brand. And it's still early for us, but we're excited about the long term potential for this, especially for the Tim's brand.
Our next question comes from Brian Bittner of Oppenheimer and Company. Please go ahead.
Thanks. Thanks very much. Just speaking with the Tim Hortons, with the sales trend in Candix, how do you guys parse out what you believe is coming from the effects of the negative media coverage? Is it a deterioration in their brand scores or some other measure? How are you convinced that the weakness there may not be more attributable, to some other headwinds going on in the Tim's business?
Yes. It's Danilo. Thanks for the question. Look, it's both. The environment is competitive and the fact that there's a ton of negative media created by this group of franchisees is also hurting the guest perception and they're both contributing to the performance, which is why we had to take a step back and work with our advisory board and work with our restaurant owners to craft a kind of a bigger bolder plan in our Winning Together plan to move the business and move the brand forward.
And that's our agenda now and that's top priority and we're encouraged by the fact that we have a bunch of support very early on from a meaningful number of restaurants and owners. And I think we have the right team, the right plan and the right support from the owners to drive the business forward.
The next question comes from Andrew Charles of Cowen and Company.
Great, thanks. Two questions for me. So for Tim's, can you talk about the decision to just remodel the interiors of restaurants just given the heavy use of drive through and off premise for the brand? And then I appreciate the detail on the weighing together plan. You guys previously talked about how the remodels would be recorded in incremental TI associated with remodeling plan.
Do you expect incremental costs or CapEx associated with any of the new Tim's initiatives that you guys outlined today?
I'll comment thanks for the question. I'm going to comment on the image and I'll let Matt, if you want to comment on the how it's been accounted for and all that. But sorry, I'm sorry if this wasn't clear. The welcome image, the restaurant exterior and interior will both be redesigned. And so I think from the exterior, it's going to have a more of a natural looking lighter, more inviting materials.
Inside, we're going to have things like artwork that reflected Tim Hortons values and histories, commission portrait of Tim Hortons, Mosaic, iconic brand images, walls that feature our unique coffee sourcing. So there's a whole variety of components to the new welcome image and including upgrading the quality of the seating, it fosters a sense of community inside the restaurant. So it's a full scope inside and outside. So Matt, I don't
know if you have any thoughts on
this financial side. Yes.
Hi, it's Matt.
Just to touch on the investment question. As Daniel mentioned, a really important piece of the winning together strategy here is the welcome image, which we rolled out. And this is a very important initiative for us and we think that it will help us drive significant reimaging of our system in Canada. And as part of our historically balanced approach to capital allocation, we've been maintaining a very healthy pace of remodels over time. And so as it relates to overall cash flows, the remodel initiative represents a relatively immaterial incremental impact to cash flows over the 4 years in capital investment.
And as it relates to the broader Winning Together plan, there's no material investment to otherwise speak of.
Thank you. Our next question comes from Peter Sklar of BMO Capital. Please go ahead.
In your commentary, when you were talking about the coffee performance in Canada, I believe you said that in addition to competitive issues, there were some issues related to the execution of the rollout to Win to Rim, which has been a longstanding promotion on the calendar of Tim Hortons. Could you just explain a little bit what happened there?
Yes. Thanks for that question, Peter. With respect to roll up during the quarter, we did miss an opportunity there, partly due to an unfortunate error with one of our suppliers who we had been using for decades. So that coupled with increasing competition, led to some softness in coffee during the quarter.
The next question comes from Gregory Francfort of Bank of America.
Hey, guys. I got two questions. Matt, one for you. Just can you help maybe gross out the revenue impact of the accounting changes? I think the $182,000,000 in revenue and $191,000,000 on SG and A.
Is that $191,000,000 also what the impact was in advertising fund revenue? So it was like a $9,000,000 drag from the fees? And then Daniel, a bigger picture question on delivery for Burger King in the U. S, how do you envision quick service delivery playing out? I mean, I think the economics to make it work probably is maybe high teens in terms of total checks.
And are you going to shift your marketing to maybe address bundled orders or bundled bundles? I'm just sort of curious how you plan to address delivery? How you think the market evolves?
Yes. Hi. Thanks for the question. It's Matt here. I'll touch on the accounting and then I'll pass it over to Daniel.
So on the revenue recognition accounting, again, 2 main impacts to our financials, the first being to franchise fees where we are previously we're recognizing upfront the franchise fees when the restaurants opened or the agreement was renewed. Starting in 2018, these will be amortized over the life of the agreement. And the second, as you pointed out, is related to ad fund. Under the previous standards, the advertising fund net positions were recorded on the balance sheet and had no P and L impact. Beginning this year, we are consolidating the full gross P and L impact of the advertising funds that we manage both revenue and expense.
And this resulted in a year over year increase in revenues. And then additionally, I would say, on a net basis, the close to $9,000,000 impact was approximately half related to the amortization of franchise fees and the other half related to the consolidation of advertising funds in the quarter.
Yes, thanks. And then with respect to the delivery question, look, we've seen delivery be quite impactful in some of our international markets. I think they had mentioned in the prepared remarks, places like China and Spain and also Turkey has been a long user of delivery in terms of impactful sales. With respect to the U. S, it's early.
I mean, our initial results are encouraging. We have rolled it out, delivery out to several 100 restaurants with the Burger King brand and several 100 with the Popeyes brand. And I think we're still in the phase where we're seeing good results and we want to continue monitoring it and adjust accordingly before we could kind of come back to you and have definitive plans on how we want to adjust or how we want to reprioritize marketing. But I'd say it's too early for that. But I think, look, this is just one good example of us being able to kind of quickly move fast to use technology to enhance our guest experience and really just to provide more channels for the guests to access the brands.
The next question will be from Will Slabaugh of Stephens Inc.
Yes, thanks guys. I had another question on Tim's and just sort of getting a gauge in terms of where you feel like you are from a product innovation standpoint and sort of where you need to be. So if we could just talk about the espresso platform, I guess, is number 1 and then some of the other lunch items and coffee that you mentioned earlier in terms of how impactful you feel like they've been in the past as you've launched and as you've initiated some changes and then what needs to be changed either from a product or from a marketing standpoint, just from a high level standpoint? And then also, if I could also ask about the supply chain. You mentioned that revenues at Tim's were down.
I think it was 6.8% on a like for like basis due mainly to the supply chain. I know you mentioned espresso and lapping over that in terms of inventories as part of that. I wonder if there was anything else going on there or if that was the big reason? Thank you.
Yes. I'll take the first one. I'll pass it on to Matt to talk about the supply chain. But I'd say, look, as it relates to the Winning together plan and the 2 pillars that you mentioned and frankly the 3rd pillar as well, I'd say we're early on all of them. With respect to product excellence, we have made some progress elevating the quality of our lunch sandwiches, including the Turkey Bacon Club, the artisan grilled cheese, and we've gotten good feedback and seen some good results with that.
We are encouraged by the success we've had and the rollout of espresso based beverages and giving us another way to innovate around coffee and we did some of that this quarter. But as I said earlier, we're going to analyze every one of our products and making sure they're the absolute best in each of their categories and that's a firm commitment that we're making. So I think there's a whole lot more to come there. And on brand communications, I think it's about elevating the quality of our communications and constantly and being more open to kind of proactively speak with the media and more proactively telling our own story. And I think you're going to see us doing a lot more of both of them.
But as it relates to the Winning Together plan, impact of product excellence, impact of brand communications, it's still very early. And Matt, do you
want to add anything? Yes, just to follow-up on your question related to the supply chain performance. The organic year over year decline in EBITDA and revenues for Tim's this quarter primarily reflected 2 impacts on the supply chain business. First, as you mentioned, in the quarter, we lapped the rollout of our espresso program that was completed in the first half of twenty seventeen. Secondly, as highlighted over the past few quarters, we passed on some supply chain savings to our franchisees through a reduction in pricing in the second half of last year.
We continue to maintain this pricing for franchisees, So margins in the supply chain business in the Q1 of 2018 are relatively consistent sequentially with the margins from the second half of last year. And looking ahead, as we no longer lap these two impacts, we expect the organic growth profile at Tim's to improve throughout the year. Overall, a variety of moving pieces, We highlighted here some of the largest. Had it not been for these issues, the business would be roughly flat in overall organic EBITDA growth in Q1.
The next question will be from Karen Holthouse of Goldman Sachs.
Hi. So you've mentioned changes to communication in Canada as part of the strategy. If that's not ultimately successful in starting to improve brand perception, is there anything you're most focused on from more of an operational spending perspective that you think would be most helpful or most effective as, for lack of a better term, an olive branch to maybe Canadian consumers or franchisees?
Yes. Thanks for the question, Karen. We've made good progress on building a strong and a positive agenda with the restaurant owners. The relationships with the owners weren't where they needed to be, but we have been making improvements. We're very excited about the Winning Together plan.
And as I had mentioned in the prepared remarks, we already have several 100 restaurants that are signed up, which indicates the support and the enthusiasm. Just last week, our advisory board openly spoke out to the entire system and this is the advisory board that's elected by the franchisees. They openly supported our management team. They supported our plan and they spoke out against some of the actions of some of the franchisees who have been creating some negative media coverage. And look, we do have a lot to improve, but we have the right team, we have the right plan, we have the right support from our restaurant owners to drive the business forward.
And I am confident that with the right brand communications, coupled with an acceleration in restaurant, image renovation and new product introduction, product renovation that we will drive the brand in the right direction.
The next question will be from Jon Tower of Wells Fargo.
Great. Thanks for taking the question. Just one more on Tim Hortons Canada and then another in BK U. S, first in the Canada business. Can you give us a little bit of information on where the customers are going if they're not going Tim's?
Are they staying at home? Or if they're going to the competitors, what's driving them to the competitors? And then on the BK U. S. Business, can you talk about whether or not you're attracting new customers to the brand or you're just seeing increased frequency of existing customers with those strong same store sales?
Thanks.
Yes, thanks. On Tim's, and you know this has been the case in the past, we don't comment on specific competitors, but we can say and we have said it has been a competitive environment and that coupled with some of the negative brand coverage has impacted our sales and which is why we put together the Winning Together plan together with our restaurant owners to drive the business in the right direction. And then on the Burger King side, we had a good quarter, especially in the U. S. And we continue to innovate around some of the existing platforms.
We saw some success with the Double Quarter Pound King. We saw success with the Spicy Chicken Sandwich platform that we launched, which we built on the crispy chicken sandwich that we had launched last year. And I think the other thing that positively contributes to the same store sales growth that we've experienced over time at the Burger King brand is the fact that if you go back in time, 5, 6 years ago, we had 1 out of 10 restaurants renovated. And now after working closely with our franchise restaurant owners in the U. S.
Over the last 6 plus years, we've renovated the vast majority of the system, which has helped. And sorry to jump back to Tim Hortons, one of the things that gives us confidence that renovating restaurants positively in the long run contributes to one's ability to drive improved sales.
The next question will be from Matt McGinley of Evercore ISI.
Thanks. On that last point, I believe that the typical remodel cycle for Tim Hortons is usually done around the franchise term every 10 years, but it may have gone a little bit longer than that as you finalize that new welcome image. I'm curious if that means that the typical Tim's restaurant is just a little older in terms of the remodel cycle than we've seen in the past. And then as far as how the franchisees will fund that, I believe you negotiated a preferred lending agreement with some of the banks in Canada for the franchisees that makes it faster to get capital to do a project. I'm curious if those lines are still available to the franchisees.
Yes. Hi, it's Daniel. So yes, the typical renovation cycle with the Tim Hortons restaurants is 10 years. And we're working with our restaurant owners to accelerate the timing to kind of bring forward the renovations such that we would want to be able to achieve the majority of the restaurants under new image by 2021. That'll be a combination of new builds and renovations.
And yes, we did arrange for this preferred lending terms for the system to be able to access that to finance renovations.
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Daniel Schwartz for any closing remarks.
Thanks everybody for joining us today and we look forward to updating you on our progress next quarter. Thanks a lot.
And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.