Q2 2020 Restaurant Brands International Inc Earnings Call
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Good morning, and welcome to the workshop brands International second quarter 2020, <unk> earnings Conference call.
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I would now like to turn the conference I would of course burglary restaurant brands International head of Investor Relations. Please go ahead.
Thank you operator.
Good morning, everyone and welcome to restaurant brands International's earnings call for the second quarter ended June Thirtyth 2020.
As a reminder, a live broadcast of this call may be accessed through the Investor Relations Web page at Investor got RV, <unk> Dot com and a recording will be available for replay.
Joining me on the call today, our restaurant brands International CEO Jose sale, COO, Josh Kobza, and CFO back down again.
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 on our company's response to an ongoing recovery from the cobot 19 pandemic.
He will then discuss our results for the second quarter and provide detail around our performance at Tim Hortons Burger King and Popeye's.
Josh will then provide an update on technology at our <unk> to conclude.
I will review our financial results before opening the call up for QNX.
I'd now like to turn the call over to Jose.
Thanks, Chris and good morning, everyone. Thank you for joining us on todays call I hope, everyone is doing well and staying safe.
In the second quarter, our global response to the Cobot 19 pandemic remains the focal point.
We operate in over 100 countries and territories around the world and this crisis has impacted everyone.
Our responses involved a huge coordinated effort across all regions and by leveraging our platforms key points of differentiation, we've been able to drive a significant recovery in our performance.
We've come a long way since March and the rebound we've seen highlights of the resilience of our business model, which can perform well both in good times and then more uncertain times.
At its core or three iconic brands, which are among the most recognized and loved restaurant brands in the World Burger King Tim Hortons and Popeye's are all leaders in their respective categories and offer a combination of high quality craveable food and convenience that you can match.
They also offer familiarity and comfort as well as great value.
Characteristics, we've seen consumers gravitate towards and more trying times like those we face today.
During the pandemic the strength of our off premise service modes has been another key differentiator with guests that recognize the added safety and convenience of hard drive thru and delivery channels.
And by moving quickly to adjust our restaurant operations and marketing to underscore the strength of off premise. We've helped drive a significant recovery in sales since the onset of cobot 19.
This has been especially apparent in our home markets were substantially all of our restaurants have remained open throughout the crisis and comparable sales across all three of our brands have improved by about 30 percentage points versus the lows. We saw in late March.
In our international markets, approximately 90% of a restaurants are now open.
First as half during the peak of the Lockdowns and we've seen sales ramp up at a healthy pace.
Moving into the second half the year, we remain focused on the key priorities, we outlined last quarter to adapt our strategy to evolving conditions and drive a continued recovery in sales.
Our diversified network of strong and well capitalized master franchisees has been a key pillar of our platform for years and we're working hard alongside our partners to reopen and returned to growth.
We're also working closely with our partners around the world to prepare for what we believe will be opportunities for growth exiting the crisis and building strong pipelines for development as we move past the pandemic and look ahead to 2021.
There's considerable white space for each of our brands around the world and we believe the dislocation caused by Cobot 19 has reinforced the positioning and consumer value a world class brands like Burger King, Tim Hortons and popeye's.
Before I continue with my remarks, I'd like to express my sincere gratitude to everyone in the extended RV I family.
Our business is naturally well suited to respond to the challenges posed by this pandemic.
But the pace and strength of our recovery has depended on the hard work and dedication of hundreds of thousands of people around the world.
The everyone that has contributed to this effort.
I want to sincerely. Thank you for everything you've done to help us navigate through this crisis gained strong footing and move forward with their plans to build the most loved restaurant brands in the world.
I'd now like to take you through our progress against the key priorities. We established in response to covert 19 before reviewing our results for the quarter.
Since the beginning of the pandemic. We've had four main priorities. The first is to protect the health and wellbeing of our guests and restaurant team members.
The second is to continue serving our millions of guest everyday through all available channels.
The third is to support a restaurant owners and the fourth is to be therefore communities in need.
Our first order of business has been to ensure that we're protecting the health and wellbeing of our guest and restaurant team members and we moved quickly to implement enhance safety protocols across our networks, including the rollout of high frequency sanitation contact with service procedures and Universal P.P. usage.
More recently as we've started to reopen our dining rooms in the U.S. and Canada, we've implemented additional measures to protect the health and safety of every guest that comes to dine with us.
Dining rooms are currently open in about one third of our restaurants across both countries and in all cases, we're limiting the number of open tables to ensure a social distancing incentivizing tables between each city.
A rapid action in rolling out protocols to protect our guest and team members has allowed us to continue serving millions of guest everyday even during the most severe period of the pandemic in March we were able to keep substantially all of our restaurants in our home markets open by refocusing our efforts on our off premise capabilities and recovering much of the sales volumes we had.
Last through growth in our drive thru and delivery business.
Given the unique challenges posed by the pandemic are over 12000 drive there was across the U.S and Canada have been one of the safest and most convenient places to get a meal over the past four months.
Within the first few weeks of the crisis, we quickly implemented new procedures like contact let's pick up at the drive through window and shifted our marketing to showcase the safety and accessibility of this channel.
By the end of April comparable derived through sales were up over 20% at Burger King and over 100% at pump eyes.
By the end of May comparable drive through sales at Tim Hortons were up double digits year over year.
In the second quarter. We also continue to serve millions of guests via our rapidly expanding delivery channel, where comparable sales grew well into triple digits across all three brands in our home markets.
We've added nearly 3000, new restaurants onto delivery in the U.S. and Canada since February and now have almost 10000 restaurants for about two thirds of our network offering the service and over 34000 unique points of delivery considering the fact that most restaurants offer delivery via multiple aggregators as well as our own mobile apps.
The strength of our off premise business has allowed us to drive a meaningful improvement in overall sales levels across all three brands.
And as a result, we believe we're well positioned to navigate the current environment and can be flexible as we reopened our dining rooms in a safe and measured way.
Even if that means temporarily slowing down or pulling back in certain areas, where local guidelines require.
Well, we're encouraged by the positive trend we've seen in sales were prepared to invest additional resources into our advertising and media funds during the second half of this year if needed.
In our international markets. We've also made substantial progress behind our priority to continue serving our guests.
As of the end of July over 90% of our restaurants are now open on a global basis.
Including substantially all of our restaurants, and APAC approximately 90% of a restaurants in EMEA and.
And approximately 80% of our restaurants in Latin America.
Supporting a restaurant owners has been another critical priority for us and our work on this front has set a strong foundation for ongoing recovery.
In April we temporarily moved to 100% variable ran at about 3700 locations in the U.S. in Canada, where we have property control so that rent expenses could flex down to reflect changes in sales levels.
We also deferred April rent collections for up to 45 days and offered significant liquidity advances toward Burger King and Tim Hortons systems on an as needed basis.
In total making over $130 million available to our restaurant owners.
Across our home and international markets. We also took a proactive approach and postponing capex commitments as we prioritize the liquidity and financial strength of our franchise partners.
This step coupled with a dislocation to permitting and construction caused by the pandemic has naturally slowed our pace of openings for 2020.
And recently, we've also worked closely with our partners to identify underperforming unprofitable restaurants that it makes sense to close.
We've shared with you in the past or work around portfolio optimization, both in our home markets and around the world and believe this process of replacing older parts of our network with new modern restaurants, and strong locations drive substantial benefits and returns for both our partners and for us over the long term.
Given the natural delay in openings that will result from our pause to capital commitments and despite proactively closing several hundred more restaurants, and we might in a typical year. We expect to end 2020 with a similar number of restaurants relative to where we ended 2019.
Looking out to 2021 will be working very closely with all of our franchise partners to the back half of this year to build strong pipelines and restart the development process.
And given the overall health of our systems and the opportunities we see emerging we're confident that we'll have our development cycle back on track by the end of this year to deliver net restaurant growth in 2021 inline with what we delivered in 2018 and 29 team.
While we made important progress reinforcing that performance and overall health of our business since March supporting our communities is also priority.
In June we announced a restaurant brands for good framework that addresses our major initiatives to invest in the quality of our food, our planet and our people and communities.
We believe this framework sets out the important long term investments that are foundational to building the most loved restaurant brands in the world.
You'll hear us talk more about our restaurant brands for good framework in future quarters, and I encourage you to go to our web site and review our plans in greater detail.
And so the our results in the second quarter were heavily impacted by the Cobot 19 pandemic. We're encouraged by the recovery, we've seen across all brands and geographies and the way in which all of our teams and partners came together to make this possible.
We cannot predict exactly when the dust will settle but we're confident that we will be well position to capitalize on opportunities for growth as we emerge from the crisis and continue towards the 40000 restaurant goal, we talked about last year.
We've been hard at work with our partners to make sure we're ready to move forward and restart our engine for growth around the world.
I'd now like to go through highlights for each of our brands after which I'll ask Josh to share an update on our digital progress and then Matt to take you through the financial details of the quarter.
At Tim Hortons in Q2, our system wide sales decreased 33% to $1.1 billion driven by a decrease in global comparable sales of 29%, which was partially offset by net restaurant growth of over 1%.
In Canada comparable sales declined 30% for the quarter and were significantly impacted by the widespread stay at home orders. Following the onset of the cover 19 pandemic in March.
However, we've seen a significant improvement in comparable sales since March and as of the end of July comparable sales are now in the negative mid teens versus the negative mid Fortys, we saw at the peak of the crisis.
Since the onset of the pandemic in late March we've seen a slightly faster pace a recovery at Tim Hortons in the U.S. and we have in Canada and as of the end of July comparable sales attempt in the U.S., our the negative low single digits in line with other coffee oriented concepts in the U.S. and about 10 points ahead of Tim's in Canada.
Historically, our performance attempts in the U.S. as closely tracked our performance at Tims in Canada and during the onset of the pandemic in late March our comparable sales were similarly impacted in both countries.
The slower pace of recovery and resulting gap in sales. We've seen since then is attributable to three main factors.
First as we noted during our remarks for the first quarter. The pandemic has had an especially pronounced impact on routine based visits including on the morning commute an afternoon snack occasions, which each represent a significant part of our business.
Hi frequency coffee led tickets or an even greater percentage of our sales in Canada than they are in the U.S. and I've seen the most significant impact during the pandemic second markets across Canada have generally follow the measured pace of reopening which has helped effectively contain the virus, but has led to a slower pickup in activity and reestablishment of routines.
By contrast, the U.S. has progressed into later stages of reopening much sooner.
Which we've seen show up in mobility data has a significant differential in commuting traffic and patterns.
And third as I mentioned earlier off premise sales, especially in our drive throughs have been especially important in driving the topline recovery we've seen thus far.
About two thirds of our Tim's restaurants in Canada haven't drive through versus approximately 90% of our tim's restaurants in the U.S.
Comparable sales have meaningfully outperformed at these locations as comparable drive through sales in both countries, increasing the double digits during the quarter.
These three factors have been particularly apparent in Ontario, where about half of our restaurants are located and performance has been more impacted by the disruption to routine traffic and a lower penetration of Dreyfus.
However, certain parts of Canada have been a bit quicker to reopen and we're encouraged by the further improvement we've seen in sales.
In Quebec for instance, where we have drive through penetration closer to our Tim's U.S. business and activity has resumed at a slightly faster pace than in other provinces, we've seen comparable sales improve into the negative mid single digits as of the end of July.
In the second quarter. We've also made significant progress in the evolution of our Tim's rewards platform. We continue to incentivize registration by highlighting the additional features available to register guests, including the ability to choose a preferred award from our broader menu and gradually adjusting the base reward for Nonregistered guests.
We also ramped up personalized offers over the course of the quarter and are encouraged by the level of guest engagement and redemptions, we've seen so far.
Considering the natural drag from pre rewards offset by the uplift from personalized offers the impact of the loyalty program to comparable sales was approximately neutral by the end of June.
You may recall that loyalty contributed approximately negative 3% to comparable sales in the fourth quarter of last year and we're pleased to have close that gap within the first six months of 2020.
We continue to be really excited about the potential of our loyalty program and Josh will provide a bit more detailed or progress during his remarks.
From a product perspective, we move forward with our plan to simplify our menu and heightened focus on the improved quality of the products that made us famous coffee baked goods and breakfast sandwiches.
Our dollar ice coffee promotion and two for five breakfast Sandwich steel performed especially well in our core layer, while we saw improvements in the consistency and quality of our brewed coffee from our fresh Brewers and water filtration systems.
And two weeks ago, we continue to invest behind the quality of our core lineup by rolling out a meaningfully improved English muffin and crispier naturally smoked bacon across our breakfast sandwich platform.
Despite the obvious challenges posed by co benign team we have nonetheless made progress on some of the important strategic initiatives, we outlined towards the beginning of the year, which form an important part of our growth strategy for the brand.
Instance, we continue to add new restaurants onto delivery and now have over 1200 restaurants offering the service versus about 200 at the beginning of this year, making us one of the only restaurant companies with full delivery coverage throughout Canada.
We also recently completed installation on several hundred additional fresh Brewers and water filtration systems and expect to install the final 700 or so by the end of this year.
As conditions have stabilized we're excited to be restarting our project to install outdoor digital menu boards in our drive throughs.
Matt will provide a bit more color around our important projects later on.
You will recall that the baseline unit economics of Tim's in Canada are among the strongest in QSR anywhere in the world and the improvement we've seen in performance across Canada and direct support we provided mean that the vast majority of our restaurants or cash flow positive even before considering the various support program is made available by the government.
And finally, we continue to maintain a strong working relationship with our restaurant owners and advisory Board.
Turning to Burger King in Q2, our system wide sales decreased 25% to $4.1 billion driven by a decrease in global comparable sales of 13% and a significant number of temporary closures in our international markets, which were partially offset by net restaurant growth of over 4%.
Given the progress we've made on reopening about 90% of our international restaurants are now open versus half back in April.
In the U.S., our comparable sales growth at Burger King in the second quarter was negative 9.9%.
By the end of April we had already seen a significant improvement in results versus the end of March as comparable sales improved from the negative mid thirtys to the negative mid teens.
Between May in July comparable sales continued to improve and as of the end of July.
Our now flat on a year over year basis.
As nearly all of our dining rooms were closed during much of the second quarter. The primary driver of this recovery was an increase in off premise sales, especially in our drive throughs.
Burger King has over 6500 drive throughs across the U.S. and has been one of the most accessible options for millions of guest to get a meal during the pandemic and with minimal exposure given the contact was procedures, we rolled out at the beginning of the crisis.
By leveraging these advantages we were able to grow comparable sales in the channel and the positive low twentys for the second quarter and saw drive through sales grow to more than 85% of total sales versus about two thirds in 2019.
We also saw strong growth in delivery in Q2, continuing a trend we noted in the first quarter.
We've brought nearly 2000, new restaurants online since February and now have over 6100 Burger King's on delivery in the U.S.
From a menu and occasion perspective breakfast was the daypart most negatively impacted by the pandemic and we underperformed in this category as American consumers put their routines on hold.
However, we were able to drive growth in other areas and saw strong contribution from family and group orders this quarter, which we helped accelerate with the launch of new bundles.
We also saw continued strength from the impossible whopper as well as a positive contribution from value oriented offerings like our pfeiffer for meal and dollar Nuggets.
And in June and July inline with local guidelines, we began reopening our dining rooms at about one third of our stores and have seen an additional improvement in comparable sales at those locations.
Moving into the back half of the year, we'll continue to sharpen our approach to the value for money equation, especially given the uncertainty the consumers facing.
We'll continue to invest in and drive momentum behind our technology assets and especially delivery.
And we'll also continue to invest behind the quality of our food, putting the spotlight on our classic products across day parts that resonate with guests seeking comfort in the midst of the pandemic.
As we mentioned last quarter restaurant level cash flows have never been more important in our business and for our teams and franchise partners.
At Burger King in the U.S. as with our other brands in our home markets. Our work with our restaurant owners to adapt operations to the current environment as well as the direct financial support provided by our VI and the U.S. government has combined with the significant recovery in sales to help the vast majority of our Burger King restaurants in the U.S. generate positive cash flow in the quarter.
In our international markets Systemwide sales decreased 38%.
Driven by decreasing comparable sales of 18% and a significant number of temporary closures, partially offset by net restaurant growth of over 7%.
The impact of these temporary closures was particularly concentrated in EMEA and Latin America, where approximately half of our restaurants were temporarily closed at the beginning of the quarter.
This impact diminish substantially over the course of the quarter and as of the ended July a considerable majority of our restaurants every opened in both regions.
Temporary closures also impacted our performance in APAC in Q2, although the impact was not as pronounced.
Substantially all of our restaurants, and APAC have now reopened and despite depend demick markets like Australia, Korea, and Japan registered positive system wide sales growth for the quarter.
As markets of reopened we've seen countries with more freestanding restaurants, like Australia, and the UK tend to recover lost sales more quickly than markets with more mall locations.
In this regard our international platforms have benefited from an increasing orientation and our development strategy to build drive through locations, especially in key markets like Spain, UK, France, Germany, Italy, Brazil, Australia, Mexico, and Puerto Rico.
In recent months, you've also seen markets with strong off premise and delivery platforms like Korea in Spain regained sales at a higher rate.
As markets move into more advanced stages of reopening we expect global sales at Burger King to continue to improve.
And finally at Popeyes system wide sales increased 24% to 1.2 billion driven by nearly 25% growth in global comparable sales and unit growth of nearly 7%, partially offset by temporary closures in our international markets.
Comparable sales growth was especially strong in the U.S., where they rose almost 29% for the quarter.
As we noted on our call for our first quarter results you us comparable sales performance at Popeye's recovered sharply into the positive Thirtys. In April then further improved into the positive low fortys and may from a starting point of approximately flat during the peak of the crisis in March comparable sales are in the positive high Twentys as at the end of July.
But nominal monthly sales per restaurant have continued at record highs.
The moderation in comparable sales growth. We saw in July primarily reflects the impact of several large scale market tests of the chicken sandwich and a highly successful big Bucks promotion during the same period in 2019.
Given the significant topline increase we've seen between 2019 and 2020 on a trailing 12 month basis Popeye's now generates an average of $1.7 million and sales per restaurant and still growing.
A large part of this growth can be clearly attributed to the chicken sandwich, but in Q2, we saw significant growth across every category of our menu.
Like our other brands popeye's generated a significant majority of it sales via off premise channels this quarter and saw especially strong traction in new and improved family offers.
We see a huge amount of potential for our flavorful offerings in the family occasion and in July we launched our Pizza Party Crashers campaign to continue the momentum we saw build during Q2.
Positive sales momentum has substantially boosted restaurant owner profitability and made Popeye's unit economics in the U.S. some of the best in the business.
Combining these strong unit economics, where the excitement around the popeyes brand not to mention the real estate opportunities, we see opening up across regions reinforces our excitement about the brands long runway for development in the US while cobot 19 has resulted in some disruption to construction and development timelines. This year, we look forward to executing behind a strong pipeline of red.
Shrontz for years to come.
Looking outside the U.S. in May we opened our first popeye's restaurant in China and have seen an overwhelmingly positive response.
We've made a few tweaks for the Chinese market, but so far our guest as love Popeye's signature, Louisiana style fried chicken.
China represents just one of the many significant opportunities we see to develop the popeye's brand around the world and we're excited to be launching into a new chapter of international growth for the brand.
As I've mentioned, our digital assets continued to make a significant and growing contribution to our results across brands. This quarter I'd now like to turn the call over to Josh to provide an update on what we've accomplished in technology during Q2, Josh.
Thanks, Jose and good morning, everyone.
Last quarter, we shared with you our observation that's the coven 19 crisis had accelerated trends in consumer behavior that we've seen building for sometime.
In the second quarter. This process continued to play out as consumers increasingly looked outside their homes for meals in a safe and convenient format.
As Jose outlined earlier this shift drove a substantial increase in sales and our drivers and it also helps for greater adoption and usage of our digital platforms.
In this context, we've continued to enhance our cortech assets and adapt our digital strategy to best fit our guests evolving needs.
We're excited about the progress we made over the past few months and wanted to share a few highlights from three core areas.
First we continue to see significant growth in delivery across all three of our brands.
Our addition of nearly 3000, new restaurants on the delivery in the U.S and Canada. Since February brings our totals nearly 10000 restaurants offering this service across our home markets.
At Burger King and Popeye's, our delivery sales are up about three times in four times, respectively versus the same time last year.
And we've seen considerable growth in sales via our own mobile apps through Q2.
At Tims delivery sales are now up over nine times versus their pre crisis level at the beginning of this year.
Second we continue to enhance our mobile app guest experience across all three of our mobile apps in our home markets.
We've added new features and continuously incorporated guest feedback, which has allowed us to once again ranking near the top of our industry in terms of App downloads and monthly active user growth.
This is also led to a sustained improvement in our App store ratings, especially for our Tim Hortons Mobile App, we saw its ratings rise toward the upper end of our competitive set.
We also recently finished integrating our mobile apps for Burger King in Canada, and the UK onto our core code base and we'll continue to add additional markets and gain scale in the back half the year.
Finally, we made significant strides this quarter and our rollout of CRM and personalized offers through our teams rewards platform.
Over the past year, we learned a lot and have been able to build it a rich segmentation based on I guess preferences.
Our engineering team also designed a framework for tailored offers that we began rolling out at scale in Q2.
All in parallel we continue to reduce the natural drank to comparable sales from redeems rewards from Nonregistered guess.
The ramp up in contribution from personalized offers and a decrease in drag from redeemed rewards meant that by quarter end. The net impact of tender awards to comparable sales was approximately neutral a meaningful improvement versus a negative 3% impact we noted for Q4 last year.
We look forward to continuing to build our capabilities around personalized offers and leaves it overtime Tenzer awards will create significant value for our guests and for our system as a whole.
Overall, we continue to make significant progress this quarter on our goal to build an industry, leading technology platform and grow sales across digital channels.
During Q2 digital sales in our home markets grew more than 120% year over year in over 30% quarter over quarter.
And this growth was broad based across our three brands, which each sauces substantial increase in digital sales in the quarter.
In Q2 digital sales in the U.S. represented 8% of total sales at Burger King and 14% of total sales of popeye's.
And it Tim Hortons in Canada digital sales represented 23% of total sales during the quarter.
Ill now turn things over to Matt to provide additional detail around our business results.
Thanks, Josh and my comments today I'll take you through an overview of our results for the second quarter and touch on some of the steps we've taken to support our systems as sales recover and to position our brands for continued long term growth.
In the second quarter consolidated system wide sales decreased 21% to about $6.5 billion, reflecting the impact of Coca 19 on the results across regions.
However, as Jose outlined we saw significant improvement in performance over the course as a quarter as we increase comparable sales by about 30 points and reopened over 4500 restaurants around the world.
Based on this progress we now have about 93% of our global restaurants open and exiting the quarter, we're back to approximately 90% of our prior year system wide sales.
We believe this highlights the quality of our business model and value of our global scale and diversification.
The quarter consolidated adjusted EBITDA decreased 36% organically to $358 million.
And beyond the decrease in system wide sales several factors contributed to the decrease we saw in consolidated adjusted EBITDA.
First the base rent relief, we provided to Tim Hortons at Burger King restaurant owners in the U.S. in Canada that has they mentioned earlier impacted our growth rate by about negative 3% this quarter.
It is important to note that this release is tied to sales performance and naturally diminishes as sales improve.
So given the recovery in sales we saw over the course of Q2, we have seen the size of this rent relief declined to a relatively marginal level entering Q3.
Second while we have not historically had meaningful bad debt expense given the level of volatility and uncertainty around the world. We increased our bad debt provision in the second quarter to reflect an increase risk environment around receivables.
In addition, our provision also included an 8 million dollar onetime charge in our supply chain business that will touch on in a moment for a combined impact on our growth rate of approximately negative 4% in the quarter.
Third our performance this quarter also reflected AD fund expenses exceeding revenues by nearly $12 million more than they did in the second quarters last year, resulting in an impact of approximately negative 2% to our consolidated organic adjusted EBITDA growth rate.
We've mentioned in the past that in some quarters, there may be a mismatch and the timing of revenues and expenses.
But that in the long run we manage these AD fund so that total revenues equal expenses.
In this quarter the southern decline in sales that resulted from the spread of Coven 19 led to a continuation of the mismatch we saw in Q1, which we expect to normalize overtime.
We also felt that given the unique challenges posed by the Coca 19th endemic and the resulting shifts in consumer behavior. It was important to continue investing behind our brands and the messages of convenience safety and community that have helped us drive our recovery.
Fourth the de leveraging of fixed costs in our supply chain on account of lower volumes also contributed about 1% to the decrease in our consolidated adjusted EBITDA This quarter.
However, the impact of this deleveraging diminish substantially over the course of the quarter as volumes recovered and represents a relatively marginal impact on results entering Q3.
The remainder of the gap between our consolidated system wide sales growth rate in our consolidated organic adjusted EBITDA growth rate stem from a number of smaller items, including a decline in fees and other income and EBITDA from company stores.
As well as a sizable shift in sales mix that we saw across brands, reflecting a more pronounced decline in sales at tims, where in addition to franchise royalties. We also generate EBITDA from property and supply chain activities.
Moving onto segment level performance at Tim Hortons, our second quarter, adjusted EBITDA was $147 million, which represents a decrease of approximately 47% on organic basis. This decrease was driven primarily by a 33% decrease in system wide sales.
Which included a 29% decrease in global comparable sales.
Well as the temporary closure of some of our restaurants due to covert 19, which were partially offset by global net restaurant growth of over 1%.
The year over year decrease in adjusted EBITDA Tim's also reflected a decrease in supply chain sales.
Which was driven by the decline in restaurant traffic and volumes, we experienced during the quarter.
Our Tim Hortons results were also affected by the onetime charge I mentioned, which is flowing through our cost of sales and is related to the restructuring of one of our suppliers during Q2.
This issue has been fully resolved with minimal operational disruption, but the associated charge reduced our adjusted EBITDA growth rate at tims by about 3%.
Further impacting our results with our strategic decision to maintain full employment our distribution business despite lower volumes.
Which contributed to the fixed cost de leveraging I mentioned earlier that reduced our organic adjusted EBITDA growth rate at tims by approximately 3%.
Again, we saw the impact of this de leveraging drops significantly over the course of the quarter.
In addition, the rent relief, we provided to Tim Hortons restaurant owners in Canada impacted our growth rate of Tim's by about negative 5%.
Finally, approximately half of the AD fund related negative impact to consolidated adjusted EBITDA was attributable to Tim Hortons and reduced our tends adjusted EBITDA growth by nearly 3%.
At Burger King second quarter, adjusted EBITDA was $160 million, representing a year over year organic decrease of approximately 34% driven primarily by a 25% decrease in system wide sales.
The change in system wide sales, reflecting a decrease in global comparable sales of over 13%.
As well as a temporary closure of approximately half of our international restaurants due to the coven, 19th endemic which were partially offset by global net restaurant growth of about 4%.
In addition, organic adjusted EBITDA growth at Burger King was impacted by part of the provision for bad debt I noted earlier the rent relief, we provided to restaurant owners in the U.S. as well as about half of the AD fund related negative impact to consolidated adjusted EBITDA.
At Popeyes in the second quarter, adjusted EBITDA was $51 million, which was up nearly 25% organically year over year.
This increase was driven by strong system wide sales growth of 24% continuing the brands strong momentum from last year.
And included global comparable sales growth of nearly 25% and net restaurant growth of nearly 7%.
This growth was slightly offset by some temporary closures due to the cover 19 pandemics.
On a consolidated basis, our second quarter. Adjusted net income was $154 million. This compares to second quarter 2019, adjusted net income of $331 million.
The year over year decrease was attributable to the decrease in adjusted EBITDA and unfavorable exchange rate movements as well as higher stock based compensation.
And was partially offset by lower interest expense, resulting from our refinancing activities in the second half of last year and the lower adjusted effective tax rate.
Our adjusted diluted EPS for the second quarter was 33 cents compared to 71 cents in the prior year, representing a nominal decrease of 53%.
Included in this decrease is a headwind from unfavorable exchange rate movements, which reduced our EPS growth rate by approximately 2%.
Our second quarter 2020, adjusted effective income tax rate declined to just under 16%, reflecting the larger relative decline in income we've experienced at Tim Hortons, which carries a higher tax rate.
However, it's important to remember that the rate in any given quarter can vary and we may see additional volatility moving forward as their mix of income continues to evolve.
Now turning to our cash generation and capital allocation for the quarter.
Since March we've seen a significant stabilization and conditions across our business.
Throughout the crisis, we've been able to leverage the strength of our balance sheet to support our brands and take a proactive stance and confronting the challenges we faced.
And the results we've seen so far has given us a strong foundation to push for with our recovery and work towards restarting our growth heading into 2021.
In terms of our cash flow, we're encouraged to report that despite the significant impact of coven 19 on our business and the investments we made to support our brands through rent relief liquidity advances and other programs, we still generated positive free cash flow in the second quarter calculated as the sum of operating cash flows less capex reinforcing our belief in the reason.
Currency of our model.
We also paid a total of $484 million in common dividends and partnership exchangeable unit distributions, which represents two quarters worth of dividends and distributions due to timing of the disbursements.
And given the continued strength of our liquidity position.
This morning, we announced that the RV I board of directors declared a dividend of 52 cents per common share and partnership exchangeable unit of RBC LP payable on October 2nd 2020.
In terms of investments in recent months the restrictions to business activity, resulting from the covert 19 pandemic have limited our ability to make progress on certain strategic projects, but despite these challenges we were still able to move forward with several key initiatives.
In the past two months, we opened two of our three new distribution centers in Canada, one into Bert Nova Scotia, and the other in Calgary, Alberta.
And I brought them on line with no disruptions to service in fact, we've already seen improvements in both efficiency and service levels to our restaurant owners.
In addition, even though we had to push back the installation of our outdoor digital menu boards in Canada, we were still able to move for on some important steps, including permitting for thousands of sites.
We are now fully restarting the rollout and aim to install around 1000 outdoor digital menu boards by the end of year with the remainder coming in 2021.
Which we believe will be a very strong enhancement to our business in Canada, given the scale and importance of our drive their network.
All three of our brands continue heading in a positive direction and with the recovery we've seen in sales and the solid financial position of our networks. We're excited to move forward with our partners and continue investing behind our brands.
As of June Thirtyth 2020, our total debt outstanding was $12.9 billion, our net debt calculated as total debt less cash and cash equivalents of $1.5 billion was $11.3 billion and our net debt to adjusted EBITDA leverage ratio was 5.6 times.
You recall that in the beginning of the crisis out of an abundance of caution we look to maximize our flexibility by drawing down on our $1 billion revolver and issuing $500 million of new notes.
However, based on the recovery, we've seen in our business over the past few months and the confidence we have in the strength of our business model, we decided to fully repaid the revolver at the end of the quarter.
Our B. I remains in a strong financial position with meaningful flexibility for a wide range of scenarios.
We ended the quarter was a healthy $1.5 billion cash balance even after taking into effect the full repayment of our revolver and two quarters worth of dividends due to the timing of the disbursements.
We also feel very well positioned from a capital structure perspective, with no near term maturities and plenty of flexibility.
We're not concerned by temporary fluctuations in our leverage ratio and are confident we have the resources to successfully navigate through the crisis and pursue opportunities for growth as we come out the other side.
With that I'd like to thank everyone for joining us on call. This morning and for your continued support we'll now open the call for questions.
Operator.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
We'll hear a tone to confirm that you are in the Q.
Exit the question Q you May press Star then to.
All callers will be limited to one question.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Nicole Miller of Piper Sandler. Please go ahead.
Thank you good morning.
When you look at franchise level cash flows and take a look back at 2018, well, what maybe was kind of planned or thought would be the levels for 2020 as you look across the brands.
Tonnage of those.
Prior year projected cash flows do you think your franchise partners can capture in this environment it seems like listen topline PPP and.
Other.
Probably lever leverage I would imagine the vast majority.
Hi, Good morning, Nicole Thanks for the question in terms of franchisee cash flows and what we've been.
Most excited about is really the return as a business and sales recovery over the past.
A month or two which we know is the primary driver I think the other thing to call out here as we've done a lot of work over the past couple of months with.
First of all our brands with our franchisees.
In terms of making operational improvements in adjustments to respond in adapt to the current environment.
And I think the result has been.
You know a pretty a pretty good amounts of progress in terms of offsetting some of the impact that we saw in the early days.
And now as we're on a ticket better path with the business and improving our outlook is good for the second half and we think that Theres a path to generate very significant profitability for the year.
Even without taking into account the government programs.
We're also quite helpful.
Our next question comes from John Glass of Morgan Stanley. Please go ahead.
Thank you and good morning, Jose wanted to go back and I want to maybe if you could clarify maybe expand on the comment you made about the development plan as I understood. It would suggest you have no net unit growth this year.
Can you maybe just talk about whereby brand you expect the most closures that would offset any development. It may be within that sub region, whether it's the U.S. or home markets.
And then I think you also said you expected to get back to normalized growth that you would've seen in 18, and 19, which feel like a 5% unit growth and I want to make sure that's right.
Hi, you get competence and that at this early stage I know some of your peers had sort of said the opposite which they don't have real visibility in 21, just given franchisees had been disrupted so maybe what insights do you have into how franchisee just thinking about development that you think that development in Brazil that that kind of pace.
Yes, hey, thanks for the question, John if you're doing well.
Our focus the last four months has been on supporting our franchisees here in several markets as well as internationally and regaining momentum and reopening markets as well as.
The momentum in sales and we've seen as we mentioned in the prepared remarks, we've seen a good strong recovery across all markets, 93% of our restaurants are open and we've regained.
Just north of 90% of our system wide sales, we have a strong.
Set of franchisees across the globe strong brands and and our partners are well capitalized as are we.
And I think as we continue to drive recovery in sales, we feel confident in our ability is to continue to work with our franchisees too.
To maneuver and managed through the current situation and be prepared for.
A return to growth in in 2021, I think we've seen just to give you our perspective on this my perspective, we see strong growth over the last.
Decade, or so with with our brands, but Burger King in particular across a broad base of markets in Europe, and Asia and Latin America, There's there's a ton of white space left for us to grow in all these regions, including.
North American our home markets for for Burger King for top buys and for Tim Hortons.
What would drive expansion and growth is really strong unit economics, and and considering the strength of our unit economics in our home markets.
And internationally and seeing the improvements that we're making including with popeye's into us.
Gives us.
Confidence in the ability to.
Grow long term, we've we've focused.
As I mentioned in my prepared remarks focus.
In the last several months on reopening.
And are now working closely with our partners on on ramping up.
Thank you get ready, but theres, a kind of opportunities in real estate in North America, as well as internationally and so that gives us confidence in the ability to get back to.
Two growth levels that we saw in 2018 2019 in terms of closures I mentioned the.
The the opportunities to optimize the portfolio, we'll see that in a number of markets across the globe.
Including here in North in North American our home markets.
Both in the U.S. and in Canada, and all of this as we've said in the past is aimed at improving the profitability or franchisees and of our system.
In many cases these restaurants that we close.
Our.
We're in good trade areas that have evolved in there are no longer the right trade areas and we're reopening we're opening new stores with better unit economics, better image better experience better technology or legacy greatest in terms of image.
And and all the different offerings. So so we're really excited about that and feel confident that that's going to create a ton of value for our franchise partners over the long haul. Thanks for the question.
Our next question comes from Dennis Geiger Oh, Yes. Please go ahead.
Great. Thanks for the question and morning, guys.
Thanks for all the up to updates in the insights here I wanted to focus on on the go forward strategy for for Tim Hortons lot of exciting stuff going on with the brand. It seems like the brands on a good place, where especially where coated restrictions or less onerous. So just wondering if you could talk a bit more about their work continued recovery from here.
Speaking about the macro and consumer mobility is that one of the biggest things that.
You know that gets you.
Terrific and recovery from here and then maybe if you know a lot going on a lot of good stuff. If you could just kind of frame what you see as the most impactful as it is it loyalty is it some of this stuff with the digital menu boards that you talked about now you that's kind of on track again, you're rolling that out.
These and other things just kind of framing.
You're most excited about how you see this recovery for the brand from here. Thank you.
Thanks, Dennis I. Appreciate the question, Yes look we from levels of in the low Fortys negative 40 years and in April when the crisis was at its peak in the in Canada and here in North America, we've seen as I've mentioned over the last several months, we've seen sequential recovery.
Quarter over every month over month in the in the business and we see that initial improvement came.
From a bunch of hard work from our teams. We we went from having about 200 restaurants, just over 200 restaurants with delivery in Canada to now around 1200, restaurants, which gave us an opportunity to expand or off premise offering in Canada to meet the needs of Canadians.
Even if they couldn't come to our restaurants, and we saw the drive through performance and prove its now double digit up versus where it was last year.
And as we mentioned the part of the business has been impacted the most in the or the industry has been affected most is is breakfast in kind of those high frequency routine visits.
Canada has as I mentioned in my prepared remarks has been a bit slower to reopen.
As confirmed by third party mobility data and industry traffic data that we look at.
We've seen the same store sales steadily improving.
Throughout the last quarter and into digital into July, but we've seen our biggest market, which is ontario be a little bit.
Slower in terms of the recovery.
It's driven by the at a high urban and routine traffic exposure that we have in that business.
And as I said, we've seen this through pretty clear evidence on third party mobility data. The good news as we've mentioned, Quebec is a good example that gives us confidence around a path to improve sales as reopenings continue and as behaviors.
Resumed in the country that said, we're not we're not sitting back and waiting for reopening we're moving and we're driving the business.
Alongside our owners, we've put in place a really strong program around improving the quality of our of our coffee offering as well as or breakfast offering we just launched improvements in breakfast sandwiches with.
Better English muffin, and a better Bacon and we've highlighted we've got out with a two five.
Promotion, we've had we have a dollar iced coffee promotion that goes along with any lunch rep.
I think our teams have done a great job of as Josh mentioned with digital and personalized offers continue to be a focus for us and we're in we're continuing to invest and have now.
Turned on the capital expenditures to to invest in quality with fresh Brewers being a priority for us fresh frozen water filtration, which will be completed by the end of.
This quarter beginning of next and then to the outdoor digital menu boards, which represent a big opportunity for us to to modernize the experience in our in our restaurants in our drive throughs, which represents a growing part of our business. So we're excited about that long term.
And excited about the progress we're making the teams are doing a great job in the franchisees in the restaurant owners are really engaged and doing a fantastic job on that front. So we continue to to be excited long term on these priorities and look forward to keep you posted on our progress.
Our next question comes from Johnson part of C. RBC. Please go ahead.
Thanks, Good morning, I wanted to ask about the breakfast Daypart in particular you'd mentioned, it's a disproportionately impacted just would like to get a sense of how you help rebuild traffic here and maybe that means increasing drive your throughput with dual lanes are emphasizing breakfast anytime, but just would like to get a sense of how you get this to return to the growth level you'd like it up.
Yes. Thanks for the question John I think it's the stuff that I've mentioned already and touched on quite a bit.
It's focusing on quality focusing on on service expanding our off premise capabilities.
Through drive thru and as well as are our digital capabilities. We've added curbside pickup we've added pickup.
At the front door in many locations that are that are in line. So our focus will be and continues to be on great service great quality offering.
Great everyday value for money with with our coffee and baked goods in Canada breakfast sandwiches, and continuing to expand and improve on on that off premise capability that we have that and that were so strong and thanks for the question.
Our next question comes from David Palmer of Evercore ISI. Please go ahead.
Thanks, Good morning, I'm going to beat the dead horse, a little bit more on that Tim's here, but you.
This is one of those stories, where we have the comps negative going into the crisis and I guess, we have the the external factors, obviously cobot itself the competitive environment to closures, maybe that you'll see from competitors, maybe that slow recovery of that greater Toronto area, but off.
From offsetting that might be.
The fact that you're doing a lot of internal stuff. So I'm trying to get a sense from you know any help you you could.
Give in sort of squinting through the numbers and give me a sense of your confidence to even get to positive comps and then.
At that rate of recovery do you do you see that tail of greater Toronto.
Dragging on into 21.
Pretty.
Commuting is down.
Or do you see those being overcome by some of the internal things you're doing or even the closures you're going to see from competitors.
Any any any commentary on that would be helpful. Thanks.
Yes. Thanks for the question, David look I think it.
It goes back to some of the comments I made earlier I think we're excited and confident in the in the long term and in Canada I think.
The investments, we're making in digital is proving to to be a big benefit for the business there as as Josh mentioned in his comments and I did as well earlier this morning.
We're seeing now that Tim's rewards is a is is becoming a positive for the business.
Not only in terms of engagement, but also in terms of being able to add to give our very loyal consumers and guest exactly what they're looking for that's allowing us to drive incremental visits and sales for the business, which we think overtime will be a big driver and a key part of our of our marketing initiatives in the business, we're focusing on quality, we're focusing on.
On expanding the capabilities and the experience in the dry produced with with technology as well as.
Expanded throughput and we think all of those.
In addition to the process that's taking place.
In the municipalities and in the provinces of reopening that combination overtime will get us into a really positive.
Momentum for the business hard to say when we're working like crazy to make it now, but but it'll it'll take time and where we're working closely with our partners and our franchise owners in a in the market to make sure. We do it the right way safely taking care of our guest in our team members, which remains the top priority. Thanks, so much for the question.
Our next question comes from Sara Senatore of Bernstein. Please go ahead.
Thank you [laughter] quick question about the Kansas State <unk>.
I had mentioned that you're seeing acceleration of trends.
Including guardrail it.
Is it possible to extract fit camps.
Anything about what like how do you think about.
The Kansas State yesterday, it's now.
Keith or its John I true versus change that you know what it should be having on go forward I mean, one of your big competitors, just working on shifting their footprint.
And in shrinking so I'm sorry.
Hi.
Do you contemplate it that.
How fast could it happen.
And so what what Capex look like I said, she did with that just yeah TV extend that there are any lingering.
Next from the pandemic.
Most pronounced would probably be just again shift greater shift out.
Mentioned to Jack Thanks.
Hey, Thanks for the question Sarah.
Our we have an amazing portfolio and real estate.
Offering in the in Canada, We've got no nearly 4000 locations, where we were able to serve all of our gas to me the the ability that we have with our penetration there.
He is probably as as well evidenced with our shift to the delivery room now one of the the strongest delivery businesses in terms of penetration anywhere in the country. So we have a really strong portfolio, we think theres an opportunity to continue to enhance the off premise abilities that we have.
Expanding drive throughs to double drive through expanded experience in the in our in our existing drive throughs with Odeon outdoor digital menu board investments.
We have curbside now in mobile order and prepayment and pick up with our digital offerings. So so we think off premise, we'll continue to be a an opportunity. We felt that was the case recovered which is why we made all these investments in technology as well as had outlined the game plan to invest in our in our delivery and our.
Drive through business. So we continue to see that as an opportunity in that and to the extent. There is some involvement in ER and Remodels and other investments in real estate will continue to do that in order to drive the business forward.
Thanks for the question.
Our next question will come from Chris Carroll of RBC capital markets. Please go ahead.
Thanks, Good morning, and just following up on my last question I did want to ask about the a the remodel programs attempts in Burger King where do you where do you target currently stand in those programs what does your to franchisees current thinking on Remodels, particularly in light of the commentary around development as well as a plans around portfolio optimization.
Net closures that you discussed this morning.
Hey, Chris it's matter. Thanks for the question I think as it relates to the remodel programs. We both at BK engines. These continue to be known important piece of our strategy going forward I think as we talked about in the past given the given the impact of scope it.
We temporarily paused and capital investments.
For the time being.
But we think given the traction that we're seeing into business.
It makes sense to start reengaging in investments and part of that will be a continued renovation of our restaurants, which we look to restart in second half a year and get back on track as we move forward.
Thanks for the question.
My last question will come from David Tarantino of Baird. Please go ahead.
Hi, good morning good.
Clarification costs and another one, but what what I guess first what percentage of the global.
Now.
They are expected to close this year and what percentage of system sale does that represent.
I look first question other than the second question as I was wondering if you could give.
On an update on.
The Burger King International business, and how that business this trend.
Given its such a big part of your your income stream.
And that if there's any any call outs related to markets that might be underperforming during that goes out, but yeah that would be helpful as well.
Yeah I gave it it's Matt Thanks for the question Oh I'll share some thoughts on the first part there and closures you don't think assume a as Jay mentioned in the prepared remarks, and we are going through a proactive processes.
Looking through our systems all around the world and.
Where it makes sense to close restaurants that will help improve the overall health of the overall health system profitability and then also longer terms.
Makes sense for our partners and for Us.
In terms of the business models and supporting future development, Yeah, that's something we're going to do and we're going to be proactive about that.
In the second half a I think you know as it relates to the size of that appeal to be relative it'll be significant relative to prior year closures. So a significant increase.
However in terms of <unk> percent of overall restaurants and system wide sales around around the world or it will be relatively small show a couple percentage points.
Thanks, David on the second question as I mentioned I think we're really.
Excited about the progress we've made in reopening or restaurants internationally and across the globe, including or home markets. We're we're now about 93% of our restaurants open.
And we've seen it was substantially all of the restaurants in APAC are open.
North of 90% of them are open in the in EMEA and just over 80% in Latin America.
And north Americas, <unk> <unk> roughly in the.
Above 98%, so we're making good progress on re opening and system wide sales have gotten back to about 90% of where the where they were pre cobot and so we're working closely with our partners there we see.
You know some some different nuances by market in terms of.
Performance, but generally everyone is making progress on reopening they're driving significant growth through off premise capabilities delivery is a really big part of our business as well as digital.
In a in many of our international markets and we have.
Strong growth that's taken place over the last five years or so in our drive to the business in many of our international markets in Europe in Western Europe in particular as well as in Latin America. So so we see continued.
Progress in those markets, we continue to work closely with our franchisees in those markets to ensure that we.
We set them up for success long term and we can get back to growth as we had seen in 2018 in 2019. Thanks again for the question.
This concludes our question and answer session.
I'd like to turn the conference back over to chip Jose sell for any closing remarks.
Hi, everyone. The Gulf is 19 pandemic as I've mentioned as an introduced a host of challenges, but the improvement in our results speaks to the strength and resilience of our incredible brands and our business model. It also reflects our proactive in coordinated approach to confronting this crisis, which has put us in a strong position going into the back half of this year.
Sure both to keep advancing in a reopening around the world and to restart our engine for system wide sales growth looking ahead to 2021. Thank you again for your time today take care and stay safe.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.