Q1 2021 Restaurant Brands International Inc Earnings Call
Good morning, and welcome to the restaurant brands International first quarter 2021 earnings Conference call.
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I would now like to turn the conference over to Steven listener D. Our eyes head of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to restaurant brands Internationals earnings call for the first quarter ended March 31 2021.
As a reminder of live broadcast of this call may be accessed through the Investor Relations webpage at Investor Dot RBI dotcom and the recording will be available for replay.
Joining me on the call today are restaurant brands International CEO Jose cell C O L. Josh.
Josh Kobza and CFO, Matt Dunnigan.
Today's earnings call contains forward looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings. In addition, this earnings call includes non-GAAP financial measures reckon.
The reconciliations of non-GAAP financial measures are included in the press release available on our website.
Throughout the call today, we will be referencing two year comparisons for system wide sales growth and comparable sales to provide a cleaner indication of how the business is trending versus a more normalized period.
These two year comparisons are calculated on a geometric stacked basis by using the 'twenty 2020 'twenty, one disclosed growth metrics.
And now I'll turn the call over to Jose.
Good morning, everyone. Thank you for joining us on today's call for the first quarter of 2021, I hope everyone is doing well.
On many fronts, our first quarter signaled several positive performance indicators that are so important to our long term business and growth model.
Before getting into the quarter, let me take a moment to highlight the foundational elements of our business model and then tie together the indicators that are giving us confidence that we're getting back on track as we emerge from more than a year of COVID-19 impacts.
RBI is a fully franchise global business with three amazing iconic brands.
Our growth model relies on stable year over year comparable sales growth of from our existing restaurants. In addition to expanding our restaurant footprint around the world at a healthy pace.
In the years, leading into 2020 comparable sales average about 2% to 3% on a global basis, while we grew our restaurant count about 5% annually.
At our Investor Day in May 2019, we shared our aspiration of growing to 40000 restaurants with an eight to 10 years and.
And we remain committed to that aspiration. Despite a year of flat growth in 2020, because of COVID-19 disruptions at our proactive strategic closure program.
At the foundational to our global growth strategy as unlocking the substantial opportunity to grow our brands in many countries, where we're underpenetrated today versus our top competitors.
And that we attract stable well capitalized and experienced operators and investors in the queue of SAR space to deliver on multi year growth commitments in order to achieve that unlock.
In fact, this is exactly what you've seen from our recent global expansion announcements of Q1.
And I'll speak about that in a few minutes.
The revenue we earned from this comparable sales growth and expanding portfolio of restaurants converts efficiently into strong free cash flow because of the scalability of our model methodical management of expenses and deliberate approach to capital allocation.
We strive to balance responsible management of costs and capital with the recognition that we need to invest in core areas of the business to drive the strong growth that we want to achieve.
This has included investing more G&A and technology and digital as well as other important areas in the business as we talked about in detail last quarter investing in our supply chain attracting top talent from around the world.
And most recently announcing $80 million Canadian of support behind the Tim Hortons marketing program in Canada, where we believe we have tremendous opportunity for growth as the leading kyocera brand in Canada emerging from COVID-19.
The resulting free cash flow even after these thoughtful investments in the business gives us significant optionality in our capital allocation over time, including returning capital to shareholders as we've done through an industry, leading dividend and opportunistic repurchases to provide our investors more participation and a long term value creation.
There are two additional in emerging parts of our business model that you will increasingly hear us talk about.
The first is our resolve to build the global sustainable business for the long term and.
And that means using our global purchasing power and brand influence to do the responsible and write things when it comes to the food we source and serve.
The impact we have on the planet through our packaging and our carbon footprint.
And supporting the communities, where we operate as well as all of the hard work and good people who work for our brands all around the world.
This is foundational to our business model for one simple reason.
Because it's important to our guests.
Our 'twenty 'twenty restaurant brands for good progress is on our website and we will have much more to highlight in our progress throughout the year.
Second we believe you will find our experience and progress and digital will also increasingly become part of our business model.
We'll get into some detail of our Q1 digital successes today that'll give you a good sense of what we're talking about.
I'll start with a few headlines of the quarter.
As Stephen mentioned at the start of our call. We're monitoring our two year comparisons as we look through COVID-19 and focus on returning our business the growth across the board.
The first headline is that in the first quarter, our global system wide sales grew by one 4% compared to 2019 as a result of having three strong brands diversified around the world with dedicated teams driving of returned to growth in their respective markets.
In our home markets comparable sales growth at Popeye's was up 30% versus two years ago.
Burger King was flat versus 2019, and showing positive two year performance in the last month of the quarter.
And Tim Hortons, Canada was down 14% on the two year basis.
We saw a number of positive trends in the tims business in Canada and are encouraged by the opportunity to return to positive sales growth as we look through the near term headwinds of COVID-19 and the return of mobility across Canada.
Q1 was also an important quarter for us from a development standpoint, and that's the second headline.
And our view Q1 as the strong early indicator of our return to meaningful growth with 148 net restaurant growth in the quarter falling just short of our best ever Q1 of 152 net restaurant growth in 2018.
Q1 is historically, our lowest contributor to annual NRG performance. So we still have a lot of work ahead of us, but this is a promising way to pivot out of 'twenty 'twenty and reinforces the confidence we've shared over the past few quarters on a path back to 2018 and 2019 levels of growth this year.
Kudos to our developing franchisees out there they do such a great job and are also committed to growing their businesses in their markets.
And the last number of weeks, we also entered into agreements to expand pop is to the U K, India, Mexico, and Saudi Arabia totaling more than 1000 restaurants over the next 10 years.
Our development teams continue to have meaningful conversations with strong operators and investors around the world building, our pipelines for future expansion.
A great example of how impactful these partnerships can become as Tim Hortons China.
Along with our lead partner there of Cartesian capital Group, we announced in the quarter and exciting new round of funding from existing Investor Tencent and new investors Sequoia capital and eastern Bell to support opening more than 200, new Tim Hortons restaurants in China This year alone.
And upwards of 1500 over the initial term of the agreement.
We're excited to have such successful experienced partners supporting the Tim Hortons brand and its expansion in one of our biggest market opportunities globally.
The third important headline of the quarter as the exciting progress at Tim Hortons in Canada delivered in digital our core underpinning of our business plan in Canada moving forward.
Across the company, we measure of digital sales the percent of overall sales that come through digital channels.
This allows us to build a more direct relationship with our guests and improving our ability to understand our guests purchase preferences and then engage them with exciting offers that are relevant to them.
At Tim Hortons in Canada over 30% of all sales in the quarter came through our digital channels.
Nearly doubling the levels of Q1, 'twenty, 'twenty and representing the largest quarter of digital sales yet for any of our three brands in their home markets.
The biggest impact for tims came from our redesigned roll up to win contest. The all digital redesign of our former and loved roll up the rim contest.
We saw an incremental 2 million downloads of our App in March twice the downloads that we saw last year during the contest and significantly higher than a typical month.
Engagement on our App also hit an all time high with over 40% digital sales during the peak of roll up and just over 50% of transactions through our loyalty program that same week.
With more guests than ever on our App, we're able to deliver our over 45000 unique offer sets delivering an incredibly personalized experience.
Overall, the Tims rewards program had another quarter of positive sales contribution we find us to be very exciting for future traffic and sales opportunities and we're still very much in the early days of what we think we can accomplish for this program over time.
Josh is going to share of wider view of our digital journey of this morning, but our digital performance at Tims in Q1 gives us a picture of a brighter digital future in Canada as well as what we want to achieve at Burger King and Popeye's.
Let's shift now to performance for each of the three brands.
Likely have a press release with the numbers in front of you. So I'll focus more on sharing some color and reflections on the quarter I'll start with Tim Hortons, particularly in Canada.
There's no doubt that the biggest factor affecting our performance at times is the continued locked down of a large majority of the country significantly affecting mobility.
Americans are experiencing a very different path out of COVID-19 than Canadians today.
Canada continues to face strict lockdowns in much of the country with mobility severely restricted.
As we sit here today, Ontario, which is where nearly 40% of Canadians live and where nearly 50% of our restaurants exist isn't of mandatory stay at home order until at least may 20th and there's a real possibility of that being extended.
Offices are closed.
Retail has restricted the curbside pick up and 25 per cent capacity limitations at essential locations.
The restaurant dining rooms are totally shut down.
Transit mobility today is down 60% from pre COVID-19 levels in Ontario, just opened up first dose availability for those 40 years old and up with second doses for most not available until the late summer or early fall.
We're clearly, saying that where Canadians are permitted to have more normal routines theyre coming back to Tim Hortons the.
The comparable sales performance of restaurants in rural and suburban areas was flat to slightly positive year over year during the first quarter.
The mobility restrictions continue to affect our morning day part the most with the single largest dragging our sales coming from our regular routine morning coffee guest.
With that said we remain disciplined at are encouraged by the underlying progress we're making the back to basic strategy, we've talked about for more than a year is now working as we intended.
We continue to take the necessary steps develop of strong product innovation pipeline, making sure we're addressing opportunities at our menu offering in areas of the market, where we believe we can expand our leadership to drive long term incremental sales in the business for.
For example, the launch of our dark roast coffee has been of success, resulting in renewed attention and love for our coffee offering.
This coupled with our investments in fresh Brewers and water filtration, which we've shared previously has helped drive 2% growth in overall coffee incidents in the quarter.
This growth in incidents, where the percentage of transactions, including of coffee is the largest increase we've seen in three years.
Our Boulder, Richard formulation of our dark roast has proven to have a significantly better flavor profile that our guests have been asking for.
And our consistent execution of the tims original blend along with greater marketing attention on the coffee category undoubtedly contributed to our growth in coffee in the quarter.
The launch of our freshly cracked egg in the quarter is our single biggest change in our morning day part menu in years.
And it's been warmly and enthusiastically embraced by Canadians.
We launched the fresh egg in early February and by the end of February our breakfast food category delivered positive year over year end two year comparable sales growth.
We also saw positive year over year growth in the overall morning day part in the last few weeks of March with the two year comp remaining low single digit negative during the same stretch at the end of March the.
The freshly cracked egg in addition to the other quality improvements we've introduced over the last year are undoubtedly meaningful changes to our breakfast offering and the team has further innovation around this product and others already lined up for later this year.
More importantly, the breakfast food category and the morning day part moving into positive territory in the quarter is a strong indicator for us.
This is Tim at Heartland, and we must own at on the beverage and food front.
We're excited to continue to build on the credentials, we've established and are now well positioned to recapture guests with an enhanced guest experience as mobility returns.
We've also successfully extended this back to basics approach into lunch in snacking with our craveable lineup continuing to show momentum with our guests driving high average check with high income in Tel Aviv.
Craveable are a key step in our quality journey.
The delicious roast beef built is not at the highest product satisfaction score of any main food item on our menu.
The team will soon be launching new innovation and craveable and our success in the lunch day part has led us to longer term innovation planning to further grow this segment as we move into early next year.
Overall, the momentum in our menu innovations as well as our strong pipeline of new innovations planned for the back half of the year end well into 2022.
Gives us a lot of confidence that our back to basics plan is working as we intended.
We view the timing of these menu innovations that are generating such a positive reaction from our guests to be very important as the Canadian economy. Reopens later, this year and Canadians returned to more normal routines.
And despite the mobility challenges in Canada, I mentioned, our network of roughly 2700 drive for the locations remember, we have 1000, plus more drive throughs and our nearest competitor and these drive throughs had been a big strategic advantage as Canadians have been limited and the ability to access food and beverages when they're out in the road.
In Q1, our drive thru sales were up 23% year over year, recognizing that only about 15 days of the quarter were impacted by COVID-19 last year.
This reflects not just the strong sales performance, but a great operational achievement with our focus on enhanced ops procedures and menu simplification all of which helped to meet the needs of the increased number of guests using the drive through today.
With Tim Hortons being a brand with such strong emotional ties in Canada, we make sure to measure and track of metric we call brand closeness rigorously.
Brent closing of the scores also happened to be a key driver of visit intention for the brand.
Based on our latest data from a third party provider that runs surveys across the country. The brand closeness measure is the highest it's been in over three years, which we believe speaks to all of the brand love initiatives and community Activations, we've engaged in over the last year as well as the perception of our improving product quality.
We believe that our large footprint of 4000 restaurants, one restaurant for every 9000 Canadians the digital success, we've seen in the last few quarters fundamental improvements for the quality of our menu.
And of more transparent improved working relationship with the tims owners, all positioned Tim Hortons to lead the Canadian market recovery.
This is what led us to partner with our restaurant owners to invest even more behind our plan.
Our commitment of $80 million Canadian combined with the 50 basis points of increase AD fund contributions from our owners will allow us to supercharge our advertising throughout the year end into the future and continue advancing our digital and overall guest experience.
Wrapping up on franchise profitability generally as we discussed in February of franchisees ended 2020 in a solid financial position in terms of four wall EBITDA, which has continued through Q1.
New category expansion like cold beverages, and craveable that come with the higher check engagement through digital which has proven to drive incremental visits and sales and a more strategic approach to pricing across the country have all contributed on average to solid franchise profitability of that positions of the system well to weather the remaining short term impact of reduced mobility.
As well as some of the macro commodity increases we've seen recently and that are projected to remain challenging in the coming quarters.
Let's turn to the discussion to Burger King.
For a number of quarters, you've heard us discuss the importance of striking the right balance of flagship products and of desirable everyday value menu offering.
In the U S. We saw in Q1, the impact of layering our long term initiatives centered around high quality, great tasting food and the introduction of a compelling dollar value proposition result in nominal monthly sales per restaurant, reaching their highest levels in recent history.
This drove solid improvement in visitation year over year end versus the industry in March, which we believe sets us up well for sales growth in the coming quarters and beyond.
We believe the dollar your way of menus of solid foundation to deliver our guests are consistent everyday value proposition featuring great tasting flame grilled products that only burger King can offer.
It has become a valuable part of our offering clothing part of the GAAP that we've had in value for some time.
That said, while we made up some ground in sales in March we still have an opportunity with our average check.
That's where our focus on menu innovation and quality improvements comes in.
This quarter, we brought back historically strong product innovation for the menu that our guests love and crave, the sourdough King and cheesy Todd's at.
Achieving the highest day vs. We've ever seen on these products.
In terms of major product innovation, we started rolling out our delicious hand, breaded chicken sandwich, which is now in half of our restaurants in the U S.
It's such a great product, but don't just take my word for it listen to the many food bloggers, who commented on at or better yet go try it.
The team took the time to test the product pricing and operational procedures, making no compromises on quality and ensuring we executed consistently.
We're continuing to rollout the new great tasting sandwich, and we'll have the product available nationally this summer.
We believe the sandwich will drive visits and check will be incremental and will provide an important opportunity for further innovation.
In terms of another long term growth opportunity in the U S breakfast is top of mind at.
It's already of decent size part of the Burger King business contributing roughly 13% of overall sales with.
With much of that tied to our delicious crisanti, which.
Now I know, what you're thinking we've mentioned the breakfast opportunity at Burger King to use several times in the last 12 months, but frankly haven't made much progress.
That's because we prioritized other more immediate initiatives.
The Burger King U S team now has this breakfast opportunities square in their sites.
And of working closely with the group of talented franchisees to build the long term plan with quality of food and beverage offerings at its core and with the ambition to make Burger King the preferred breakfast destination in our space.
There's still so much more we can do on top of the existing breakfast business in terms of menu expansion food and beverage innovation product quality everyday value and awareness.
And while our long term plans for breakfast will take some time to develop test and launch we're not standing idle for example, we recently introduced the delicious French toast sandwich in the last week of the quarter that is showing promise as a check driver.
We also have plans to make our iconic per sandwich, and even more powerful anchor of the breakfast business with product quality upgrades that will introduce later this year.
Driving elevated awareness consideration of repeat visitation for our breakfast offering at Burger King is the strategic priority going forward.
A great way to drive these metrics across the menu is through our digital channels and on that front, our new Royal Perks loyalty program is now available across the country on digital channels and later coming to more of our ordering and service modes.
During the first quarter total sales coming through digital channels were about 9% up nearly 40% versus this time last year.
This is a good start and Youll see us increase our digital focus at Burger King in the coming quarters with the benefit of everything we're learning from the Tim Hortons experience in Canada.
Finally franchise profitability on average was at a solid position entering the year.
And while recent media reports mentioned pressures in commodities and wages. We continue to work closely with our franchisees focusing on driving traffic and sales growth strategic procurement efficient service toward digital drive thru and off premise channels all of which we're confident will help our franchisees continue to drive improved four wall profitability in their business.
Internationally, we're continuing to see of recovery in many markets across APAC as case counts in most of the region remained low for EMEA and Latin America regions remained under near term pressure.
Temporary closures increased slightly in EMEA with 92 per cent of the system fully opened over the quarter and at the end of it.
APAC improved versus the fourth quarter with 96 per cent fully opened over the quarter and 97% at the end of it.
And Latin America temporary closures increased slightly with 92 per cent of the system fully opened over the quarter and 84 per cent fully open at the end of the quarter.
The ability our international markets and franchise partners of demonstrated to bounce back. After restrictions are lifted gives us confidence that our international business will return to providing consistent growth in 2020, one and in the coming years.
And we see that in some of our markets were already fully back to growth for example, Australian Korea comparable sales were up plus 10% and plus 13% respectively on a two year basis.
In EMEA, Russia has returned to growth with plus 3% comparable sales on the two year basis.
In Latin America, we have several countries that are back to comparable sales growth in the two year basis, including Puerto Rico, Mexico and Chile.
A big part of our growth story of Burger King over the last 10 years has come from our international business.
With solid performance returning across much of the World. Our partners are just as excited as we are to get back to at opening beautiful, new restaurants building out and shopping digital capabilities and driving sales by delivering high quality products and an excellent experience to our guests.
Let's turn our attention to pop is the.
At the single biggest highlight at Popeye's is the solid continued performance at of chicken sandwiches driving for the business.
This resulted in year over year comparable sales in the U S up 1% in Q1 end up 30% on a two year basis.
And while the sandwiches undoubtedly been a game changer for the brand.
It's also contributed to broader consumer awareness and trial, resulting in growth across other major parts of the menu, including bone in the less and seafood.
With the success of the Popeye's chicken sandwich at the team is motivated to continue the long term menu innovation pipeline.
You saw us launch the Cajun flounder sandwich in Q1 that proved to be of great complement to our chicken sandwich with guests, adding on the sandwich to their orders and both new and existing guests, creating an additional visit the popeye's for this line driven sandwich innovation.
We believe there's plenty of room to innovate in the broader chicken category, which we're excited to get into later this year.
The substantial increase in the awareness of the Popeye's brand and our amazing products had been of great way for us to introduce many new guests of the brand.
Our research shows that popeye's shoot to the top of the list in preference once the guest has tried our products.
Our digital channels and off premise business. Therefore, it represents a big opportunity to grow of the brand.
In Q1, Popeye's had 17% of at sales come through our digital channels more than double the level from this time last year.
Adding to our digital environment, We recently launched the pilot of our new digital first loyalty program at Popeye's in the quarter and we're excited to use this connection with our guests to drive incrementally through targeted offers and campaigns to improve our lower frequency higher check relationship with our guests.
The strength over the past year has established a new baseline for pop is on average four wall profitability is at an all time high end franchisees are excited about what's to come.
We think this great brand is incredibly well positioned for a long runway of growth in both the U S and internationally and clearly developers restaurant tours and business owners think so too.
Without providing too much detail into our pipeline, there's an amazing appetite to put capital behind popeye's, both in the U S and internationally.
This first quarter, we delivered strong net openings of plus 25 or.
Our best first quarter performance at Popeye's U S. Since 2017.
At this point, we're focused on selecting the best partners and the best locations with our partners that will make the brand even more convenient and accessible while driving traffic sales and profitability over the long term.
I'll now hand things over to Josh to update us on our digital journey across the company.
Thanks, Jose and good morning, everyone.
I want to take just a couple of minutes to revisit our digital strategy.
A great example from the quarter and how we can learn from it strengthens the targeted conversion within our marketing funnel across all of our businesses today and into the future. If you imagine the non digital guest experience for a moment, we rely on a powerful recognizable brand and memorable advertising to attract you to our restaurants.
We focus on a few famous core products that are differentiated from our competitors, we entice our guests with visual menu boards and point of purchase materials at the restaurant that highlight deals. We think our guests will value we focus on providing a positive interaction with our team members and serving you hot delicious food and the timely and accurate way and we do panel studies one of them.
Of the interviews and samples of guest feedback to understand how our guests react to the experience we offer and then use that data to make adjustments for the next time they come in.
Now I'm simplifying at a bit but not that much.
That was how our industry operated for a long time before the power of fully integrated digital experiences combined with leveraging technology and data has begun to change the way that we and others manage our business.
The foundation of our digital and technology strategy is our guests.
We want to be part of the smartphone in their hand and be one of the apps that they returned to frequently.
This is an important point, we've spent decades to develop and protect our iconic brands. We want to design every step of the guests' journey with our brands and we can best do that on our digital platforms and our own applications, whether on desktop mobile kiosks digital menu boards or any device, where we interact with our guests we are building our apps.
And our associated digital loyalty programs to be highly engaging and the reason to visit our brands more frequently.
Given the lifetime value of our guests relationships and deepening connections with our own brands are Great example, from this quarter that we believe as a guide for the future is the roll up to win experience that Jose mentioned earlier.
We took something historical iconic and unique tour at Tim Hortons brand and brought it into the modern digital world and of caring and highly guest focus way through that transition we were able to bring a very large group of our tims guests a lot closer by creating a new digital relationship.
But we also drove engagement with existing guests spending more time on the App.
Something we plan to assist the staying with games contests and more reasons to use the Tim Hortons digital ecosystem in the future.
Ultimately this deepening of our guest engagement is allowing us to better understand our guests and drive sales through more personalized offers that is to say we are using better offers and addressing a larger portion of our guest base at.
That means that our digital platforms are having a more relevant impact to our business than ever before.
Who is he mentioned that we are deploying loyalty programs at Burger King and popeye's as well, which will help to reinforce the already large and growing number of guests to engage on our digital platforms at those brands.
Fundamentally what this allows us to do is work very differently and much more efficiently with our marketing funnels across our businesses.
Many of the members of our rewards loyalty programs tend to be some of our most loyal fans and we can now personalize the offers and messaging that they received to improve their experience and offer suggestions for other day parts or menu items that they might like to try.
We have also leveraged these channels to communicate about purpose driven messages that are important to our guests like tim's for good or recent Papa as quality campaign.
<unk>, even greater visibility to the great work of our brands do at little to no media cost. This is of much more efficient way of marketing to our guests and we are excited about the path ahead of us.
Alongside loyalty, we've discussed significantly expanding our outdoor digital menu board footprint.
With plans to have over 10000 drive throughs equipped by mid 2022.
It's exciting to see the menu boards and sold so far of producing a quantifiable uplift in sales.
Even while we are early in rolling out and optimizing our predictive selling capability and fully integrating our loyalty programs.
With that in mind, we continue to work closely with our franchisees to roll the boards out across the system as quickly as possible, while our engineers and product teams continue to improve the software capabilities.
I'll stop there for now and pass the call over to Matt to cover financial results.
Thanks, Josh and thanks, everyone for joining us this morning.
While we're still working through of COVID-19 related headwinds in various parts of the world and so as he mentioned we've seen solid underlying progress against our plans in many areas of the business and when you look at our consolidated results, we see the benefit of our global scale and diversification across three great brands and a differentiated set of partners around the world who remain focused on growing their business.
Yes.
As a result, our global system wide sales for the quarter were up one 4% and our adjusted EBITDA was up over 5% organically year over year.
Beyond the growth in system wide sales I would call out to other factors contributing to our growth in adjusted EBITDA.
First while we haven't historically had meaningful bad debt expenses, we did increase our bad debt provision in 2020 to reflect an increased risk environment.
Net sales in the unit level profitability of now largely rebounded we're seeing some release of cautionary provisions, which accounted for about one and a half points of our year over year growth.
Additionally, our Tim Hortons retail business in particular has performed very well throughout the lockdown environment at.
As a result of market share gains new product listings with some of our largest partners expansion into new markets in the U S and adding points of distribution.
Overall, our growth in retail also added about one and a half points to our year over year growth in adjusted EBITDA.
Next we wanted to provide a quick update on G&A.
Our last call I mentioned that we expect to continue making proactive investments in digital and technology initiatives as well as adding hires across a number of key areas all leading to sizable year over year increase in G&A.
When looking at the first quarter and adjusting for timing and one off expenses last year. Our segment G&A was up slightly year over year consistent with Q4.
However, as we look forward, we expect these investments to increase over the course of the year as we ramp up our various initiatives.
And as Jose mentioned earlier, we also recently announced 80 million Canadian dollars of support behind the Tim Hortons marketing program in Canada.
This along with other advertising expenses will flow through of newly separated the line item in our P&L added as part of an effort to enhance disclosure around advertising expenses revenues and core segment G&A.
We hope this enhanced disclosure makes things easier for everyone to understand going forward.
Now turning to EPS, our first quarter adjusted earnings per share of <unk> 55 cents grew at a higher rate than our consolidated adjusted EBITDA at about 15% year over year, including an FX benefit of about 2%.
The higher growth was further supported by a lower effective tax rate, mainly as a result of stock based compensation realized during the quarter and a lower share count following our $380 million share repurchase last year.
These tail winds were slightly offset by higher stock based compensation and DNA.
Jose talked quite a bit about the underlying progress and opportunities that are driving our positive outlook on the business at along with that we're moving forward on our key capital projects, including investing behind Remodels and rolling out outdoor digital menu boards across the Tim Hortons system, both of which we expect to ramp up as the year progresses.
From a capital structure perspective, we ended the quarter with slightly lower net leverage relative to the end of 2020 now at six X.
While net leverage may seem high relative to other industries, we are very comfortable with our position for a number of reasons for.
Our liquidity position of solid between our $1 $6 billion of cash on hand, and our Undrawn revolver, we have about $2.6 billion available.
We also have no upcoming maturities until 2024, and approximately 80% of our capital structure is fixed at attractive rates as a result of the refinancing work we've done over the last few years.
And most importantly, as Jose mentioned earlier, our business model as the franchisor is very efficient at a high conversion of earnings for cash flow provides plenty of capacity to cover our debt service obligations multiple times over.
And finally to wrap things up I am pleased to share that we declared a dividend of <unk> 53 per common share and unit payable on July seven 2021, which extends our industry leading dividend consistent with our previously announced target of $2.12 for 2021.
With that I'd like to thank everyone again for your support and we'll now open the line for questions operator.
We will now begin the question and answer session.
To 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.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Jon Tower with Wells Fargo.
Please go ahead.
Great. Thanks for taking the question luxe, the dig through today and congrats on the progress of <unk>.
Just curious, perhaps you could dig into the incremental AD fund contribution that you've made or plan to make at Tim Hortons, Canada.
Can you discuss how you plan to utilize the mark of incremental spending for the incremental dollars, particularly given that right now you've got a challenged environment in Canada as you alluded to earlier her day and the conversation and where we should expect to seeing that.
Joe up whether it's the digital channels more traditional media or is it going to be of promotional activity.
And particularly the timing can this bleed over into 2022, given the challenges that are facing the Canadian mobility at the moment.
Thank you.
Hey, John Thanks for the question.
Look as I mentioned during the prepared remarks, we feel encouraged by the progress we're making at at Tims encouraged by the first quarter.
Obviously, the situation is different than in Canada as it is in the U S and some other markets around the globe.
But we've we've been focused on the back to basics plan and are making good progress on those initiatives around.
The quality of our food expanding the menu.
Keeping it to what we're really good at and what made tims famous modernizing the restaurant experience with the with a rewards program as well as the investments in the drive thru.
And what this investment means is that we at.
At the company the tims team as well as our owners have confidence in the plan confidence of the team and feel it at its really important to invest now in the business investing behind these initiatives to be able to be in a position once mobility returns the vaccine reaches higher levels of Roe.
Loud and and things start opening up again as we've seen here in the U S.
We have confidence that we're gonna be well positioned to capture that growth in net return to normalcy.
The normalcy, if you will that debt will come to Canada.
Timing of it is really a function of how much we believe in and the planning and the partnership that we have with our owners and the the opportunity that exists in Canada.
And how we'll use it will depend.
We've got flexibility, obviously, we think that it's going to be investment behind initiatives that are driving our core platforms and the digital experience as well overall, we want to be able.
Two two to bring higher levels of awareness and and also just continue to drive our brand love initiatives in Canada and bring more firepower to the.
To the advertising budget to be able to get the message out to Canadians in the in the coming quarters.
Yeah, Hi, John just one quick thing I would add there and timing.
I think we'd expect the investments here as I've mentioned to be fluid at probably fluctuate a bit as we progress throughout the year, but we do expect to.
We do expect to invest for the entire 80 million kind of support for this year.
Thanks for the question.
The next question comes from David Palmer with Evercore ISI. Please go ahead.
Thanks, and thanks for the discussion as well, particularly on tims.
I heard some comments in there about two year breakfast comp you debt.
You mentioned being positive and I think you said.
Down the debt break.
The area I think it was breakfast food comp was positive in the breakfast day part was down low single digits slightly perhaps you can go over those numbers again.
What that means for how youre doing overall for change at a two year basis lately I think thats going to be important for people to get a sense of and I'm and I and I and really just a big discussion I know youre not going to get too much into guidance, but.
We look back at <unk> 19 at the base year that was kind of a rough year for Tim you had the loyalty issues from the drag than in 2020 was supposed to be a little bit of of rebuild.
Anyway. So it's interesting that the street numbers for 'twenty two are still below that in terms of same store sales below that level of 19.
It seems conservative when you think about at do you agree that you should be higher in sales per unit in 22 of if Canada is reopened.
And I'll pass it on thanks.
Thanks, David.
On the second question, we don't I'm not going to get into that at what we're focused on executing our plan now and and as I mentioned Burger. We're excited about the progress we're making still have a lot of work to do and there's obviously macro.
Conditions in the in Canada in particular that we're still working through but the plan.
<unk> is working as intended and we're making good progress on all fronts product quality improvements and coffee with.
With the dark roast as well as the fresh Brewers that we rolled out at our progress with the with breakfast food in particular that was one of them one of the key priority as I mentioned, a couple of times over probably over the last 12 months the importance of us.
Moving into the top consideration for breakfast visitation when food is the driving motivator and so we certainly at the top of the list. When coffee is the is the motivator and I think we're getting better at that but in addition to that when food is driving the decision for our customers in Canada, we needed to move up that list and food quality was critical freshly.
Cracked eggs was a big Big initiative for US it's taken us over a couple of its two years plus in the making and in a very strong partnership with our restaurant owners in Canada to get that in place as well as great. Great work from the team at Tims in Canada from an operational standpoint from a supply chain standpoint, as well as from the from a marketing and product.
Innovation standpoint the.
The number as I mentioned of the progress that I mentioned.
We launched freshly cracked eggs at the.
Sometimes at the beginning of February.
And by the end of February we saw our breakfast food category. So the.
The food side of the business at.
Breakfast delivering a positive year over year.
And two year comp growth. So so that was encouraging.
Early days in the and the launch of that product.
And really the enhancements of quality of our breakfast offering.
Driving growth in the food category and then we also saw positive year over year of growth in the overall morning day part of the last few weeks of March so it wasn't for the full month of for the full quarter, but for the last few weeks of March we saw progress on a year over year basis, we're still negative on the two year basis.
In the day part, but it was low single digits at the end of March.
Again, it just highlights that we're in the early days for.
Using baseball analogy early innings of the of.
For the game here, but but we're working hard with our teams at our franchise owners in the in Canada to make real progress here. So thanks, so much for the question.
For the next one.
The next question comes from Dennis Geiger with UBS. Please go ahead.
Great. Thanks, and then Jose Thanks for the color and it'll be insights across brands definitely helpful. I wanted to ask a bit more about about Burger King U S. So you highlighted the number of compelling initiatives across the chicken breakfast digital with the focus on quality of experience. It seems like I wanted to ask how quickly you think of lot of these.
The initiatives can start to drive market share gains from here and you've kind of related to that and we've seen a little bit of uneven performance certainly over the last several years from the brand in the U S with LTE OS and promotions working well, but but it's probably difficult to have really good year in year end consistency with that so curious now as you highlighted.
A lot of these strategic points of focus if this can drive sort of green at greater annual consistency of momentum for the brand going forward. If that's if that's a part of of kind of the the roadmap at you outlined there.
Hey, Dennis Thanks for the question Yeah, just on the on the second point. The idea here is definitely to build the long term plan at.
We've made some meaningful changes to the team and the use of the marketing team.
We feel really good about the talent that we havent, the and the team and the progress we're making in terms of planning and the work they're doing.
Collaboratively with the franchise owners in the U S, which at which is helping us build a solid plan that we all believe in and then everyone's executing behind so so there is for the confidence they are in the plan long term plan and our commitment is to build something meaningful that drive sustainable growth over the long haul at I think in the in the short.
Term, which is your first question the progress that we're making and the excitement that I shared in the in my prepared remarks is that the the first quarter was a good quarter in terms of.
Of of nominal monthly sales per restaurant, we saw really good improvements on that front, but reaching highest levels. We've seen in recent history, a big part of the progress we've made in the quarter was the the implementation and then at the full quarter execution of the the dollar value menu and we think it's helping us close.
Gaps in terms of visitation and we saw some really good progress on that front year over year as well as versus the industry.
But we're also it is a balanced approach and you've heard me say that multiple times over the years the importance of with Burger King in particular of having a balanced approach.
All of these obviously driving our core, but having a balanced with premium offerings as well as.
As value and so the quarter was encouraging in that regard we've made some good progress as well in digital I think theres a lot more to come there with the the BK team and we're excited about the the launch of digital loyalty, which we which over time will be available.
The other channels and service modes.
And we've got I think this quarter also reflected the.
At the move back into innovation meaningful innovation.
We saw the work on the.
Breakfast, French toast sandwich as well as at <unk>.
<unk> types of that came back and those are popular.
The limited time offers that we that we've had in the past and so bringing it back for for our customers.
Quite impactful.
Also the the work we've done on hand, breaded chicken Sandwich, which I mentioned in my prepared remarks, it's coming coming to a location near all of you very soon.
This is an important launch for US we've had chicken for a long time. This is not a new category for us, but it's a massively improved the offering and I think will be really exciting for our business long term of the franchisees are excited they're executing it well and we're being deliberate in terms of the rollout because of the importance of building something sustainable long term so.
Youll see a shift at Burger King from trying to do promotional Activations short term debt to drive them.
The visits and the transactions of that high low approach I think youll see us build a sustainable long term plan on meaningful platforms and that's why I mentioned the <unk>.
Breakfast the importance of breakfast, how strategic strategic it is for our business and the investments, we're making behind at long term to make a meaningful push on that over time. So we're excited about where we are the progress we've made in the but its early days of we've got a long long way to go. So we'll keep you posted on our progress. Thanks Dennis.
The next question comes from John Glass with Morgan Stanley.
Please go ahead.
Thanks, and good morning.
Coming back at Tims in two unrelated pieces, one just on digital in the past you've talked about the contribution of digital was negative at slipped of positive maybe just some insights as to how thats progressed and the contribution of the comps and inside that 30% of digital customers of transactions you're experiencing.
What are the dynamics are you seeing those customers frequent more and if so how much units at the check lift because they are buying up the near the bespoke offers what is that check lift that's on the Tims, Canada business.
If we just flipped over the other side of the World Tims, China. It seems to be getting some momentum in unit growth of just obviously some excitement from the external investors can you just remind us how the brand is positioned differently. There that makes this resonate if theres any metrics around sales volumes that you can share. So we could just better understand how that all of that opportunity of shaping up.
Yes.
Thanks, John I'll have Josh touch on the the digital <unk>.
Related to Tims in Canada, and then I'll come back to Tims China.
Josh.
Good morning, John Thanks for the questions on <unk> I would say.
But the direction on the gym is loyalty program.
We have seen is at.
Of that over time the.
The contribution to the sales has been more positive.
We've been consistently working on that as we've been able to make.
The offers more targeted and the team's done a great job of as I mentioned in the remarks, but with consistently growing the end.
Base of of the.
The loyalty users getting them to be more registered and then making those offers more targeted which is end of overtime, allowing the program to be more and more effective.
And then I would say at.
You asked the question about and of what are we doing.
With the program are we growing check or the.
The driving more frequency one of the big thing that debt I referenced in some of our remarks earlier and that we're really focused on.
It is.
That's probably the biggest part of of what we're trying to do is driving more engagement.
With the App and I think that drives more engagement with the brand at Inc.
At a lot of that surround the frequency so you've seen us doing a lot of different things like the roll up to win.
And of the Digitization of in the existing.
All of the rim game, that's driving people to come back to the apps more often to play more games and we can actually see in the segmentation of our guests that the the guests are coming back and they are engaging with us more and more frequently and I think our goal is to see the guests engage with the Tim Hortons brands more often and come back end viz.
At us more often drive the more frequency at the engagement over time. So those are some of the biggest things that we've really been focused on where we think we're making progress.
What do we think we can do even even more over time.
Thanks, Josh at John.
John on the on the question of the Tims, China as I mentioned in the prepared remarks were really excited about the.
The progress there were only two years into it. So we started we built our first restaurant opened the first restaurant and at the beginning of Q1 of 19.
And where we're at.
At about 200 locations now.
<unk>.
Very good.
Very exciting interest from important investors in China on the business.
And we have commitments to the double the size of the business this year and continue on our journey to.
To reach the targets of growth that we set for the business as the starting point.
We announced the.
The partnership back in 2019.
The end of 2018, we we're not we're not sharing details on the <unk> in these sorts of things for it for that business, but the progress has been tremendous the positioning for the brand there.
Interestingly enough the Chinese consumer connects well with with the.
The Canadian brand.
Not at Tims necessarily but Canada is a broader concept, obviously things like hockey players aren't going to be highly relevant in China, but but there's a lot more.
Canada than the than hockey players and so an end to the brand as well so we've been able to build on those we've done a bunch of research with the.
Chinese consumers in the and the things of that really resonate or the quality of the product of the.
The quality of the digital experience the design elements that we've built.
At a really modern and forward looking at and very cool in connecting well with our customers and convenience being there every day for every transaction with high levels of service to the local team in China is doing an awesome job with tims and the and I think it's a really good example.
At the Cagny Micro example of what can be the.
The possibilities with tims internationally, we've seen good progress with the with our business in the in the U K.
We have a really strong business in the middle East, Saudi Arabia with Tims.
And we think we have a tremendous opportunity for growth long term with the tims brand.
As a great offering for.
For for coffee for breakfast for baked goods and and doing it with with the digital forward game plans. So we're excited about the.
The progress, but it's early days in AR and given the nature of coffee growth in China, We think we're well positioned to.
To see a long term.
Growth of the business there for years to come thanks for the question.
The next question comes from Chris.
Right.
Excuse me Carroll with RBC capital markets. Please go ahead.
Hi, good morning, Thanks for taking the question.
On the back of the recently announced development agreements for Popeyes, how shall we think about where the brand is along its growth trajectory both in the U S and globally and if you could maybe to help us better understand the trajectory can you maybe frame up how you're thinking about the brand relative to how your store.
At about Burger King of ahead of its development ramp of few years back.
Hey, Chris Thanks for the question.
I think it's important to go back to 2019, when we shared at.
Of our ambitions to reach 40000 restaurants in over an eight to 10 year window.
We thought that and still think now that we have an incredible amount of of open space around the world to build our three brands and our franchisees new ones in existing ones or are super excited about the business, especially.
Especially given the power of the brands and the resilience of the business and the most difficult to circumstances. So the.
The unit economics, and the performance of the business during probably the most complicated environment anyone's ever seen gives them confidence at this business is really solid and can create a ton of.
Of value for them over overtime.
One of the things that I think is important from from our development journey as we've talked about.
And obviously dk has been a big part of our growth internationally for the last several years we.
Doubled the size of our international business from 2012 to 2020, we went from something like just under 6000 international restaurants to over 11000.
Excluding the U S business. So there was a tremendous amount of growth internationally, we doubled during that stretch of time.
And that was at.
Because of the benefit of the Great partners, we had internationally in the master franchise joint venture agreements, we put in place, but the reality is we still have the kind of of room for growth in many of the markets, where we've made of ground versus our competitors over the last eight years, China, France, Spain, UK, Germany, Brazil. These are markets, where we've seen tremendous growth but.
We still have big opportunities for for growth going forward and we have great partners and great teams, there too to achieve that as it relates to Tim's and popeyes, it's even I think it's even earlier days in Burger King, obviously, but the kind of the experience we've had with our master franchisees and the approach we've taken to the double the size of the <unk>.
Internationally for BK over the last eight years is similar in how we're thinking about Tim's and Popeyes and popeye's, obviously with the momentum of the chicken sandwich and the momentum of the business in the U. S has has burned a lot of excitement and interest internationally and that has led to important partnerships in the U.
K in India and Mexico.
In Saudi and we think it's just the beginning of the potential of this brand has internationally.
There's a lot of work here, we're not trying to meet the short term goal here, we're trying to build something meaningful for the long term and the selection of partners, ensuring we have the right teams in place with the right incentives and the right capital structure, that's what's driving us and Thats what drives the process.
And we look forward to seeing of our business grow and our brands grow internationally in the years to come.
The next question comes from Nicole Miller with Piper Sandler. Please go ahead.
Thank you good morning, I was hoping to understand consumer behavior and the digital impact through the lens of average check or transaction. So could you. Please share where you landed last year by concept.
The dollar amount you know average check our transaction and then at each brand how is it how does.
At trending higher in the where are the same as you.
You entered the year and why thank you.
Thanks Nicole.
In general, we don't really breakout traffic end.
And the average check.
Performance for for our brands in home markets are internationally.
Obviously with the impact in the last 12 months of.
Of the COVID-19 on on mobility end transactions, we've seen in.
When people smoke more people dining through off premise channels delivery as well as drive at as we've seen check growth.
Across the globe.
As I mentioned in my remarks on an earlier on the BK. We've made good progress with the with transaction growth in the first quarter here in the U S with our focus on the dollar value menu.
I think there was the.
Probably the digital aspect of that question as well I'll ask Josh to maybe comment on it.
Bye.
By brand.
Yes, Nicole.
The couple of thoughts just generally on the stomach the a couple of things that we do see between.
A little bit different between some of our digital and non digital channels.
But I would say at at a high level.
We tend to see that our digitally engaged guests.
Even with in store service nodes, they tend to be some of as I mentioned in my remarks earlier at tend to be some of our more loyal guests some of our bigger fans. So they tend to be a little bit more of a little bit higher frequency of yesterday.
And to see them coming in a bit more often.
And then obviously the check profiles of little bit different based on the service mode, but any of our delivery service from our guests are obviously at.
Much higher check for it.
So those are the two things that I would probably point out to you in terms of different check and transaction dynamics between the channels.
Thanks for the question.
And the last question today for questions will come from Patricia Baker with Deutsche Bank. Please go ahead.
Thank you very much and good morning, everyone. Just wanted to return to the discussion of the Gimcrack day. Thank you for sharing what you had shared with us and it's great to see that that has traction.
The early but I'm just curious what you know about that customer and the person buying the cracked egg sandwiches are they replacing other breakfast offers.
Maybe from returning customers that may have locked on breakfast for you and do you have any evidence that you're seeing some new customers, having the particular offer.
Hi, Patricia Thanks for the question.
It's early days with the with.
With the launch of fresh cracked eggs.
The data for the update that I shared.
Was the information we had at this point with the which is encouraging with the progress we're making I think we've seen.
The higher frequency through our digital channels of.
Of loyal guests that the.
Net are coming back and adding of chicken sandwich I'm, sorry of chicken sandwich I have that I always have that in my mind, but at breakfast sandwich at the.
At Tims.
Maybe eventually of breakfast sandwich chicken as well, but.
But anyhow, we've seen our digital.
The data and loyalty data confirm that we're seeing we have higher frequency from our.
From loyal guests coming in and adding a.
Our breakfast sandwich. So we think there is new customers coming in early days and we're seeing more frequency from existing customers and that gives us confidence and encouragement that we are on the right path in terms of developing.
The really high quality offerings for breakfast at Tims, it's the it's really just the beginning of the journey.
We've started to add.
The fresh cracked eggs to at.
The bagels, and we think there's other opportunities as well to introduce at another products. So.
We are excited about the progress excited about the start with it and are looking forward to.
That's the continuing to drive more customers into into terms for breakfast and for other day parts as well. Thanks, so much for the question.
This concludes our question and answer session I would like to turn the conference back over to Jose <unk> for any closing remarks.
Thanks for everyone for their questions and for joining US. This morning, we're pleased to see the business returned to growth and to see such a strong start to the year from a development standpoint, as we get our unit growth engine back up and running on top of that our digital efforts are beginning to produce impressive results as we discuss highlighted by what we saw from the tims roll up to win <unk>.
First with loyalty programs at all three brands at all three of our brands in home markets. We're excited to build the more personalized experience for our guests while delivering them at high quality craveable food at a compelling price.
Our teams here at RBI and at our franchise partners around the world of working hard to continue building on the progress we've made so far and I look forward to sharing more in the next quarters to come of a great day and stay safe out there. Thanks, everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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