Q3 2019 Earnings Call
2019 earnings conference call.
All participants will be in listen only mode.
Pardon me the systems placed an order conference specialist for personal store can you followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question remember press Star then one order telephone keypad.
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Please note this event is being recorded.
I would now let's turn the conference over to Chris Brooks Club Arbitrage <unk> Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to restaurant brands International's earnings call for the third quarter ended September Thirtyth 2019.
As a reminder, a live broadcast of this call may be accessed through the Investor Relations Web page at Investor Day, RB <unk> Dot com and a recording will be available for replay.
Joining me on the call today, our restaurant brands International CEO Jose sell and CFO , Matt Dhane again, Jose and that will also be joined by our COO, John Kobza, instead of Q and a portion of today's call.
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 todays call.
Because they will start with some opening remarks and highlights for the third quarter and then discuss our performance at Tim Hortons Burger King and Popeye's, Matt will then review financial results before opening the call lot procure and I.
I'd now like to turn the call over to Jose Thanks, Chris and good morning, everyone I'd like to start with a quick summary of the third quarter results and then spend some time sharing my views on the key drivers of our performance and the confidence we have in our plans for each of our brands to continue driving significant system wide sales growth around the world.
Overall, we had a strong quarter with nearly 9% consolidated system wide sales growth and 5% year over year unit growth to over 26300 restaurants worldwide.
That's nearly 9% system wide sales growth represents the highest rate we've achieved since the beginning of 2018 and was led by Burger King at approximately 11% and popeye's at approximately 16% well, Tim Hortons was roughly flat versus last year.
Our results in the quarter were highlighted by continued restaurant expansion around the world coupled with very strong global comparable sales results at both Burger King and Popeye's.
Which indicates a burger king represented our strongest results since 2015 at about 5% and then the case a popeye's represented one of the strongest results since the company went public as part of HFC in 2001 at about 10%.
On the other hand, our results at Tim Hortons were not where we want them to be with global comparable sales dipping into negative territory. However, we remain confident in our focus on the most important fundamentals of the business through our winning together plan, which is designed to reinforces the strength of our Tim Hortons brand and create a strong foundation to drive sales growth.
Over the long run through important improvements an image technology product quality drive through an overall customer experience.
Now jumping into a bit more detailed results for each of our brands.
As I mentioned in Q3, Tim is comparable sales were weaker than planned coming in at negative, 1.4% globally and negative 1.2% in Canada.
In Canada softness in comparable sales reflected a tough year over year comparison, as we lapped the launch of breakfast anytime in 2018 in particular, we saw softness in our lunch food offering where we continue to see a gap in sales of our sandwiches and wraps.
As we noted in Q2, we're taking steps to address this part of the menu and given our leadership in convenience and frequency. We continue to believe that we can win market share in launch overtime with the right investment and focus.
Our third quarter results in Canada also reflected a weaker contribution from our cold beverage lineup.
Specifically, we saw a decline in performance from ice cap line due to weaker than expected performance from some of the LTL is around in the quarter, including our Oreo and chocolate chip ice caps.
However, we were encouraged by the performance of our new creamy chills products and believe they have the potential to be a strong platform for future innovation and growth.
Though the cold beverage category tends to be less impactful during the late fall and winter months as you'd expect into places like Canada, we expect to build on the creamy chills platform. During the warmer months next year and overtime. The declining contribution from cold beverages also coincided with softness that we experienced in hot beverages sales during the quarter.
On this front, we believe we're making the right investments behind important initiatives that will reinforced our leadership position in the category over the long run, including the system wide fresh for implementation, we recently launched to improve the consistency quality and efficiency of our coffee experience all across Canada.
We continue to make progress toward our national rollout and expect to finish by early next year.
Recognizing the near term challenges, we faced this quarter, we're concentrating our energy in further enhancing our winning together plan across four key areas coffee leadership food quality and innovation guest experience and community connection.
Just last week, we met with over a thousand of our restaurant owners at the annual Tim Hortons owners convention and laid out a number of exciting new initiatives around these four themes.
We received positive and encouraging feedback from our owners that we're focused on the right areas and are pushing the brand forward into right direction together now for a bit of color around recent progress we've been making against each of these important themes.
First among the core focus areas his leadership in coffee copies of the core of Tim's brand identity, and we believe it's absolutely critical to serve the best Cup of coffee in Canada period, I mentioned earlier, the rollout of our new fresh Brewers, which improve the consistency of our coffee well also freeing up time for our team members to better serve our guests.
The Burris also incorporate a new water filtration system that ensures that each cup of coffee has the same great taste and aroma as a cup prepared and our coffee lab in Toronto.
This past quarter, we moved swiftly to roll out the new borrowers and hundreds of restaurants across the country and have received good feedback so far.
In the third quarter. We also completed the rollout of our redesign lids to all Canadian locations as many of you know the majority of our sales come through the drive thru and portability is one of the most important considerations for our guests as they commute to work or take their kids to the rank.
We've collected feedback from our guests and the response the new lids has been really positive, especially around spilt prevention and Recyclability. This type of change may seem simple, but enhancing our core everyday offerings is absolutely essential to maintaining and growing our leadership in the industry overtime.
Our second key focus area is food quality and innovation.
In July we opened our flagship innovation cafe in downtown Toronto, which were excited has been pack from day one.
For those of you who haven't visited were seen pictures. The cafe looks fantastic, we can modern while still totally consistent with attends brand.
We have been delighted with a positive feedback we've gotten so far from thousands of guests, particularly the millennials you expect to see in downtown Toronto.
Of course, we serve all of our core products at the Cafe, but we've also incorporated several new and really exciting menu items.
We completely reinvented, our don't line up with more premium dream donuts, including the Maple Bacon Dream don't it and the PBM Jay during donut. The doughnuts are not only selling at 199, but are also driving nearly half of our product mix in the cafe.
We're playing to rollout a selection of these dream donuts across Canada, a step one in a largest strategy around product innovation and leadership.
We also introduced a natural bar featuring nights real cold brew and natural iced teas that is so far exceeded our expectations.
And we'll be testing or nitrile line in some of our newer urban locations early next year.
Going forward, we'll use the innovation cafe as a lab for an exciting new products and technology, some of which will make it into our stores all over the country.
Given the dominant position we have in the Canadian market. We think it's critical to be out in front, leading menu innovation with exciting new products that resonate with guests of all ages, especially around the core.
Moving to our third focus area. We're excited about several initiatives to enhance guest experience both physically at our restaurants and also digitally.
We've made good progress on our welcome renovation program. This year and are on track to complete several hundred reimages together with our restaurant owners.
Rob, creating many of these stores with double drive throughs, which will continue rolling out across the country into next year. We're also very excited to be opening our first super urban location in the fourth quarter and believe we have significant runway to grow the concept and filling gaps in our coverage in downtown and urban areas and many of candidates great cities.
Our digital platforms and mobile app represent another important component of our strategy around guest experience.
Our Tim's rewards loyalty program sits at the core of our digital suite and we continue to be very excited about the ramp up over the past two quarters.
50% of transactions now feature either a scan or swipe, demonstrating a level of engagement far beyond what we expected to see so early on.
We're already collecting a tremendous amount of insights through the program and then the future we expect to be able to leverage this information to engage want to one with our guest and provide promotions tailored to their preferences. We're working hard to put these tools in place and believed they'll provide us with a unique advantage to establish deeper relationships with our guests overtime.
Given the high and sustained levels of usage on loyalty. We're excited to begin harnessing greater guest engagement in the next phase of the program.
Our final focus areas centers on weaving, a clear and consistent thread into our brand messaging that highlights our connection with local communities across Canada. Many of our dedicated guests come to Tim not only for a great products, but also for the sense of community that pervades over thousands of neighborhood stores between are well known Tim Hortons Foundation camps or supportive coming.
Any sports through Tim bits and are supportive thousands of smaller charities through our smile, but you campaign. We are undoubtedly the most connected community brand in Canada. In fact, our small cookie campaign in September perform 25% better than last year and raised $10 million for local charities. We recognize that we have somewhat taking this important brand attribute for granted.
And heading into next year, you'll see an increase in community orientation in our brand marketing.
Overall, we continue to feel really good about the long term growth prospects for Tim Hortons, both in Canada and internationally.
It's a rarity in the QSR space to have the degree of penetration and frequency the Tim's hasn't Canada, and we believe that our positioning remains one of the strongest of any brand in any market across the globe.
With the right mix of many improvements investments in guest experience, including drive through and the activation of digital loyalty and brand messaging, we're confident that Tim will regain momentum.
We're also happy to have a healthy relationship with our owners and increased alignment over the path forward coming out of our convention.
This was a challenging quarter, but we continue to be focused on delivering results and have our sleeves rolled up as we finished the year turning to Burger King in the third quarter, we generated system wide sales growth approaching 11% globally, including comparable sales growth of 4.8% and restaurant growth of nearly 6%.
Our results. This quarter included another strong contribution from our international business, where system wide sales expanded 14.6%.
BK has now more than doubled to almost 11000 restaurants outside the U.S. up from approximately 4700 in 2010 and continues to deliver exciting growth for our business outside its home market with approximately 5% comparable sales growth and over 9% unit expansion this quarter.
This performance was broad based across international regions, but we saw particularly strong system wide sales growth in markets like France, Italy, as well as the UK, China Korea and Mexico.
As we saw during the second quarter, a large percentage of our sales and these international markets is coming through digital channels in China. For example, we're routinely seeing delivery penetration rates north of 35%. We continue to see a long runway for growth for the BK brand around the world and credit our amazing team and our Switzerland, and Singapore offices as well as our fantastic franchise.
Partners around the world for working day in and they out to bring the best of Burger King to more and more guest around the globe.
We believe our balance menu offering in great tasting products together with a consistently superb in store experience and rapidly growing digital connection with guests provides us with an engine for growth for many years to come.
At home in the U.S. comparable sales were positive, 5%, representing a significant acceleration versus our performance during the first half of the year and our strongest comparable sales growth since 2015.
The impossible Whopper is a huge hit with our guests and has quickly become one of the most successful product launches in Burger King's history.
What's especially exciting is that the sales of the impossible Whopper had been highly incremental and have attracted new types of guest into our restaurants, it's really been something to see as I've visited stores across the country in our team has been getting a lot of questions as to just who this guest is that's coming in for the impossible Whopper.
We've done a lot of research and found that the appeal is quite broad based across several types of consumers.
We see a lot of millennial and gensix customers, who tend to really connect with the message around sustainability.
We also see older guests to perhaps used to come to Burger King, but haven't visited in awhile.
Just recently I was visiting a restaurant and delay it was behind the counter when a woman in her mid Fortys came in in order to impossible Whoppers I started a conversation with her and she said she hadn't come to Burger King for over a decade, but came back because the product really resonated with her and tasted great.
We couldn't be happier with the performance of the impossible Whopper, both during its initial launch phase and on a sustained basis over the course of the quarter.
We're very pleased with the mix of growth between check and guest count and have seen really healthy rates of repurchase intent in line with those of the original whopper.
We're especially proud to have been in the leading edge of launching the plant based trend in QSR nationally and see a great deal of momentum for continued growth in the category going forward as adoption continues to spread across the U.S. and beyond we believe the impossible Whopper gives us one of the best plant based platforms in the industry and look forward to building further on the success over time.
We're already working to expand our platform outside the U.S. as we don't believe the impact of the plant based trend is unique to the U.S.
We recently launched plant based beef and plant based chicken products and Sweden, the rebel whopper and the rebel chicken King and are developing great new products for markets in Latin America in Asia as well the uplift provided by the impossible Walker and a third quarter was great, but it's important to note that we saw considerable success across other key layers of the many as well.
For example, our two for six platform had a strong quarter and we saw high levels of attachment in our one dollar Taco offer which help us address a gap we noted in Q2 and the value segment of the menu.
The radio King and pulled pork sandwich LTL has performed well in the lunch and dinner Dayparts and sales of the French toast sandwich LTL exceeded expectations in the breakfast day part on development, our global net unit growth for Burger King was 5.8% down slightly versus last year, driven impart by the timing of openings, which we expect will be weighted toward the end of the year almost.
I need to work closely with our franchise partners in the U.S. to upgrade restaurants to the brand new modern Burger King of Tomorrow image, which we're seeing drive sales uplifts in the double digits.
We expect Burger King to remain at the top of the list of fastest opening brands in the U.S. in 2019 and believe the Burger King of Tomorrow renovations meaningfully enhance our brand image over the long term as I mentioned earlier, we saw strong international unit growth of over 9% and now have a base of just under 11000 restaurants.
We worked closely with a great network of partners around the world to drive continued growth, including in markets like China, Russia, Brazil, India, France, and Korea, our growth has been broad based and we're expanding significantly both in more established markets like those in western Europe as well as many emerging countries. Just a couple of weeks ago, we celebrated the opening of our B.
Okay restaurant number 3000 in the Asia Pacific region, which is a remarkable milestone considering the fact that we had only about 800 restaurants in APAC back in 2010 within a pack I'd like to highlight our progress in India in particular since signing or initial development agreement in 2013, we've opened over 200 restaurants starting from scratch.
The restaurants are doing very well and that success reflects several years of hard work with our partner ever stone.
From tailoring the menu to fit local tastes and cultural norms to developing a national supply chain network and building a healthy real estate model everything was built in just the past five years. Our stores. There are also ahead of the curve as it relates to digital penetration and the team. There has done a great job of growing swiftly into the delivery channel as we expand Burger King and our other brands.
And to other new countries, India's a great model for how we can build new markets from the ground up looking towards the end of the year, we feel good about our full year openings pipeline for Burger King in the U.S. and around the world where their network of high quality partners significant white space and strong returns on capital we feel we still have very significant growth opportunities.
Now, let's take a look at the results for Popeye's. This was a fantastic quarter from a sales perspective, and one that we're confident we'll be a significant milestone for the brand.
The performance of the chicken sandwich far exceeded our most ambitious expectations and brought popeye's into the national and international Spotlight. We also continued to make important strides in establishing the foundational building blocks to drive long term comparable sales growth in the U.S. through a compelling layered offering.
Combining the contribution both from the sandwich and from a foundational work in Q3, we grew comparable sales, 9.7% globally and 10.2% in the U.S., representing one of the highest growth rates for the brand in the past two decades.
While the chicken sandwich was an important component of overall sales growth in Q3, it's important to remember that it was only in stores nationally for about two weeks. The demand was so overwhelming that's a supply we secure to support an aggressive sales forecast over several months ran out in approximately 14 days by the end of its first week on the national stage, the chicken Sandwich had generated mid.
In terms of dollars a free media and garnered a huge response from existing popeye's guests and thousands of new ones. We've shared in the past that our research suggests that for Popeye's trial is a key obstacle to purchase intent. However, the same research shows that when people try our products they loved them and they come back for more the chicken sandwich craze was great in attracting new guest.
Many of whom had never experienced the brand or its Cajun influence. Many before and you may have seen earlier. This morning. It's back we're excited to announce the return of the popeye's chicken sandwich in less than a week our teams and franchise partners have been working around the clock over the past two months to make sure we're ready to relaunch and we're excited it will be back out in the market and just a matter Dave.
It's worth noting that while the sales from the sandwich and the Buzz online were fantastic. We also saw remarkable positive reaction to our menu across the board in the quarter or 10 dollar token dine offer drove impressive volumes in our bone in chicken segment, while our double dipper and while honey mustard wing promos accelerated momentum in our boneless Chicken segment. In addition, our buttermilk.
LTL in August also performed really well.
This may occasionally get lost in the mix. The popeye's is one of the only national QSR brand, serving this type of seafood and our LTL is in the category tend to perform really well.
Occasion inspired seafood is also totally in line with the Louisiana Heritage of the brand, which we see as a great an important differentiator for popeye's.
On the digital side, we once again saw strong incremental contribution from delivering Q3, as we rolled out the service to additional locations.
We also made progress on implementing our new Pos systems across the U.S. and are now up and running at more than 80% of locations, providing us critical mass we need to generate high quality real time sales and product mix information from our restaurants to sharpen our sales and marketing plans.
This is also allowed us to start moving even faster on digital initiatives like the continued rollout of delivery and implementation of multiple aggregators at certain restaurants on the development side, we continued expanding the popeye's brand in the third quarter with global net unit growth of 5.6%. This reflects a slower pace versus last year, but as is the case with Burger King we build.
Our development plans on a 12 to 18 month timeframe and continue to feel very good about our openings pipeline going into the fourth quarter.
This is especially true in the U.S., where we're one of the fastest growing QSR brands and the country based on unit growth and generate very strong returns on capital at our stores, even before considering any uplift from the chicken sandwich. We believe were significantly underpenetrated in the U.S. relative to our potential and with great brand image and fantastic products. We're confident we have the spa.
Based to drive significant growth for a long time to come.
I mentioned earlier the celebration of our BK restaurant number 3000, and APAC, which was the product of nearly a decade of hard work alongside our fantastic partners in the region.
Today, the Popeyes brand has fewer than 120 locations in Asia, and we see enormous potential to build our network. There in the coming years, we announced in Q2, a deal to bring popeye's to China with deify and the could double brothers. The same partner that has done a tremendous job of scaling Burger king up to over 1000 restaurants across China and continues to deliver strong unit growth.
This Q3.
We're excited to have already started working together towards the first popeye's in China and are confident as we set out after a share target of building 1500, popeye's restaurants, there over the next 10 years.
There are significant opportunities all over the globe for this great brand of course in China, Philippines, and the rest of Asia, but also in countries like Brazil in Spain, and right here in the U.S., where we have similarly excellent partners that are helping us build popeye's into one of the fastest growing QSR brands in the world.
So to conclude we believe the fundamentals are very strong at the Burger King and Popeye's brands and we're confident we can tackle the headwinds Tim Hortons currently faces in Canada.
Despite the tough quarter for Tim's on a consolidated basis, our global system wide sales increased by nearly 9% in Q3 illustrating the strength of our unique and diversified global platform for growth.
We look forward to finishing 2019 strong in the fourth quarter and believe we're on the right path across all three of our brands focusing on the most important long term drivers of the business across image menu guest experience and branding.
We've outlined some of the key components of our plans for you today and look forward to providing updates against our progress as we move forward.
I'd now like to handed over to Matt to take you through our profitability and cash flow results for the quarter.
Thanks, Jose and good morning, everyone.
The third quarter systemwide sales growth across each of our brands led to consolidated adjusted EBITDA of $602 million up 6.7% organically year over year, representing our strongest quarter of growth in the past seven quarters going back to 2017, our growth. This quarter also reflected AD fund revenues exceeding expenses.
By $6 million less than they did in third quarter of last year, resulting in an impact of approximately negative 1% to our consolidated organic adjusted EBITDA growth.
As we mentioned in the past while in some quarters, there may be a mismatch and the timing of revenues and expenses in the long run. These add funds are managed such that total cumulative revenues equal expenses.
At the segment level, Tim Hortons third quarter, adjusted EBITDA was $301 million, which represents a 1.7% organic increase year over year.
This increase was driven primarily by supply chain sales, which includes a combination of changes in product mix growth in our retail business and growth in equipment related to our fresh brew rollout.
As well as the timing of certain cost recoveries and Gina.
Also the majority of the negative impact to consolidated adjusted EBITDA related to the timing of AD fund revenues and expenses was attributable to Tim Hortons.
At Burger King third quarter, adjusted EBITDA was $254 million, representing a year over year organic increase of approximately 12% our strongest quarters since the fourth quarter of 2017.
This increase was driven primarily by strong system wide sales growth of approximately 11% with continued momentum in global net restaurant growth of nearly 6% and global comparable sales growth of nearly 5%.
Finally at Popeyes. This quarter's adjusted EBITDA was $47 million, which was up nearly 12.5% organically year over year.
This increase was driven by very strong system wide sales growth of over 15 in half percent among the brand strongest growth rates in the past few decades, including net restaurant growth of just over 5.5% and global comparable sales of just under 10%, partially offset by slightly higher segment SDMA on a consolidated basis are.
Third quarter adjusted net income was $337 million.
This compares to third quarter 2018, adjusted net income of $297 million.
The year over year increase was attributable to adjusted EBITDA growth and a favorable year over year improvement of our tax rate.
Partially offset by unfavorable exchange rate movements.
Interest expense related to the annual step up in our interest rate swaps that we noted in the first and second quarters.
As well as higher expenses year over year related to stock based compensation and depreciation and amortization.
Adjusted diluted EPS for the third quarter was 72 cents per share compared to 63 cents in the prior year representing growth of 14.5%.
Included in this increase is a headwind from unfavorable foreign exchange rate movements, which reduced our EPS growth rate by approximately 1%.
Our third quarter 2019, adjusted effective income tax rate was approximately in line with a range. We had provided earlier this year.
However, it is important to remember that the timing and amount of stock option exercises can vary materially quarter to quarter and can thus have a more or less material impact on a specific quarters tax rent.
On a full year basis, our view on the adjusted tax rate has not changed from the low 20% range. We shared earlier this year now, let's discuss our cash generation and capital allocation for the quarter.
We generated free cash flow of approximately $418 million calculated as the summer cash flows from operating activities less payments for property and equipment.
Including the results of the third quarter, our free cash flow generation over the last 12 months totaled approximately $1.3 billion.
During the third quarter and prior 12 month period, we also paid a total of $232 million and $880 million, respectively in common dividends and partnership exchangeable unit distributions.
We also continue to make progress on key investment projects, including our previously announced remodel programs at Tim Hortons and Burger King.
As well as the expansion of our Tim Hortons supply chain that work in Canada.
Based on the timing of our remodel pipelines and construction projects, we anticipate our spend will be most heavily concentrated in the fourth quarter of the year as we complete more Tim Hortons and Burger King renovations in advance the Buildout of our Canadian distribution centers, which we expect will continue into 2020.
And be completed midway through the year.
As of September Thirtyth 2019, our total debt outstanding was $12.8 billion.
Our net debt calculated as total debt less cash and cash equivalents of $1.7 billion was $11 billion.
And our net debt to adjusted EBITDA leverage ratio was 4.9 times.
In September we took advantage of favorable market conditions to refinance our one in a quarter billion dollar firstly notes due 2022.
With $750 million of new first lien notes due 2028, and a 750 million dollar term loan a due 2024.
Through this transaction, we're able to generate significant interest savings through a meaningful reduction of our cost of capital combined with a 235 million dollar reduction in our term loan b.
Our original 2022 notes carried an annual cost of foreign five its percent and were significantly more expensive than both our new term on a and new firstly notes.
Our new term loan a has a current rate of LIBOR, plus 125 basis points or approximately 2.7% on a fixed basis.
The leverage based grid that allows for decline to as low as LIBOR plus 75 basis points.
And our new Firstly notes were issued with an extended maturity of 2028 and interest rate of 373%, which we've been told is among one of the lowest price callable bonds ever placed in the U.S. high yield market. In addition, we were able to further enhance our term loan interest savings by increasing the size of our Euro cross currency swap.
By $500 million, which reduces our interest carrying cost by an additional 2.1%.
And in order to remove the risk around future increases in floating rates, we added $500 million of floating to fixed interest rate hedges, which allows us to lock in the cost on this portion of our term loan.
The net result of these transactions is expected annual interest savings of approximately $25 million, which could increase overtime. If we continued to de lever and reduce the spread on our term loan.
On top of these expected savings, we also extended our revolving credit facility by two years and doubled our available capacity from 500 million to $1 billion concurrent with our refinancing process. We're pleased to report that we received upgrades on our corporate rating from both S&P and Moody's to double B and be Athree, respectively.
On account of continued improvement in our business leverage profile and free cash flow generation.
It is important to note that various components of the refinancing took place between September and October .
And as a result, our balance sheet at quarter end reflected only the receipt of $750 million in cash proceeds from the new 2028 notes and the pay down of $235 million of our term loan b.
We completed the other elements of the refinancing that I described in October and they will be fully reflected in our balance sheet for Q4.
This morning, we also announced that the RV I board of directors declared a dividend of 50 cents per common share and partnership exchangeable unit of RV LP.
Payable on January Threerd, 2020, which is consistent with our previously announced target of $2 per share in total dividends to be declared in 2019.
And reflects our strategic priority of maintaining a balanced approach to capital allocation. Thank you everyone for joining us on the call. This morning and for your continued support I'd now like to open the call for questions operator.
Thank you we will know begins the question answer session.
To ask a question you remember a star then one under total chunky.
Your tone different firms.
Yes.
Actually it's a question Q.
Then too.
All callers will be limited one question.
At this time, we will pause momentarily to assemble a roster.
And today's first question comes from Jeffrey Bernstein.
Please go ahead.
Great. Thank you very much.
Just a question on.
And.
I know you acknowledged another challenging quarter.
Couple of things I'm, just wondering maybe what are you looking for or what milestone will you maybe question the confidence of the winning together plan.
And I know you mentioned being excited about the long term growth prospects in Canada and the relief just wondering.
At what point, we talked more about North America, and rest of the world or whether you think this is primarily be focus just specifically on Canada.
Any color on that as well as any feedback from franchisees in terms of concerns with the conventional would be great. Thank you.
Hey, Jeff Thanks, a lot for the question.
We were as I mentioned in my opening remarks, we remain extremely confident in the winning together plan I think we're creating a strong foundation to drive sales growth over the long run through through the improvements in image technology product quality, the drive thru and overall customer experience.
These things are not things that happen from from one day to the next or quarter over quarter. It takes time and the focus areas as I mentioned in my remarks are leadership in coffee and we're doing quite a few things that are better structural we're making some innovative changes to how we prepare and serve coffee, which which are changes at that.
That are changes in our technology for growing that have that has been in place for about 40 years. So important really really structural important initiatives food quality and innovation is a big part of our plan I touched on innovation cafe being a hub for really creative innovative thinking which is going to help us over the long.
Paul in Canada, and in the U.S. in international markets.
First experience, both physically and digitally again, it's going to be critical for us. The welcome renovations the double drive throughs outdoor digital menu boards with artificial intelligence and decision taking the technology to drive personalization and of course, our Tim's rewards program.
Then and ultimately the brand messaging program that we put together highlighting community and connection all these things there are things that we believe are going to make it in big impact on the business both in terms of.
Perception of the brand continued strong reception to the brand and our and continue to help us maintain and grow market share.
In the country. So we feel really good about that I think beyond.
To your question on on Tim's beyond.
Canada, we feel very good about what's happening internationally with with the brand we didnt touch on that in the in the prepared remarks, but our continued excitement the excitement continues in.
In the international markets as we open more restaurants in China were opening more restaurants in the UK.
In Spain, as well, Mexico, and the Middle East, which has been a big stalwart for Tim Hortons for many years, our beverage platform is doing really well there and our food offering as I've mentioned in the past is evolving.
And and growing quite a bit baked goods and breakfast are strong.
The international markets, and and we see a big opportunity for growth over the long haul and in the U.S.. We continue to work with our franchise partners. There the restaurant owners on on fine tuning and evolving the the model to be able to accelerate growth over time, we feel confident that the U.S. will be a strong market for Tim.
Hortons for the long haul and and we're excited about the work, we're doing there and internationally and as I mentioned in my.
Third question or the third sub part of your question.
The the franchise.
And owner reaction to our convention last week was positive and we continue to work well with them or team in Canada has a strong relationship with the advisory Board another franchise owners in the in the country and we're spending time working through the details of our winning together plan and executing that plan long term. So we're confident and excited about the long term.
From.
Tim Hortons in Canada in the U.S. and internationally and look forward to keep you posted on our progress. Thanks a question.
Our next question today comes from Denis Gallagher, Yes. Please go ahead.
Thanks. Good morning, Thanks for all the color on the factors impacting hortons in the quarter as well as the key growth pillars. Looking forward. Just wondering if you could talk though a bit more about the impact.
Perhaps of loyalty on sales in the quarter recognizing that some of the benefits are likely to build over time.
Then the risk of being a little repetitive just thinking about the drivers of the four key areas of focus that you outlined seems like a mix of kind of compelling near and longer term sales contributors, but just your thoughts on on those go forward initiatives relative to kind of what has been launched over the last 12 months and just kind of the differences there.
And why that can can strengthen the brand going forward. Thanks.
Great. Thanks, Dennis.
On on loyalty as I've mentioned, many times, we're super excited about the Tim's rewards program. It's.
With our existing dominant market share in Canada, we saw.
Over the over the last two years as we started to work on this program, we saw an opportunity to reward our guests for the years of loyalty through personalized offers that are meaningful to them and that help us drive incremental traffic and ticket growth for our restaurant owners now we're playing both offense and defense here most of our competitors have have they have loyalty.
Programs that have already been deployed and with our existing traffic and loyalty, we see an opportunity to drive as I mentioned incremental traffic and ticket. So step one of the program.
It was to attract as many existing guess as possible to join the loyalty program and step too.
And our plan was always.
To make meaningful personalized offers to all of those guests to better influence their behaviors through frequency or check growth, including add ons mix shift.
Those sorts of things.
Our retail and QSR benchmarks indicated that it would take something like 12, 18 months or even multiple years. This was a case was for some of the competitors that we benchmarked against it to build a meaningful.
Guest adoption of our loyalty program and this would be a period of time that we would it was going to require some investment and ongoing investment on our part but as you. All know we've mentioned many times. It's it took us just a few months before we had a substantial number of guest join and start using the that the Tim's rewards program. During this time.
We saw incremental traffic, which offset the plan discounting in the program. So we saw we had a an initial kind of neutral impact on sales, but after the expected initial increase in traffic, which we saw at the beginning of the program that the discounting is slightly more than offsetting the traffic levels, which is causing.
A little bit of softness in sales.
Now with the advanced adoption of the loyalty program, we're pulling forward or implementation of step two and have begun to test personalized offers based on and guest purchasing history. We're also advancing our efforts to convert guest onto the digital loyalty platform. We can best deliver these personalized offers in the coming months amid a share will share more with you and.
You'll see continued.
Progress on our end to convert is guests from analog to digital and we are going to continue to test offers that are going to be valuable to our guest and they're going to be incremental to us into our owners that during this period, we may see a little pressure on comps, but we're confident long term that this is going to be a driver of traffic and profitable sales and ultimately.
We believe strongly that our long term loyal guests are dominant market position and our best in class digital loyalty program. All of these things set us up well to continue to drive incremental sales and maintain the loyalty of our guests now coming to your second question, which is on.
The winning together plant.
A lot of the initiatives that we touched on last year user initiatives that are.
Around guest experience around food quality and.
Improving the consistency of our of our coffee experience technology all the initiatives. We've touched on these are initiatives that take time to work on and to implement in deploying our in a restaurant and so we feel very good about the the pillars of the plan the details of each each pillar the plan to work, we're doing with our franchise and restaurant owners and we feel confident.
It over time these are going to have a big impact on the performance of the business in Canada and and beyond thanks for the question.
Our next question today comes from John Glass Morgan Stanley . Please go ahead.
Thanks, and I'm going to ask another one on Tim's.
Two parts. One is just if you look at last three years comps have been slack in Canada. So this isn't a recent phenomenon in sometimes there's just take a change in the market that's occurring and we sort of lose it in the quarter to quarter cadence.
When you look at the business over the last few years do you think it's more of that the category is just slower in Canada, where do you view. This is more of a competitive issue. How do you frame why sales are not as strong given you're doing a lot of things you have been doing a lot of things over the last year or two in that brand in secondly, specifically this quarter I think you'd launch.
We had the plant based products in breakfast and as well as a lunch and I think you pulled them out or at least decided to to pause why didn't they drive sales I think in Canada you'd seen other brands have seen successes and that those products white why didn't they work if your assessment as they didn't work for Tim So I Didnt day.
Thanks, John appreciate the question I think in terms of.
Overall market in in Canada continues to be a great QSR market, we feel very good about the long term prospects, obviously over the last four or five years and even longer.
New competitors have come into the market Theres Theres always competition.
In in our in the quick service restaurant business, especially when you include the informal market.
So we we feel very good about our market position. It's a dominant position we have more than seven out of 10 cups of coffee or had a Tim hortons. So we feel very good about where we are but the plan.
Is to continue to grow that market share and so the work. We're doing is not is not short term marketing campaigns that are the to drive.
Or traffic, it's really long term structural initiatives that are going to help us continue to drive a significant traffic and and volume into our business and dominate and continue to dominate from a market share standpoint. So we feel good about where we are and where we're headed over the long term long term in Canada, I think as it relates to plant based we.
We've kept the the breakfast sausage.
Product beyond me product and in many of our markets, it's actually more than 60% of our of our restaurants, we it was nice.
Driver of of check in our business.
We launched other products plant based products that were more limited time offers to see if there was an opportunity there.
For growth and and we felt ultimately that it was going it was only going to be a short term limited time offer which is how it performed and how we dealt with it but we feel good about the plant based breakfast Patty working well and in many of our restaurants in in Ontario, and beyond and we'll continue to.
Evolve our breakfast offering to to continue to to while our guest in Canada. Thanks for the question.
Our next question comes from Nicole Miller of Piper Jaffray. Please go ahead.
Thank you good morning, I wanted to switch gears to top five minutes. So when you gave the PK impossible Whopper information you did talk about how about how potentially China, new customer also not just the customer product necessarily so the question is around the chicken sandwich launch.
How did that strength then.
Daypart or other day part although product.
Trigger Pepperidge farms and then just a second comment broadly if you could how did a farm across markets and clearly is very successful. So what part of it was different in terms of results versus the cash. Thank you.
Thanks, Nicole I think as I mentioned in the prepared remarks of the opening remarks.
What was exciting about the the popeye's sandwich launch in the U.S. underperformance in the quarter is that it lifted.
All other parts of the business. So we saw lift in.
In our bone in chicken business, we saw lift in in tenders, we saw lift and Ancillaries, we saw lift in beverages.
Quite a quite a lift as well and desserts. So there was a lot of strong performance for the business and from a mix standpoint across.
The entire business, we brought in and we're still working through the data, but where we saw a lift in frequency from existing guests.
And customers and fans are super fans at no the Popeyes brand quite well and we also saw new folks come into try it a lot of it driven by by the Buzz online around the the so called Chicken Wars people wanted to test invalidate that that in fact, we had we had come up with the greatest chicken.
Sandwich of all time, so thats for for people to decided our guests to decide but there was a lot of folks coming to the restaurants.
Specifically for the check for the chicken sandwich.
But a lot of those transactions included other products in the menu, which is what are the things. Its most important about popeye's is that.
The overwhelming majority to still about 65% of the of the U.S. as it Hasnt tried.
Popeye's and we know when when guest try the product, but when consumers try the product.
Preferred over any other chicken QSR most other chicken QSR players in the market So our goal.
Through a bunch of different initiatives, including delivery, including rapid expansion of our of our footprint as well as.
The expansion of our menu offering to make sure we can be enticing to a broad base of consumers. Our goal is to have people try the product when they try the product they come back for more and that's what we're seeing and Thats what were excited about thanks, a lot for the question.
Our next question comes from Sara Senatore Bernstein. Please go ahead.
Thank you I wanted to go back to Tim's because.
Talked about I think some of the disappointment to now pianists.
When I compare what I've heard from you versus some of your competitors and called has been doing very well for some competitors. Likewise I don't think I recall seeing quite as much check pressure for example from loyalty launches for an extended period of time. So just as I compare on an execution perspective, do you need to make more fundamental changes there.
With respect to you know whether it's your approach to loyalty.
The maybe.
Meaning that the team or or do you have in place rents.
Turning the brand I'm, just trying to understand why there's been seems to be such a distinction between some of these initiatives at Cannes versus.
What we've seen elsewhere. Thanks.
Thanks, Dara as it relates to Tim's I think I provided quite a bit of color on on the rewards program. So our focus there as to evolve from from step one or phase one of attracting guests into the program and to step two which is kind of evolving getting more folks on the digital platform and and then personalizing the offers.
So that it becomes an incremental visit and or add on and it drives incremental growth for our franchise owners and for the business. So that's going to be the focus and it's not so much structural as it is kind of an evolution of planned evolution of the program.
As I've mentioned earlier on cold beverages, we continue to see growth of the platform year over year.
But I think and the team thinks that this is a huge opportunity for us to make it an even bigger part of our business and in Canada, we have a strong kind of dominant and and legacy built heritage on on hot coffee and brewed coffee, we're evolving to make it a more modern kind of broad.
Based offering including cold beverages, and the launch of a lot of the LTL wasn't kind of platforms that we included in Q2 in Q3.
So progress creamy chills being one of them and we'll continue to to innovate there and drive.
Improved growth in that and that platform, which we think is important and I feel really good about the team that we have in Canada. We're always looking for one of the hallmarks of our company in our culture is constantly looking for for great talent to continue to to build our amazing teams to drive the business forward. So we were excited about the team that.
We have excited about the progress, we're making and look forward to keeping you guys.
Updated on our progress thanks for the question.
Our next question today comes from David Palmer of Evercore ISI. Please go ahead.
Thank you great discussion on Tim So thank you for this question on the digital elements of loyalty and the personalized marketing upside you talked about going forward.
I understand and correct me, if I'm wrong that most of the loyalty occasions, our swayed cards and not in App. At this moment could you talk about the connectivity and how you can improve engagement to that personalized consumer level that you're talking about and where you are sort of technology wise versus maybe program wise.
Goal. Thanks.
Hi, Dave Good morning, it's Josh Thanks for the question you're right that the majority of the program today is based on slip cards as opposed to being in that program. So there is a large part of the argument that's in the App and you're also right in I think.
Going forward.
We are will likely go with the program.
Is having a more digitally focused program, which will allow us to be more connected with our consumers and ever closer one on one interaction with those consumers. So it's something we're still working on but I think likely as we look forward over the next six to 12 month.
That is.
We'll be a prominent part of the direction of the Jim's rewards program.
Yeah.
Our next question today comes from David Tarantino of Baird. Please go ahead.
Hi, Good morning question on Burger King U.S. comps I know you mentioned impossible whopper.
Likely one of the bigger drivers of the acceleration is saying just wondering if you could elaborate on what you've seen as the as that program has.
Moved on I know, you've probably got a lot of trial upfront, but as that sustaining as you see it and the.
Longer we for the program and and I.
Hi, guys talk about the dynamics that maybe you saw.
When you launched it system wide versus what you saw in tough.
Yeah.
Hey, David Thanks for the question we.
I am possible, we saw really good performance on the National launch we were.
Essentially in line with what we expected we expected to see incremental.
Traffic coming from existing gas and new guest and as I mentioned in my opening remarks, there was a a lot of traffic and trial that came in from from new guest and even in my own experiences in the restaurants visiting.
During the quarter had a chance to speak to many customers and new essentially new BK guest that were coming in specifically for that product and and the feedback was really positive I think both in terms of innovation and bringing to the table and across the country a product that is.
Thats innovative it's a it's different and taste, great, which is what's most important about about the impossible whopper.
Over the we don't discuss specific.
Performance and and details of the product.
Over the quarter beyond but we continue to see good.
Performance of the product of the impossible Whopper and and we're excited about it being a long term platform for the business, we're going to continue to.
Invest behind it we're going to continue to work closely with our.
Franchise partners and and the folks from impossible to continue to drive a great tasting innovation in that platform over time. Thanks for the question.
Our next question comes from will Slabaugh of Stephens, Inc. Please go ahead.
Yes. Thanks, guys had a question on popeye's and curious what did for from a franchisee profitability standpoint, as you look at the success of the chicken sandwiches and what I'm, assuming was generally higher jacket. So how those guys are feeling and feedback you've gotten for the franchisees.
And then can you speak a little bit more to the U.S. franchise unit expansion interest and I'm, assuming this quarter didn't do much tied to heard that interest.
Hey, well thanks for the question.
We we don't really disclose or share too much from quarter to quarter on franchise profitability because it tends to.
To bounce around at times over over the long haul and we've seen growth and in the popeye's.
Four wall margins and EBITDA in the U.S. and and the performance of the chicken sandwich and the perform and a strong performance in the quarter as you say as you.
Right, we say it didn't hurt.
We saw a lot of positive.
Momentum and the performance for the quarter was it was really good our franchisees. We just finished our convention late last week here in Miami and we had.
Over a thousand almost 1500.
Owners and and others that are close to the pump by system here in Miami and there was a lot of excitement about the popeye's chicken sandwich launch and the relaunch that was that we announced earlier this morning, and we feel over time a continued.
Expansion of our menu, making the chicken sandwich available.
Full time across 2500 restaurants in the U.S. and growing I think we'll have a really positive impact in terms of the guest experience that's going to drive trial and growth in check and ultimately we know that Thats a key driver seeing.
Topline growth is going to be a key driver of.
Four wall EBITDA for the long haul so were really positive about that and as it relates to.
The restaurant expansion in the us.
Theres a lot of excitement from existing franchisees as well as new franchisees.
That are looking to to expand and partner with us to expand the brand in different parts of the country, where we have quite a bit of white space and opportunity for growth for the Popeyes brand. So we're looking forward to continuing to partner with great operators, great investors with Great management teams that are that are excited about building really goods looking restaurants and.
Building the popeye's brand in the us for the long time to come.
And our final questions today comes from Eric Gonzalez of Keybanc capital markets. Please go ahead.
Hey, Thanks for squeezing me in.
Burger King U.S. thinking your analyst day, there was some discussion about your efforts to drive good morning business. If you could tell us what percentage of sales and what percentage of franchisee profit.
This represents today and then how do you think about the impact on the industry as another large competitor plans to enter the marketplace. Thanks.
Hey, Eric Thanks for the question.
Yes, as we mentioned in May is a big part of our plan long term after became the US. It's a it's one of the fastest growing day parts in the U.S.. It's also one of the most profitable.
Parts as well given very healthy margins.
In that in that business.
We continue to invest behind it both in terms of product quality innovation beverage innovation and we're investing in media overtime. We're excited about the long term plans there.
We have already a pretty healthy.
And strong business and breakfast right around 14, 15%.
On average for the us with some parts of the country.
Well well north are north of 20% and we were excited about our position we've already invested.
Over decades behind the platform, we have the people already working to Daypart, we've already got a customer or guess behaviors.
In place to come to Burger King they loved it for sandwich, They love some of our anchor products.
At BK for breakfast and we aim to continue to expand and innovate in the area to be able to drive more growth over time. Thanks for the question.
This concludes and thanks for the next recession I'd like to turn the conference back over to Jose So for any closing remarks.
Thanks, everyone. Overall, we had a strong quarter with about 9% system wide sales growth with which led to adjusted EBITDA growth of 7% the strongest we've seen.
Since 2017, we're excited to continue to show the progress of each of our amazing brand.
Over the next quarters and look forward to keeping you posted thanks again to everyone for joining us. This morning, and thank you again for your support have a great day. Thank you Sir Todays conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.