Restaurant Brands International Inc. (QSR) Q1 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Burger King Worldwide First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this call -- conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Sami Siddiqui, Senior Director of Investor Relations. Please go ahead.

Thanks, operator. And good morning, everyone. Welcome to Burger King Worldwide's earnings call for the first quarter ended March 31, 2014. A live broadcast of this call may be accessed through the investor relations page on our website at investor.bk.com, and a recording will be available for replay. With me today are Burger King Worldwide's CEO, Daniel Schwartz; CFO, Josh Kobza; and President of North America, Alex Macedo. The team will be available to answer questions during the Q&A portion of today's call. Before we begin today, I'd like to remind everyone that this earnings call and presentation include forward-looking statements which are subject to various risks set forth in the press release that we issued this morning. In addition, this earnings call and presentation include non-GAAP financial measures, the reconciliations of which are included in the presentation and in this morning's press release, both of which are available on our website. Let's start on Slide 4 with the agenda for this morning's call. First, Daniel will walk us through highlights for the quarter and provide an update on our key initiatives. Then he'll turn it over to Alex to discuss progress we've made on our Four Pillars strategy in the U.S. and Canada. Daniel will then run through regional performance, and Josh will discuss financial results. Daniel will close the call with concluding remarks before opening it up for Q&A. And with that, I'll turn the call over to Daniel.

Good morning, everyone, and thanks for joining us today. We started off 2014 on the right foot, as we were able to deliver strong year-over-year growth and make significant progress on our major strategic initiatives. Remember that everything we do here at BURGER KING revolves around 2 overarching themes: one, ensuring that our guests always have great experience; and two, translating that great experience into strong profitability for our franchisees. Ultimately, it is these 2 groups, our guests and our franchisees, that are instrumental in making the BURGER KING brand what it is today. The first quarter was focused on laying the foundation for a strong 2014. To that end, we continued to execute on our strategy of launching fewer, more impactful products in the U.S. and Canada. We introduced 4 new menu items during the quarter, all of which were designed to provide our guests with fresh new tastes without adding operational complexity to our kitchens. 2 of these products, the Rodeo Chicken sandwich and the Rodeo burger, were unveiled as part of our all-new KING DEALS value menu, which offers a range of products starting at $1. These products are great examples of how we can deliver compelling value without sacrificing operational efficiency. Neither of them required new SKUs to be rolled out to our restaurants, leading to less waste, less incremental training and higher franchisee profitability. While we have a long way to go in terms of improving franchise profitability, we were pleased to see year-over-year restaurant-level EBITDA growth and margin expansion in the first quarter. And we believe we have the right strategy in place to continue to drive franchise profitability. Internationally, during the seasonally slow first quarter, we focused our efforts on ensuring that our record number of Q4 2013 openings got off to a strong start. We also solidified our openings pipeline for the remainder of the year. As with the years prior, we expect development activity to be back-end weighted as we convert our pipeline of sites into new openings throughout the year. Consistent marketing and development activity allowed us to deliver 19% year-over-year adjusted EPS growth and 13% year-over-year organic adjusted EBITDA growth. We have successfully grown adjusted EBITDA and adjusted EPS every quarter since becoming a public company in mid 2012. We know this impressive level of growth would not be possible without the hard work of our development partners, franchisees and team members around the globe. Let's start with Slide 6 for an overview of growth highlights. Global comparable sales were up 2% in the first quarter, driven by positive comparable sales across all 4 regions. In the U.S. and Canada, we were able to finish the quarter slightly up despite severe winter weather that negatively impacted our traffic. As this weather subsided later in March, we saw one of our highest months in restaurant sales in recent history, which gives us confidence that our strategy of balanced promotional activity, coupled with menu and operational simplicity, is working well. We were also pleased to see strong comparable sales growth across our international businesses. Although each region has tailored product and promotional strategies, the one underlying focus was on delivering compelling value to our guests across multiple price points. From a restaurant development perspective, we opened 676 net new restaurants on a trailing 12-month basis, representing more than 5% new unit growth, putting us among QSR leaders in restaurant growth. This represents almost 50% year-over-year growth in net new units from the first quarter of last year. Strong unit growth, combined with positive same-store sales growth, drove system-wide sales growth of almost 7%, up 5 percentage points from the prior year. The next slide highlights our strong results for the quarter. All 3 metrics, organic adjusted EBITDA, adjusted EBITDA minus CapEx, and adjusted diluted EPS, grew by double-digit year-over-year growth percentages. Performance was driven by organic adjusted EBITDA growth across all 4 regions, including double-digit growth in EMEA, LAC and APAC. Moving to Slide 8. You can see that we're continuing to execute on our established business strategy to drive long-term results. Alex will walk you through our strategy in the U.S. and Canada on the next couple of slides.

Thanks, Daniel. During the first quarter, despite severe winter weather impacting much of the U.S. and Canada, positive sales performance was driven by our continued focus on 2 priorities: one, delivering compelling value across multiple price points; and two, launching fewer, more impactful products that allow us to simplify in-restaurant operations and improve franchise profitability. We have had this strategy in place for almost 1 year now, and we believe consistency in menu and promotional activity is helping drive our improved performance. During the first quarter, we were excited to launch the Spicy Original Chicken Sandwich and improve upon the BIG KING sandwich. The Spicy Original Chicken Sandwich was launched at the beginning of this quarter through our 2 for $5 promotion. And this spicy twist on our classic Original Chicken Sandwich delivers on 2 important fronts: building on our already popular chicken offerings, which continue to be an important category for our guests; and minimizing operational complexity. We believe that this type of product innovation is beneficial for our guests and our franchisees. Our guests can continue to expect exciting and bold additions to our menu, while our franchisees can continue to operate their restaurants without complex new procedures. In addition to the Spicy Original Chicken Sandwich, we were excited to roll out the improved BIG KING sandwich. As it is our priority to deliver compelling value to our guests, we decided to make the BIG KING sandwich even bigger this quarter, giving our guests an even larger bite of our fire-grilled flavor. This sandwich continues to be a guest favorite, and we're excited to enhance it while maintaining simple operational procedures. As Daniel mentioned earlier, another highlight this quarter was the launch of our KING DEALS value platform, which featured the Rodeo burger and the Rodeo Chicken sandwich. Both of the Rodeo sandwiches feature our signature barbecue sauce as well as our long-time favorite onion rings. While these sandwiches helped drive sales and traffic, they also delivered on our priority of simplifying restaurant operations, as their ingredients required no new additional components in our kitchens. We further expanded this compelling value into breakfast with the rollout of the KING DEALS breakfast value menu. This allowed us to drive traffic during the morning daypart, which we view as a major opportunity to increase restaurant sales and ultimately improve restaurant profitability. We continue to believe that a balanced marketing approach with refreshed value options in all layers of the menu is an effective strategy that will continue to help us improve upon and deliver positive comparable sales growth in the U.S. and Canada. Our focus for the remainder of this year will be to build on Q1's positive results while continuing to focus on improving our franchisees' profitability. Moving on to Slide 10. Following the initial success of our integrated SATISFRIES marketing campaign, we were excited to partner with the NCAA as a corporate sponsor of the 2014 NCAA men's basketball tournament this quarter. The marketing campaign featured premiere TV spots during the entire tournament, in addition to media impressions on numerous websites, including Sports Illustrated, the Bleacher Report and the NCAA March Madness website, which millions of users used to watch the live games online. Building on our success in digital marketing innovation, we launched the March Madness-focused social media campaign with the slogan Watch Like a King. Our promotion over Twitter offered prizes to users that demonstrated the best reasons why they should get to win tickets to the Final Four so they could really get to Watch Like a King. The popularity of this social media campaign not only multiplied our BURGER KING Twitter account activity eightfold, but it also made us the most mentioned brand on Selection Sunday, in addition to making us the most mentioned corporate sponsor of the NCAA tournament through the duration of March Madness. We are encouraged by the success of this campaign, and we'll continue to evaluate future opportunities to keep our brand at the forefront of social media innovation in the QSR industry. Turning to Slide 11. The reimaging component of our Four Pillars strategy continues to be a focus area, as it is a proven avenue for growing the AUVs of our restaurants. Our team continues to work hard on expediting construction and growing our remodel pipeline for the remainder of the year. As always, we will update you on the progress at year end, but we remain on track to hit our stated target of 40% of the U.S. system on the modern image by the end of 2015. Moving on to Slide 12. Restaurant performance and guest satisfaction continue to be a focus as we work to promote consistency in restaurant operations to make sure our guests have the best experience possible and come back to our restaurants over and over again. To that end, we were excited to launch the Restaurant Excellence Visit program in Q1, a new operational initiative that builds off the success of the Coaches Program we launched in 2012. The Restaurant Excellent Visit program, or REV, has the same focus as our Coaches Program. Our coaches continue to make visits to restaurants, working side-by-side with our managers and crews to share best practices. In the new program, however, restaurant auditing and performance analysis is performed by outside specialists, which allows us to be even more objective in diagnosing performance. Coaches therefore can focus their efforts solely on improving the operations of each restaurant they visit, which we believe helps move the system closer to best-in-class operations. Even in its initial stages, the rollout of the REV program has achieved positive results. Guest satisfaction scores improved 6% versus the prior quarter, and we saw a 13% improvement in guest satisfaction within the drive-through speed-of-service category alone. Although there's still much to improve in our restaurant operations to make them best in class, we are pleased that our initiatives are improving system-wide operational consistency. Now I will turn it back to Daniel, who will give you an update on our international development.

Thanks, Alex. 2013 was one of the most active years for international development in the history of BURGER KING, as we opened 670 net new restaurants around the world. As I mentioned on our last earnings call, we're focused on delivering the right kind of openings. Our commitment is to open restaurants with attractive unit economics that deliver compelling financial returns for our franchisees and partners. To that end, much of our Q1 effort was focused on supporting those Q4 openings so that these restaurant can ramp up quickly. We also worked hard to solidify our new restaurant pipeline for the remainder of the year. Our development teams from around the world have been identifying sites which will yield high restaurant sales and traffic and drive strong financial returns for our franchisees. We believe we have a solid pipeline in place, and we look forward to updating you on our progress in the second quarter. Now let's walk through the first quarter highlights for each region, starting with the U.S. and Canada on Slide 14. Alex has already talked through many of the highlights here in North America. The only point I'd like to call out is that our consistent marketing and G&A management helped us generate approximately 4% year-over-year organic adjusted EBITDA growth in Q1. We still have a lot of work left to do, but we're confident that we have the right strategy in place, with a strong new product pipeline planned for the remainder of the year. Turning to Slide 15. EMEA continued to perform well, delivering a 13th consecutive quarter of positive comparable sales growth, with nearly 5% comps. Germany, our largest market in the region, outperformed due to a strong balance between premium LTOs and value offerings. We were excited to introduce the Steakhouse Gold Collection limited-time offering to complement our Trial Weeks promotion that continues to perform well. In the U.K., the King of The Day and the King Savers value menus helped drive sales and traffic. Finally, we were excited to roll out SATISFRIES to some of our major European markets, including Germany, Spain and the U.K. With this, our guests in EMEA now have the opportunity to sample our better-for-you French fries. In the last 12 months, EMEA has opened up 340 net new restaurants, representing half of our global net restaurant growth. Both strong net restaurant growth and comparable sales growth helped us increase total system sales by nearly 15%. Turning to Slide 16. Positive momentum in LAC continued, as we generated 4% comparable sales growth in the quarter. Strong performance in Brazil was driven by the introduction of the premium Picanha Steakhouse LTO and the Double Cheddar burger, which has been one of our most successful value products to date. In Puerto Rico, a challenging macro environment continued to impact our sales, although the team is working hard to refine our value offerings to help drive traffic. LAC overall system sales grew by 17% in the quarter, driven by 156 net restaurant openings in the last 12 months. This was primarily driven by Brazil, where we opened nearly 100 restaurants over the past year. In Brazil, we continue to be focused on improving site selection and optimizing CapEx to drive even stronger new restaurant economics across all formats. Wrapping up on Slide 17. APAC delivered its sixth consecutive quarter of positive same-store sales growth, with nearly 4% growth in the quarter. Australia, our largest market in the region, continues to outperform as new premium limited-time offerings, such as the Tropical WHOPPER, complemented the STUNNER value platform. Similarly, in South Korea, the balance between the premium Philly steak limited-time offering and our popular value menus has helped us drive positive performance. And lastly, in China, we continue to see double-digit sales and traffic growth due to a strong menu and promotional mix that was successfully realigned mid last year. APAC system sales grew by 15%, which was driven by 235 net new restaurants in the last 12 months. In China, which was the largest driver of net restaurant growth, restaurant margins have continued to improve as we've done a more effective job of optimizing our site selection. I'll now turn it over to Josh to review our financial results.

Thanks, Daniel. Moving now to Slide 18. I'd like to walk through our financial results for the quarter. Q1 revenue increased 6% year-over-year on an organic basis, excluding the impact of refranchising transactions and changes in foreign currency. Top line growth was driven by all 4 regions, particularly EMEA, LAC and APAC, which all generated double-digit organic growth. Q1 adjusted EBITDA grew 13% year-over-year on an organic basis. Strength was driven by double-digit growth across all 3 international businesses, solid performance in North America and disciplined corporate cost management. It's significant to note that this was the first quarter where we did not have any global portfolio realignment project costs due to the successful completion of our global refranchising late last year. Finally on this slide, our adjusted net income and adjusted diluted earnings per share increased by 20% and 19%, respectively, in Q1, driven by higher adjusted EBITDA, offset by higher interest expense and income tax expense. Depreciation and amortization was relatively unchanged from the prior year, as we have completed our transition to a fully franchised business model. Net interest expense increased by approximately $1 million year-over-year as a result of accretion in the balance of our noncash-pay discount notes. Moving now to Slide 20. You can see that we added $76 million of cash to our balance sheet in the first quarter after paying down $19 million of debt and paying out $25 million in dividends. Consistent cash flow generation has led to steady deleveraging, bringing us down to 3.2x net debt-to-EBITDA for the quarter. We are very comfortable with the leverage level of the business and recognize that we are relatively underlevered compared to fully franchised QSR peers who share our highly cash-flow-generative business model. As we approach the first call dates of our existing senior notes and discount notes, we will begin to evaluate ways to optimize our capital structure in order to maximize value for shareholders. On Slide 21. We're excited to announce the continuation of our $0.07 dividend for the second quarter of 2014. This underscores our confidence in BURGER KING's business model and commitment to returning capital to shareholders. I will now turn the call back over to Daniel for a summary of the quarter.

Thanks, Josh. Our focus in Q1 was on establishing a strong foundation for the year while not losing any momentum on our sales and profitability growth. We did that in multiple ways. We had successful product launches in the U.S. and Canada that reinforced our strategy of menu consistency and operational simplicity. We had healthy comparable sales growth in all 3 of our international businesses through a well-balanced menu and promotional mix. And finally, we solidified our openings pipeline to help drive development activity later in the year. Despite all of this progress, we know we still have a long way to go. We have to continue to execute in North America, drive improved restaurant profitability and expand our presence in both new and existing markets. In Q1, we successfully laid the groundwork for all of these initiatives thanks to all of the hard work of our franchisees, partners and team members around the world. We are confident that, with their help, we can make 2014 another successful year for the BURGER KING brand. Thank you all for joining us this morning. And at this point, we'll open up the call for Q&A.

[Operator Instructions] Our first question is from Jeffrey Bernstein of Barclays.

Actually, just 2 quick things, just one that was related to the franchisees. In terms of the unit growth, first and foremost, I mean, internationally alone, it looks like it was 13% growth, if our calculation's correct. Obviously, it wasn't much in the U.S. But in terms of international unit growth, I'm just wondering whether you think that is sustainable, or do you think they have appetite to accelerate that level? It just seems like it's such a rapid clip. I don't know if there's real estate constraints, or maybe you can opine upon what you're hearing from them in terms of profitability in their new and existing markets. And then I had one follow-up.

Jeff, it's Josh. And thank you for the question. I think, as we said at year end, we're very pleased with the pace of growth around the world, in particular in our international markets, as we added over 600 net new units last year. I think our focus in all of those markets is on continuing that pace of growth, which we think is really great and really best in class among the large QSR franchised companies around the world. And as we move into this year, as Daniel mentioned, we're focused on rebuilding our pipelines again and on ensuring the highest quality and the highest profitability of all of the new units that we're building around the world. So we're very excited about all of the work that we're doing together with our partners and the pace at which we're able to grow the brand in so many of these exciting new markets. And we are also excited about the profitability of all of those new units, which, as I said, is going to continue to be a big focus for us.

Is there any color on that profitability? Do you get a peek into the franchisee P&L? I'm assuming you do, but just any metrics you can share on that front?

So yes, we do spend a lot of time focused on the profitability of these new units. And we've been very encouraged by the sales levels that we've seen of the units that we built at the end of last year. And we'll be focused as well on the profitability as we work through ramping up those units across 2014.

Our next question is from Joseph Buckley of Bank of America Merrill Lynch.

Two questions. Could you elaborate a little bit on the outside consultants using -- being used for some of the U.S. and Canada store visits?

Sure, Joseph. This is Alex Macedo. Well, what we're doing is this. We got outside consultants so that our coaches can do more coaching and so that our auditing can be more neutral, right? So I think we gain in both ways. If you look at where we were a few years ago, we've really built a very solid steam -- team structure that execute very disciplined routines. But we saw a great opportunity in really making sure that our coaches can provide, for our franchisees, training and learning for their teams so that they can increase their profitability and release them from the auditing function because that was a dual message many times when they got into the restaurants. So we're using some of the best-in-class partners as third parties that are trained within the BURGER KING system to go into these restaurants and really, from a very neutral perspective, fill out all the questionnaires and all the auditing on how they see restaurant performance. And then the coaches come after these visits and make sure that they work with the restaurant teams to improve in each and every of the aspects that the third party identified as an opportunity.

Our next question is from Karen Holthouse of Crédit Suisse.

As we are starting to see on, at least in the spot market, some pressure on beef and cheese costs, can you comment at all on any coverage that your franchisees have and how they're just feeling about pricing and margins, given those pressures?

Sure. The -- I'll talk about -- this is Alex Macedo. I'm going to talk about the United States. So in relation to the beef pricing, we did see an increase in beef pricing in March. Year-to-date, it's actually overall food cost has been relatively flat. And for the year, we expect an increase of about 2 percentage points. However, what we've been doing over the last year, by changing our menu innovation platform and also really focused -- focusing on simplifying restaurant operations, is to leverage -- increase franchisee profitability. What we saw in Q1 was increased franchisee profitability by more than double digits in relation to last year by a measure of reducing complexity, making sure we have strong impactful launches and marketing and really taking very close care of how we manage the business in the daily routines and training to maximize profitability. So overall, despite having a flat food cost for Q1, we've seen significantly increased franchisee profitability in the United States.

Our next question is from Jeff Farmer, Wells Fargo.

Josh, you touched on it toward the end of your comments, but again, a popular conversation over the last several calls. But the $795 million senior notes first callable October '14, I think you have about $450 million first callable April '15, but I'm just curious if you could run us through the variables in terms of what all goes into that refi decision when it comes time, meaning things like the make-whole provisions, call premiums. And I imagine your interest rates got to look a lot better now that you've pushed your net debt-to-EBITDA ratio down to, I think you guys said, close to 3x. So again, just a little look behind the curtain in terms of how that refi decision-making goes down would be helpful.

Yes, Jeff. Thank you for the question. As you mentioned, we have about $800 million of senior notes coming due in October of this year and another $450 million or so coming due in April of 2015. Today, there are fairly significant make-wholes and call premiums that would have to be paid to refinance those notes, which make it less attractive as an option today. But as I mentioned on the call, as we get closer to the first call dates, the amounts of those make-whole payments will decline quite materially. So as we get closer and closer to those dates, we're going to spend more time analyzing what the right capital structure is, both in terms of level of leverage as we look at our current level of leverage compared to some of our peers and the right structure for that debt. As I think you alluded to, we're paying pretty high interest rates on those 2 tranches of debt, 10% and 11%, respectively, for the 2 pieces. And we do think that, given our current debt profile, we would have the opportunity to refinance that debt at significantly lower rates if we were in the market today.

Our next question is from Keith Siegner of UBS.

Alex, a question for you. So the BURGER KING brand has had a quite long and deep relationship with the young, single guys in particular, very tech-savvy folks. It's always been sort of a core competency. There's a lot of press lately about somewhat of a rush to market for mobile, either payment and loyalty and stuff for many different brands. Where does the BURGER KING brand stand now? Like what is the current state of that effort to, say, continue that best-in-class leadership with the big QSRs in mobile and tech engagement?

Thanks, Keith. This is Alex. So we think that mobile platform is going to be an integral part of our business in the coming years. We see it taking part of consumer behavior. We see our young consumers totally engaged with their mobile devices. So we've been dedicating a lot of effort, very significant effort, to making sure that we can be at the forefront of QSR when it comes to everything that we talk about in mobile platform, right, digital payments, mobile ordering, mobile couponing. So we've been working very, very hard, and we're going to have a lot of news coming out to the market this year. Right now, we're in this stage of making sure with our consumers and our guests that we have the exact platforms and the functionalities that they expect from us, right? That puts us ahead of anyone else in the QSR business. And as soon as we're confident that all these functionalities are working and are well received by guests in our test markets, we're going to push it out to the whole system. So a lot of news to come. And we're very excited about the impact that mobile and digital platforms can have on our business in the very short term, actually.

Our next question is from David Palmer of RBC Capital.

One of the things that seems to be working for you is that 2 for $5 platform. I'm curious, is that becoming more of a permanent platform for you? Is that something that you'll pulse in and out of? I'm curious about that. And then secondly, in Germany, another market you seem to be gaining share, how are you doing that? And you mentioned that you have premium and you also have a value platform there. I'm wondering if it's the value platform that's working for you there as well.

Thanks, Dave. This is Alex Macedo. I'll take the U.S. question, and Dan will take the follow-up on Germany. So -- and the way we look at it, what's been really working for us is having a very consistent approach to our menu and promotional activity. 2 for $5, you're right, it's one of the components in our promotional activity, but what we think that really worked for us really is having an innovation platform with fewer, more impactful launches that resonate with consumers. Having a core price promotion, which is the 2 for $5, it's also a good promotion to help us introduce new core items. And then we launched the KING DEALS value menu, which also helps us to work at the lower price point between $1 and $2. And what's really going to make the difference for us, we believe, is having the consistency in the long run. And we think that a balanced approach of having value in the restaurant with introducing products that the guests are excited about is really what's going to take the United States to the next level in terms of sales in a very consistent way, which for us is important, not only for us to manage our business so -- but also so that the franchisees can really turn in their profits. Now I'm going to hand it over to Daniel to talk about Germany.

David, yes, Germany has been quite a good market for us now for some time, and it's really all about being very consistent with our approach there. We offer guests good value, good products across multiple price points. So this quarter, at the premium level, we launched the Steakhouse Gold Collection. We had very good offers at our Trial Weeks as well as our SparKINGs, which is more of a core and value layer. And in addition, the team has done an excellent job working with franchisees to remodel the market. So in Germany, we've now crossed 50% of our restaurants being remodeled. So with a good focus on restaurant operations, on menu, on value and then remodeling, we've really done a quite a good job in the Germany market for several quarters now. And it's actually one of the cases that gives us so much confidence that we're doing the right thing here in the U.S. and that, in the long term, the Four Pillars in the U.S. will lead to great sales and profitability here for our franchisees.

Our next question is from Will Slabaugh of Stephens.

With regard to the performance in the U.S. and the commentary about a strong March, could you talk about that performance across different markets as much as you'd be willing? And I'm assuming you had a significantly negative weather impact on the Northeast, the Midwest. So I'm just curious if you saw strength ahead of the headline U.S. number in markets such as California, Florida, Texas, or whatever you'd be able to comment around that.

Sure, Stephen (sic) [Will], I'll comment on -- this is Alex Macedo. You're absolutely right. We did see a big difference between markets, right. And we know that some of the most heavily impacted areas this year were the Northeast and the Southeast. Markets with less weather impact, like the West Coast, had a very positive sales performance, and we're very glad with our strategy. And moving ahead, as I mentioned earlier, we're going to keep a very consistent strategy. We're going to keep doing what we think is working. We saw progressive improvement in Q1 as the weather subsided. And moving ahead, we expect to see the same progress without the weather headwinds that hit us mostly in January and February. So yes, there was significant difference between markets that were not affected and markets that were severely affected by weather.

Our next question is from Carla Casella, JPMorgan.

Most of my questions have been asked and answered about the financing structure, but I just -- you mentioned that you have the ability to take your leverage up more in line with your peers. What kind of range do you see as a fair leverage going forward?

Carla, it's Josh. And thank you for the question. As you mentioned, we are around 3x levered today on a net debt-to-adjusted EBITDA basis. What I was alluding to with respect to our peers is, when we look at some of the other fully franchised peers' companies like Dunkin' and Domino's, they do have slightly a higher level -- leverage levels than us. And we're certainly benchmarking against our peers, and we'll be looking at those peers as we consider what the right long-term capital structure is for our business. So I -- we don't have a specific range that we're targeting yet, but as I said earlier, as we approach those first call dates on our bonds later this year and earlier next year, we'll certainly be looking at that and analyzing all the different options to decide what the right level is.

Our next question is a follow-up from Jeffrey Bernstein of Barclays.

Just 2 follow-ups. One, just on the inflation side of things, I think you mentioned that the commodity basket will be up 2% in '14. Also, obviously, we have labor and health care. So it's a good time to not be really operating any restaurants. But I'm just wondering, as you talk to your franchisees, what may be suggestions you have on pricing. And maybe how does that impact their promotional decisions? And separately, any comment on breakfast? I know you mentioned being pleased with the early rollout of kind of a value edition, but it seems like it's becoming a very competitive segment. So I'm just wondering what you're seeing in terms of your mix and where you see that trending in recent months.

Sure. So I'll take the question on the food costs. As you mentioned, we saw food inflation relatively flat for Q1. And we expect around a 2% increase for Q2 -- for the remainder of the year. When we talk about pricing with a franchisee, it's really a very relative game that we play here in the QSR industry. So we expect to take pricing as the market takes pricing, nothing more, nothing less. And we try to monitor that with extensive consumer research to track how the pricing is moving in the industry every quarter. So there's no significant effort or no significant or material change that's going to happen in pricing over the next year.

Our next question is a follow-up from Joseph Buckley of Bank of America Merrill Lynch.

And it's sort of a follow-up on the outsiders consulting question. Who are these folks? Is it one firm you're dealing with? Or is it done on a regional basis? And then also, I want to ask on China, you mentioned double-digit comps. Could you give us an update where you are in China in terms of number of restaurants and maybe the type of markets that you're operating in?

Sure. This is Alex Macedo. I'll take the question on the coaches. This is a third-party company. And we added a significant amount of consultants all across the country. So they're in each and every region. And we kept the same number of touches that we had last year in the restaurants this year, when you combine the coach visits with the audit visits. So in terms of the overall coaching, we just believe that this is going to become much better, as the auditors can really, from a very neutral perspective, identify the opportunities in the restaurants. And then the coaches, they follow up on that visit and they really train the restaurant teams to improve on the areas that were identified by the third party. So this is not -- these are not regional companies. This is one of the very big players that has operations all around the country, and we're very happy with the early results that we've seen from this program. And now for the other question, Daniel?

Yes. Joe, it's Daniel. As you know, we set up this master franchise joint venture in China a couple of years ago now, and we're very excited about the progress that we've made to date. We have approximately 200 restaurants in the country, primarily on the coastal cities as of now. And the markets continue to really show strength, and we've seen double-digit sales and traffic growth in the last few quarters as the JV has really grown to some meaningful scale. And the improvement there has really been driven by 3 factors: First, our menu realignment was really effective at tailoring our products to the local tastes. Secondly, our RMB 15 to RMB 18 platform has really proved to be a sweet spot for the value Chinese consumer. And then finally, we've done a better job optimizing our site selection to really have the right sales-rental equation there and really improved our new unit economics. So we're excited about the prospects in China, and we'll continue to update you on future calls.

This concludes our question-and-answer session. I'd like to turn the conference back over to Daniel Schwartz for any closing remarks.

Hi. We continue to be very excited here about the prospects for the BURGER KING brand globally. Here in the U.S., we're going to continue to execute on the Four Pillars to drive further sales and profits for our franchisees. And globally, as Josh mentioned earlier, we've really become one of the fastest-growing fully franchised QSRs. And we're at a position now that we're confident that our strong franchise partners are going to continue to grow at this pace. And we're excited about all the new restaurants we're going to open this year and the jobs we're going to create in all of these markets. So with that said, I want to thank everyone again for joining us today. And we look forward to updating all of you next quarter. Thanks a lot.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.