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Tim Hortons Inc. (THI)

March 13, 2013 8:00 am ET

Executives

Paul D. House - Executive Chairman, Chief Executive Officer, President and Member of Executive Committee

Cynthia J. Devine - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Scott Bonikowsky - Vice President of Investor Relations

Analysts

Chris Li - BofA Merrill Lynch, Research Division

Chris Li - BofA Merrill Lynch, Research Division

Welcome to Day 2 of our conference. My name is Chris Li, I cover the Canadian consumer and retail stocks in Toronto and we're very delighted to have Tim Hortons come back and provide us with an update of the company. With us this morning, we have Paul House, who's the President and CEO; Cynthia Devine, CFO; and then Scott Bonikowsky, Head of IR.

Without further ado, I'm going to ask Paul to come up. Thank you.

Paul D. House

So let's get started. All right. Well, good morning, everyone. Cynthia and I are pleased to be here with you and present some things about our great company. I want to start -- or before I begin, because of my friend, Scott, I've got to mention that our Safe Harbor statement applies to our discussions today, and I don't think you need me to go through that.

So to get on with the presentation, Tim Hortons is the largest quick service restaurant player in Canada by a very wide margin, both in traffic and in systemwide sales. Our share of QSR traffic in Canada is close to 42%, and we serve 2 billions of cups of coffee every year and we have nearly 4,300 restaurants systemwide. And with a market capital of approximately CAD 8 billion, we are also one of North America's largest publicly traded restaurant companies.

This next slide illustrates the Canadian quick service restaurant competitive landscape in terms of major players, and the clear lead that we have over time. And as I mentioned, we have nearly a 42% share of quick service restaurant traffic. Our next largest competitor has about 15% market share by way of comparison, and we enjoy significant competitive scale advantages in the Canadian market. While our large market share of the Canadian quick service restaurant traffic often comes as a surprise, to those of you that aren't familiar with our brand, the strength of our cornerstone coffee category typically has even a greater impact. For all the coffee poured in Canada and quick service restaurants, nearly 8 out of 10 cups of coffee are served by Tim Hortons. And we enjoy a very strong customer loyalty and a very, very high level of repeat business.

This next slide highlights some of the aspects of our market position in Canada. We are the dominant player with over 60% market share in several categories, including hot beverages, morning meal, and morning snack. We are the #1 player in the overall QSR market, as well as the afternoon snack and evening snack categories. We're not the largest player in the lunch category, but we've added 5% to our market share in the past 5 years. And our new Canadian sandwich platform is one element of our strategy to become stronger at lunch. Similarly, in cold beverages, in the past couple of years, we've introduced products like frozen lemonade, iced lattes and fruit smoothies. Single-serve coffee is another market we've just entered. Initially, our coffee is available for the Kraft TASSIMO system, but our strategy is to expand to other formats in the near future. We are very proud to have delivered positive same-store sales growth in 21 -- for the past 21 consecutive years. And this slide shows the past 10 years broken out by our Canadian and U.S. segments. We've averaged over 5% growth per year over that period of time.

Growth rates have been lower on average since the financial crisis in 2008. The economic climate conditions continue to post challenges in our industry. While our rate of growth has moderated in a low growth economic environment, we continue to outpace much of the industry.

Three weeks ago, we reported our 2012 fourth quarter and year-end results. We said that the challenging economic climate has led to an intensified competitive environment in the restaurant sector. Most companies, including ourselves, are relying more heavily on promotional activity to drive traffic into their restaurants. People are fighting to grow their share in a low growth environment. The results for us in recent quarters has been moderate same-store sales growth. We have many initiatives in place designed to help address these challenges. We operate in 3 distinct markets and we have a tailored strategy for each of them. We have a very solid foundation in our Canadian business, which generate strong cash flow and at this time represents the vast majority of our operating income. We have gained a solid foothold in the U.S. market, which promises to be the next wave of growth for our company. Cynthia will provide more details on our Canadian and U.S. operations in a few moments.

And international expansion opportunities offer exciting longer-term possibilities for our company. We currently have 24 restaurants in the Gulf Cooperation Council, with plans to reach up to 120 in the region by 2015. We're also exploring other international markets at this time. We are currently focused on executing a number of strategic priorities, which will help us address -- it all happened here -- sorry, my apology. We are currently focused on executing a number of strategic priorities, which we believe will help us address the challenging environment. We're improving the guest experience by introducing convenient payment options, installing digital menu boards and adding contemporary design elements to our restaurants. We're devoting resources to new restaurant development, as well as renovations for existing locations. We plan to build between 250 to 290 restaurants systemwide in 2013 and renovate over 300 restaurants in Canada. And these will feature new design treatments that will help us refresh our image. We're enhancing many of our very popular drive-thru facilities by adding double-order stations or double lanes or by relocating order stations, so that we can increase throughput and by adding new exterior menu boards -- and expanding menu boards -- exterior menu boards. Capacity is a key concern in our system, given our heavy volumes, so these initiatives are essential to our system. We expect to touch more than 1,000 of our drive-thrus in Canada this year alone in some way or another.

And then menu innovation is always a key to our strategy. For example, we recently introduced Grilled Panini sandwiches and expanded our cold beverage platform. And we will continue to focus on day part and category opportunities. And although these are challenging times overall, we feel very good about our business and the future ahead for this great company.

With that, I'll turn it over to Cynthia to review some of the financial numbers. Cynthia?

Cynthia J. Devine

Thanks, Paul, and good morning, everyone. One of the key differentiators for Tim Hortons compared to others in the restaurant sector is really our multilayered revenue stream that exists within our business model. We have a traditional royalty business, as you would expect from a highly franchised company such as ours, and this creates an income stream that's typically based on about 4.5% of sales. But we also control through ownership or control the head lease, more than 80% of our system real estate, and this generates a quality of revenue stream for us that's typically based on 8.5% of sales. Our revenues are reliable and recurring and they form really one of the cornerstones of our business model. Finally, we have significant levels of vertical integration, as well, in our business. And we're vertically integrated for 2 primary reasons. First, we expect that any vertical integration that we undertake is going to be a benefit to our restaurant owners. And that's in ways of driving cost efficiencies, better service or to protect proprietary products that we have. And secondly, which is equally important, is that it has to provide returns for the company in any investments that we make in vertical integration.

So on the next slide, we show healthy systemwide sales growth in both the fourth quarter and in the year. And given the economic uncertainty, we're relatively pleased with those results. And same-store sales was moderated versus prior year. And if you note, Q4, that was one of our strongest quarters -- in Q4 of 2011, that was one of the strongest quarters that we lapped in 2011. We had really strong growth in both markets, Canada and the U.S. So while these were very respectable results, we did fall short of our targets for the year. So in Canada, we had targeted 3% to 5% same-store sales growth, and we actually were at 2.8%. But in the U.S., we're right within our targeted range. We delivered 4.6% in a range with 4% to 6%. We grew adjusted operating income by 4.4% in Q4 and 6.5% for the year, and similar -- that was very similar to our revenue growth during those time periods.

In both cases, we've adjusted -- the adjusted operating income was adjusted for the corporate reorganization expenses that we incurred during 2012. And as I have to say, this is a non-GAAP measure, so I would ask you to refer to a reconciliation in our public disclosures to reconcile that back to the closest GAAP measure in our business.

So in the next slide, you'll see in 2012, we ended with 3,436 restaurants in Canada. We have a solid presence in every part of the country. But we still have room to grow. And our analysis historically has indicated that we have room for at least 4,000 Tim Horton restaurants in Canada. We're currently focusing our restaurant development in areas of the country where we're less penetrated. And this would include Québec, Western Canada, Ontario and major urban markets where we think there's a real opportunity. So for 2013, we're targeting between 160 and 180 new restaurants in Canada.

On the next slide, if you look at our U.S. market, we've been aggressive in our development efforts, doubling our footprint in the last 5 years. We're currently located in 11 states in the Northeast and Midwest regions, with our largest presence concentrated in New York, Ohio and Michigan. Our strategy is really to focus our capital resources on our most developed markets where we already have a solid presence. A higher density of restaurants in a particular city increases the convenience for our guests and enables us to use our advertising spend more efficiently.

This next slide summarizes our financial position at the end of Q4. Capital expenditures totaled $77 million in the fourth quarter. And that reflects a busy period that we had in terms of new restaurants and renovations of existing restaurants. Depreciation and amortization was approximately $35 million, which was up from $30 million in 2011. And from a balance sheet perspective, our balance sheet remained strong. We ended 2012 with $120 million in cash and cash equivalents, which was approximately $6 million lower than a year ago, but we've invested those cash flows back in the business, either reinvesting them for future growth in our business through some of the capital that Paul talked about. And also, we've returned value to shareholders through both dividends and share repurchases, which I'll speak about in a minute. But the end of 2012, we had $406 million in long-term debt on our balance sheet.

In -- with our most recent financial results, we also included our guidance for 2013. So we're targeting full year EPS of $2.87 to $2.97, and that's compared to $2.59 in 2012. But on a comparable basis, if you exclude the reorganization charges that I referred to, our EPS for 2012 would've been $2.69. We're targeting same-store sales growth in the range of 2% to 4% in Canada, and 3% to 5% in the U.S. And we noted in our Q4 disclosures, as Paul talked about a little bit, is that we've seen weakness in our year-to-date results due to the ongoing challenges in the operating environment and less favorable weather that we've experienced in the first bit of 2013. We have marketing and operation plans, as well as menu initiatives that are in place that we think will address some of these challenges.

We plan to build 160 to 180 restaurants in Canada, and 70 to 90 full-serve restaurants in the U.S. market. We're targeting CapEx in the range of $250 million to $300 million spending. And that's largely related to new restaurants and renovations of existing restaurants. And we're anticipating our effective tax rate to be approximately 28%.

We believe strongly in returning value to shareholders. And if I refer to the chart up here, our business generates strong cash flow and we've returned a large portion of those cash flows to our shareholders in the form of both dividends and share repurchases. Last month, with our results, we announced a 23.8% increase in our quarterly dividend, as well as a 5% increase in the payout range, so we've moved our payout range now to 35% to 40% of prior-year normalized net income. This is the sixth consecutive year that we've had dividend increases.

We also announced the approval of a new share repurchase program with a maximum value of up to $250 million, and that was up from $200 million, which has been our previous share repurchase level, absent some unusual years that we had there, but that's typically what we've been spending over the last few years in share repurchases. You'll see in the earlier years, in both 2010 and 2011, we had higher share repurchases. And that was really we had a cash infusion from a divestiture of our bakery business. And so we used proceeds from that to buy back shares, so that's why it was a little bit higher during those years. So we have returned a lot of capital to shareholders over the past number of years.

So with that quick summary, we'd like to open it up for Q&A.

Chris Li - BofA Merrill Lynch, Research Division

Well, thanks, Cynthia and Paul.

Question-and-Answer Session

Chris Li - BofA Merrill Lynch, Research Division

Maybe I'll just start the ball rolling with a couple of questions. Paul, this is going to be your final time presenting at our conference as -- in your current position as President and CEO. The company is set to announce your successor in a few months. Can you please remind us of the qualities that the Board, the search committee, is looking for in the next individual to lead the company?

Paul D. House

Sure. Well, first, they want someone better looking than myself, so that should be a little fence to get over. Like any search, you have a profile of what you're looking for and you have a series of things that are obviously essential and then there's other things that you'd like to have. And so with any candidate, you're not going to check every box off, but it's a great thing about our company, we have a very strong management team. So whoever comes in as the new CEO will be very complemented by the strength of our team. And we've just gone through reorganizations, so the company is very well set up for a new CEO to come in and take over the organization.

Chris Li - BofA Merrill Lynch, Research Division

And how important is having some U.S. QSR experience? What does that rank in terms of the qualities?

Paul D. House

Well, again, I would relate it to that we have David Clanachan, who is our Chief Operating Officer, has been running the U.S. business for the last 4 or 5 years; and now Mike Meilleur is doing that, reporting to him. So we have lots of depth in the U.S. business. So whether we can check off the box with somebody with direct U.S. experience is not as essential as -- again, it would be nice to have, but it depends on the candidate.

Chris Li - BofA Merrill Lynch, Research Division

And maybe a question for you, Cynthia. VIEs has become a very topical issue in the last several quarters. I think most people have a good understanding of how it impacts your income statement. But can you remind us, maybe take us through how it impacts your cash flow statement from that?

Cynthia J. Devine

Sure. So some of -- once a VIE has been established, it's really -- for those who aren't familiar with our businesses much, these are operator agreements where typically -- and it's not all our operator agreements that fall into VIEs, but for the most part, this is what is in that category. But we have an operator agreement where we keep the equipment on our books and so they're coming into the business, we're getting to know each other, we have these operator agreements in both countries, so it's not just a U.S. initiative that we have, but they will not have to go out and finance that equipment until they have -- until sales are at such a level that we feel that they can go out and get financing and support the business. So from a cash flow perspective, it really is -- the only difference between an 80-20 operator agreement versus a regular franchise agreement is that initial purchase doesn't take place. So we keep the equipment on our books, so there's no real cash flow coming in for that equipment to build out the restaurant. But on an ongoing basis, then we would typically collect rent and loyalty and then a rental stream associated with that equipment. But it really depends on whether a restaurant is on a lease. If it's in a developing market and sales haven't reached the levels that we would expect them to, then they'll be provided some relief on it. But once it's up and established, the cash flow, they're really not that different from a nonconsolidated operator agreement in a regular one, so it really doesn't have an impact on cash flows once the initial restaurant is established.

Chris Li - BofA Merrill Lynch, Research Division

Great. I'll take a question from the audience.

Unknown Analyst

How do franchisees evaluate the different drive-thru enhancements? And what works best for their stores?

Paul D. House

I'm sorry, would -- can you repeat that, please?

Unknown Analyst

How do franchisees evaluate the different drive-thru enhancements? And what works best for their stores?

Paul D. House

Well, I think it's, really, a lot of it is volume-related. If they're at the high end of the volume in our system, then the double drive-thru lane is probably suitable for them, if they have the real estate to do it. And I must admit, in a lot of cases, you don't have the real estate to do it, but where you do, those are the opportunity. The biggest one is moving to fifth car, which pretty much probably 75% of our drive-thru lanes we have the capability of being able to do that. And so -- and we say we're going to touch at least 1,000 drive-thrus this year. The bulk of them will be moving from the fourth to fifth car.

Unknown Analyst

What does that mean, fourth to fifth car?

Paul D. House

Well, fourth car from the window. So by moving back another car, it gives you a little more time, preparation time, before the order gets to the window for pickup, Malcolm [ph].

Unknown Analyst

But the usual, the order takes...

Paul D. House

Back one station, yes.

Unknown Analyst

Okay. I just thought I'd clarify that.

Paul D. House

Yes, I know. I meant, 4 cars has been our standard from day one, from 20 years, I guess, or so.

Unknown Analyst

Can you please compare the unit economics of your U.S. -- typical U.S. store to your typical Canadian store? And also, are there any local markets in the U.S. where the stores, as a whole, are performing at the level of Canadian store?

Cynthia J. Devine

Sure. With regards to unit economics, there really are not a lot of differences between Canada and the U.S. in terms of the cost of restaurants and anything else about even from a restaurant owner perspective, labor and raw materials and that. There aren't a lot of differences. The key difference is average unit volume. So your annual unit volumes in Canada for a standard restaurant now are at about $2 million, whereas the U.S., it's just over $1 million. So that is the fundamental difference between the 2 countries. But if you have a restaurant in United States that does $1.5 million and you have a restaurant in Canada that does $1.5 million, I would tell you that the economics from a restaurant owner perspective are very similar, and from company perspective, would also be very similar. And then on the second part of your question, Buffalo would be very comparable to many of the markets in Canada. As well, in each of our core markets, we have restaurants that would perform very similar to Canadian restaurants. So we do have higher volume restaurants in each of our core market. The opportunity for us is move everybody up to those higher levels and get to the AUVs that are similar to Canada.

Unknown Analyst

And what is the challenge for you there? [indiscernible] marketing, is it...

Cynthia J. Devine

Well, it takes time. I mean, we always laugh because people talk about us in Canada as being a 49-year overnight success. Because we've really been in Canada for 49 years, almost 49 years. And in the U.S., we have -- it's probably just over 20 years. And in Canada, in the same period of time, in our first 20 years in Canada, we had slightly over 200 restaurants. So what we're trying to do in the U.S. market is accelerate what took us a very long time to build in Canada. So we've probably -- we're in more markets, maybe, than we would've been in Canada in the early days. And then we try to penetrate those markets in a little bit faster pace so we can get to the average unit volumes. But it takes time. And the type of loyalty that Paul talked about in terms of our guest frequency and coming to us every day and multiple times a day, you don't change that habit overnight. So it takes time. You have to be convenient. And you have to have a loud share voice in terms of marketing. And those are some of the initiatives that we put in place over the last few years.

Chris Li - BofA Merrill Lynch, Research Division

Can you talk about your single-serve strategy a little bit deeper? I know you said you're in TASSIMO, I don't think you're in K-Cups. Maybe just what's the long-term plan there?

Paul D. House

Yes. Well, as we said, I think I actually, probably going back 2 or 3 years, that we've been talking about that, we would enter the market when the economics were right and the economics have gotten right as the market has changed, as you all know, dramatically. So we did our initial. In Canada, TASSIMO and K-Cups are the 2 major players. And they both have about the same amount of share, something around 40%, 45%. And then about 10% of it is what the rest of the players. So and we will be in that platform sometime this year. So we'll be able to address the bulk of the market. Probably 80% to 90% of the market that's out there, we will have our product available for those types of machines.

Chris Li - BofA Merrill Lynch, Research Division

And out of curiosity, so I know you mentioned vertical integration, would that apply also to the single-serve market on the K-Cup side? So is that something where you would outsource the manufacturing or is that something where you think you would do that on your own?

Paul D. House

We would outsource the manufacturing, but we would supply the coffee that goes into the product at this point.

Unknown Analyst

Can you speak to the company's willingness to add on additional levers, share repurchase stock at these levels?

Cynthia J. Devine

Sure. We continue to look at our balance sheet and look for opportunities. As I said in my prepared remarks, we believe we have a very strong balance sheet. And I think we set out a strategic plan that we completed in 2009, and we really rolled out to the market in early 2010. That was 4 years strategic plan, of which 2013 is the end of that planning cycle. We are currently going to be beginning the next phase of strategic planning for 2014 and beyond. And in the context of the strategic plan, we would also, as we always do, look at our balance sheet and look at other areas of the business and know what kind of CapEx and other things are needed in the business and take a holistic approach and then determine what our capital allocation strategy will be in the future in the context of the overall business strategy.

Unknown Analyst

Talking about capital allocation, could you explain what the rationale for choosing the United States are? It's a neighboring country but it's a highly competitive market, there's a lot of coffee shops to choose from. And you discussed quite the economics that the turnover is half what it is in Canada and that's a lot lower so that what you can get in other less developed, less competitive market. So what was the rationale for choosing the United States as the main international growth opportunity? And that's the first question. And the second question, if I may, is about just coffee price. Do you -- it's come down a lot in the last year. What's the implication for the company, is it margin benefit or do you expect to see deflationary pressure out of that?

Paul D. House

Okay. Well, to address the U.S., I mean, it's a competitive market but it's a wonderful market. It's got great opportunity. And I think, when -- you've got a look at our Canadian and U.S. business, you've got to look at it in a timeframe. If you talk about our North American business, we wouldn't be talking about the U.S. versus Canada because Buffalo is very profitable for us. Our Michigan market is growing nicely. So as competitive as the U.S. market is, there's lots of opportunity here. And a lot of brands that are in the U.S. have been around for a while, some of their facilities retired and so there's opportunities. It doesn't matter where you go in the world. Outside of your own country, you've got challenges. We're in Dubai right now, in the Mid East, with 25 stores. And there's tons of coffee competition there. Probably more than in any market in the U.S. But the reality is, is that when we looked at the market, we say, you know what, I think that nobody is doing coffee with food properly and there's a great opportunity for us there. And we're into the market. We're doing extremely well there. And guess what, our food is terrific. Our average guest check is about double of what we experienced here in North America. So I think you have to be very selective of where you go and what you do. But I don't think you're going to go anywhere today that you're not going to run into strong competition in what you do. So picking the right country with the right currency. Certainly, the language is very important for us when we look at another country as well. And so there's a number of factors we look at. But we're pleased with the -- I mean, we've only -- I think, some of the speakers that have been on here today that have been in international market, they'll talk about their development outside of the United States. They've been over 20 years trying to establish their brand to get them going and the market has been very patient with them. And what other company has -- in food service, has the United States as a growth vehicle? And it's still a tremendous market. It's the best retail market in the world. So you can look at all the markets. You can look at China and you can look at all these other countries, but this is still a wonderful country to do business in and offers great opportunity if you have a good brand and you market it properly and you're patient with it. And so that's -- for those factors, that's why we picked it. And as I said, we are profitable in the Buffalo market. We are moving towards that in the Michigan market. And so it's no different than we developed Canada, we had areas that weren't profitable and we had areas that were profitable. And as far as the coffee, I'll let Cynthia address that.

Cynthia J. Devine

So in terms of our commodities, we like to buy coffee out -- generally, we're out at least 6 months. And so we have our coffee prices. In fact, just towards the end of the fourth quarter, we reduced our pricing to our restaurant owners to reflect the much better commodity rates. But the way that our business model works is we typically price products, like coffee, that go through our warehousing and distribution business based on a penny profit. So when commodity prices go up and down, we pass the savings or the cost onto our restaurant owners and we keep that penny profit relatively constant. So as coffee prices come down, we'll pass those on, those savings onto our restaurant owners but it's a very positive thing for the system because a healthy restaurant owner with strong margins and strong cash flows for their business, they're able to reinvest in the business and they're able to be very -- just able to do some of those capital initiatives and some of the other things that you need to grow the business. So we're very pleased with the commodity outlook for our system in 2013. In recent times, the C market continues to be -- the coffee market continues to be very soft. And that's a good thing for our business and will really help strengthen our owner profitability. And in turn, that's a great thing, overall, for the business.

Unknown Analyst

Two separate questions. Number 1, what portion of your U.S. stores now are company-owned versus franchise? And the second one is, you say that the economic environment is challenging and promotion is expensive. Is that showing itself on a regional basis in Canada, or is it more uniform across the country?

Paul D. House

Your second question, I would say it's across the country, as it is in United States. Everyone's couponing. I mean, couponing has become kind of the order of the day lately, all the major brands are doing, starting at McDonald's, as you all know, have been doing it, but everybody else is kind of joining into that. So we see a lot of couponing activity. And then your TV programs aren't -- most of the marketing around that has got a price point of some type attached to it. So you've got to give the consumer a reason to come and purchase that. So that's basically -- go ahead, Cynthia.

Cynthia J. Devine

And your first question on company-operated restaurants in the U.S., we have very few. We're about 90% -- 98%, 99% franchised in the U.S. business. But we do have -- as I mentioned earlier, and it is very confusing kind of accounting, a piece of accounting literature on variable interest entities. And we do have the restaurants where the owner hasn't yet paid for the equipment package. And so that's our real way to bring new restaurant owners into the system. And so we don't have a corporate store model, but the 80-20 operations, not that they are like corporate stores in very many respects, but it is a way for us to bring new owners in and get the business up and running in new markets.

Unknown Analyst

In Canada, obviously, McDonald's doesn't like the fact that you're beating the hell out of them. And so I'm hearing that they've become much, much more aggressive and trying to force market share increase for them. How -- is that -- A, is that true? And B, how are you responding to that?

Paul D. House

Yes, well, there's no question, they've become more aggressive, Malcolm. They've done -- they just did it a couple of weeks ago, they ran free coffee at their locations for a week. And they've done that once or twice a year for the last 3 or 4 years. And McCafé, they put pretty much, I think, they've got in all their restaurants today. They had stated that they would have all their restaurants -- they've had their restaurants -- they didn't do a lot of renovations for many, many years. And they stated that they were going to renovate all their stores in Canada and have it done by the end of 2012, I think. But a recent statement by their CEO, they're about 70% completed in renovations. So but they're a good, strong competitor. But they've got 1,200, 1,300, 1,400 locations. We've got 3,500 locations. We still serve 8 out of 10 cups of coffee. We have a very loyal consumer brand. In the economic side, I think the greatest factor impacting us today is our core customer, which is our manufacturing worker and so forth, have been really hurt by this economy. And they are the people that come to us many, many times. And so I think when you look at some of our transaction studies and so forth, those people are still coming to us but they can't afford to come to us as often as they have in the past. That, I believe, is the biggest impact we have. We've always got competition. It's what's you do with your own business is how you respond to that. So it's good to have them around because if it isn't them, it's going to be somebody. And we've always had strong competition. We used to have very, very strong competition in the coffee and doughnut category. We had a number of regional chains that have virtually disappeared off the landscape. So yes, Dunkin', and they're gone, and Country Star, and Robbins, names that you wouldn't be that familiar with, but they were formidable foes a few years ago, and they're gone. And that never -- nothing stays the same and so today, it's McDonald's.

Unknown Analyst

Also in the U.S., you seem to be going more to a more cafe kind of orientation. Can you talk about that and why that gives you an edge?

Paul D. House

Yes, well, doughnuts was our history. Doughnuts today in our Canadian business are 5% or 6% of sales, depending on the market you're in. A little higher in some other regions or whatever. And so because you sell doughnuts, you get tagged with the name of you're a doughnut shop. Well, we're a lot more than that. And we pride ourselves in the quality of food that we offer consumers. And we realize, in the U.S., how do we tell the consumers what we really are? And so the cafe, bake shop, we feel, really gives a proper descriptive of what our company is about and what we offer to the consumer. So that's kind of how we got to that strategy.

Unknown Analyst

Can you talk about the use of smartphone and mobile technology in your restaurants and how that helps with speed of service?

Cynthia J. Devine

Sure. We're looking at various forms of payment options. We have the technology now, the PIN pads and whatnot at restaurant level, that allow us to do a lot. We have a lot of capabilities that exist in that PIN pad and we're just looking at how leveraged we have done. Someone used it as a promotional kind of debut of mobile payment and so we had a mobile payment that took place at our PIN pad from one of the banks and one of the telcos. So the capability exists and it's where do we take it from here. But we have, over the last few years, we've really added a lot. We were probably the last holdout in terms of 100% cash business up until kind of 5 or 6 years ago. And now we offer MasterCard, Visa, American Express and debit in our restaurants. And so we offer a lot of forms it. And Tim Card, which is our reloadable card, which has great consumer acceptance. But we've really only scratched the surface. We think there's a lot more opportunity that we can do with payment options for our guests and we're, as most people are in the industry, looking at various forms of that as we speak.

Chris Li - BofA Merrill Lynch, Research Division

I know it's still maybe a bit early days, but can you share with us your experience with the single-serve offering so far. Any surprises?

Paul D. House

No, there's no surprises with it. It's been good acceptance. But again, the market is much more fragmented in Canada than it is in the U.S. So I don't know, like, what K-Cup share is in the U.S., but I would guess it's 70% to 80% of the market. Whereas I said earlier, there's 2 carriers that really control. So we're really only dealing with less than half the market today with TASSIMO. So the results are there. But Cynthia has pointed it out, when you compare us to Dunkin' and what they've got over at same-store sales growth, you've got to remember that their average sales are about half of what ours are. So to get the same-store sales growth out of our chains for single-serve is not like they're going to incur, we're not going to -- I think they saw 2% to 3% same-store sales growth for the single-serve, that we're highly unlikely to get to that number, just given the sheer volume of what we do in our stores.

Chris Li - BofA Merrill Lynch, Research Division

Is there an opportunity to expand that to the grocery channel as well?

Paul D. House

Initially, we have said it will stay with our existing retail outlets until we understand the market better. But we do, as you know, we have a large amount of product in the grocery network in Canada. And in fact, if you take our existing store network and the grocery network, we're the largest seller of take-home coffee in the Canadian marketplace. So it's a very important business to us. And as we go forward, we'll see whether we're going to put single-serve into that and those other formats or not.

Chris Li - BofA Merrill Lynch, Research Division

I think we have time maybe for 1 or 2 more questions from the floor.

Well, if not, thank you, Paul, Cynthia and Scott.

Cynthia J. Devine

Thank you.

Scott Bonikowsky

Thank you.

Paul D. House

Okay. Thanks, everyone.

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