Restaurant Brands International Inc. (QSR) CEO José Cil on Q1 2020 Results - Earnings Call Transcript

Restaurant Brands International Inc. (NYSE:QSR) Q1 2020 Earnings Conference Call May 1, 2020 8:30 AM ET

Company Participants

Chris Brigleb - Investor Relations

José Cil - Chief Executive Officer

Josh Kobza - Chief Operating Officer

Matt Dunnigan - Chief Financial Officer

Conference Call Participants

Dennis Geiger - UBS

Mark Petrie - CIBC

Nicole Miller - Piper Sandler

John Glass - Morgan Stanley

David Palmer - Evercore ISI

Brian Bittner - Oppenheimer & Company

Sara Senatore - Bernstein

Peter Sklar - BMO Capital Markets

Operator

Good morning and welcome to the Restaurant Brands International First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Brigleb, RBI’s Head of Investor Relations. Please go ahead.

Chris Brigleb

Thank you, operator. Good morning, everyone and welcome to Restaurant Brands International’s earnings call for the first quarter ended March 31, 2020. As a reminder, a live broadcast of this call maybe accessed through the Investor Relations webpage at investor.rbi.com and a recording will be available for replay. Joining me on the call today are Restaurant Brands International’s CEO, José Cil; COO, Josh Kobza; and CFO, Matt Dunnigan.

Today’s earnings call contains forward-looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings. In addition, this earnings call includes non-GAAP financial measures. Reconciliations of non-GAAP financial measures are included in the press release available on our website.

Let’s quickly review the agenda for today’s call. José will start with some opening remarks on our company’s response to the ongoing COVID-19 pandemic. He will then discuss our results for the first quarter and provide detail around our performance at Tim Hortons, Burger King and Popeyes. Josh will then provide an update on technology at RBI. And to conclude, Matt will review our financial results before opening the call up for Q&A.

I would now like to turn the call over to José.

José Cil

Thanks, Chris and good morning everyone. Thank you for joining us on today’s call. I hope you and your families are doing well and staying safe. I would like to start today’s call by thanking the hundreds of thousands of people that have been working behind the scenes and on the frontline to ensure that we are continuing to serve our guests and communities in every way that we can during this time of need. Our business partners, our franchisees, our team members, our employees, our suppliers, everyone has been working together around the clock and has been doing an extraordinary job.

We are fortunate to have an exceptionally strong platform and network. Our talented and dedicated teams, the great business model we have developed around our three iconic global brands and our strong and diverse network of partners around the world have underpinned our strength over the past decade and continue to act as an incredibly strong foundation in the midst of this crisis. As we move forward, we will continue to serve our millions of guests and to support our restaurant owners. Our drive-thrus, which have for decades been an important source of differentiation, have allowed us to act as a secure and highly convenient means for our guests to get food. Once we are safely on the other side of this crisis, we are confident we will pickup right back where we left off growing our brands in our home markets and internationally. With over 27,000 restaurants across over 100 countries and territories and 3 amazing iconic brands, we came into this crisis in a position of strength and we are confident we have the tools to emerge even stronger and better.

I will start my comments today by highlighting the most important things we have done to manage through the COVID-19 pandemic before moving through our results for the quarter. The health and safety of our guests and team members has been a critical priority from the start of the crisis. In early March, we were among the first restaurant companies in North America to close our dining room seating areas before local governments asked us to. We moved quickly to install measures to ensure social distancing in the front and back of house. As the crisis unfolded, we thoroughly reviewed our restaurant health and safety protocols and expanded our cleaning procedures in consultation with health experts and medical professionals.

We mandated masks, gloves and contactless procedures in our locations across brands. And using our experience in Asia as a valuable guide, we were among the first in North America to introduce temperature checks for our team members. Early on, we committed ourselves to supporting team members in our corporate restaurants and their ongoing need to adjust their day-to-day routines. We also announced we will be paying all restaurant team members at our corporate restaurants $3 extra per hour for the month of April to thank them for their above and beyond service. I have personally watched our team members work the frontlines everyday of this crisis with great admiration, so much so that two weeks ago, I asked our Board of Directors to redirect half of my salary over the next 6 months to funds our charitable foundations have setup for COVID-19 relief, including supporting restaurant team members that are most in need.

Our co-Chairman of the Board have joined me and are foregoing half of their Board compensation for 2020. Beginning in March, we have quickly pivoted our marketing and advertising, replacing spots that emphasize price points and promotions with messaging around the benefits of our off-premise business model as well as messaging around purpose. We are now emphasizing features of our service model that we haven’t highlighted for quite sometime, in particular, the availability and utility of our of our drive-thrus. In this environment, a drive-thru window is a great option for so many people who want to limit physical contact. And from guests that can’t access our drive-thrus, we are rolling out new curbside pickup options on our mobile apps in North America.

We have also adjusted our recent marketing to highlight the benefits of home delivery and how accessible our products are, both through our own app and through third-party delivery partners. Since the onset of COVID-19, we have seen a rapid rollout of home delivery across thousands of restaurants. At Tim Hortons, for example, we have gone from about 250 restaurants participating to more than a thousand in less than 2 months offering coverage for nearly all of Canada and we are still increasing the number of restaurants on delivery given the rising demand we are seeing in this channel. Throughout all of these efforts, we have stayed very close to our restaurant owners. We have established weekly and even daily communications with our advisory boards of restaurant owners and have been working constructively together on all of the decisions and changes we needed to implement.

In that context, we set out the design support programs that would move the needle for our restaurant owners. We believe the ability of our owners have shown to swiftly adapt their businesses and leverage the different support programs now in place has left our networks in an overall healthy and stable position. We mobilized quickly to provide support. Early in the crisis we announced we are moving to 100% variable rent at about 3,700 locations, where we have property control so that these expenses could flex down with the sales impact to those restaurants.

We also announced in March that we are deferring April’s rent for up to 45 days to give restaurant owners more flexibility in managing their cash flow. In addition, we looked ahead and identified a number of significant cash payments that would be due to owners and pull those forward, representing more than $70 million of advanced liquidity. For our Burger King restaurant owners in the U.S., our cash advance on rebates made immediately available up to 15,000 per restaurant. On top of these cash advance programs, we also temporarily suspended capital investment commitments for owners, including for renovations and new development across our brands.

Across our international regions, we have similarly engaged with our restaurant owners to identify sources of immediate liquidity, including by working with suppliers to secure extensions to payment terms and by working with lenders to access new lines of credit. We have also put mandatory capital commitments on hold and have been proactive in working with local government officials first in China and now elsewhere in Asia and Europe to reopen stores as soon as possible. And despite the many challenges we faced, the strength of our business model continues to shine through. Across all three of our brands, we began this first quarter performing in line with the trends we noted Q4 and maintained steady performance through January, February and the first 12 days of March. In mid-March, we saw a sharp decline in comparable sales across brands and regions coinciding with the global proliferation of COVID-19.

While many of the challenges remain in April and continue as we head into May, there was optimism and renewed confidence amongst our brand teams and restaurant owners that we have seen a strong improvement in comparable sales over the course of the month of April. Low double-digit improvements for each brand in our home markets from the lowest levels we saw in late March. We will provide more detail around this dynamic at each of our brands in just a few minutes.

Given the ongoing limitations to in-restaurant dining in most markets, our rapid shift to emphasizing off-premise has been a key driver of this improvement. In our home markets, majority of our sales were for off-premise consumption even before the crisis and the important adjustments we made to our marketing and operations have helped reestablish momentum in our drive-thrus. Technology has emerged as a critical differentiator in enabling delivery which has also contributed substantially to the improvement in sales. We have seen this internationally as well as in markets like Spain and China where off-premise consumption is a very important part of the business.

We have been focused on understanding shifts and consumption patterns to guide adjustments like those I just mentioned. As COVID-19 has spread, most of our guests have put their ordinary routines on pause and consumption has shifted accordingly. Whether its people on their way to work, parents taking their kids to school or students on their way to class, we have seen normal traffic routines completely suspended while most people are staying at home. Dayparts like breakfast and snacking that fit into these routines have seen a disproportionate decrease, while lunch and dinner have shown more strength.

Also whereas you would typically see sales pickup on Thursday and continue at a higher clip in the weekend, we now see stronger performance on weekdays. And while traffic has decreased, we have generally seen an increase in average check sizes due to more frequent group ordering both in the drive-thru and on delivery. As we sit here today, more than 95% of our U.S. restaurants are opened. In Canada, around 85% of our Tim Hortons’ restaurants remain open, with most of the temporary closures in places like universities or malls that are currently closed. In APAC, more than 80% of our restaurants are open, which reflects a strong recovery in China after majority of the restaurants were closed during the peak of the crisis there in February.

And in EMEA and LAC, around 40% and 50% of our restaurants are open respectively. The proportion of temporary closures in EMEA and LAC is particularly pronounced given the higher number of countries that have mandated total lockdown, but in both cases, most of our networks are managed by large, well capitalized partners that are well positioned to push through the crisis. Many of them are already working on preparations to reopen as governments have started to communicate potential paths over the coming weeks. So on a global basis approximately three quarters of our restaurants are open today, although again most still have limited service modes. We know that the full reopening of all of our restaurants and service modes would take some time yet, but we are encouraged by early signs of improvement in sales trends across many of our major markets.

With all the decisions we have taken and with the strong working relationship we have with our restaurant owners, we believe we are well positioned to come out of this crisis even stronger as a system. Our supply chain operations in those of our restaurant owners have continued operating with limited disruptions and we have put in place measures to minimize risk across our systems. I’d now like to go through a few highlights for each of brands, after which I will ask Josh to share an update on our digital progress and then Matt to take you through the financial details this quarter.

At Tim Hortons, in Q1, our system-wide sales decreased negative 10% to nearly $1.4 billion driven by decreasing global comparable sales of negative 10.3%, which was partially offset by net restaurant growth of 1.2%. In Canada, comparable sales declined 10.8% for the quarter and were significantly impacted by the spread of COVID-19 in March. During the peak crisis period in January and February, our comp sales performance continued on the trajectory we noted during our February earnings call and was about 1 point better than what we saw during the fourth quarter of last year.

In the weeks following the onset of the crisis across Canada in March, however, average daily comparable sales growth decreased a negative mid 40s. As I mentioned earlier, breakfast, snacking and other routine based dayparts have been disproportionately impacted across all of our businesses and this dynamic is clearly illustrated in our results of Tim’s and those of our coffee-oriented competitors in North America. However, over the course of April, we have been encouraged by early signs of momentum returning to our core coffee and breakfast platforms as well as our drive-thrus. Also, our rapid expansion of delivery to more than 1,000 stores has allowed us to drive strong and consistent sales growth in the channel. And the launch of curbside order and pickup has had a positive impact as well.

On the back of these initiatives, we spurred a positive trend in daily comparable sales growth that at the end of April had us in the negative high-30s, a more than 10 point improvement from the lowest level we saw in late March. In Q1, we also had to pivot our annual Roll Up the Rim promotion and pulled 81 million paper rollup cups from the market as the early effects of COVID-19 were emerging. This resulted in an unplanned shift to in all digital rollup promotion. All of our teams from digital to marketing to operations and our restaurant owners reacted incredibly quickly to make the necessary adjustments in a matter of days. It’s hard to quantify the final impact of the program on sales given it coincided exactly with lockdowns beginning in Canada, but we saw clear benefit from all digital promotions, which greatly contributed to the 1.5 million new app downloads and the significant increase in loyalty registration we saw during the quarter.

In terms of restaurants owner profitability, the decrease in sales we have seen in recent weeks has led to an expected near term decrease in profitability so we are confident that a combination of programs we have made available and those launched by the Canadian government will provide the resources our owners need to whether the crisis you will recall that our base line union economics in Canada are among the strongest in global QSR which provides a degree of installation even in the phase of the sales declines seen to date and means that on average our restaurants continue to be cash flow positive as I mentioned earlier one of the measures we implemented to help our restaurant owners was to suspend current capital investments pre COVID-19 we installed a fresh brewers and water filtration in thousands of restaurants and still have about 900 restaurants that will undertake these installations once we emerge from the current prices similarly we have slowed down the implementation of our outdoor digital menu boards the importance of these projects has not changed we are focusing our full attention on working with our franchises to plan for a full reopening of their restaurants and adapt the business to meet all the demands of a post COVID-19 world.

Turning to Burger King, in Q1 our system-wide sales decreased 3% to nearly $5 billion driven by a decrease in global comp sales of 3.7% which was partially offset by net restaurant growth of nearly 6% in the U.S. Our comparable sales growth at Burger King for the quarter was negative 6.5% during the pre-crisis period January, February and the first two weeks of March. We posted positive comparable sales growth in the U.S. in the low single digits driven by a continued strong contribution from the impossible Whopper and improved performance in the value layer of our menu. With the onset of COVID-19 across the U.S. in mid-March, our daily comparable sales growth decreased for the last two weeks of the quarter to negative low 30 the largest individual driver. This decline was a closure of our in store dining areas.

Despite this headwind, we quickly refocused our attention on our drive-thru and delivery as primary sales channels at the onset of the crisis our dining business drop essentially to zero and even our drive-thru business went negative year over year as customer traffic dropped due to the stay at home orders enforced through out the country since then our intense focus and modified approach to drive-thru has allowed us to improve sales in the channel each week and our drive-thru sales for Burger King U.S. are now up above 15% year over year and have been positive since the second week of April and on delivery in the final weeks of the quarter we accelerated the role out to several hundred restaurants so that we now have over 5000 restaurants offering the service most we have multiple delivery partners as well as the burger king mobile app we have continued to see tremendous growth in average delivery sales per restaurant through April including on our own app and are confident that market penetration we have been building in our delivery channels will position us well as we emerge from this crisis. On top of our other marketing initiatives our momentum in drive-thru and delivery sales has underpinned a sequential improvement in our total comparable sales from the negative low 30’s in late March to the negative teams in the last few weeks of April.

In terms of restaurant profitability not surprisingly the decrease in comparable sales we have seen since March has negatively impacted store level profitability in the U.S. However, we have been working with our restaurant owners to adapt to their businesses to the current environment and access support programs both we and the government have made available to drive restaurant level cash flow given current conditions and available support programs we believe our restaurant owners in the U.S. are well positioned to whether this crisis and as I mentioned before remain over 95% open. In our international markets system-wide sales decreased just over 1% driven by a decrease in comparable sales of 1% which is partially offset by net restaurant growth of 9.5% the decrease in system-wide sales was in part driven by a sharp decline in system-wide sales in China.

During the initial spread of COVID-19 in January and February at the peak of the crisis in China, a majority of our restaurants were temporarily closed and comparable sales for restaurants still operating were down 60% over the course of 5 weeks between February and March restaurants steadily reopened so that today less than 10% of restaurants in China remain closed. At the same time daily comparable sales have recovered to approximately negative 15% and maintain deposit of trend. Lower international system-wide sales in Q1 also reflected the early impact of COVID-19 across the rest of APAC, Latin America and EMEA, where several markets instituted lockdowns in late March.

As I noted earlier, many markets have remained closed throughout the month of April and will continue into May and perhaps beyond although governments are starting to release details around their expected timelines for reopening for example Italy has communicated the timeline to reopen restaurants over the coming month, well in Spain many of our restaurants are now able to full fill delivery orders. And finally, at Popeyes our global system wide sales increased over 32% to $1.3 billion driven by over 26% growth in global comparable sales and unit growth of nearly 7%.

Comparable sales growth was particularly strong in the U.S. rising nearly 30% for the quarter. Performance of Popeyes varied substantially before and after the onset of COVID-19 in the U.S. but saw the least impact relative to our other brands. In January, February in the first two weeks of March comparable sales drew in the 30’s, driven primarily by sustained volumes of the Chicken Sandwich but also reflecting growth across other parts of the menu including bone-in, boneless and seafood. Following the onset of COVID-19 in the U.S. in mid-March, comparable sales declined to flat levels year-over-year for the last two weeks of the quarter. In April, like Tim’s and Burger King teams the Popeyes team has move quickly to emphasize our off premise business in comparable sales has substantially improved are returning to the levels we were seeing for the second week of March before the onsite of the crisis. Popeyes success last year wasn’t like anything, any of us have seen in our careers but its resilience in the phase of COVID-19 with dining rooms closed across the country has been equally remarkable.

We have made many important adjustments at Popeyes since the global spread of COVID-19 rolling our contactless procedures in the drive through and putting additional resources behind delivery and mobile order and pickup. In these channels, we have seen an increase in average order size and ticket, especially in the dinner date part through communication of our family meal bundles. Comparable delivery sales are up in the triple digits year-over-year and we continue to see delivery as a huge opportunity to reach new guests and enlarge the trade area of our stores as a brand builds on the momentum. It has sustained from last year. At Popeyes and across all three of our brands we have seen the importance of digital sales through apps, through curb side pickup at our restaurants and through our delivery partners. I would like to turn the call over to Joshua is been instrumental in leading all of our digital efforts that are prepared to so well to lean into these channels. Joshua?

Josh Kobza

Thanks, José. And good morning everyone. In many ways the COVID crisis has accelerated some of the behaviour change that we have had already seen building. Social distancing has forced consumers to quickly change their behaviour and adopt solutions with a new threshold for our convenience. For us, this has been a critical movement to leverage the infrastructure we have building for years to move quickly to adapt our platforms in response to our guests rapidly evolving needs and we have seen some pretty remarkable progress in just a short period of time. Especially in three key areas. The first is delivery. From a base of just a couple of hundred restaurants in North America on delivery two years ago, we now have well over 9,000 active restaurants across our three brands with most offering delivery via our own digital platforms as well as multiple aggregators.

At Tim’s in Canada, we have brought nearly 800 additional restaurants online with delivery in just two months. And have seen overall delivery sales grow by more than 6x versus their pre crisis levels. And our Burger Kind and Popeyes, our delivery sales are up more than 3x versus the same time last year. As we expand locations and average sales per restaurant. Much of this is driven by delivery through our own mobile apps, which now represent around 20% of our total delivery sales for Burger King and Popeyes. The second area focused for us is our mobile app guest experience across all three of our mobile apps in the home markets. Where we have made significant strides to incorporate guest feedback and enhance our user experience. This has led to improvements in our app store ratings, industry leading download growth during the quarter and has also resulted in very significant improvement in terms of guests, who visit our website or mobile apps and untimely make a purchase. In some cases, this is improved up to 10x in the past couple of quarters.

The third area I mentioned, is our efforts around CRM with particular focus on Tim’s rewards as José mentioned earlier, we have been pleased with the transition to the new points based structure, which was designed to open up more of the menu to our loyal guests and increase registration. Today approximately 45% of guests using Tim’s rewards to registered versus about 25% back in February, which is in line with our expectations going in. Progress in each of these areas is critical to achieving our overarching goal, which is to drive the digital sales across each of our brands. As of the third week of April for our home markets digital sales represented about 9% of total sales at Burger King, 15% of total sales at Popeyes and more than 30% of total sales at Tim Hortons. We believe that our future growth prospects will be increasingly tied into our digital capabilities, we will continue to build leading teams and capabilities in technology, so that we can bring our guests digital experiences that contribute towards our dream of building the most loved restaurant brands in the world. We are encouraged by the progress we have made this quarter and look forward to sharing more developments with you going forward.

I will now hand things over to Matt to take us through more detail on the business results.

Matt Dunnigan

Thanks, Josh. My comments today, I will take you through an overview of our results for the first quarter as well as some important steps we have taken to further enhance the strength of our balance sheet in light of the uncertainty surrounding COVID-19.

In the first quarter, system-wide sales performance across each of our brands led to consolidated adjusted EBITDA of $444 million, down 9.6% organically year-over-year reflecting the impact of COVID on our results throughout the quarter, first in Asia then later in other regions around the world. Our performance this quarter also reflected ad fund expenses exceeding revenues by nearly $20 million more than they did in the first quarter of last year, resulting in an impact of approximately negative 4% to our consolidated organic adjusted EBITDA growth rate.

We have mentioned in the past that in some quarters, there maybe a mismatch in the timing of revenues and expenses, but that in the long run we have managed these ad funds so that total revenues equal expenses. In this quarter, the sudden decline in sales that resulted from the spread of COVID-19 led to an especially pronounced mismatch, which we expect should normalize over time. As José mentioned earlier, we also suspended base rent for several thousand properties in Canada and the U.S. and realized the one-time expense related to the write-off of coffee cups that were intended for us in our Roll Up the Rim program. Taking together, these two items reduced our adjusted EBITDA growth rate by about 2%.

Now, moving on to segment level performance, at Tim Hortons, our first quarter adjusted EBITDA was $189 million, which represents a decrease of about 19% on an organic basis. This decrease was driven primarily by a 9.9% decrease in system-wide sales, which included a 10.3% decrease in global comparable sales that was partially offset by global net restaurant growth of 1.2%. The year-over-year decrease in adjusted EBITDA also reflected a decrease in supply chain sales which are primarily driven by restaurant traffic and volumes. Also, approximately half of the ad fund related negative impact to consolidated adjusted EBITDA was attributable to Tim Hortons, which reduced our Tim Hortons EBITDA growth rate by approximately 4%. And finally, the base rent adjustment and one-time write-off of costs I mentioned earlier together reduced our year-over-year growth rate by about 3%.

At Burger King, first quarter adjusted EBITDA was $200 million, representing a year-over-year organic decrease of approximately 7%, driven primarily by a 3% decrease in system-wide sales growth. The evolution of our system-wide sales reflected a decrease in global comparable sales over 3%, which was partially offset by global net restaurant growth of nearly 6%. Also, about half of the negative ad fund related impact to consolidated adjusted EBITDA was attributable to Burger King which reduced our Burger King growth rate by about 4.5%.

Finally, at Popeyes, this quarter’s adjusted EBITDA was over $54 million, which was up nearly 35% organically year-over-year. This increase was driven by strong system-wide sales growth of over 32%, continuing the brand’s strong momentum from last year, including net restaurant growth of nearly 7% and global comparable sales of over 26% partially offset by higher segment SG&A.

On a consolidated basis, our first quarter adjusted net income was $226 million. This compares to first quarter 2019 adjusted net income of $255 million. The year-over-year decrease was attributable to the decrease in adjusted EBITDA and unfavorable exchange rate movements partially offset by lower interest expense resulting from our refinancing activities in Q3 and Q4 of last year as well as slightly lower expenses year-over-year related to stock-based compensation and D&A. Our adjusted diluted EPS for the first quarter was $0.48 compared to $0.55 in the prior year representing a nominal decrease of 11.8%. Including this decrease is a headwind from unfavorable foreign exchange rate movements, which reduced our EPS growth rate by approximately 2%.

Our first quarter 2020 adjusted effective income tax rate of 19.2% was approximately in line with the first quarter of 2019. And on a full year basis, we continue to expect the rate in the low 20% range. However, it’s important to remember that the timing and amount of stock option exercises can vary materially over time and can therefore cause some volatility from quarter-to-quarter.

Now, turning to our cash generation and capital allocation for the quarter. It’s worth highlighting upfront that our liquidity position continues to be very strong and we have reinforced the strength and flexibility of our balance sheet through the actions we have taken in response to the COVID-19 crisis. Our leverage remains one of the lows in our peer group. We have no near-term maturities and we feel very well-positioned from a capital structure perspective. Despite the impact of COVID on our business around the world, we generated free cash flow of approximately $116 million in the first quarter, calculated as the sum of cash flows from operating activities less payments for property and equipment. We also paid a total of $232 million in common dividends and partnership exchangeable unit distributions at the beginning of the quarter. And this morning, we announced that the RBI Board of Directors declared a dividend of $0.52 per common share and partnership exchangeable unit of RBI LP payable on June 30, 2020.

In terms of investments, while we continue to make progress on key projects during the first part of the quarter, including our remodel programs at Tim Hortons and Burger King, the expansion of our Tim Hortons supply chain network in Canada and the rollout of outdoor digital menu boards at Tim Hortons across Canada and the U.S., the unprecedented impact of COVID-19 has caused us to press pause on many of these initiatives. We also suspended all capital expenditure commitments for our restaurant owners to maximize their flexibility as we navigate this crisis together. We remain confident in the rationale behind each of our investment projects and we resume work once we are assured it is safe to do so. In the meantime, we are continuing to move ahead with our project to expand our distribution footprint in Canada.

As of March 31, 2020, our total debt outstanding was $13.4 billion. Our net debt calculated as total debt plus cash and cash equivalents of $2.5 billion was $10.9 billion. And our net debt to adjusted BITDA leverage ratio was 4.8x and one of the lowest in our peer group. As I mentioned, in March, we moved quickly and taking several steps to maximize our liquidity as the spread of COVID intensified. Within the first week of COVID-19’s initial spread in the U.S., we drew down substantially all of our $1 billion revolving line of credit. Even though we entered the first quarter with a very healthy cash balance of $1.5 billion, we felt it was prudent to maximize our liquidity out of an abundance of caution.

At the end of the quarter, we saw an opportunity to raise additional funds in the debt markets, which up to that point, have been effectively closed for a number of weeks. On April 7, we closed $500 million of new 5-year first lien senior secured notes. Given the considerable uncertainty surrounding COVID-19, we are pleased to strengthen our balance sheet even further on top of the nearly $2.5 billion of cash we held at the end of the first quarter. As a result of these actions, we are confident we have the resources and flexibility needed to manage through this crisis and emerge on the other side even stronger. Thank you everyone for joining us on the call this morning and for your continued support.

With that, I’d now like to open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Today’s first question comes from Dennis Geiger with UBS. Please go ahead.

Dennis Geiger

Good morning, guys. Hope all is well. Thanks for the question. José, thanks for all the insights on the recent trends and the franchisee help. I was just wondering if you could talk a bit more about unit developments given some of the near-term choppiness across the industry, maybe kind of the way you are thinking about longer term store development, if that long-term outlook that you folks framed is still applicable? And I know you mentioned kind of confidence in getting back to where you left off with growth in the brands as well as I think the large well-capitalized international franchises that you partner with. So, maybe you could just discuss some of the puts and takes as you think about longer term store development? Thank you.

José Cil

Hey, Dennis. Thanks for the question and hope you are doing well and staying safe. Yes, look, I think in the short-term, we are going to see an impact in net restaurant growth. And I think in terms of future years, it’s too early to say exactly what the path is going to look like, but we have amazing restaurant brands as we have said time and time again and has been evidenced by the growth over the last many years. We have amazing franchise partners all around the globe, master franchisees as well as smaller operators in North America, all working hard and investing well in their businesses and we have seen in different markets, I think it’s going to be varied by region and it’s going to be varied by country as markets reopen as businesses get back to normal as consumers get back to normal behaviors and we think there is an opportunity down the road just with real estate and with our well capitalized partners to be able to get back on track from a development stand point. I was in Europe with Burger King back in 2010 about 10 years ago a kind of at the height of the economic crisis and these were some of the best years we had with in Western Europe with many of our developing partners because there was a tremendous opportunities, the resilience of our business and our brands the strength of our investment model and returns on capital as well as opportunities that exist from a real estate stand point so we feel very confident long term. In the short term we will continue to manage and walk through the current situation very closely with our partners market by market but we are continuing to be very excited long term about the business. Thanks for the question.

Operator

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

Mark Petrie

Hey good morning. Just wanted a follow-up on that question and specifically, with regards to the Canadian network at Tim’s we noted the net restaurant closures in Q1 and wondering if you could just give a little bit of color around that?

José Cil

Thanks for the question. I think in Canada and throughout North America our business continues to whether the current situation in Q1. We tend to have closures that happen from time to time in mature markets and mature brands like we have with Tim’s and Burger King and Popeyes in North America so there was nothing specific to call out for Q1 from a closure standpoint.

Operator

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

Nicole Miller

Thank you so much. I know there is a lot to cover but I will just keep to one question so mine would be this, while there is a lot of near term disruption there is still lot of phenomenal brands out there and I would be very curious that perhaps some things become attractive. So as a silver lining potentially, what kind of opportunities are you seeing to expand the portfolio maybe not right now but maybe on horizon? Thank you.

José Cil

Thanks Nicole. As we said in our comments our prepared remarks and we said time and time again over the last several weeks publicly we are focused right now on taking care of our guests, taking care of our restaurant teams in all of our restaurants, we have got tens of thousands of restaurants open, 75% of our restaurants are open in a very complicated situation so we are focused on safety, well-being, taking care of our guests we are working with our franchise owners to make sure that they have the proper liquidity to whether the current situation, we’re working with our communities as well giving back and making sure that we have that our brands are present in the communities that need us and we are continuing to work on the reopening plans all across the globe. We have an attractive model in long term will be exercising flexibility around what we do with our balance sheet but our focus right now is on today and the near term and making sure we get out of this in a stronger position than we entered. Thank you so much for the question.

Operator

Our next question today comes from John Glass of Morgan Stanley. Please go ahead.

John Glass

Thanks and good morning. My question is on the Tim’s business model. Can you help us better understand in both the distribution business and then also the sub rent business for Tim’s, the fixed and variable costs, how much in the distribution business de-levers when you see sales decline like this and given that you are giving the franchises variable rents what proportion of the rents or other costs in that line item are fixed from your prospective so we can understand how that acts through this crisis?

José Cil

Yes John. Thanks for the question. It is not here. I think as it relates to the distribution business that is generally driven by level of activity and traffic and volume in the country and as we’re vertically integrated pretty much throughout Canada so we continue to operate really at full steam across our supply chain capabilities and as volumes go down we do see a little bit of an impact on the fixed costs leverage but in general so far I have not seen a material impact to the margins in that business in the first quarter. And then as it relates to the property business, you are right, we – as part of our commitment to working with our partners and trying to create some flexibility and support on the liquidity side as we work through this situation in Canada, we temporarily suspended our base rents and we switched our rents over to fully variable so that rent expense would flex down the sales for our owners just like royalties have in this environment. And then on the expense side of that for us where we do have head leases across a number of properties in Canada, we generally have fixed contractual rents that we paid through the head lease. And so we have pointed out as part of that adjustment in the quarter. We did see an impact to our EBITDA related to that rent variable rent adjustment, which was about a point or two of the EBITDA growth impact. Thanks for the question.

Operator

And our next question today comes from David Palmer of Evercore ISI. Please go ahead.

David Palmer

Thanks and good morning. Question on Tim Hortons, I think coming into this year, there was a lot teed up, you had change in loyalty, coffee improvements, better marketing. And I think the concern is that the brand was trying to bend the trend and of course things are short-circuited by the crisis. So I am wondering how you are thinking about what Tim’s can do to drive improvement from here, how much has the game plan changed? And then in addition, I would imagine there is going to be an overlay of economic factors you are considering, it’s an oil market up there, how are you thinking about driving improvement beyond just the social distancing effect with the economic one? Thanks.

José Cil

Hey, thanks, David. Appreciate the question. The first thing, we obviously had a clear plan that we were excited about the work we were doing coming into March with Tim Hortons in Canada, we had alignment with our restaurant owners on bringing the business back to basics focusing on coffee, on breakfast focusing on loyalty and then making improvement in our off-premise experience drive-thru in particular, but also going all-in to digital which has been a big part of our plan for the last couple of years.

As we headed into the crisis in mid-March as I mentioned in response to Nicole’s question, that the real focus was safety of our teams and guests first, stability of our franchise base, second and then connecting with our communities and making sure that what Tim’s does best which is really act as a local kind of home for most of its guests all around the country so that we did that really well and that we communicated that we were there for Canadians during the most difficult of times. And what we have seen over as I mentioned in my comments, what we have seen over the last several weeks through the crisis is that, we obviously had a big impact at the beginning that we see that as we look at other competitors in our space in the coffee, in morning daypart kind of routine based business like Tim’s is. We have seen lot more closures than what we have seen. So our business is 85% open. We have seen that everyone has been impacted heavily in that breakfast business, but we have made really strong pushes over the last several weeks to expand our off-premise business. We have expanded delivery. We have expanded curbside in many cases. In addition to seeing really good progress on loyalty and really good progress on mobile order and other aspects of our digital platforms, which we are really excited about. As we look forward and we go into the next phase, obviously, there is a big component of reopening communities, reopening the economy, reopening our dining rooms in conjunction with that and doing it safely. I think we are going to be working closely in each of our markets around connecting with folks as they get back of their routines, going back to the offices. This may take a little bit longer to open up completely, but we are going to be there every step of the way and trying to drive that behavior back to where it was pre-COVID-19. And we are going to reactivate many of the growth drivers that I mentioned coming out of our Q4 call in February around coffee, continued improvement on coffee, continue driving the next phase with loyalty which has a big component of one-on-one marketing as we get registrations up and get more information from our loyal guests in Canada and continued investment in digital, continued investment in breakfast food. And we are – we had as Matt mentioned we have put every all of our CapEx initiatives on pause but we are reevaluating that as it relates to the key quality and off-premise initiatives that we talked about, fresh brewers drive through and also looking at things like curb side being an additional element of premise which was not a priority coming into it but we see as a big opportunity and another way to serve Canadians in Canada the other piece that’s exciting and encouraging more so and exciting for us is this idea of bringing the brand back to its roots to its community connection the local strength of the brand and we have seen some encouraging feedback through different measures that we have that Canadians are connecting better with the brand that some of the initiatives that we have done around coffee trucks to serve medical providers free coffee free doughnuts, free Timbits. That's resonated really well. And some of the other initiatives that we have done that are been completely and totally focused locally and driven in many cases by our amazing restaurant owners in Canada so we are optimistic and confident that long term we’ve got a great plan for Canada and we are going to work like crazy in the short term to work through the current situation to get back to what we think we should be and will be long term with sprint thanks for the question.

Operator

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

Brian Bittner

Good morning. Thanks for taking the question. Again on Tim’s, another question here can you just clarify what percentage of Tim’s assets in Canada have drive troughs and just secondly when you said you expect Tim’s units on average to remain cash flow positive can you just clarify what you mean by that do you mean under the current sales trends you expect them to be cash flow positive and does that include the help from the government just additional color there would be helpful? Thank you.

José Cil

Yes, Brian. Thanks for the question. We have about 60%, just under 65% of our restaurants in Canada have drive troughs it is about 2,500 out of the 4,000 and I will pass on to Matt the question on franchisee liquidity and cash flow that you asked as second question.

Matt Dunnigan

Yes. Hey, Brian thanks for the questions. It’s Matt here. I think as we look at this franchise profitability has decreased as expected with the sales decline but I think through a combination of both the initiatives that we have implemented as well as the government programs being made available in both Canada and the U.S. we are pretty confident that a vast majority of our franchisees have runway to manage through the crisis and on average remain cash flow positive on our side we as we mentioned we flexed trends to become more variable we also found ways to advance some additional cash into our systems including the Burger King liquidity program we talked about on the Tim’s side some advancement of retail profit sharing and then on top of that as I mentioned we have similarly thoughtful government programs in place that we think are very helpful and supporting our franchises through this situati9ons and we will offset some of the profitability and cash flow impact from the sales decline so I think through a combination of the things that we have implemented plus these programs we will continue to allow the systems in the U.S. and Canada that deal with the situation and remain in a reasonably healthy position. Thanks for the question.

Operator

Our next question comes from Sara Senatore with Bernstein. Please go ahead.

Sara Senatore

Thanks. I know obviously your focus right now is on the pandemic and recovery but I do want to ask about trends at Burger King U.S. prior to the outbreak in the U.S. which is basically the U.S. comp I think you said, was low single digits. But what we heard from other large limit service restaurants were more in the mid or even high single digit range in the sense of the whole industry seem to have really accelerated so I guess I am trying to understand why Burger King didn’t fully participate in that if you have a sense of where you might have loss share versus some of the other big competitors because they don’t think that the question is tougher compares were pretty easy so just trying to understand sort of longer term the prospects for Burger King in the U.S. just consider what we have seen in the last couple of quarters? Thanks.

José Cil

Yes, hi, Sara. Thanks for the question. Coming into the crisis as I mentioned in my prepared remarks, we were kind of low single-digits with Burger King, slightly better, but roughly in line with what we saw in Q4. As I mentioned in my remarks in February, we were really confident with the long-term plans for Burger King with some of the investments we are making around Burger King of Tomorrow, some of the investments we are making on food quality and communicating that to our guests, the work we are doing on digital which has accelerated tremendously as Josh mentioned a few minutes ago has accelerated tremendously both in terms of delivery as well as in terms of the mobile app and downloads have jumped tremendously. So we are able now to connect directly with our guests and have one-on-one marketing. We have also made investments and continued to look at investments that are long-term on drive-thru and expanding that capability we have started to test and rollout to many markets, curbside which we think is an additional opportunity from an off-premise standpoint, but there is – we think the plan for the long-term as I mentioned I guess 90 days ago is a strong one that has long-term growth potential. Breakfast continues to be an area where we think we have a lot of room to grow and we have got a really strong base of consumers that already know the brand and love the brand for breakfast. And so our focus as I mentioned in the context of this scenario is to make sure that our business and our franchisees and our teams are safe and well prepared to weather the storm. We have seen good trends coming out of the lows of the end of March in terms of the comp in BK U.S. as I mentioned in my comments. And so all of the signals give us confidence that we have the right plans, we have great partners and we have the right long-term potential for this business. Thanks so much for the question.

Operator

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

Peter Sklar

Thanks. Just with what’s – everyone sees what’s going on in the protein processing complex as a result of COVID-19 and with processing plants going down, particularly – well I guess it’s poultry, beef and pork plants have gone down. Have you seen any issues yet in terms of supply to your banners and what are your contingency plans, because obviously, there is going to be interruptions?

José Cil

Yes. Peter thanks for the question. Yes, this is something we are very acutely aware of and monitoring on an hourly, daily basis, I have got updates with my team regularly on this topic. We haven’t seen any interruptions or disruptions to our supply chain in North America either on the beef, pork or poultry side. What gives – we are obviously working closely with the suppliers and our distribution partners as well to make sure we have all of our contingency plans in place. Some of that has to do with safety stock. Some of it has to do with the diversity of raw material suppliers as well as processors that we have, which gives us confidence that we can manage through any situation that’s out there. We haven’t – as I said we haven’t seen any issues in this near-term despite some of the headlines we have seen from others. Our supply chain is intact and working well, but we are monitoring closely and we will keep everyone posted if anything changes. Thanks so much for the question.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to José Cil for any final remarks.

José Cil

Thanks, everyone and thanks for your time today. The COVID-19 pandemic has obviously introduced a wide variety of challenges, but we feel we are well positioned and have the resources we need to come through this together with our franchisees across all three of our amazing and iconic brands. Over time, we have demonstrated our ability to grow in a wide variety of macroeconomic conditions and we believe the resilience of our business model will serve us well as we confront and ultimately emerge from the COVID-19 pandemic. Once we are safely on the other side of this crisis, we are confident we will pick right back up where we left off on our plans to grow our brands all over the world. Thanks again. Take care and stay safe.

Operator

Thank you. This concludes today’s conference call. You may now disconnect your lines and have a wonderful day.