Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Tim Hortons (NYSE:THI)

Q1 2014 Earnings Call

May 07, 2014 2:30 pm ET

Executives

Scott Bonikowsky - Vice President of Corporate, Public & Government Affairs

Marc Caira - Executive Chairman, Chief Executive Officer, President and Director

Cynthia Jane Devine - Chief Financial Officer and Principal Accounting Officer

Analysts

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Irene Nattel - RBC Capital Markets, LLC, Research Division

Michael Van Aelst - TD Securities Equity Research

Derek Dley - Canaccord Genuity, Research Division

Perry Eugene Caicco - CIBC World Markets Inc., Research Division

Peter Sklar - BMO Capital Markets Canada

John S. Glass - Morgan Stanley, Research Division

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Amod Gautam - JP Morgan Chase & Co, Research Division

Keith Howlett - Desjardins Securities Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Tim Hortons' First Quarter 2014 Analyst Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and will be available on the Investor Relations section of the Tim Hortons' website following the call. It is now my pleasure to turn the conference over to Scott Bonikowsky, Vice President, Corporate Affairs and Investor Relations at Tim Hortons. Please proceed.

Scott Bonikowsky

Thanks, operator, and welcome, everyone, to the Tim Hortons' First Quarter 2014 Analyst Call. We released our results earlier this morning before the market opened. To access our earnings material and a presentation supporting today's discussion, please visit the Investor Relations section of our website and click on the Events and Presentations tab. This material will be available for a period of 1 year. Marc Caira, our President and Chief Executive Officer, along with Cynthia Devine, our Chief Financial Officer, will be joining the call this afternoon. We will be pleased to take questions after our prepared remarks. [Operator Instructions]

Please note that we may provide forward-looking information this morning, including discussions about planned initiatives, our strategic plan, future performance, results and outlook based on current expectations, assumptions and information, including information about our restaurant development plans, same-store sales expectations, earnings, performance, 2014 outlook and targets and operational initiatives.

Forward-looking statements are based on a number of assumptions, contain risks and uncertainties and our actual results and activities could differ materially from these statements. Please refer to our Safe Harbor statement on our investor website and at Slide 3 of today's supporting presentation, and refer to the risks and assumptions outlined in our public disclosures with securities regulators in Canada and the U.S.

All Tim Hortons' results are presented in accordance with U.S. GAAP and reported in Canadian dollars, unless otherwise noted. Today's discussion and a supporting presentation reference adjusted operating income, which is a non-GAAP financial measure. Reconciliations of adjusted operating income, to its most directly comparable GAAP financial measure, and other information relating to our use of adjusted operating income is included in the presentation.

I will now turn the call over to Marc Caira. Marc?

Marc Caira

Thank you, Scott, and good afternoon, everyone. It is a pleasure to update you once again about our progress and our results for the quarter. Typically, I would begin my remarks with some high-level comments on the quarter we've just completed, however, I believe the most significant milestone for us in the first quarter had little bearing on the quarterly results. Rather, its impact will be felt over the next 5 years. I am referring to the completion and announcement of our 2014, 2018 strategic road map titled: Winning in a New Era.

As most of you know, we hosted an investor conference in February to review that roadmap in detail. That was just 2.5 months ago, which of course, is not enough time to implement the new strategic plan. Nevertheless, we have already made good progress in executing on some of the concepts we've talked about. I would like to update you on our progress in the context of the major themes of our strategic plan.

I'll begin with Canada, where we have summarized our strategy as Lead, Defend and Grow. An important part of defending our core business in Canada is category leadership. For us, it starts with coffee leadership, and we have spoken about our intention to broaden our offering beyond our traditional single blend and our current lineup of specialty coffees. It also refers to snacking leadership. We already have the #1 share in both a.m. and p.m. snacking, but we see opportunities for further growth.

Category leadership also means food leadership. We said that we want to become a food destination in the lunch day-part. We took an important step towards this goal in the first quarter with the introduction of our Crispy Chicken Sandwich, which gives us another hot signature sandwich to complement our Panini line. Breaded chicken and sandwiches are both the most popular sandwich category in the Canadian QSR and the fastest-growing segment. We were not participating in this category. We believe we have a winning product. Besides being popular with our guests, our Crispy Chicken Sandwich compares very well to similar products from our competitors. Generally speaking, it has more meat, with less fat and fewer calories than many competitive offerings.

Our new Turkey Sausage Hot Breakfast Sandwich, that we launched in both Canada and the U.S. in the first quarter, is another product that appeals to guests who are concerned about nutrition, health and wellness. We will continue to address the increasing consumer interest in nutrition health and wellness by offering our guests healthier options throughout the day and across all beverages and food categories.

We also said that we would work to narrow the gap with our peers on average check. This is a measure where we lag, in part, because of the sheer number of guests who purchase single items from us, which typically is a coffee. Our plan includes encouraging our guests to buy more items per transaction. We need to convince a small percentage of those ordering a single item to order 2. And for those currently ordering 2 items, we'd like some of them to order 3. Part of our strategy is to emphasize combos on our digital menu boards. We are currently rolling out the new menu boards for our lunch menus, following the successful introduction of new combo-focused breakfast menus several months ago.

Another important factor in encouraging guests to buy additional items is to have the right side dishes. In the first quarter, we launched a new hash brown and promoted it as part of our breakfast combo. It also has the advantage of using the same equipment platform as the Crispy Chicken Sandwich. Our restaurants can execute the order more quickly than it could with our previous hash brown and they can use the equipment for an additional day-part. This is consistent with our principle of reducing operational complexity in our restaurants.

Another side dish that we are currently rolling out is our Warm Kettle Chips. We believe this product will appeal to guests in the afternoon and evening day-parts, and is another great product. We have a number of exciting initiatives underway that we believe will differentiate us and improve the experience of our guests.

Last quarter, we spent some time talking about our simplification efforts, which are ongoing. We're now approximately 75% of the way through our planned delistings, and that has cleared room for new menu innovations that we expect will have a greater appeal to today's consumer. On the front-of-house side, the proprietary digital programming network, known as TimsTV, is in full rollout. We expect TimsTV to enhance the in-restaurant experience of our guests and increase their engagement with the Tim Hortons brand. We also spoke last quarter about our co-branded credit card and Tim Card that we are launching with CIBC, known as a Double-Double Card. This innovative product is set to debut this summer. It represents Tim Hortons' first significant loyalty initiative.

Another new initiative that we plan to announce very soon is barcode scanning that will integrate with our TimmyMe app to allow our guest to make mobile payments using their smartphones. This technology will be compatible with the most popular smartphones in use today and they will integrate well with existing mobile payment platforms. We believe this new payment option will improve speed of service for our guests, which is always a key concern for us in locations where capacity is stretched. We expect this to have particular appeal to the younger demographic group that is increasingly becoming more important to us.

Our last major initiative I will address that will impact our guest experience is our new point-of-sale system. We are replacing a number of legacy systems with a modern, flexible, dynamic POS platform that will help our business in several ways. It will make the ordering experience more efficient and consistent for our guests. It will be simpler for team members to learn and operate. It will enable us to innovate more quickly and effectively. It will provide realtime access to data that both the company and our owners can use to improve our business. The new POS system is being tested at a limited number of restaurants right now, and we expect to begin the rollout in Canada later this summer.

The last 3 projects I spoke about, the Double-Double Card, the mobile payment capability and the new POS system, all have something in common. They will each enable us to gain new consumer insights on an aggregated, anonymous basis that we can leverage for competitive advantage. We spoke about this at our investor conference. We want to have an in-depth and data-driven understanding of our guests. We are aiming to become one of the most consumer-centric companies in the industry. These insights and capabilities are essential to achieving differentiated innovation that will allow us to compete and win in this new era.

Many of the points I've covered apply to all of our markets. In addition, there are some strategies that are unique to our U.S. business. We characterize our U.S. operations as a must-win battle. We also said that we need to significantly improve our returns in this segment. We intend to do this in 2 ways; we will seek to drive average unit volumes at our existing restaurants; and optimize our model for new assets. These are both long-term initiatives, but we have already made early progress.

One way to drive AUVs is to develop menu items that appeal directly to American consumers. What works in Canada is not necessarily going to resonate in the U.S. In the first quarter, we introduced several new products in the U.S. only. These include the Meatball Panini, Spinach and Egg White Pie and a line of caramel crunch baked goods and beverages. We've also been testing new promotional approaches in specific markets designed to drive trial and loyalty in the U.S.

In our core and priority markets, people know us for breakfast, but we need to convert that awareness into traffic in other day-parts. As far as new assets in the U.S., we are complementing our own development, which is focused on our core and priority markets with a disciplined approach that leverages the capital and expertise of our franchisees.

In February, we announced 4 new area development agreements that we expect will result in nearly 100 new Tim Hortons locations in the next 5 years. More recently, we've added a fifth development agreement with a company which will develop, using their capital, 15 to 20 locations in the Pennsylvania, West Virginia area. We continue to work with other prospective partners and franchisees in the U.S. market.

I will touch briefly on our international strategy, which we described as Grow, Learn and Expand. Last month, I made my first visit to the Gulf Cooperation Council since joining Tim Hortons. I spent some time getting to know our local partner, the apparel group, and touring some of our restaurants. I was greatly impressed by the progress they have made in just a few short years. And by apparel's plans to achieve our development targets established in that region.

The locations I visited are very well run. They embrace the high standards we work to instill in our restaurants and our showcase for our brand. For me, this drives home the importance of having the right partner as a prerequisite for successful international expansion. You need someone who understands the local consumer and has the expertise and resources to run an operation that upholds the standards of your brand.

I've spoken today about a number of strategic and tactical initiatives. Some were underway prior to the announcement of the strat plan because we needed to head in a certain direction. Others have really begun in earnest in the past few months.

So, what impact has this had on our business? As I said at the outset, our strategic road map is not about driving short-term results. It is intended to enable us to deliver sustainable long-term profitable growth. In 2014, we are investing in capabilities and infrastructure that will help us achieve that outcome.

That said, we did report a solid first quarter. Same-store sales growth were positive, and significantly ahead of the first quarter of 2013. We also improved our profitability and completed a major recapitalization of the company, as Cynthia will discuss in detail.

While our first quarter results were good in the context of an environment of ongoing competitive intensity and severe weather in some parts of the country, we know that we can and must do better to realize our full potential. This challenging environment is still with us, and I believe it is here for the foreseeable future. That's why we call it the New Era.

We are addressing these challenges head on. Our business is well-positioned and we have a good plan in place. We just need to execute it flawlessly and with a high sense of urgency. This is always the most important part of any plan. You will hear us speak often about the strategic plan in the quarters and years to come. This is our road map to sustainable profitable growth, and we expect to be held accountable to achieving the objectives we have established.

As most of you are aware, Tim Hortons turns 50 years old in 2014. In a Reputation Institute study published last month, Tim Hortons was again named the top ranked Canadian brand. Perhaps more significantly, we ranked #2 in Canada among the worldwide brands, ahead of many global brands. That is our highest ranking ever in a study.

A lot of the credit for this success goes to Bill Moir, our Chief Brand and Marketing Officer, and his team. Bill has done an incredible job guiding our brand for nearly 25 years, dating back to the time when we had less than 500 restaurants. Last week, we announced his retirement, and I would like to thank Bill for his decades of dedication to Tim Hortons.

At the same time, we introduced a successor, Peter Nowlan, who will join us later this month from Molson Coors, where he is responsible for our sales and marketing activity. He previously headed up marketing and strategy for Kraft's U.S. Grocery business, after holding a similar role in Asia. Peter started with this career with Nabisco. We are very excited with the new ideas Peter will contribute as we look to grow our business and further strengthen our connection with consumers. His depth of knowledge in food and beverage marketing and his tremendous track record will greatly benefit our system.

I know that both Bill and Peter would agree that it is a both tremendous opportunity and an important responsibility to act as stewards for such an iconic brand. We are confident that Peter is ideally suited to take on this opportunity and build on Bill's tremendous track record.

I will now ask Cynthia to provide more details on our financial performance in the first quarter. Cynthia?

Cynthia Jane Devine

Thanks, Marc, and good afternoon, everyone. Systemwide sales grew by 5.1% in the first quarter on a constant currency basis, reflecting positive same-store sales in both Canada and the U.S., as well as the impact of new restaurant development. In Canada, systemwide sales growth was 4.6% and same-store sales growth was 1.6%. Both figures are consistent with the trends we've seen in the past several quarters.

Same-store sales growth in Canada was driven by gains in average check, resulting from favorable product mix and pricing. We saw positive contributions from the breakfast day-parts, where the introduction of the Turkey Sausage Hot Breakfast Sandwich and the new Hash Brown both played a role. We also benefited from our take-home category, which continued to grow with the recent introduction of our Tim Hortons' RealCup single serve coffee product.

This growth was partially offset by a decline in same-store transactions, but we continue to grow systemwide transactions through the addition of new restaurants. Results in both Canada and the U.S. benefited slightly from the timing of the Easter holiday, which fell in Q1 last year, but shifted to Q2 this year. We believe this positive effect was offset by the negative impact of the more severe weather we experienced in 2014, compared to the first quarter 2013.

In the U.S., a 7.9% increase in systemwide sales in the first quarter was supported by same-store sales growth of 1.9%. The growth drivers were very similar to Canada. Average check gains resulted from favorable product mix and pricing, partially offset by a decline in same-store transactions with systemwide transactions continuing to grow. U.S. same-store sales growth also benefited from gains in both the breakfast day-parts and the take-home category.

We show our revenue on Slide 15. You will see that total revenues grew by 4.8%, the increase in the 2 largest components of revenue, distribution sales and rents and royalties, were both primarily driven by systemwide sales growth. Franchisee revenue grew more rapidly, at 28.1%, because we opened more restaurants in the first quarter of 2014 than we did 1 year ago. Franchise fee costs increased by more than 20% for the same reason as you will see on the next slide.

Operating expenses increased by 7.3% in the quarter, that's a result of higher rent and depreciation expense driven by new restaurant openings and the renovations we've been completing. This is offset by the timing of support costs related to property maintenance. We expect to see the rate of growth in operating expenses increase over the course of 2014.

You will see on Slide 16 that we had other expenses of $2.7 million in Q1, compared to other income of $800,000 1 year ago. As we mentioned in this morning's news release, we incurred $3.1 million of expenses related to the launch of our co-branded credit card, the Double-Double Card. That represents an EPS impact of approximately $0.02 per share in Q1, but we expect the impact of this program to be cost neutral over the course of 2014.

The final cost item I will mention is the $9.5 million corporate reorganization expense we incurred in first quarter of 2013, with no comparable expense this past quarter. As we lapsed this expense, investors should be aware of the effect it had on our profitability growth rate, which we show on Slide 17.

Operating income grew by 13.6%, but adjusted operating income increased by 5.7%, when you exclude the effects of the 2013 corporate reorganization expense. I will remind you that adjusted operating income is a non-GAAP measure, which we reconciled to operating income on Slide 22 of your presentation.

Let's look next at net income. As I will discuss shortly, we are now incurring higher interest costs and a higher tax rate as a result of the incremental debt we have taken on in the past 6 months. As a result, net income growth of 5.5% was below the increase in our operating income. Our interest expense will be higher in subsequent quarters due to the most recent bond issue.

Our earnings per share grew by a little over $0.09 per share, or 16.9%, over Q1 last year. EPS in the first quarter of last year was negatively impacted by approximately $0.05 by the corporate reorganization expense. EPS in the first quarter of 2014 benefited from a reduction in our share count. We had an average of 15 million fewer shares outstanding during the quarter, which is nearly a 10% reduction compared to Q1 of 2013.

I'd like to make a comment on a factor that impacts a number of line items this quarter and that's foreign exchange rates. The Canadian dollar has weakened considerably in the past quarter. We recognize a portion of both our revenues and expenses in U.S. dollars, so the exchange rate effect of converting them into Canadian dollars has an insignificant impact on our overall operating income, although it has impacted individual revenue and expense lines.

I will now move on to discuss the performance of our operating segments, which are summarized on Slide 18. Operating income in the Canadian segment increased by 5.2%, to $153.5 million, in the quarter. Systemwide sales growth led to higher rents and royalty income and a higher allocation of supply chain income. The segment also benefited from lower support costs related to property maintenance. The $3.1 million of expense is related to the Double-Double Card launch, which I mentioned earlier, partially offset the growth in operating income.

U.S. operating income was $4.4 million in the quarter, a significant improvement, compared to $900,000 1 year earlier. Systemwide sales growth was the key driver of the increase. In addition, rent and royalties benefited from lower release costs. This was a positive start to the year for our U.S. business. I believe the decisions we made last year to close some underperforming restaurants has enabled our U.S. team to start from a more solid foundation and to focus more on growing their business.

Before turning to our recent financing activities, I'll comment briefly on coffee prices, which have been in the news a lot lately, as they've increased rapidly. In general, the price of any particular commodity does not affect the corporation directly, since we largely pass on any price increases or decreases to our restaurant owners. That being said, we actively manage the procurement process and we strive to secure the best prices on behalf of our owners. We typically lock in prices for several quarters in advance through purchase contracts on major commodities to achieve some stability.

Currently, our coffee prices are locked in through the remainder of 2014. We have begun buying for 2015, but at higher prices, reflective of current market conditions. We are monitoring market prices closely. We will continue to take a prudent approach and make decisions that we feel are right for the chain over the long term.

I will turn now to a key financial highlight of the first quarter. In late March, we announced a $450 million debt financing through a private placement of 5-year senior unsecured notes. Combined with the $450 million of 10-year notes we issued last November, this private placement completes the planned $900 million of debt financing that we announced last August. We are pleased to have been able to take advantage of a favorable climate for bond offerings. Our most recent notes have a coupon rate of 2.85%.

We also achieved our objective of establishing staggered maturities for the 3 bond issues we completed since 2007. Three series, maturing in 2017, 2019 and 2023, allowing us to reduce our refinancing risk. Last August, we also announced our intention to repurchase 1 billion of shares in the 12 months ending 2014. I'm pleased to report that we have substantially completed those repurchases as of the end of April.

We plan to remain active in repurchasing our shares, but at a more moderate level. Our current normal course issuer bid included approximately $240 million to complete the targeted $1 billion of repurchases, plus an additional $200 million that we are authorized to use by February 2015. The accelerated repurchase program contributed meaningfully to EPS growth in the first quarter, and will continue to do so in coming quarters.

As we saw with our first quarter results, the positive impact of a reduced share count is partially offset by higher after-tax interest cost, which also produced a slightly higher effective tax rate. Overall, the recapitalization was accretive to our EPS in Q1, and we expect that to continue to be the case. I should note that both interest costs and the tax impact on the incremental debt were contemplated at the time we provided our 2014 performance targets in February.

I would also like to reiterate that we are comfortable with our current capital structure. We believe that it has allowed us to take advantage of strong cash flows that our business generates, while still being prudent, maintaining financial flexibility and paying dividends to our shareholders. We also announced this morning that the Board of Directors has declared a quarterly dividend of $0.32 per share.

As we execute our new strategic plan and explore new avenues of growth, we are confident that we are well-positioned to continue to deliver solid returns for our shareholders.

With that, I will turn the call back over to Scott.

Scott Bonikowsky

Thanks, Cynthia. We are ready for the Q&A portion of the call. It's important that we give analysts the opportunity on the call to ask a question. [Operator Instructions] Operator, please proceed with the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from Joe Buckley of Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

If you like, a number of the initiatives that were put in place in the fourth quarter and maybe even during the first quarter, such as the drive-thru modifications, the remodels, the revised menu board for breakfast, were focused on speed of service and customer throughput. So I guess, could you comment on how those metrics looked and how they contributed to the 1.6% Canadian comp for the quarter?

Marc Caira

Sure, Joe. Thank you for the question. All these initiatives that you've clearly mentioned all play a factor in what we call the ultimate in guest experience. And we're working very hard on all fronts, whether it's the drive-thru renovations, the restaurant renovations, the menu innovation, the digital boards, the technology. So there's a lot of activity that's going on with a great deal of rigor, with a great deal of urgency. The encouraging thing for me is that when you look at the overall picture, and you look at our performance in the first quarter, we're pleased with where we are. And as we've said right from the start, at our investor conference with our strategic plan, 2014 is very much a transition year for us, where we need to continue to work on these initiatives that you, Joe, rightly pointed out. Some of them will be completed or more completed than others. A lot of them will continue to be work in progress. So to specifically put a number on each initiative is a very difficult thing to do. Hopefully, as we get near the end of these things, we'll have more clarity in terms of how they're contributing to the overall. But I can tell you that given the very, very competitive intense environment that we saw in the first quarter, even though we don't like to talk about the weather, in this instance, I must point it out. I mean, January was not the friendliest of months for us. So when people don't make it out to restaurants, we lose transactions. So that has to be pointed out. But overall, I'm pleased with the overall Canadian results, of the 1.6% same-store sales. I'm also pleased with how the bottom line has worked out. I know there's some cost recovery that will happen to the balance of the year. To be honest with you, we need to improve on the 1.9% in the U.S., I think that number is lower than certainly I would have liked to have see. And there's also a lot of initiatives going on in the U.S., as also you rightly pointed out. But again, the weather will balance itself out over a 52 week period, but as my competitors have pointed out in their conferences, the weather played a dramatic role in the first quarter. So I think there's some of that also built into our numbers. But to summarize, I think, given where we are, given what we committed to at the investor conference in terms of this is a 5-year plan, focused on long-term profitable growth, this is not a short-term month-by-month. But given the long-term journey, I think that it's a good start in a very, very difficult environment.

Operator

The next question comes from Irene Nattel of RBC Capital Markets.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Just looking at the -- continuing with some of the initiatives and I'd like to focus for a moment on some of the menu initiatives. I think Marc, you noted that 75% of the delistings happened during the quarter. Wondering about the impact that you saw on sales, was it in line, better, worse than you expected? And also on the combo focus around breakfast, just wondering about any learnings you might have had there and how you can incorporate that on a go-forward basis, as you turn your focus a little bit more to lunch?

Marc Caira

Sure, Irene. Thank you for that. When we talk about the 75% rate, that's really our whole simplification effort that we started very soon when I got here, and this is looking at our entire menu and really taking a hard look at each item to see whether it's really contributing or not. So we have eliminated many of the menu items. But again, these things don't stop and go. This is going to be part of the culture that we have here. We will continue to look at our menu, at our SKUs, on an ongoing basis. This is done on a monthly basis. So we will continue to scrutinize products and systems and anything else to make our business more efficient. So we're happy with the progress that we're making in our simplification, but this will continue. This, as I said, this will not end. In terms of the menu innovations, this is one area that I'm particularly very, very pleased with because, again, I keep talking about differentiated innovation to drive our sales and to really please our consumers. And when you talk about Turkey Sausage Breakfast Sandwich, when you talk about Crispy Chicken, when you talk about Frozen Green Tea, real fruit smoothies with yogurt, our Pretzel Bagel, the Ultimate Cinnamon Bun, the Meatball Panini, the Frozen Hot Chocolate. I mean, these are all innovations that occurred in the first quarter. And I think, in this very, very competitive, intense environment, we need to continue to innovate. We need to continue to offer our consumers unique differentiated products. In that, I'm very pleased. And in fact, if you look at our Crispy Chicken Sandwich which, by the way, it's also very differentiated because it's the lowest calorie of our competitors. It's the lowest fat level of our competitors. It's got a proprietary seasoning. We are neck and neck with our competitor for #1 at lunch. But in fact, during that quarter, first quarter period, on the strength of our Chicken Sandwich, which is now our #1 best-selling sandwich, we became #1 at lunch. So there is an example, I think, of what these types of innovations can do to drive your business. Specifically, for breakfast. Breakfast is an area that we do extremely well. It's an area that we have a very significant market share. But it's also an area where there's still room to grow. And if you look at breakfast, it seems to become the new battleground. Everybody is focused on breakfast. But we're in a very unique position because I believe that we're in a position of strength. So you'll see the innovations at breakfast. You'll see the hash browns to help us put the combos together. I promise that we're going to innovate around coffee, and we're going to do that, and you know some of the tests are going on now. So breakfast is a key category for us. Breakfast is a key battleground for the industry. And we are committed to ensuring that we continue to succeed in breakfast. While at the same time, continuing to build our position in snacking which, again, where we lead. And also, in lunch, where we're currently neck and neck with our #1 competitor.

Cynthia Jane Devine

One of the things, Irene, just in regards to the combo question. We were pleased with the uptake in combos at breakfast. And to your second part of your question, do you see opportunity at lunch? And the answer is, yes. As Marc talked about some of the sides, the Kettle Chips and then -- and other side dishes that we think we're really scratching the surface there and have a lot more opportunity.

Operator

The next question comes from Michael Van Aelst of TD Securities.

Michael Van Aelst - TD Securities Equity Research

Yes. First, I'd like to just follow-up on that -- those comments on the uptake of combos and the increased sales of Crispy Chicken, and things like that. It seems to be helping you out. With these positive wins, your same-store sales aren't growing that fast relative to the past. And I guess the question I have is -- on this is, are you seeing the traffic reductions, same-store traffic reductions, are those accelerating over the past year?

Marc Caira

Well, I tried to clearly articulate this new environment in which we're operating. I refer to this as the New Era of low growth. And we're seeing low growth in the industry. We're seeing low growth in many of the categories. This new era of competitive intensity, and that's not going to go away, people are going to try and grow. And how we're going to try and grow with the industry is in growing us by taking volume away from each other. So this is -- this environment, this new era, in terms of our own performance, as I said, I think given everything that happened in the first quarter, the 1.6% in Canada, I'm very pleased with. The 1.9% in the U.S., we need to improve. And I would expect that, that will improve in the coming months. But again, I'm not going to focus on 1 month at a time here. This is, I think, a journey that has been clearly identified. A journey that has been clearly set out. It's a 5-year journey. Yes, within that 5 years, we have to deliver each and every year, and we will. But to look at this thing month at a time, and even a quarter at a time, in this volatility, including weather, by the way, is somewhat dangerous. So within that context, I think we're in a good place. The sales, top line sales, I'm happy with. I've talked about that. Bottom line, we're exactly where we need to be with some recovery that will take place over the balance of the year. So all we need to do is really focus on this ultimate guest experience, keep your focus on consumer, keep your focus on differentiated innovation. Keep your focus on making sure that your restaurants are relevant. So we're going to continue remodeling. We're going to continue to build new restaurants. We're going to continue to bring in the new technology. We're rolling out the TimsTV. We're introducing the bar scanners for mobile payment. The Double Double Card is coming. We're going to one system POS. There is a lot of things going on. A lot of things going on that will hopefully have -- bear fruit in the future. So I guess the summary is, I'm happy with where we are. There's a lot of work happening around Tim Hortons these days with a lot of rigor and sense of urgency. And we expect things will improve, but the environment will continue to be very, very difficult.

Michael Van Aelst - TD Securities Equity Research

Okay. And just a short numbers question. You highlighted the $3.1 million cost for the Double Double Card. You had 2 benefits that seem to be kind of timing or onetime benefit, including a reversal of some performance bonuses, I guess, and shift in timing of support costs related to third-party maintenance. Could you quantify those 2 items?

Cynthia Jane Devine

Yes. In terms of the bonus, the release of the bonus, it was around $1 million in favorability. The -- with regards to the operating expenses, about the same amount, a little bit higher. The -- as we looked out to 2014, in terms of our guidance, we understood some of those timing issues.

Michael Van Aelst - TD Securities Equity Research

So why didn't your G&A grow more than if there was only a $1 million reversal when you were staffed up at the end of last year?

Cynthia Jane Devine

So as you'll recall, like the reorganization, we still had some in January and part of February, we still had some of the costs pre-reorganization because we did the last tranche, if you'll recall, kind of in a little bit towards the middle of the quarter, so we still had some of those costs last year. So you'll see, as we got get out a little bit further that, yes, we filled those vacancies and now in the prior year, you're going to have some of the vacancy favorability that we recognized last year. So we're going to lap that as we get out further in the year. But again, these are all things that we understood and contemplated as we outlined our objectives for 2014.

Operator

The next question comes from Derek Dley of Canaccord Genuity.

Derek Dley - Canaccord Genuity, Research Division

Yes. I was just wondering if you guys could give us some more color on a pricing level that's currently in the system, like how much of the same-store sales growth was driven by price? And is that a combination of increased prices and mix? Or how is that sort of playing out?

Cynthia Jane Devine

Yes. So the growth was driven by a combination of pricing and mix. In Canada, pricing was less than 1%. And in the U.S., it was a little bit over 1%. But again, we were seeing favorable mix as well that we're pretty pleased with. Some things we talked about in terms of menu innovation, single serve and combos, and things like that were all helpful in terms of driving that mix.

Derek Dley - Canaccord Genuity, Research Division

Okay. That's great. That's helpful. And just following up, can you give us an update on the Single Serve Coffee initiative? How is that playing out? Is it meeting your guy's initial expectations?

Marc Caira

Sure. Single serve is a -- if you follow single serve around the world, it's a significant piece of innovation, particularly in Europe where it started. It's in North America. It's gaining momentum in North America. We're very pleased with our Single Serve at Tim Hortons. We currently only sell it in our restaurant. We have the Keurig-compatible and the TASSIMO product in our stores. We've also made the announcement and commitment that we will take our Single Serve product to the supermarkets. And we're in the midst of finalizing that, and you should see them on the shelf sometime in the summer. So again, as a coffee leader in Canada, we take our responsibility to give the consumer the innovations they require. And the Single Serve is one of those innovations that we intend to play with very aggressively.

Operator

The next question comes from Perry Caicco of CIBC.

Perry Eugene Caicco - CIBC World Markets Inc., Research Division

Yes. The key to the U.S. business -- or one of the keys to the U.S. business, you've said, is to get the average unit volumes up. Just wondering, is that simply menu innovation that will drive that? Or are there other kind of more fundamental problems that need to be addressed?

Marc Caira

Yes, sure, Perry. Yes, you rightly pointed out that we have 2 priorities in the U.S., very clear priorities. One is to increase the AUVs in our core priority markets. That's where we've already invested. And that's where we have a very significant breakfast day-part business. We also learned that we had good awareness in the U.S., and we have also good convenience in the U.S. So the challenge there is to build loyalty beyond the breakfast day-part. And how we plan on doing that is by developing products specifically for the American consumers. And this is something that's a little different because in the past we may have tried to perhaps use Canadian products a bit too often. So these will be products developed for American consumers. These will be products that perhaps could go beyond lunch, into snacking, into the lunch-plus area. So the point here is that we're not finished with breakfast yet. There's still a lot of things that we need to do with breakfast in the U.S. And we'll continue to build breakfast, we'll continue to build coffee. We want to bring more consumers in from drive-thrus to -- into our restaurants. So there's work to be done there. But then, as I said, let's build the consumer loyalty beyond breakfast. And that's going to be done through products, innovations, specifically for the U.S. consumer.

Perry Eugene Caicco - CIBC World Markets Inc., Research Division

And how important, Marc, is getting those AUVs up to developing more partnerships in the U.S., or to working with the partnerships signed, to develop more restaurants?

Marc Caira

Sure, absolutely. I think, when we sit down with partners, and I can tell you we don't -- there isn't a lack of partners that we could align ourselves with. But they're going to want to know what does a successful model look like. And we can show them that. And we can also show them what we've learned, I think, in the past number of years is that -- box size here makes a difference. Store format makes a difference. We don't have to go 3,000 square-foot stores anymore. We can go smaller, where the breakeven is a bit more reasonable. So again, we know what the formula is. We're very good at the breakfast day-part. We understand how to build loyalty into the lunch. We understand what the ideal box size is now for the U.S. So these are all things that we can convey to the right partners. And again, we announced 4 new partners back a few months ago. And this time, we've announced 1 other new partner that we're going to align with. So we're very encouraged. And if you look at the U.S. business, I've been critical of the top line for the U.S. And again, I'm reminded that we don't like to talk about this, but the weather played a big role in the 1.9% in the U.S. But I'm very happy with the progress that we're making on the bottom line. And this is, as you recall, Perry, this was a key area for us. We need to improve the financial matrix of our U.S. business. So the fact that we're doing quite well at our operating profit line is very encouraging. I'm convinced that our top line will be more in line to where they need to be, provided that the weather cooperates a little bit. And we know that we need to build our business beyond the breakfast day-part. So, all the elements have been identified, now I rely on our team for, what we call around here, flawless execution.

Operator

The next question comes from Peter Sklar of BMO Capital Markets.

Peter Sklar - BMO Capital Markets Canada

Can you explain how the de-branding of the Cold Stone had an impact on your comp stores? Does that figure into the calculations? Or how you're dealing with the Cold Stone de-branding?

Cynthia Jane Devine

So we've been, throughout the quarter, removing Cold Stone from our restaurant locations. And by the end of the quarter, we were substantially complete. We have a few more still to do. But really, it hasn't been a significant negative drag on same-store sales because what we've been in a lot of places is we've enhanced the restaurant. We've added express beverage lines and done some things to bring customers back to the restaurant, move more Tim Hortons customers through. So overall, it has not been a big impact on same-store sales.

Peter Sklar - BMO Capital Markets Canada

And were you able to enhance the restaurant because taking out the Cold Stone freed up real estate in the store?

Cynthia Jane Devine

Absolutely. So where it made sense, we've done things to speed up operations and speed of service in the restaurants, so that's things like the beverage express line, where it made sense. And some of it made room for some of the theater baking that we're doing. And so, there's been a lot of things to enhance the restaurant with that, as you said very important real estate, hence the decision, right? Because we knew that if we got the Cold Stone out that we could probably contribute more favorably to the Tim Hortons brand and grow the business.

Marc Caira

And I also want to complement here our franchisees that had the Cold Stone. And once we made the decision that we were going to de-brand it, our franchisees jumped on board very, very quickly. And in fact, initiated the changes that Cynthia just talked about. So again, it happened very, very quickly. And I appreciate that very much.

Cynthia Jane Devine

And it did -- one of the other things that it was a favorable contributor to G&A as well, because we are investing on the G&A line. So that was helpful, back to an earlier question I had from Mike.

Operator

The next question comes from John Glass of Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

If I could just first follow-up one more time on the notion of the higher check. Is there a metric that we can follow quarter-to-quarter that marks your attachment rate? For example, food, some companies talk about a food attachment rate. Do you look at that internally? And can you -- are you willing to share some metric like that with us?

Cynthia Jane Devine

Yes. Obviously, we look at our sales in a lot of detail on a very regular basis, weekly basis and that. Let us give it some thought. If there is some additional metrics, we can provide that give more clarity. Again, if you want to, obviously, we are in a very competitive industry. So we like to make sure that anything that we know, that we think is a competitive advantage, that we're going to capitalize on, we like to obviously do that rather than share it with everyone. But let us give some thought to whether there is something that can provide more -- some more granularity for people to understand our sales results better.

Marc Caira

Yes. I think it's a good question. But I think what you need to understand that, it's for us, one of our key strategic initiatives is that we want to get -- we want to narrow that average check gap with our competitors. So that's what we're focused on, and I think we're starting to see some improvements in that area, which is very, very encouraging.

John S. Glass - Morgan Stanley, Research Division

And just 1 question then. On the remodels and drive-thrus, by my notes, you are 90% done, more -- maybe more with the drive-thru innovations and 50% or more with the units. If there's an update there, I'd love to hear it. Are those stores out-comping the average? Is there a way you can measure how successful those renovations and drive-thru upgrades have been?

Marc Caira

Well, I can comment on the drive-thrus because I'm a bit more familiar with it -- with that. We're seeing some improvement in drive-thrus. When we renovate, whether it's a double drive-thru or, more particularly, moving the speaker box back. The problem is, as we improve our drive-thrus, more people tend to want to use the drive-thrus. So I guess, it's a good thing. But one of the things that we're going to ask Peter Nowlan to look at, when he starts here on May 21, is some programs that really motivate and drive our consumers to come into our restaurants and perhaps a little less reliance on the drive-thru. But we'll see.

Cynthia Jane Devine

But to answer your question, just in terms of the completion. Yes, we're substantially complete, the drive-thru renovations. And then, just from -- qualitatively, from a guest experience standpoint, I think we're getting a lot of positive feedback. Our menu boards are easier to navigate now. It makes it easier for people to order things. And in some ways, it probably helps your average check because they can see different things to order at the drive-thru that might have been more difficult to navigate through before. So it's early days with it, but I think we're pleased with the enhancements that we made at the drive-thrus.

Marc Caira

I think you also have to remember that when we do these renovations, a lot of times we do them because you need to remain relevant. You need to remain up-to-date and fresh. And so, although there's a payback, that's expected, I mean, you almost have to do this in order to be competitive.

Operator

The next question comes from Chris O'Cull of KeyBanc.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Cynthia, just a follow-up on a question earlier about G&A. Was the incentive reversal the reason there was no stock comp expense for the quarter?

Cynthia Jane Devine

Was the what?

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Was the incentive accrual reversal? It doesn't look like the stock comp expense for the -- stock compensation expense in the past, has been several million dollars. So I was little surprised there wasn't...

Cynthia Jane Devine

Yes. It was more -- it's more related to the total return swap that we have. So those 2 things, you have to look at them both. But the total comp option expense was offset where you had a little bit of offset with regard to the TRS gains. So we're showing that now in -- actually, in the quarter, it was a loss. So that was about $2.2 million. So it's now outlined in Note 11 in the 10-Q. So you can see that shown there. So on a net basis, the year-over-year on a net basis was actually slightly higher. That make sense, Chris?

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

It does. I think I understand what you're saying. It does. So is the G&A run rate, going forward, going to be closer to the mid-40s on a quarterly basis?

Cynthia Jane Devine

Yes. We expect the G&A to be higher -- the growth rate on G&A to be higher than it was in the first quarter. As I said, we had some items that were favorable in the first quarter. And then, we weren't lapping as many vacancies in Q1 of last year as we did -- as we moved out in the year. So yes, we expect it to grow a little bit more than it did in the first quarter. But again, all of this was contemplated. There aren't any surprises here that weren't contemplated, at this point in time, in our outlook for 2014.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

And just one last one, if I may. Will there be any similar large expenses in the remaining quarters associated with new initiatives, similar to what we saw with the Double Double costs this quarter?

Cynthia Jane Devine

Yes. This one, I did. I was asked about it last year whether there could be some costs, and I said, overall, on a net basis, we didn't expect it. But we did expect some timing where we would incur some costs upfront, and we would receive a contribution for those later in the year. And so, this was definitely anticipated in our outlook. But from time to time, we have things where we may incur the cost earlier and get contribution or reimbursement later on. But this one was obviously a little bit more sizable. But it is -- we're rolling out the Double Double Card and had some costs associated with it, again, that we expect to have a contribution. And it will go through the same line item. So it's in other expense right now. And that's where the contribution would offset it, so you'll be able to see that as we progress.

Operator

The next question comes from Steve Anderson of Miller Tabak.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

I think you may have answered this in another way. But I noticed, like going back to the time you were spun off from Wendy's back in 2006, the dollar amount of operating profit in the U.S. is the second highest and, in percentage terms, it's the third highest. Do you think -- I know you cited closing some of the unprofitable units maybe are getting some more breakfast combo sales. Do you think there are any other factors that helped U.S. profitability, and you could see that sustained going forward?

Cynthia Jane Devine

One other thing that we pointed out is, given the strength that we've had in systemwide sales, and we've -- the team has been also been very focused on relief and managing the relief line. They've done a great job in looking at restaurants, where it doesn't make sense to be open 24 hours, and a number of things like that, that really have operating costs for the restaurant owner that we've been helping out on through relief. And if we've reduced those hours down, whether the 24-hour isn't generating a lot of revenue, we've been able to reduce the relief costs, and things -- initiatives like that. So the team has been very focused on it. But as well, driving the top line growth for the restaurant owners is really helping as well. And as we pointed out, Mike Meilleur did a nice job at the Investor Conference of talking about we're having a better success now as we open new restaurants, the AUVs that they're opening at, are higher than they were a number of years ago. So again, that goes to you don't have that negative kind of headwind of more relief coming on with some of those openings. So I think the team has made a lot of positive contributions that have helped drive that improvement in operating income.

Operator

The next question comes from John Ivankoe of JPMorgan.

Amod Gautam - JP Morgan Chase & Co, Research Division

This is Amod Gautam, filling in for John. I think I heard pricing was less than 1% in Canada in the quarter. So -- and thanks for the color on the coffee contracts, but if you could just update us maybe on franchisee thoughts on pricing going forward given the coffee environment? Are franchisees willing to accept some margin hit to maintain a value proposition? Or should we expect the level of pricing maybe to go up in subsequent quarters or in 2015?

Cynthia Jane Devine

As we mentioned, we're comfortable with our position for 2014. We have very reasonable kind of commodity costs in 2014. It's really, as you look out to '15, where the market right now is just trading a lot higher than what we had purchased our '14 requirements. So in regards to pricing, the pricing process for restaurant owners hasn't changed a lot over the years. There's a lot of rigor that goes into it. There's a lot of analysis done on the P&L, and it's not just commodities. It's labor. It's a number of factors that are taken into account. And then, they'll work -- once that work is done and the analysis is completed, they'll look at whether or not pricing is necessary. But again, that work is ongoing. And the coffee costs are really a 2015 event, at this point in time. But hopefully, some of the volatility in coffee may change as we get a little further into 2014.

Operator

The next question comes from Keith Howlett of Desjardins Securities.

Keith Howlett - Desjardins Securities Inc., Research Division

I had a question on the Cold Stone Creamery de-branding in Canada. Do you anticipate as you get into this second and third quarter when presumably sales at Cold Stone were mostly accrued that there's going to be any notable drag on the same-store sales in Canada?

Cynthia Jane Devine

A good question, Keith. Thank you. With regards to that, I think we've really -- we're focused on setting the restaurants up so that they can have Tim Hortons kind of product offering, and move more people through with the Tim Hortons offering. So we're hoping that will offset it. And we have a number of initiatives. Marc talked about all the things that we have in the pipeline. But it really -- as the years went on, Cold Stone, unfortunately, wasn't contributing as much to same-store sales, hence the decision. So it had been kind of declining for the last few years in terms of same-store sales. So, we don't expect it to be a significant impact on same-store sales. But those things were contemplated when we set our guidance range for the year.

Marc Caira

Well, I think, importantly, you touched on this. But I think, importantly, we made this decision. There were many reasons why, but one of the primary reasons is we want our people to focus on our core business. And I believe that if we really focus on our core business that any downside to the Cold Stone can be taken care of. So that's what I would expect our people to do. Focus on coffee, focus on baked goods, focus on lunch. And Cold Stone is a decision that's been made, and it's over for now.

Operator

This concludes the time allocated for questions on today's call. I'll now hand the call back over to Scott Bonikowsky for closing remarks.

Scott Bonikowsky

Great. Thanks, Brock. And thanks, everyone, for joining us today for the call. I know we have to keep moving along in the -- with questions in the queue, and you may not have been able to jump back in, so we appreciate your patience. We wanted to make sure we fit everybody in with at least one question.

Any follow-up questions, as always, feel free to reach back out to me. And I'd like to remind everyone that we're holding our Annual Meeting tomorrow, at 10:30 in Downtown Toronto. We hope that many of our shareholders will be able to join us for that. And for those that are not, we'll be webcasting the event live from our Investor Relations website as well. And with that, everybody, thanks again for joining us, and have a great day. Thank you.

Operator

This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tim Hortons' (THI) CEO Marc Caira on Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts