Q3 2020 Restaurant Brands International Inc Earnings Call
Good morning, and welcome to the restaurant brands International third quarter 2020, <unk> earnings Conference call.
All participants will be in listen only mode.
Would you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
You ask a question you May press Star then one on your telephone keypad you.
You will hear a tone to confirm that you are in the queue.
Just a question queue you May press Star then two.
All callers will be limited to one question.
Please note this event is being recorded.
I would now like to turn the conference over to Chris Bottiglieri, RB <unk> head of Investor Relations. Please go ahead.
Thank you operator.
Good morning, everyone and welcome to restaurant brands International earnings call for the third quarter ended September Thirtyth 2020, as a reminder, a live broadcast of this call maybe accessed through the Investor Relations Web page at Investor Dot <unk> Dot com and a recording will be available for replay.
Joining me on the call today are restaurant brands Internationals, CEO Jose sell COO, Josh comps out 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 right.
Reconciliations of non-GAAP financial measures are included in the press release available on our website.
Let's quickly review the agenda for today's call.
Jose will start with some opening remarks, our performance during Q3 and our ongoing recovery from the COVID-19 pandemic before providing additional detail around our performance at Tim Hortons Burger King and Popeye's.
Josh will then provide an update on technology at our <unk> and to conclude Matt will review our financial results before opening the call up for <unk>.
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 for the third quarter of 2020, I hope, everyone is doing well and staying safe.
Since the onset of the COVID-19 pandemic in March we've mobilized behind a clear set of priorities to confront the crisis in our considerable progress behind these objectives over the past seven months has helped drive a significant recovery across our business.
The recovery, we've seen since March highlights the resilience of our three iconic brands and our network of strong and well capitalized partners around the world.
It's also a testament to the incredibly hard work of our restaurant team members franchisees and employees to reopen or restaurants and continue serving our guests through this difficult time.
In the third quarter, our continued recovery reflects the strength of our platform and positioning and we shared some of the key details around our performance in the pre release, we issued ahead of a refinancing earlier this month.
Through September Weve reopened nearly 6000 restaurants globally since the peak of the crisis and as of the end of Q3, okay.
Over 96% of our locations are opened worldwide.
As of September substantially all of our restaurants are now open in North America, APAC, and EMEA and approximately 92% or open in Latin America.
In our international markets, where approximately 50% of our restaurants were closed at the peak of the crisis, we've seen a significant improvement in sales as markets have reopened.
At Burger King, which represents about 85% of our international restaurant footprint comparable sales outside the U.S. improved from negative 18% in Q2 to negative 10% in Q3 with September comparable sales improving into the negative mid single digits.
Given our steady progress on reopening and the recovery in sales we've seen across regions in Q3, we generated over 94% of prior year consolidated system wide sales a significant sequential improvement versus the second quarter.
As we noted in Q2, the strength of our off premise channels, particularly in our home markets has been an important differentiator for our systems and a key component in a recovery.
After a strong performance in Q2 comparable drive through sales were again up in the double digits from last year across brands in the U.S. in Canada.
Total delivery sales were up well into the triple digits across our systems.
Given the momentum Weve seen in off premise, we're excited to have ramped up our work to revolutionize or drive thru experience with the installation of outdoor digital menu board technology at over 10000 drive throughs in the U.S. and Canada, the bulk of which we expect to complete by the end of next year.
We provided some exciting details around the program in a separate release this morning, which Josh will take you through a little later in the call today.
While we made considerable progress during the third quarter. Our performance also reflected a certain more challenging impacts of the pandemic on consumer behavior.
Routines remain on hold for a significant percentage of people as many offices schools and other establishment remain closed.
Millions of people are still working from home and the recent spike in cases in different parts of the world has caused some localities to reinstate certain restrictions, including the closure of dining rooms in some cases.
Our guest are still grappling with considerable uncertainty around the evolution of the pandemic and associated response measures as well as the implications for the economy and availability of stimulus and other resources.
For our brands, the resulting impact to consumption patterns has caused some variability in the pace of recovery across regions and dayparts.
And we remain vigilant as we continue to serve our guests and respond to their evolving needs.
Despite these near term challenges were confident in the long term positioning of our brands as we look ahead.
Our three systems are in great shape as franchisee profitability has recovered significantly across regions, particularly in our home markets and were aligned with our partners on the path to return to growth.
On the development front were similarly focused on positioning our systems for long term growth.
We are proceeding as planned with the portfolio optimization, we noted in Q2, which will replace older underperforming restaurants with new modern ones in great locations, and we believe will enhance the image and health of our brands across markets.
On average the stores, we're closing generate revenue, 30% lower than the average in the regions. So we expect to closures will have a relatively small near term impact on our store count and an even smaller impact on system wide sales.
We expect the replacements will drive a meaningful topline uplift and benefit the franchisee profitability and support attractive returns for both our partners and for us over a multiyear period. We also believe this initiative will provide our partners with greater flexibility to capitalize on the opportunities we see amidst the dislocation caused by that pandemic, while this optimization.
And will result in more closures than we'd see in a typical year and the pandemic has delayed some of our openings timelines. We still expect to end 2020 with a similar number of restaurants relative to where we ended 2019 and.
And looking ahead to 2021, we've been working closely with each of our partners to build strong pipelines for next year. We're confident that we will return to strong net unit growth in 2021, as we advance towards the goal we shared last year to reach 40000 restaurants worldwide.
From early on in this crisis, we made a deliberate decision to continue investing behind the long term initiatives, we outlined earlier in the year. We've made considerable progress and believe we are setting a strong foundation to build on as we emerge from the crisis. This includes our commitment to making our food and operations more sustainable and ensuring that we attract and retain great talent with a rich diversity of perspectives.
Earlier this year, we announced a restaurant brands for good framework and published a number of major initiatives on our web site.
But I'd like to point to just a few important developments from this last quarter.
First with regards to our food we've made important progress in upgrading our core products with real ingredients. In Q3. This includes our flagship product at Burger King the whopper as well as our English muffins and biscuits, the Tim Hortons, which are now free of all colors flavors and preservatives from artificial sources. We also launched our innovative cows many of.
Burger King, where we partnered with scientists to reduce the methane produced by cows that we use in our iconic 100% beef burgers.
Second on packaging, Tim Hortons has announced a number of adjustments that will result in environmental improvements to more than 3 billion pieces of packaging and year.
As well as the removal of more than 1 billion single use plastics in Canada alone and the Economization of about 200 million cups per year by eliminating double coming.
Finally on the people side, we made substantial progress in our commitment to building a diverse and inclusive team at RBC, which we're confident will enable us to build an incredibly talented team and make the best decisions for our business over the long run.
This is anchored by a commitment that at least half of all final round candidates interviewing for roles that RV I will be from groups that are diverse and in reviewing the new hires we've made since this commitment we're proud to have higher diverse candidates for more than 50% of all open positions.
We made a number of other commitments around diversity and inclusion that were accountable for all of which can be reviewed on our web site.
I will now take you through a bit more detail on our results by brand before handing things over to Josh for an update on our progress in digital.
At Tim Hortons in Q3, our system wide sales decreased approximately 14% to $1.5 billion driven by decrease in global comparable sales of approximately 12%, which was partially offset by net restaurant growth of 1%.
At the beginning of this year, we shared our plans to reinforce tim's positioning across Canada by enhancing the quality of our core platforms, focusing innovation on high impact products and investing to modernize our system by leveraging technology.
Since January we've added a number of professionals across key roles with deep experience in the Canadian QSR market and we're confident we're executing in the areas most critical to our long term success.
In Q3, our team continued to make substantial progress behind our strategy, which we believe will drive strong growth over the long term.
For example, we push forward with the rollout of fresh Brewers and water filtration systems and as of the end of September we've installed them at about 90% of locations across Canada. Since the start of the year, we've seen a substantial improvement in product satisfaction scores nationally and an increase in our already significant market share leadership in coffee.
We've also completed market test for the relaunch of our dark roast blend, which will roll out across Canada in early 2021, and will reinforce the depth and quality of our most important platform.
In addition, as mentioned earlier, we're excited to have restarted the installation of outdoor digital menu boards in our drive throughs across the U.S. in Canada and while it's still early we're encouraged by the sales impact we've seen at the nearly 800 locations we've upgraded so far.
Our network of drive throughs is by far the largest in Canada and has been a particularly important differentiator since the onset of the pandemic and as a result, we believe this investment will have an especially pronounced impact.
We expect to have upgraded all of our Tim Hortons drive throughs in the U.S. and a little less than half of our 2700 drivers in Canada by the end of this year and upgrade the remaining Canadian locations in 2021.
We've also made important strides in digital at Tims during Q3, especially through our Tim's rewards program.
Over the course of the quarter, we continued to ramp up our personalized offers and CRM capabilities and though we're still in the early days. Our targeted offers contributed approximately 1% to comparable sales for Q3 were pleased that the investment we've made to scale. The program over the last 18 months has started to bear fruit and believe that Tim's rewards will be a powerful tool to engage with our guests.
Particularly as they reestablish their routines.
We're confident that our progress behind these core initiatives will put teams on a path to strong long term growth in Canada as we emerge from the pandemic.
As I mentioned earlier, however in Q3, the pandemic continued to have a substantial impact on activity levels in Canada that resulted in an uneven pace of recovery in sales at tims.
In Canada comparable sales declined 14% for the quarter driven by a continuation of the trends we noted during our remarks for Q2.
The spread of COVID-19, and resulting stayed home orders have had an especially significant effect on high frequency routine based visits in the morning, which are particularly important part of our business in Canada, given our high rate of visitation.
This is especially true in large metro areas like Toronto that have large commuter populations.
Since the beginning of the crisis, many Canadians a pause or normal commuting routines using.
Using third party mobility data, we saw transit activity fall by as much as 80% in March and April and it was still down by about 50% in July.
It's worth noting that transit mobility data did show incremental improvement in August and into the beginning of September which we believe contributed to a slight sequential improvement in comparable sales in each month.
In the back half of September the increase in cases of COVID-19, and reinstatement of restrictions in different parts of Canada had a negative impact on mobility.
As cases have continued to increase municipal governments have re imposed restrictions, including a mandate to once again temporarily close dining rooms in Ontario in early October.
As a result environment in Canada remains challenging.
In this context, we rolled out a number of proactive measures to drive sales and less effective day parts at lunch time and in the afternoon.
We brought back or popular Oreo Iced Capp, which helped drive positive growth in our cold beverage lineup in August and September and saw strong positive reaction to our new crispy chicken and roast beef craveable Sandwich line.
While shorter term in nature. Both of these products are high quality and offer compelling everyday value characteristics that tied directly into our longer term positioning.
Despite the near term challenges stemming from the pandemic, we continue to execute on our strategy for long term growth, we've made significant and steady progress through the first three quarters of this year and believe we're taking the right steps to emerge even stronger on the other side of the crisis.
Even considering the recent spike in cases, we believe our system is well positioned given the strength of our off premise platform and the unique position our brand holds with millions of Canadians.
From a franchisee perspective restaurant level profitability has improved in every month since March and the vast majority of our franchisees exited Q3 with healthy balance sheets.
It's important to note that prior to the pandemic or restaurants started from a strong sales base.
And as our system has recovered unit economics continue to be strong and nearly all of our franchisees are well capitalized.
We've maintained frequent communication with our system and work closely with our advisory Board and are thankful to have a strong relationship with our franchisees who share our confidence in the long term vision.
Turning to Burger King in Q3, our system wide sales decreased approximately 8% to $5.5 billion driven by a decrease in global comparable sales of 7% and temporary closures in our international markets, which were partially offset by net restaurant growth of approximately 2.5%.
In the U.S., we continue to proactively confront the challenges posed by the pandemic, while also working to position our more than 7200 restaurants for long term growth.
Especially in light of the disruption caused by the crisis. We believe it's critical to reinforce the foundational elements of the Burger King brand and product offering.
Since the beginning of the year, we have done a great deal of research to identify what's most important to our guests and have built those preferences into our long term strategy to drive growth through our core platforms.
In particular, it's clear that quality is a key point of focus for our guests.
Our reputation for flame grilling naturally aligns with our guest expectations around quality that we've identified a number of other important ways to enhance our offerings.
As I mentioned earlier in Q3, we moved to reinforce the quality perception of our flagship product with a whopper now free from colors flavors and preservatives from artificial sources.
At the same time, we updated our branding and packaging to showcase our use of real ingredients.
We have a number of other upgrades that we'll be launching across day parts in the coming quarters, all of which will be focused on reinforcing our core platforms to drive sales over the long term.
In addition to quality values another important point of focus for our guests.
In recent quarters, we've seen success with limited time offers like our dollar nuggets or five for four and our two for five deals and we sharpened our focus on the value for money equation as we move into 2021.
As with our initiatives around quality, we're approaching value with a long term mindset. The supplements are strong promotions with compelling everyday value.
Finally, we continued to make progress in modernizing the Burger King system.
Particularly in our off premise channels given the growth we've seen in the wake of the pandemic.
The system has now installed outdoor digital menu boards and over 1500 of our Burger King drive throughs, and we expect to complete upgrades across 75% of our system between this year and next before installing the remaining 25% in 2022.
Josh will provide more details in a few minutes, but we believe this technology will be an incredibly valuable tool to improve guest experience and drive sales in our largest channel.
While we made substantial progress behind these long term initiatives in Q3, we saw mixed pace of recovery across different parts of our business as the pandemic continued to have a pronounced impact on consumer behavior.
This dynamic continue through September when our comparable sales were slightly better than our average for the quarter.
In Q3 breakfast and late night were comparatively slower to recover while encouragingly, our core lunch and dinner dayparts recovered more quickly.
In breakfast the pandemic disruption to morning routines and mobility has contributed to our softer performance in the morning Daypart.
That said there are also clear areas for improvement in our breakfast offering at Burger King that we will actively addressed during the first part of 2021 as an important part of the initiatives I outlined earlier.
In late night or slower recovery is largely attributable to the limitations to nightlife activity, we saw over the summer, although our strong growth in delivery in Q3 helped offset some of this impact.
As I mentioned, our core lunch and dinner Dayparts have recovered at a faster pace with Q3 comparable sales back to about flat year over year.
Off premise has been an important contributor to this recovery with comparable drive through sales up 28% and total delivery sales up over a 100% versus Q3 of last year.
Weve also now rolled out delivery to over 90% of eligible Burger King locations in the U.S. and have over 6200 stores offering the service most of which offer delivery via multiple aggregators as well as our own mobile app during the quarter. Our two for five offer it was a meaningful contributor to lunch and dinner and the impossible Whopper continued to perform as well as we lap.
Its successful launch during August of last year.
With regard to innovation, we didn't launch any new products in Q3, as we focused on simplifying our menu and highlighting our quality upgrade to the whopper.
Innovation remains a critical part of our strategy going forward, our upcoming launches will link into our long term focus on enhancing our flagship platforms.
In Q3, our focused approach had the added benefit of allowing our franchisees to concentrate on the health of our team members and guests as well as restaurant operations and profitability, which has made a strong recovery and is substantially positive for the vast majority of franchisees.
Despite the recent spike in COVID-19 cases across certain markets. We believe our system is well capitalized and strongly positioned to continue pushing through the crisis and emerge with all the building blocks necessary to drive sustained long term growth.
In our international markets system wide sales decreased 12% to nearly $2.9 billion driven by a decrease in comparable sales of 10%.
Temporary closures, partially offset by net restaurant growth of nearly 5%.
As I mentioned at the top of the call. This represents a significant improvement versus the second quarter when system wide sales decreased 38%.
Since Q2, we've worked with our partners to reopen almost 5000 Burger King restaurants that had been temporarily closed and as of the end of September approximately 95% of our international Burger King locations are now open versus about half at the beginning of Q2.
We've also seen a substantial improvement in sales across many of our largest markets. Both for Q3 as a whole and sequentially over the course of the quarter.
For example, Burger King, Germany, France, and Russia, all had comparable sales and a negative single digits for Q3.
And improved to approximately flat year over year in September.
The recovery, we've seen across many of our global markets as demonstrated the resilience of the Burger King brand internationally and reinforced the position of our master franchisees.
We've been actively engaged with each of our partners to finalize plans for 2021 and they share our excitement around the brand and emerging opportunities for growth.
In Q4, we remain focused on continuing to proactively confront the pandemic as case counts have risen, but the encouraging pace of reopening we saw over the summer coupled with our strong off premise capabilities and network of well capitalized partners gives us confidence in the positioning of our international business as we close out the year and look ahead to 2021.
Finally at Popeyes system wide sales increased over 21% to over $1.3 billion driven by over 17% growth in global comparable sales and unit growth of over 7%, partially offset by temporary closures in our international markets.
Sales growth was especially strong in the U.S., where comparable sales rose almost 20% for the quarter.
And rose at a similar rate in September.
This result comes on top of 10% comparable sales growth during the third quarter of 2019, which is when we initially launched the chicken sandwich in August.
Millions of people have been coming back for the chicken sandwich, but it's been really exciting to still see a significant number of first time purchasers in Q3.
And while the chicken sandwich continues to be the largest single driver of sales growth during the quarter. We saw substantial growth across all categories. For instance, we saw a double digit sales increase in the family occasion, this quarter and continued to see a great deal of potential you'll recall that we relaunched the chicken sandwich on a permanent basis in November of last year, and we're excited as we head into the second year.
What has become an iconic product for the brand the topline momentum at Popeye's between 2019, and 2020 has propelled average restaurant sales at freestanding and inline locations to over $1.8 million on a last 12 month basis and augmented popeye's already incredibly strong unit economics as we mentioned in the past the number one reason for not.
Visitation continues to be the lack of a nearby location.
Taken together these two data points have created a tremendous amount of appetite for new development and we've been building a strong pipeline of restaurants with an outstanding set of partners.
While the pandemic has disrupted construction and permitting timelines. This year were nonetheless, making progress on our goal to transform popeyes into a mainstream national brand in the U.S. and around the world.
Our over 7% net unit growth this quarter represents a substantial acceleration versus the approximately 5.5% net unit growth. We delivered in Q3 2019, and we're confident that popeye's is just getting started.
We see a long runway for growth internationally as well and continued to see very positive result for popeye's in China.
We've generated a very healthy level of sales and profitability at the stores. We've opened to date and we believe there is considerable white space all over the globe that will fuel growth for years to come with that I'd like to hand, it over to Josh. So he can walk us through the technology update Josh. Thanks.
Thanks, Jose and good morning, everyone.
This quarter, we continued to make important advances in building out our digital capabilities and deploying them across brands.
With many elements of our technology infrastructure now in place and fully integrated.
We've increased our focus on improving and personalizing, our interactions with our guests through our digital platforms.
We believe this type of tailored interaction will be an increasingly important differentiator as digital adoption continues to increase over time.
One key example of our efforts around personalization ties into our initiative to upgrade our drive throughs with the installation of outdoor digital menu boards.
These updated menu boards offer a variety of advantages versus the legacy paper based menu boards.
Key among them is the ability to adjust displays in real time to account for anything from weather patterns to the basket of items I guess, just starting to build wall ordering.
As Jose mentioned earlier Weve now installed outdoor digital menu boards in over 800, Tim Hortons drive throughs across the U.S. in Canada.
We've also installed them in over 1500, Burger King drive throughs across the U.S.
Where in Q3, we started to rollout our predictive selling technology designed by our guest intelligence team, though it's still early days, we're really encouraged by the increases to check and overall sales we've seen at both brands.
In addition to personalization and digital menu boards were installing also have the functionality to add remote contactless payment to allow guest to both order and pay at the menu board and speed up our drive through lanes.
We're about to go into field testing with one of our longstanding payment providers.
We've also designed the menu boards to be easily modified to integrate loyalty scanning at the menu board to simplify operations at the pickup window and improve speed of service.
We're really excited about the potential this technology upgrade has to transform our guest experience and our most important channel and feel that there is no better time than now to make the significant investment.
At Tim's and Burger King, we expect to install about 40000 screens and over 10000 drive throughs in the U.S. and Canada. The considerable majority of which we expect will be completed by the end of next year.
Another key example of our progress on personalization in the third quarter is our Tim's rewards program.
As Jose mentioned, we are now pushing out personalize offers at scale and we're really encouraged by the level of engagement we've seen.
These offers have had an increasingly positive impact and added approximately 1% to our comparable sales for the third quarter.
As we've ramped up our tailored offers increasing digital registration remains a key priority. So that we can actively engaged with our guests and maximize access to personalized rewards.
We've already made significant progress on this front in late September.
We announced some important changes that we expect will further boost registration.
With these changes which will go into effect. This week, we expect to convert to an all registered program throughout the fourth quarter.
The head of the shift we've rolled out additional signage and provided special training to our team members in store to highlight the benefits of registration and make the process simple and easy.
We also recently activated delivery directly through the tims mobile app, giving guests another compelling reason to join our integrated platform.
We're confident that the personalized offers and other features available via the registration led significant value for our guests overtime and were excited about this important transition.
Overall, we saw significant growth across our digital channels in the third quarter continuing the trend we've seen since the onset of the pandemic.
On a year over year basis digital sales in our home markets grew more than 100%.
Well on a quarter over quarter basis, they grew well into the double digits.
In Q3 digital sales in the U.S. represented 8% of total sales at Burger King and 15% of total sales of pop us.
And at Tim Hortons in Canada digital sales represented 20% of total sales during the quarter.
I'll now turn things over to Matt to provide additional detail around our financial results.
Thanks, Josh and good morning, everyone.
Our results for the third quarter reflect a continued recovery across our business.
Consolidated system wide sales were approximately $8.3 billion, representing a 5% decrease year over year, but at nearly 30% sequential increase versus the second quarter.
In the third quarter consolidated adjusted EBITDA was $561 million, representing a nearly 6% decrease on an organic basis year over year, but an increase of over 55% versus the second quarter.
In addition, our adjusted EBITDA growth was approximately in line with our system wide sales growth in the third quarter.
We did see a continued impact to adjusted EBITDA growth from our AD funds in Q3, although we saw a reversion of the trend we've called out in recent quarters.
In Q3 growth in AD fund revenues exceeded growth in expenses by nearly $14 million.
Resulting in an impact of approximately positive 2% on our consolidated organic adjusted EBITDA growth rate.
Offsetting this impact was the shift we saw in sales mix across brands right.
Reflecting a relatively greater decline in sales at Tims, where in addition to franchise royalties. We also generate EBITDA from property and supply chain activities.
Moving on to segment level performance at Tim Hortons, our third quarter, adjusted EBITDA was $258 billion, which represents a decrease of approximately 13% on an organic basis.
This decrease was driven primarily by an approximately 14% decrease in system wide sales, which included approximately 12% decrease in global comparable sales that was partially offset by global net restaurant growth of 1%.
The year over year decrease in adjusted EBITDA Tim's also reflected the decrease in supply chain sales, which was driven by the decline in restaurant traffic and volumes, we experienced during the quarter in Canada.
The rent relief, we provided to Tim Hortons restaurant owners in Canada has continued to diminish and impacted our growth rate at tims by just negative 1% in the third quarter.
And finally, approximately half of the AD fund related positive impact to consolidated adjusted EBITDA was attributable to Tim Hortons and increased our Tim Hortons adjusted EBITDA growth by approximately 2%.
At Burger King third quarter, adjusted EBITDA was $245 million representing year over year organic decrease of approximately 2% drift.
Driven primarily by a decrease of nearly 8% and system wide sales.
The change in system wide sales reflected a decrease in global comparable sales of 7% as well as the temporary closure of some of our restaurants due to the Cove in 19 pandemic, which were partially offset by global net restaurant growth of over 2%.
Our adjusted EBITDA growth. This quarter also reflected a decrease in Jena expenses at Burger King Prime.
Primarily from temporarily reduce travel in certain fees, which increased our burger king adjusted EBITDA growth rate by approximately 2%.
In addition, approximately half of the AD fund related positive impact to consolidated adjusted EBITDA was attributable to Burger King and increased our adjusted EBITDA growth rate for the brand by approximately 3%.
Popeye's in the third quarter, adjusted EBITDA was $58 million up over 24% organically year over year. This.
This increase was driven by strong system wide sales growth of approximately 21%.
Continuing the brand's strong momentum from last year, and driven by global comparable sales growth of over 17% and net restaurant growth of over 7%.
This growth was slightly offset by some temporary closures due to the COVID-19 pandemic.
On a consolidated basis, our third quarter adjusted net income was $320 million, which compares to third quarter 2019, adjusted net income of $337 million.
The year over year decrease was attributable to the decrease in adjusted EBITDA and unfavorable exchange rate movements, which were partially offset by lower interest expense, resulting from our refinancing activities in the second half of last year as well as a slightly lower adjusted effective tax rate.
Adjusted diluted EPS for the third quarter was 68 cents compared to 72 cents in the prior year, representing a nominal decrease of approximately 5%.
Included in this decrease as the 6 million dollar headwind from unfavorable foreign exchange movements apps.
Absent this organic EPS growth rate would have been approximately negative 4%.
Our third quarter 2020, adjusted effective income tax rate was again, just under 18%, reflecting the larger relative decline in income we've experienced that 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 our mix of income continues to evolve.
Yeah.
Turning now to our cash flow and capital allocation. During Q3, we continued to see a significant stabilization across our business our strong balance sheet and high degree of cash flow conversion have allowed us to maintain a proactive approach to confronting the pandemic and provides us with valuable flexibility as we navigate through this to the other side of the crisis.
Despite the ongoing impact of COVID-19, we generated $380 million of free cash flow in Q3.
Related as the sum of operating cash flows less capex, which we believe further highlights the resilience of our business model.
Given the timing of disbursements between Q2 in Q3, we paid two quarters worth of common dividends and partnership exchangeable unit distributions in Q2 and May no dividend payments or distribution this quarter.
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 RP LP payable on January five 2021.
The flexibility our balance sheet affords US has also allowed us to be opportunistic in terms of capital allocation.
As we've noted in the past when holders of our exchangeable units elect to convert we can choose to exchange those units for cash from the company or for common shares instead.
In September we took advantage of one such conversion and exchanged approximately 6.8 million units for $380 million in cash and canceled all of those units. Following the completion of the exchange in early October.
Given the strength of our long term prospects and resilience of our business model. We believe this transaction represented a compelling use of capital while also maintaining complete flexibility and optionality as we continue to invest in the business and drive meaningful long term value creation for shareholders.
On the investment front as we mentioned we moved forward with several strategic initiatives in Q3, including the installation of outdoor digital menu boards that are Tim Hortons and Burger King locations in our home markets.
We believe this investment will meaningfully enhance our drive thru experience at a critical time and solidify a key point of differentiation for our brands.
In Q3, we also continued to make progress on our project to expand our distribution centers in Canada with.
With facilities in Calgary, Alberta, and divert Nova Scotia fully operational as of this summer and the third facility in British Columbia ramping up now.
So far the transitions to the new facilities have been seamless and the reaction from our franchisees has been very positive.
We're on track to complete the project by the end of this year and are encouraged by the improvements to efficiency and service levels Weve seen thus far.
As of September Thirtyth 2020, our total debt outstanding was $12.9 billion, our net debt calculated as total debt less cash and cash equivalents of $1.9 billion was $10.9 billion and our net debt to adjusted EBITDA leverage ratio was 5.5 times.
Following quarter end, we took advantage of favorable market conditions to refinance all $2.8 billion of our 5% second lien notes due 2025 with new 4% second lien notes due 2030.
Meaningfully, reducing our annual cost and moving our maturity profile out an additional five years.
Also as announced last week, we are redeeming $725 million of our 4.25% first lien notes due 2024.
With new 3.5% first lien notes due 2029.
We are pleased that through these three transactions, we are extending maturities on over $3.5 billion of our capital structure by approximately five years and have locked in historically low rates to generate go forward interest savings of nearly $30 million.
As we move towards the end of the year, we remain in a strong financial position with meaningful flexibility to navigate through a wide range of scenarios we.
We believe we have the right strategy and all the resources to pursue opportunities for growth together with our partners as we look ahead to 2021.
With that I'd like to thank everyone for joining us on the call. This morning and for all your support we'll now open the line 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.
If you are using a speakerphone please pick up your handset before pressing the keys.
You withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Nicole Miller of Piper Sandler. Please go ahead.
Good morning, and thank you for the update.
In terms of franchisee cash flow I'm wondering what level of comp makes them whole either on a year over year basis or maybe what the prior plan was pre pandemic. If you could just compare and contrast, what might be struggling margin our labor benefits. Some thinking it's less comp than we might think it could even be a negative comp.
And then you have a very committed pipeline for development.
You think about that playing out what is likely to happen first to return to 5% plus global BK growth or a possible acceleration for popeyes into the double digit range. Thanks.
And Nicole Thanks for the question it's amount here I think on the first part here in terms of your question around franchisee profitability and cash flow I.
I think it's really.
I think it's really both sides.
We've seen.
Yes, good recovery in sales from the lows at the peak of the crisis.
But that's also been combined with some really strong operational adaptation by our franchisees.
Plus the work that we've done.
Together with our franchisees and some of the support programs that were put in place.
In the early days and I think you know where we see ourselves now is weve gotten back to you a pretty healthy.
Chris restaurant sales across our brands with with strong unit economics.
Then on top of this there's been some cashless savings as we mentioned earlier in the year.
Some of the capital projects were paused and so there's been some cash flow savings. There. So I think overall, we're pretty confident our franchisees will well end the year in a strong position to return back to growth and enter in a pretty healthy position as it relates to profitability.
As well as cash flow.
And then I think you know in terms of your second question on development you know we've been working.
Hand in hand, with our partners as we mentioned last quarter.
To build strong pipelines of growth for next year I think we've we've made good progress shoring up shoring up capital and making plans and budgeting for growth with our partners and they are very eager as we are to return to growth as part of the.
The expansion of their business and their value creation as we head into next year and we feel very confident that we have the right partners that will have access to capital as we move forward.
To move back to our.
Our pace of growth in our goal of getting to 40000 restaurants over the next eight to 10 years.
Thanks for the question.
Our next question comes from John Glass of Morgan Stanley. Please go ahead.
Thanks, and good morning, first I had just a clarification then a question clarification Jose is I think you gave some color on September for some of the brands, but could you just be clear what maybe the exit rate was for the Burger King Us business.
And the kids, Canada business, if there's any way you want to kind of color. What you think September October looks like.
And then the question.
Is how do you how is the menu board installations funded is that to the franchisees is it through the AD fund is it through the queries or corporate contribution whats the cost and how is that blended for those those menu board installations.
Hey, John Thanks for the question.
I'll start with the with the SEC.
Second question on on many board installation. So you want to touch on that briefly yes, sure John too on the menu boards as we mentioned we have a really big push in what we think is a critical and important strategic project for.
For both BK intense with some big goals here I think we are already well underway as we talked about earlier this year in rolling out our own dnbi is across the Tim system.
You know we are we're at about 800, you know we have a few hundred more to go this year and we think we'll complete the.
The system.
Sometime next year.
Talked about that being about a 120 million CAD investment.
Asked which has been funded through through the AD fund and access that they have in terms of liquidity.
From the float of gift card cash that exists there.
And then you know on the BK side I think we're also moving pretty quickly here and very excited about.
Rolling out Oh Dnbi is across the system, we have been making good progress I think you know Josh touched on that in the prepared remarks.
We've we've had good alignment with our partners around.
In this case and the opportunity is rolling out OTI MBS and they're excited about the project.
And aligned with the timeline.
I think in terms of funding for those where we're involved in the property, which is a little bit more limited in the U.S. just contributions that we would make.
But by and large I think it's it's a rollout plan that that our partners at BK are aligned with an excited about rolling out.
Thanks, Matt and John on the first question.
As I discussed in my prepared remarks.
We saw strong quarter over quarter recovery for Tims in Canada from a low of about minus 30% in Q2 and same store sales to about 14% negative in Q3.
We saw it in Q3, the continuation of the factors. We noted in Q2, obviously breakfast being the most impacted and that being an important high frequency routine based visit for the Tim's business.
We saw that continue to be an impact in the third quarter.
Mobility in transit channels in Canada continued to be impacted it was down about 80% in March April and improved to about negative 50% in July we saw sequential improvement in mobility and kind of hence as a result, partly improvements in same store sales in Q2 in Q3.
Three each month of Q3, but that.
That changed a bit towards the end of September.
We've seen that we've mentioned you know restrictions coming back and in Ontario, and Quebec, as well and closure of dining rooms in several provinces in the country.
On the positive side, we saw continued improvement off premise with drive through and into our digital business continuing to grow so as we as we headed out of September the situation is.
It is currently still quite.
Right.
Dynamic and we're working very closely with our franchisees and our partners.
In in Canada to ensure we continue to focus on the things that we believe.
Or having an impact with the guest experience safety protocols.
Looking at our quality products, including coffee in the in and some of the other breakfast items that we've touched on as well as investing in technology.
Through the drive throughs as well as our loyalty program it with Burger King and it was relatively consistent throughout the quarter, we had the strong lap versus impossible in August but we saw.
The business roughly in line throughout the quarter. Thanks for the question.
Our next question comes from Mark Petri see Ibcs. Please go ahead.
Hi, Good morning, I wanted to follow up on the topic of net restaurant growth and obviously, there's lots of moving parts an unknown factors, but two things I guess do you expect closures are largely captured in 2020.
Or do you think some of that still beyond sort of typical run rate would spill into 2021 and also in 2021 do you expect you're going to be able to get back to sort of the previous expectations on opening pace or should we think of that.
Think of it as more of a transition year and how might that vary in each branch home market versus international thanks.
Yeah, Mark Thanks for thanks for the question I think it was it was we talked about this year was heavily impacted by Cove. It obviously and we had a capex POZEN and as part of that we really wanted to focus with our partners on optimizing the portfolios and setting ourselves and our partners up.
The best base to grow from as we move forward and get back to development.
And then as I mentioned before.
I think we're making good progress we think about development really over a multiyear period.
And we've been really focused here over the last few months on capital reinforcement and balance sheet management with our partners as we go through 21 planning and development and at the same time, you know look to optimize those portfolios as we talked about you know as part of that as we think about closing out. This year. We mentioned, we sort of what we expect to be roughly.
Lee around the same restaurant count to end this year as last year.
And then moving forward into into next year, we think we're moving in the right direction with strong partners, who are eager to lock in capitalization and eager to grow again.
And we think about that over a multiyear time period, and we feel very confident that we are we will have a path with our partners and the line of sight that we see in the <unk> and the growth opportunities in our big markets are big priority markets around the world.
That will be able to get back to strong growth and move toward that 40000.
Restaurant goal that we.
That we set out for ourselves and get back on track there.
Thanks for the question.
Our next question comes from Dennis Geiger of EUV, Yes. Please go ahead.
Good morning, Thank you okay. Thanks.
Thanks for the commentary on the important strategic plan to drive further improvement from here just wondering if it's possible to talk a bit more about that recovery and if you're kind of able to isolate the cobot impact to some extent and talk about how the brand is positioned now relative to the beginning of the year I'm not sure. If it's some of the customer satisfaction.
She metrics that you mentioned orbitz performance at some of the stores that are in less restrictive regions right now and how they're looking but just kind of what all that means for for the recovery from here, obviously, it's tough with mobility and restrictions I assume but just given all the initiatives you have it if you can kind of give some some high level comments around where the brand is from.
Where it from where it was and what that means for the recovery maybe into next year. Thank you.
Hey, Thanks for the question Dennis Yes look I.
Touched on and quite a bit of detail. Our Q3 performance I think despite some of the near term challenges, we're making significant progress behind the long term initiatives that we laid out at the beginning of the year.
As you'll recall that the three areas, we talked about and are focusing on quite intensely our quality of our core platforms modernizing.
Modernization of the brand.
Technology at the drive thru as well as through our loyalty program and then innovation in high impact products and platforms that support the core and so we've made a lot of progress on these initiatives over the last seven months.
First in terms of the quality initiatives fresh.
Fresh Brewers in water filtration as I mentioned in our comments.
We're about 90% installed and we've seen good progress on on guest feedback from that so we measure product satisfaction through.
Third party program and we've seen really good progress on product satisfaction.
On brewed coffee over over the last seven months since the beginning of the year.
We've seen improvements as well in market share on on brewed coffee and other specialty items as well so there's there's been good.
Good data points to suggest that we're making progress and the things that we felt were important and we prioritize and the quality side with fresh Brewers and water filtration on our core platform. We're also as I mentioned excited about launching dark roast at the beginning of the year, which we think will.
It will be an important platform to continue to highlight the quality aspects of our of our core platform in terms of modernization of the of the experience in the restaurants mentioned the Odeon be rollout were were about 800 locations. So far.
And we have a path to to install about half the system by the end of the year and then continue into 2021.
Encouraging impact so far in terms of results, but it's early days.
And we're excited about about what that can do for our business given the strength of off premise and directed in particular, we have by far the largest network of drive thru locations in Canada.
Have any QSR and so we're really doubling down on the importance of that business and that channel for the long term and our owners are really excited about that.
And then as it relates to Tim's rewards we've seen improvements in.
Terms of registered guests, we talked about that before that Weve gone from about a quarter of.
The transactions being which registered users to nearly half.
And that continues to allow us to scale up our personalized one on one offers which we've seen add about a point in same store sales.
So far and it's just early days. So we're excited about that and finally as it relates to innovation in some of our.
And some of our other four platforms, we've seen progress in terms of cold beverages with Oreo Iced capp during the.
For the quarter, we also launched roast beef and crispy chicken sandwich craveable is for the lunch, daypart, which really resonated well and address an opportunity that we see over the long term and building out our lunch.
At lunch and late night dinner day part so we.
We feel really good about the initiatives, we're working on to the right ones. Their core the basics of this business that have made Tim the famous brand in a dominant brand that it is in Canada, and we're going to continue to work with our owners in Canada to execute well on these on these priorities. Thanks for the question.
Our next question comes from Sara Senatore Bernstein. Please go ahead.
Great. Thank you very much.
Also a question on Canada.
You did talk a lot about that then mobility I guess.
It's sort of two part question. One is is there any random aircraft longer term implications in terms of work from home that kind of thing yes. That's the category that seems the most likely to have.
Charles structural change if there is one inch and on now.
Secondary to that are there do you contemplate things that you could do to mitigate the exposure as Matt pointed out yes, EBITDAX pleasure is a lot higher than some might say also yeah, whether it's the real estate where they.
Okay.
Yes, Lisa.
Value and then return cash to shareholders, which I think is something that a lot of your shareholders like what appetite.
[laughter].
Hey, Thanks for that question there Sara I think the dog had a question as well.
At any hour.
I'll touch on the first point and and Matt maybe you can you can touch on the second point I think as it relates to two mobility in Canada, It's really it's hard to predominant but im not in the business of predicting and projecting so.
Hard to tell how this is going to evolve in the in the coming quarters our focus.
Has been on on ensuring in the in the immediate term ensuring that we deliver our great products or coffee in our baked goods and doughnuts and other products safely and we're working very closely with our owners to ensure we do that consistently across the country and I'm really proud of the work that our franchisees are owners have done.
Executed and done over the last seven eight months as well as our teams. So it's so on that front, we're very focused and continue to be focused on on executing our game plan or short term game plan and then continue to invest.
Heavily into our long term plans that I, just kind of laid out in response to that was his question related to modernizing modernization of the brand and on the drive to siding and loyalty continuing to invest in quality on the product side on the coffee side, and innovating, where where we think there's an opportunity to innovate to drive.
Frequency and and trial. So we're excited about the long term, we continue to stay vigilant in the short term and make sure. We do the right thing for the business and then how this evolves we will continue to stay close to it and keep you posted on our progress.
Yes, the answer I think you know Jose Jose sort of.
Just describe everything very very well there in terms of the core priorities, but I think just overall in thinking about.
How we move forward and how we set ourselves up.
You know in the best possible position to delivering grow over the long term I think it's all about the long term plans, it's all about investing and sticking to our investment behind the quality of our core platforms. The innovation that we talked about.
And investing I think importantly, investing to modernize our brands via attack and focus on off premise and so you mentioned.
The real estate side, we participate in the real estate real estate across.
Across Canada, and we think that's a great opportunity for us.
To really take advantage of the amazing asset that we have in the Tim Hortons system and the network of drive throughs and off premise capabilities that we have across the country and push that even further to the next level as we think about.
Modernizing our drive through capabilities.
Integrating tech even more into what we're doing through our loyalty program, where as Josh mentioned, we've made a ton of progress over the past year and moving that forward into.
And impactful program, that's that's driving positive incremental returns for US and then I think along the way as we continue to invest behind our core behind our core products.
As we talked about with the with the fresh brew rollout and some of the early success Weve seen there in terms of product satisfaction and share.
We think those things are going to position us.
Very well to come out of this situation.
Stronger than when we entered.
And be on a good path to drive growth in Canada over the long run.
Thanks for the question.
Our next question comes from Chris Carroll of RBC capital markets. Please go ahead.
Hi, good morning, and thanks for taking the question. So given the continued industry wide focus on drive through and in your case the rollout of the digital menu boards, where is your current thinking on the reopening of dining rooms. I mean, obviously, there are safety and capacity restriction considerations, but curious to hear how you're weighing other factors as those restrictions.
Your concerns are alleviated, primarily the benefit to margins from focusing on July 3rd.
And then related to this how would you characterize drives through efficiency and capacity currently giving utilization where sales are today.
Great. Thanks, Chris for the question I'll take the first one I think as it relates to dining rooms, and the reopening of dining rooms were obviously the first priority. There is ensuring that we do it safely and were working closely with at the local and municipal level.
Both with the communities as well as with our franchise owners to ensure we do that safely. Our teams have put incredible focus on on on what procedures and what steps we need to take to do so.
In a safe manner, we've added PPD and all these all sorts of other protections in the restaurants to ensure that our team members as well as our guest feel safe.
We have a strong off premise business, we have a strong drive through as well as digital business delivery as well as mobile order prepayment and curbside pickup which allows us.
To operate well and continue to serve guests in almost any circumstance and to do so safely.
As it relates to there's different unit economics for each of these service modes, but our focus is on ensuring that we do so we serve our guests any way they want and do so in a safe manner and that will continue to be the focus of our teams and our business.
This time, Josh I want to touch on the second question on the Andre.
On drugs or yeah.
Yeah, Chris Thanks for the question just with respect to the question of drive for efficiency and capacity certainly the shift to more off premise and more volumes and the drive to where weve seen a tonnage growth does put some pressure on the drive through and I think you've seen us.
I have a lot of focus on operations and a lot of focus on simplicity of our offering and less innovation.
That's allowed us to to work with our franchisees a lot more on operations in speed and the dry after adding you also see.
I think you also see a lot of focus on the drive through and a lot of the a lot of the operations innovation that we've been focused on just a few examples of that some of which we talked about in the other releases. This morning, I think if you look at some of the drive through digital menu Board innovation that we brought out one of the big elements of that is very is very.
Very efficiency.
So for example at Tim Hortons, we're looking at ways to have our guests a end or scan their loyalty cards at at the at the menu boards, which.
Would allow for significant efficiencies and the drive to process and allow us to both enhance the guest experience and speed up that experiences. So we think that would be an amazing innovation something we haven't really seen others do and we think it can really enhance the guest experience for for all of our guests at tims, another big focus for us throughout our BK.
Systems has been converting single drafters to double drive throughs. So we've done this in a quite a number of our restaurants in the U.S., we're doing it in as many of our new restaurants as we can in the U.S. and we think Thats, a huge advantage and to drive both guest experience and throughput and our tractors and see the.
Maybe a third angle on this that we've really been focused on is our kitchen engineering. This has been a particular focus in especially in our lives where the concept has evolved a lot as we've added the chicken sandwich and Thats a whole new process for our teams in and for our kitchens. So we've been looking at ways to make our kitchens more efficient.
And allow us to drive faster drive through throughput. So we're doing a ton of work on this front to make sure that we can we can drive greater efficiency in our drive throughs and continue to make the guest experience better every day.
Our next question will come from David Palmer of Evercore ISI. Please go ahead.
Thanks, and thanks, so far for your color on Tim's just a follow up to your answer to I think it was Dennis Geiger. His question you mentioned improving coffee share are you back to growing coffee share in Canada and is that translating to a broader share gain within Canadian quick service any color there would be helpful.
No.
And then when you when you do update drive throughs at Tim's and Burger King with better technology and better.
Hi enabled functionality between not just the hardware, but also some of these this new software what's the impact to same store sales from that and what is the return on investment proposition to franchisees. Thanks.
Okay.
Hey, David Thanks for the question yes.
On the question of of coffee share, we as I mentioned, we have seen some progress.
Over the last.
Seven eight months since the beginning of the year on on coffee share I think overall, the pies gotten smaller given mobility and all the other issues that I touched on earlier I think our our brand being well positioned in the country with drive throughs 2700, approximately 2700 dry.
Through throughout the country gives us the ability to continue to serve Canadians even in the most difficult of circumstances. So our focus has been on doing that with our teams with our franchise owners and making sure. We do so safely and I think it's.
It's been a really strong effort on the part of the team during the pandemic and we continue to be focused on on those elements of service and delivering a great tasting coffee consistently and I. Appreciate the question I'll pass the second one to Josh to touch on that.
Hi, David Good morning, and thanks for the question on the drafters.
So just a couple of thoughts on on this one I would say that when you look holistically at the investments, we're making in the drive throughs. So I would I would look at a combination of especially with Burger King where we're doing a lot of conversions of single drive throughs to double drive throughs were upgrading to digital menu boards and then when we're adding the AI driven.
Suggestive selling we're seeing probably some of the best ROI that we think there is out there for our franchisees and that's why there's so much interest from the franchisee community and making these investments. So we're seeing really strong sales up this from from the investments that our franchisees are making and it I think it's a combination of all three of those elements the conversions.
It will drive through the investments in the digital menu boards, which really create I think a much more attractive that guest experience and the software that's able to do the suggestive sell and I think we're seeing similar things.
Tim Hortons right, where we're just starting.
In Canada to implement some of the suggestive sale.
Software was a little bit earlier, there, but I think.
It's going and we're going to see a really attractive results over time.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Jose So for any closing remarks.
Great. Thank you so much.
We've made a lot of progress over the past seven months and are confident we are advancing in all the right areas to emerge from the pandemic well positioned for long term growth. 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.