Tim Hortons Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: Restaurant Brands (QSR)

Tim Hortons (THI) Q2 2012 Earnings Call August 9, 2012 2:30 PM ET

Executives

Scott Bonikowsky - Vice President of Investor Relations

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

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

Analysts

Irene Nattel - RBC Capital Markets, LLC, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Peter Sklar - BMO Capital Markets Canada

Michael Van Aelst - TD Securities Equity Research

David Hartley - Crédit Suisse AG, Research Division

James Durran - Barclays Capital, Research Division

Chris Cerrone - Goldman Sachs Group Inc., Research Division

Keith Howlett - Desjardins Securities Inc., Research Division

John S. Glass - Morgan Stanley, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 9, 2012. I would now like to turn the conference over to Scott Bonikowsky. Please go ahead, Sir.

Scott Bonikowsky

Thanks, operator, and welcome, everyone, to the Tim Hortons' 2012 Second Quarter Conference Call. We released our results earlier this morning before the market opened. To access our earnings material and the presentations supporting today's discussion, please visit our Investor Relations website at timhortons-invest.com and click on the Events & Presentations tab. This material will be available for a period of 1 year.

Paul House, our Executive Chairman, President and Chief Executive Officer; and Cynthia Devine, our Chief Financial Officer, will be joining the call this afternoon. We will be pleased to take questions after our prepared remarks.

Please note that we may provide forward-looking statements or information this afternoon within the meaning of the Private Securities Litigation Reform Act of 1995 and Canadian securities laws. These statements may include discussions about future performance, results and outlook based on our current expectations and information. Forward-looking statements are based on a number of assumptions, contain risks and uncertainties, and our actual results could differ materially from these statements.

Please refer to our annual report, 2011 annual report, on Form 10-K filed on February 28, 2012, and as updated in our quarterly report on Form 10-Q, expected to be filed today. This will include detailed information regarding risks and -- certain risks and uncertainties, which could impact our ability to perform as expected, as well as material assumptions underlying the expectations described in our forward-looking statements. Please read our full Safe Harbor statement on our investor website and in our presentation supporting today's call.

All Tim Hortons' results, I will remind you are presented in accordance with U.S. GAAP and reported in Canadian dollars unless we note otherwise.

And with that, I'm going to turn the call over to Paul House, our Executive Chairman, President and CEO. Paul?

Paul D. House

Alright. Thanks, Scott, and good afternoon, everyone. Well I'm pleased to report that we had solid earnings growth in the second quarter. While facing a difficult macroeconomic environment, that also affected many others in the consumer and restaurant sectors. Our rate of EPS growth was strong, benefiting from higher net income and a cumulative positive effect of our ongoing share repurchases, and to a lesser extent, the impact of the charges related to our former CEO incurred in 2011.

We were pleased that our menu initiatives to grow our business, once again, contributed to a higher average check, which drove same-store sales growth in the Canadian segment this quarter, growing by 1.8%.

We believe the continuing challenging macroeconomic environment played role in our rate of same-store sales growth in Canada, placing frequency of visits under slight pressure. I will note that there was very little pricing benefit in the system in the Canadian segment during the quarter.

We were very encouraged by the continued same-store sales growth in the United States, which increased 4.9% in the second quarter. The team has done a great job for the past few years, in positioning the Tim Hortons brand with our U.S. guests, building brand awareness and loyalty while executing our growth programs.

Despite challenging economic conditions in both markets, we are confident in our ability to grow our business and support our long-term goals and strategy. Throughout the quarter, we continued to develop several initiatives and to illustrate, free Wi-Fi has now been installed in approximately 1,100 of our Canadian restaurants and about 500 participating restaurants in the U.S.

By the end of the year, we expect that approximately 2000 of our restaurants in the Canadian system will have Wi-Fi, creating the country's largest free Wi-Fi network.

Digital menu boards have been implemented inside approximately 60% of our Canadian restaurants offering compelling guest visuals to showcase our products. We expect the national interior implementation of digital menu boards in Canada to be completed during the fourth quarter of this year. We will also continue to implement our enhanced drive-thru menu boards into 2013.

We're also continuing to planning work and implementation of double order drive-thru stations in our restaurants. We believe that the ability to shave even fractions of seconds off of our drive-thru times will have a real benefit to our guests and to our system.

In the second quarter, we began to broaden our roll out of Panini sandwiches in Canada in preparation of our national launch later in the second half of this year. We believe the launched day park represents a significant opportunity for us, and that there is an unmet need for a quality hot sandwich platform like our high-quality Paninis at a reasonable price. We plan to meet that opportunity head on. This product has been a strong performer for us in the U.S. market since we introduced it.

Our promotional calendar included the expansion of our cold beverages offered by introducing our Frozen Lemonade in Canada at a promotional price of $1 for a small. This promotion will run throughout the summer. It is available on 2 flavors, the Original Lemonade and also, Raspberry Lemonade.

We also promoted a new flavor in our fruit smoothie lineup, the Peach Mango. It was advertised at a price point of $1.99 in both Canada and the U.S.

Lastly, in terms of our cold beverage platform, we promoted a variety of items that range from our iced capp to cold espresso-based drinks to iced lattes and iced mocha lattes, all at their very attractive prices.

We continue to strengthen our cold beverage offerings and enjoyed positive growth in this category, supported in part by the unseasonably warm spring that we've experienced in many of our markets.

Many of you have been asking about our views on the single-serve coffee market. We have expressed that we would enter the market on our terms once we are able to meet the criteria we have set for market entry.

I'm very pleased to announce that we are taking our first steps, and I emphasize, our first steps, in the single-serve coffee market, having reached a North American line agreement with Kraft Foods and their TASSIMO on-demand, single-serve T DISC coffee platform. Our premium blend coffee, decaf coffee and lattes will be available for sale in the single-serve format in close to 3,000 of our restaurants in Canada and approximately 500 of our restaurants in the United States, as well as online at Tim Hortons or TASSIMO websites, in time for the 2012 holiday season.

According to Kraft, TASSIMO is one of the fastest growing single-serve platforms in Canada. More than 950,000 TASSIMO brewers have been sold in Canada to date.

In our view, the North American single-serve market is still in a relative infancy stage compared to the overall coffee market. However, we believe there's significant opportunity for us in this rapidly growing market.

I'm going to wrap up my commentary on the quarter, mentioning that from a development perspective, we opened 19 restaurants in Canada in the quarter and we now have opened 41 locations year-to-date. We continue to be one of the most active QSR players in Canada in terms of development and we look to continue this momentum in the second half of this year.

In the U.S., we opened 15 locations and 22 year-to-date, which included a mix of standard, nonstandard restaurants and self-serve kiosks.

Internationally, we opened 5 locations in the GCC, with a planned total development of approximately 15 openings for 2012. We continue to be very pleased by our results at our GCC locations.

Now, I'll end my remarks by discussing the organizational announcements we released with our earning results, which included the creation of a corporate center and business unit organizational structure, as well as new executive appointments.

Since our IPO in 2006, we have added more than 1,000 restaurants, growing our annualized revenues by close to $900 million and entered new markets including the first international market as part of our strategic plan.

I believe the longer-term opportunities in front of this company are very compelling and that the new structure will be a key enabler to those opportunities.

Put simply, the structure helps us streamline decision-making, putting resources and accountability closer to the business to drive success and allow us to be more agile.

The earning release contained the relevant details and I will highlight some notable changes. Pertaining to our business unit structure, David Clanachan has been appointed Chief Operating Officer of Tim Hortons and has executive accountability for the operating business. David is a 20-year veteran of the company and most recently led our U.S. and international business. He has held a wide range of responsibility during his tenure and has been responsible for significant innovation and growth of our great business.

Roland Walton has been appointed President of Tim Hortons Canada. Roland has been with the company for 15 years, and he has played a key role in the operational success and significant growth of the business during his tenure.

And Mike Meilleur has been appointed Executive Vice President, Tim Hortons U.S., and as an Executive Officer of the company. Mike, too, is a seasoned leader in the company, having been a key contributor to our significant success and momentum in the U.S. market for the past few years. Mike has substantial operational experience gained over 2 decades with this company.

Within the corporate center, Cynthia Devine has been appointed with executive accountability for our supply chain, an addition to our accountability as CFO and head of manufacturing. Cynthia joined the company nearly a decade ago and played a key role since then with our IPO, finance, strategic initiatives and leading our manufacturing operations since 2008. Cynthia brings a wealth of background in vertical integration, manufacturing and distribution operations.

Bill Moir will remain Chief Brand and Marketing Officer. Bill has dedicated more than 2 decades of service to the company and building the brand. He has entered into a 2-year employment agreement in which he will remain Chief Brand and Marketing Officer until a new successor has been identified over time and accountabilities transitioned.

While on the other executive team, Brigid Pelino, Executive Vice President of Human Resources; and Jill Aebker, Executive Vice President and General Counsel, and Corporate Secretary, will continue to lead their respective functions.

We also announced this morning that additional organizational lineup will take place in the second half and then we expect to take a restructuring charge following the completion of this review. The extent of such a charge and expected efficiencies as we align the rest of the organizations to the new structure are not known at this time, but we will update you when the work is completed.

Now the new executive organizational structure has been set in place, the board has confirmed it is proceeding exclusively with an external CEO search at this time. There is no doubt this is a challenging time when you look at the volatility in global markets, consumer uncertainty, high unemployment and other economic factors. However, we are excited about our strategic growth initiatives we have set in place and the overall strength of our great brand to drive growth well into the future. And with that, I'm going to turn it over to Cynthia.

Cynthia J. Devine

Thanks Paul, and good afternoon, everyone. We continued our track record of positive system wide sales growth in the second quarter with an increase of 6% year-over-year on a constant currency basis.

We continued to have active restaurant development and growth of same-store sales, which contributed to our overall system growth. Expanding on our same-store sales performance that Paul addressed earlier, a 1.8% growth in Canada was driven by average checks and that was mainly due to favorable product mix as there was limited pricing in the system. Our product mix continued to benefit from our hot espresso and latte beverages, and new hot beverage cup sizing including the 24-ounce cup, all of which were introduced in the first quarter.

In addition, product mix in the second quarter benefited from strength in our breakfast category, with the extension of our breakfast hours from 11 a.m. to noon across Canada. Higher average check growth more than offset the slight decline in same-store transactions during the second quarter.

In the U.S., same-store sales growth was 4.9%, and it benefited from average check gains, which came from both pricing and favorable product mix. Our Panini sandwiches continue to prove popular with our guests during the quarter. In addition, our specialty bagels and specialty cold drink categories, including our new iced espresso-based beverages, contributed favorably to our product mix. Transaction growth also contributed slightly to our U.S. same-store sales performance.

Compared to 2011, we are in unseasonably mild spring in many markets in Canada and the U.S. We believe this slightly created a shift towards our cold beverage platform offerings and slightly away from our hot beverages. The economic environment in both Canada and the U.S. remain volatile and the continued uncertainty appears to be impacting consumer confidence. This theme was echoed by many in the restaurant sector last quarter and into July and likely had a moderating effect on the rates of same-store sales growth in the industry. We, too, noticed that some of the more moderated growth in the second quarter that they carried through into July.

So turning to the supporting slides on Slide 13 of the presentation, you can see that total revenues were up about 12%. Our revenue growth outpaced our system wide sales growth, primarily due to an increase in sales, which were up about 13%, primarily driven from our distribution business and higher sales from variable interest entities, or VIE.

Rent and royalties increased 7.3% compared to the second quarter last year and that was supported by our system wide sales growth. Distribution sales grew 11.6% year-over-year due to a higher number of system restaurants, continued same-store sales growth and new products that we've managed through our supply chain.

Pricing and favorable product mix also contributed to our distribution sales growth mostly due to higher underlying prices for coffee and other commodity. VIE sales were higher in the second quarter this year compared to 2011, due primarily to an increase of the number of nonowned restaurants both in Canada and the U.S. that were consolidated under the accounting rules and from same-store sales growth at existing consolidated restaurants.

The increase in nonowned restaurants consolidated VIE relates primarily to an increase in the number of restaurants opened under operator agreement.

Franchise fees were up about 18%, mainly due to a combination of international restaurant openings and equipment sales, a higher number of U.S. sales and a higher number of renovations during the quarter. Now these factors were partially offset by the recognition in 2011 of the upfront fees associated with the Master License Agreement related to our expansion into the GCC.

Now turning to the cost. You can find on Slide 14 of the presentation. Higher costs of sales in the quarter reflect higher distribution costs of sales and higher costs related to VIE. Distribution costs of sales were higher primarily due to system wide sales growth as well as the higher commodity cost that I referred to earlier. Operating expenses grew over 12% compared to the second quarter last year resulting from higher rent and depreciation expense because an increase of the number of system properties that we have, higher percentage rent on certain properties where we pay percentage rent and the ad fund rollout of the expanded menu board program.

Operating expense growth was also impacted by project-related and renovation expenses that we incurred during the quarter.

G&A decreased more than 8%, but as a reminder, our G&A in a comparable period of 2011 included the $6.3 million charge related to the separation agreement with our former CEO. Higher salaries and benefits are really to support growth of the business, as well as the timing of professional fees partially offset the decrease this quarter.

Turning to our earnings now. You can refer to Slide 15. Net income attributable to Tim Hortons increased approximately 13% from the second quarter last year. So the increase in operating income to about $159 million and a lower effective tax rate were the main reasons for the improvement in our net income and this was partially offset by higher net interest expense.

Second quarter as diluted earnings per share increased almost 19% to $0.69 per share compared to $0.58 last year. Our EPS benefited from higher net income, and the cumulative, positive benefit of our share repurchase program, we had close to a 5% decrease in the average fully diluted common shares outstanding year-over-year.

The separation agreement that I noted earlier also reduced EPS by $0.03 a share in the second quarter of 2011.

So now looking at our segment reporting on Slide 16, operating income in the Canadian segment was about $165 million. The year-over-year increase of just over 5% can be attributed primarily to an increase in our system wide sales in Canada, and that really drive the rent and royalties and distribution income in the market.

These gains were partially offset by -- as you recall last year, we talked about a favorable temporary impact in the second quarter of 2011 that related to the timing of coffee pricing and the underlying costs in our supply chain during the second quarter.

In the U.S., our operating income increased to just over $5.5 million, up from $4 million last year. The increase in system wide sales, again, drove our rent and royalties, as well as our distribution income, which really contributed to our U.S. operating income performance in the quarter.

It's worthy of noting that U.S. results also included a $700,000 benefit associated primarily with the reversal of previously accrued closure cost following the conclusion of our closure activities related to the New England market.

In addition, we had higher franchise fee income due to a higher number of restaurant sales that we recognized during the quarter in the U.S. and higher relief relating primarily to restaurants that were opened for less than 13 months, and higher general and administrative cost partially offset the operating income growth for the quarter.

So I'm going to briefly touch on our financial position at the quarter end, and you can find that on Slide 17. One of the continued strengths of our business is our solid financial position and flexibility. At quarter end, we had about $58 million in cash and cash equivalents, and we continue to invest in the business and provide value to our shareholders through both dividends and share repurchases.

Our capital expenditures were about $50 million in the second quarter and this level of capital expenditure includes nearly $17 million of capital spending by the ad fund related to our expanded menu board program.

We had depreciation and amortization for the second quarter of 2012 that was approximately $31 million. And overall, you know, in spite of the challenging macroeconomic conditions, we had solid earnings growth and we feel that we're making considerable progress against our strategic initiative.

So with that, I'd like to turn it back to Scott.

Scott Bonikowsky

Okay. Thanks, Cynthia, and operator, we will now begin our Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Irene Nattel with RBC Capital Markets.

Irene Nattel - RBC Capital Markets, LLC, Research Division

I just like to drill down a little bit more into the same-store sales in Canada. I think it was on the Q1 call that we were having -- there was a conversation about some regional variations and you noted that, really, where you're seeing the biggest impact is in areas that are the most economically depressed or that are having the toughest time. But we really see in employment growth stall in a lot of parts of the country, and so I'm wondering if you could just talk a little bit about what you're seeing out there.

Paul D. House

Well, Irene, I think we all -- the whole industry has been feeling the impact of the economy, the climate. It's hard to put your finger on what really is impacting sales performance. I feel good that given the conditions that we're playing in that, we do have same-store, positive same-store real growth and we have -- our transactions, overall, are increasing so -- but to drill down and fully identify, we certainly where the economy -- our local economy is impacted. We certainly feel it with our stores, but you see that with some other areas as well as we progress into the summer.

Cynthia J. Devine

I think, Irene, one of the things that we saw a little bit is on the afternoon snacking day parts where we saw a little bit of softness there and that is really consistent with a consumer that's under a bit of challenge. Our morning business, we continue to grow our breakfast business and our morning business remains strong. I talked about the extended breakfast hours and other news and things that we had at breakfast. That continued to be strong, but what we did see is a little bit of transaction softness in the afternoon snacking day parts. And if you think about the consumer, they have to cutback a little bit during some of these challenging times. They're quite likely is that snacking day parts. Also, given the hot weather, the temperatures that were -- that we were experiencing in most of our key markets when you have that kind of heat. We were fortunate to have strong cold beverage, but it's not a complete offset. You're not coming back in the afternoon for that hot coffee when the climate was what it was. But again, we were very pleased in terms of cold beverage and I think the expansion of our cold beverage platform has really helped us. And if you look back 8 or 9 years ago, we really didn't have the breadth of lineup on cold drink and I think that was a great offset for us during the quarter.

Irene Nattel - RBC Capital Markets, LLC, Research Division

That's great. And once consumers are in the store, how are they responding to certain of your more value, the combos? And what -- can anything you can share with us around maybe some innovations, some promotions that you currently have in store, that you're planning for the balance of the year to try and get at that -- this increasing consumer sensitivity towards spending?

Paul D. House

Well, Irene, certainly, our average guests check is up. And so we're pleased with that. And a lot of the menu initiatives that we're doing -- certain, as Panini sandwich, a high-quality sandwich at very attractive price. But it should raise our average guest check as well, but as great value in our marketplace compared to what you have to see in comparable sandwich elsewhere. So just to name a couple of things that we have initiated that are going to move the business. So we've got a lot of good initiatives going under way around our menu, and we think that they will hold today.

Cynthia J. Devine

We've seen as well, Irene, as I mentioned, you have the specialty bagel lined up now that it is at a higher price point. But it gives the consumer a choice. They can come in and they can still have our classic bagel lineup, but it gives them a choice in our specialty bagel lineup. It's still great value for the consumer, but it is a higher average check, the same with espresso based -- our new platform and specialty. Again, it's higher check and giving the consumer choice, but it's also very good value compared to other things in the marketplace. So I think those are a couple of things that have definitely helped us from an average check standpoint.

Operator

[Operator Instructions] Our next question comes from the line of Joe Buckley with Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Tell me about continuing the external search for CEO position. Has that been part of the decision to go outside or is that still open to the board to fill internal or external?

Paul D. House

Our focus right at this point, Joe, is totally outside. And the restructuring that we've done is to set the platform so that when we do recruit the right person, that they can come in here with a structure that is well aligned with the management team that's focused and all ready to go.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then couple of questions on the Kraft TASSIMO agreement. I think, what you emphasized it was the first step, so is there exclusivity on either side or are you opening to explore other single-serve options? And is the relationship with Kraft broader than what it might appear? Is there any relationship in the grocery business or Kraft would do some version of cake cups? Is there any cumulative there on your part?

Paul D. House

Right now, Joe, this is our entry and we've remain -- we've kept our flexibility as we go forward. We've done a lot of business with Kraft over the years. They've been a great partner to us. TASSIMO brand in Canada, like I said in my script, is over 950,000 machines that are out there. So we think this is a very logical first step for us and, but, again, I emphasize, it's our first step.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then just a question on U.S. business. A number of VIEs is going up. Talk a little bit about that? What -- is that symbolic or this represents more issues in the U.S. or the same-store sales number looks fine, and the operating income looks fine. I guess there's somewhat some items in there that you broke out. But just kind of curious if the increase in VIEs is the reflection of something changing again in the U.S. business.

Cynthia J. Devine

No, not at all, Joe. We previously had a franchise incentive program, which was a financing program that we set up for the restaurant owners, and we felt that the complexity of that program was really -- it wasn't doing exactly what we needed to do in the U.S. business. So we went back quite frankly to the program that we used in Canada in the early days and we still continue to open a new restaurants under 80-20 agreements in the Canadian market as well. But it's great. It's allowing us to bring new restaurant owners into the business. These are people that are anxious to be renting a business of their own. We keep the equipment on our books until such time as -- there's a number of criteria that we go through, but in our U.S. business until such time as we believe that they can go out and get financing, and that they are financially able to get financing and that we won't be in a relief situation with them, then we would move them into full agreements that's very similar to what we did in Canada in the early days to grow the market.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. So most of the U.S. openings now going in that format?

Cynthia J. Devine

I would say in developing markets, Joe, most of the openings would be under the 80-20 arrangement in developing markets, in a market like Buffalo, in some of the more developed markets, they would not be going under 80-20 operators. Owners want to be -- they want to be franchisees and full franchisees and this is the way of -- previously, we used to hold the note on our books so we would enter into this franchise incentive program and we would take back a note. This way, we really either cut some of the complexity out and hold the equipment until they're ready to go out and get financing and become a full franchisee. But as I said, even during this quarter, some of the new restaurants that we [indiscernible] work from Canadian 80-20 [indiscernible] because we use that in the Canadian markets as well, Joe.

Operator

Our next question comes from the line of Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

I wanted to follow up on the same-store sales question in Canada. You talked a lot about the macro and weather and I guess I'm curious as to what analysis you might have done to ensure that it's something you're not more permanent like the early indication of saturation in Canada or the impact of McDonald's efforts including McCafés and remodels in the country and what gives you the confidence that it's something fleeting like macro or weather?

Paul D. House

Well we've got a lot of stores. I mean we're over 3,000 restaurants. Certainly, with the weather we've had and the kind of economic conditions we have in certain areas of the country, you're going to feel some of that impact. Yes, it's a more competitive market. We're not hiding from that fact, that everybody's trying to get into the coffee business and the coffee business as a whole is flat. And so there's more people chasing the same dollars, so that's certainly a factor there. But we're growing overall transactions and we've got a huge market share in the marketplace, and so we feel comfortable where we're at. And we see a lot of the menu initiatives that we're doing will give us some good long-term results in our sales.

Cynthia J. Devine

And we have, Michael, a lot of analysis on it. And I think we are -- we're saying that it is a number of factors, right, that are impacting it. And in terms of -- we have opened in Canada, we've opened the most restaurants of anyone else out there in QSR, we are the biggest developer. And what we're seeing is the productivity of our new restaurants is very strong. And so we feel good about the new restaurants we're bringing into the marketplace. That's not an issue and -- but those are factors in addition to the factors that Paul outlined. But it isn't -- each market has a different story to it and different factors, but I can tell you that obviously, the team is very focused on it and feel that we have some great initiatives in order to continue to grow the business.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And the management reshuffling which -- as you've explained it, it's generally related to the growth that you've achieved and the complexity of the business as you've grown. I guess I'm trying to better understand what specific things you're trying to accomplish like where there have been bottlenecks that have been created or where there's some of inefficiencies that have just kind of organically bubbled up without this having fixed? And what specifically are you looking to have done differently with the new structure?

Paul D. House

Well, yes. Well I think our U.S. model is probably the best example. We have -- it's more of a standalone business. It certainly relies on corporate support and so forth that we put some of the resources right into the business unit. And so, Michael, this is more as we go forward with -- there are 3 markets, Canada, of course, being the giant, we're at point -- at this point in time but what a sizeable U.S. business and an emerging international business, set up business units and set up a structure that we can support each of these structures with the appropriate resources and allow them a freedom to make decisions and within those business units to drive the business. And so I think it's a model that is well used. We've grown so much and when I came back into place, we've identified some things that we think we could streamline and make work better and so that's what's resulted in these changes.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then one last one, a quick one actually. What -- could you help us with what TASSIMO's market share is in Canada today and what those share trends have looked like in the last year or 2? I'm just not familiar with the Canadian market on the single-serve side.

Paul D. House

Well it's about -- they're a good 50% of the market place here. They have been in the past, I mean, their competition has made inroads. But they have been the biggest player in the Canadian marketplace and had dominant share. So they still own a good chunk of the market.

Operator

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

Peter Sklar - BMO Capital Markets Canada

Back on the agreement with Kraft, can you talk a little bit about what the nature of the economics are? Do you get a wholesale margin or a royalty? could you just explain a little bit how the economics work?

Cynthia J. Devine

Peter, the great news about it is we're going to be using -- we're going to be blending and roasting coffee, our own coffee that's going to be used in the T DISC or TASSIMO system, which is great. And so obviously, we're participating on the manufacturing side of the business from that standpoint. But in addition to that, our restaurant owners are going to be selling the product exclusively through our restaurants and so they will make an appropriate restaurant margin on it. And then as is typical for our things sold at our restaurants, we'll make our rent and royalty about 13% on it from a standpoint that is similar to any other sale happening to a restaurant.

Peter Sklar - BMO Capital Markets Canada

So you expect this arrangement to generate earnings right from the get go?

Cynthia J. Devine

Yes.

Paul D. House

Yes.

Peter Sklar - BMO Capital Markets Canada

There's no start up cost to drag initially?

Cynthia J. Devine

No.

Paul D. House

No.

Peter Sklar - BMO Capital Markets Canada

And what other brands does TASSIMO selling through its distribution in Canada?

Cynthia J. Devine

Yes, TASSIMO has a few other brands, but I think they're...

Paul D. House

As I've listed those, Peter, I can send you offline.

Peter Sklar - BMO Capital Markets Canada

Okay. And so do you have a target of what share their distribution you will achieve or is there anything you can throw out there in terms of how big do you think this could be or how substantive?

Paul D. House

Well I think better put is that the single-serve market is certainly growing and it's a market that we wanted to enter at the right time. And under the right conditions with the right flexibility and so we think there's good opportunity and they have been the largest player and so we think this is a logical start.

Peter Sklar - BMO Capital Markets Canada

Okay. And I just have one question on your switching topics on your price in Canada. As you pointed out, you've largely run off your last price increase in Canada. You've lapped [ph] that through recently, I think, you had some minor price increases on muffins and other baked goods in Canada. Can you talk a little bit about what your strategy per price when you will be reviewing price and when you think you could be implementing further price increases?

Cynthia J. Devine

Well we -- as in the past, we have a very structured format on reviewing financial conditions and things like that and the input cost going into from a restaurant owner perspective, so a lot of that work has been substantially completed. And you're correct, we took very moderate pricing recently in a few markets on some baked goods as a result of underlying cost increases that we were experiencing. But they were pretty moderate. And we estimate that even the pricing would be about a percentage point of price, 1% in the balance of the year associated with the price increase. It was moderate. It wasn't on coffee or any of our hot beverage.

Peter Sklar - BMO Capital Markets Canada

Right. And what was the effective date of that price?

Cynthia J. Devine

It varies by region, but it was in and around end of July, beginning of August time frame. But it varied a little bit by region.

Paul D. House

Some will be in September.

Cynthia J. Devine

Yes.

Operator

Our next question comes from the line of Michael Van Aelst with TD Securities.

Michael Van Aelst - TD Securities Equity Research

I'd like to start with your restaurant counts. You opened up, I think, 41 in year-to-date in Canada, but your target or your guidance was 160 to 180. And I'm wondering if you're still feeling comfortable with that guidance?

Paul D. House

Yes. We feel comfortable with our guidance. The front half of the year is always slow for openings because of the construction season in Canada and so forth. So we're where we expect to be at this time of the year.

Michael Van Aelst - TD Securities Equity Research

Okay. And the same thing for the U.S.?

Paul D. House

Yes.

Michael Van Aelst - TD Securities Equity Research

Okay. And the franchise fees cost that you're -- are continued to be an excess of your franchise fee revenues this year, which is something that we haven't seen in the past. Is that something that will trend towards 0 as the year comes to a completion or is that --- is this a new trend going forward?

Cynthia J. Devine

We have seen it in the past from time to time and again, I think we have talked about our franchise fee, income and associated costs. It's not a big stream of income for us because we don't make a lot out of opening new restaurants. But from time to time, it is negative and it depends on one of the things that we did have last year, we had the Master License arrangement that we had -- that we signed for the GCC and we're lapping that and some things like that. But in general, you're right, we do aim at making that a break-even business, but you can have opening cost and different things that can affect it on a periodic basis. But there isn't a fundamental change in that part of the business.

Michael Van Aelst - TD Securities Equity Research

So it's not from location or where you're putting them or the [indiscernible].

Cynthia J. Devine

It's nothing to do with -- on a per restaurant basis or anything like that. It really is from time to time, and I think last year in Q2, I think, it was negative as well. It is from time to time, and I -- we have called that out before that on any given quarter because it really -- the new restaurant openings, they're kind of on a standard model and of pricing and underlying costs. But you will have opening costs and other training-type costs and programs that we're doing throughout the system that also ran through franchise fee costs because they are related to the restaurant openings and trainings. And so you will have those costs from time to time that occur in a certain quarter that can affect the profitability, but again, it's generally not a big profit driver for the company.

Operator

Our next question comes from the line of David Hartley with Crédit Suisse.

David Hartley - Crédit Suisse AG, Research Division

Just a quick question on the cold beverages on the coffee. So the cold beverages, obviously, a big home run for you guys. I just want to be clear on your commentary there that it was or wasn't an offset to perhaps some of the weather impact on say, coffee sales, et cetera. Can you just clarify that first of all for me?

Paul D. House

Sure. Cold drinks are great, but a consumer won't necessarily come to you everyday for cold drink. When you're in more favorable weather, we have a lot of regular customers that come to us every morning, every afternoon for a coffee. You get another 16 hot weather that they may come one day and replace it with a cold drink, but the next day they may not come at all because -- so you don't get the same frequency of visit, but it is certainly -- I can tell you having been around here forever that years ago, summer like this would have been disastrous for us because we did not have any cold drinks. We relied strictly on our coffee and baked goods, and then when the winter came -- the summer came, that was a long summer for us in the business back in those days. So I love the balance of our menu today and we're going to balance it even further as we go forward.

David Hartley - Crédit Suisse AG, Research Division

Okay. Now that's helpful. And just thinking about the product line up here. I mean I would expect that your breakfast businesses, particularly on the bay side, has done well with the expanded time you have your stores open for breakfast and some of the other categories like cold beverages and some of the new product introductions have and maybe some of your specialty coffees have probably done well, given the pulsing and the advertising of the market. So it kind of takes me back to coffee sales. And I think you've kind of alluded to the fact that it's a lot more competitive market for coffee in a flat growth environment, so I suspect coffee sales are down. But is it really related to snacking or is there some other demographic factors or demand issues around quality or most often reached-for type of status that is changing here?

Paul D. House

I think, the demographics, I mean as you get more younger people come into the market, you're going to find that they're going to drink more of what I would call -- I'm calling them exotic drinks as opposed to straight coffee. And you also got to remember that we have upsized our customer that we're selling larger sizes today. The introduction of the new 24 ounce has been very successful for us, but that could affect that some people don't come back for that second cup of coffee because they purchased 24 ounces on their visit. So there's a number of things there that you can look at as far as the coffee business is concerned. But overall, we still have a great share of the marketplace and we're still a favorite coffee in the marketplace and so we -- but as I said before, our balanced menu is where you want to be long term and the beauty of our business today is we're not as reliant on beverages as we once have been. We're really building our lunch to deeper and we've done a great food business in the morning with our breakfast sandwiches. We're the leader in that category, as you said. And so not standing on the hands over 1.8% same-store sales growth, but there's no pricing in that. And we're still building new stores, we're increasing transactions. So we got a lot of stuff happened and it's all positive. And we've run through these times before. We've always come -- we handle them pretty well. But we may see of sales -- same-store sales growth not as great as it would be in good times, but we still swim the water pretty strong.

David Hartley - Crédit Suisse AG, Research Division

Okay. And just so if I can tack on one more, since we've practiced here. Opportunities for enhanced increase or peer distribution in the U.S., could you potentially talk -- could you talk to that potential opportunity?

Paul D. House

Well I think we've like called it out before. Just the states that we're currently in and the population of about 70 million people so the adjacent markets to where we are already established and so forth is great opportunities for us. We've distributed the brand now pretty well through Michigan and we've got -- we're into Syracuse in the New York market. We're up in Erie and moving down towards Pittsburg. So the distribution of the brand, we see lots of opportunities for that. We're staying though to our strategic focus and we want to stay in the markets that we're in and grow in adjacent markets. And that strategy, we going to stay true to.

David Hartley - Crédit Suisse AG, Research Division

Actually, that's helpful. I misworded, missaid spoke there. What I meant to say was that from a warehousing distribution perspective.

Paul D. House

Sorry, sorry.

David Hartley - Crédit Suisse AG, Research Division

No problem. Is there opportunity there?

Cynthia J. Devine

We continue to look at that and as it stands right now given the concentration of our restaurants and the service that we're able to get in that marketplace from third-party carriers, the trucks today, we have trucks that are logo-ed with Tim Hortons. You would think it was part of our system, they're servicing our restaurants very well. So the competitive environment that exists in the U.S. and third-party distributions make sense for our business today. We'll continue to look at that over time, but it certainly is not -- has not been a hurt to our U.S. business at this point in time.

Operator

Our next question comes from the line of Jim Durran with Barclays.

James Durran - Barclays Capital, Research Division

I just wanted an update on where you're at in terms of your commodity commitments on coffee and wheat and other products?

Paul D. House

Well, we're still buying forward and we're bought into next year and the market is comparatively very attractive and so, we're taking advantage of that as we speak.

Chris Cerrone - Goldman Sachs Group Inc., Research Division

And so there is an increase on muffins and sandwiches, et cetera. Is that related to your expectations of what your wheat cost are going to be?

Paul D. House

No. We've look at the wheat cost and I think as the drought conditions and the same as where we're going to -- where the industry is going to feel the impact that is in protein. But as far as wheat, we have good coverage and so forth on that. So in the near term, we're not worried about that.

Cynthia J. Devine

But in the -- what you're seeing today is obviously, from purchases that we made back last year because we're always bought out pretty forward, so it's 2 different time frames.

James Durran - Barclays Capital, Research Division

Okay. And the Kingston DC, can you just update us, Cynthia, on where that's at in terms of the ramp-up and can you give us some ideas how the incremental costs that might have impacted this quarter?

Cynthia J. Devine

Yes. As we called out that in the first quarter, there were -- we had invested in incremental resources in making sure that the service to our restaurant owners that we could really try to maintain a high level of service there. In the second quarter, we were pleased. We made a lot of progress in that and it was not as big a burden on our quarterly results. It was pretty flat year-over-year and not really wanting to be yet, but we're making a lot of progress and hope to get it more efficient as we go for closer to year-end.

Operator

Our next question comes from the line of Keith Howlett with Desjardins Securities.

Keith Howlett - Desjardins Securities Inc., Research Division

I have a question on speed of service. Just how many drive-thrus roughly do you operate and how many will you be -- do you plan to retrofit with some speed of service adjustment?

Paul D. House

I'm not sure of our total number of drive-thrus but I would guess, in Canada, maybe 60% to 70% of our restaurants have drive-thrus. Our full restaurants, not talking nontraditionals, and we're still studying. We've certainly identified a good number of restaurants that we think that double, double drive-thru would be applicable for. We're getting some open now. We're pleased with the results we're getting out of them and so to quantify at this point would be premature.

Cynthia J. Devine

But the -- in situations where we can't do -- where we're not able to do a double order station either through a double lane or a single lane to a double order station. We are -- it's part of our menu board's enhancement program that we're doing outside in the drive-thrus. We are looking at moving the speaker box back on a number of restaurants as well and we believe that, that will also help speed of service because it gives more time between order and window for our team to prepare the order. So again, that initiative will affect the number of restaurants as well and that's in progress right now.

Keith Howlett - Desjardins Securities Inc., Research Division

And then just in terms of in-store service, there are a lot of initiatives to make the staff more visible and to reorient the workflow a bit. How far through are you, thus the network in instituting those improvements in speed of service?

Paul D. House

Well we're certainly well into it. Hospitality program is certainly a couple of years old and we're seeing great results out of that. Our Canada teams, I would say that, that's in the bulk of our restaurants, but only during peak times and we're looking at expanding that during the hours of operation and so forth. So it's an ongoing project. I guess, it's the best way to answer.

Keith Howlett - Desjardins Securities Inc., Research Division

And just one last question on the afternoon day park. We would've seen -- there've been a good year for ice cream sales. I'm just wondering how the Cold Stone Creamery performed in the U.S. and Canada?

Paul D. House

It's done well in certain stores. In other stores, it's still a category. Especially in Canada, it's a category we're still trying to grow. The brand has very little identification in this country at this point. In the U.S., it's pretty much trending with what Cold Stone is doing overall.

Operator

Our next question comes from the line of John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

First, just back of the single-serve coffee question since you mentioned you're going to roast the coffees and you're going to participate in manufacturing? I just want to make sure I understand the flow of dollars here. You roast the coffee. This is hypothetically, you sell them to Kraft, they package it, it's -- they sell it back to you then you impose your sales line to franchisees, you make the margin there, plus are you getting the right incremental sales or does it not flow through your sales line that way?

Cynthia J. Devine

We -- I mean, we haven't started doing that. We'll have to look at all the flows of how it's recognized on sales in that. But in general, the flow that you talked about is relatively accurate, but I would more focus on us making a contribution on rent and royalty as the biggest contributor to our profitability.

John S. Glass - Morgan Stanley, Research Division

Got you. And in this alignment review, you talked about reorganizing the management structure of the business, but then it sounds like there's a second step here which is then they're going to go forth and reorganize maybe the business lines. And I'm wondering is this actually a cost-savings initiative? Do you expect G&A dollars to fall because of this and is it coming out of just human resources headcount or is there perhaps a review of some of the other things you're doing the way you distribute products and insourcing versus outsourcing. How broad is this when you look at the organizational structure?

Paul D. House

Well, we're looking at the whole organization. This is -- we're going to cascade down through the whole divisions of the company. But as far as quantifying, it isn't set out to be a cost cutting measure. Let me put it that way. It is to drive efficiencies within the organization and looking at expense of controls and things like that. So to make the business more efficient than what it is today and people more accountable in certain areas for their divisions and so forth. So we've made the -- I've made the top layer changes and we're now working with the team. And by the time we get to the next call, we'll have a better fix on what we're at with this.

Operator

Our next question come is a follow-up question from the line of Irene Nattel with RBC Capital Markets.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Just following up on the Wi-Fi. I was wondering if you could walk us through the thought process out to that shift and what you've seen in terms of the customer spending and customer behavior in the stores where you have installed the Wi-Fi?

Cynthia J. Devine

In terms of the thinking about Wi-Fi? Why it's in the restaurant? Is that what your -- is that the first part of your question, Irene?

Irene Nattel - RBC Capital Markets, LLC, Research Division

Yes. I mean, wait, it's interesting subject, because we've had a lot of discussion on this call about speed of service and Wi-Fi is all about sitting in -- it's about a different sort of in-store experience, so I just kind of want to think through that.

Cynthia J. Devine

Right. And what we have found over the years is that our restaurants weren't being utilized -- not all restaurants, inside the restaurant were being utilized to capacity that obviously, a lot more of our customers are going through the drive-thru so hence, a lot of the work that we've been doing on inside the restaurant making it more comfortable offering Wi-Fi. And we did testing with Wi-Fi, and what we found is that people use the Wi-Fi but they don't necessarily stay in the restaurant for hours and hours and hours and take up tables. They're doing it to check emails, to do a quick thing while they're enjoying lunch or enjoy an afternoon snack. And it really, it has become a lot of -- in a lot of industry, it's become table space [ph]. We think it just made sense for our business and where we're moving to add it and it's very early days. We don't have it rolled out so we haven't really -- we haven't been able to market it across the system yet. So we're excited about being able to do that as we get out and get the whole -- that the participating restaurants all rolled out. We can really start to leverage that but again, we see it as just another way of really making the inside of the restaurant more inviting and comfortable for our guests.

Operator

We have no further questions at this time.

Paul D. House

Okay. Thanks, operator, and thanks, everyone. We appreciate you for joining in for our second quarter call. And as always, if you have additional questions or topics that you'd want to address, please feel free to give me a call at (905) 339-6186, and have a great day.

Operator

Ladies and gentlemen, this does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines.

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