Q4 2022 Restaurant Brands International Inc Earnings Call

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Good morning and welcome to the restaurant brand International Fourth Quarter 2022 earnings conference call. All participants will be in listen only mode. Should you need assistance please signal a conference specialist by resting the star key followed by zero. All right.

After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. You will hear it telling to confirm that you're in the key.

To exit the question queue you may press start then too. All coolers will be limited to one question.

Please note this event is being recorded. I would now like to turn the conference over to Kendall Peck, RBI's Head of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to restaurant brand's International's Erning Call for the fourth quarter and year ended December 31, 2022. As a reminder, a live broadcast of this call may be accessed on the investor relations webpage at rbi.com forward slash investors.

and a recording will be available for replay. Joining me on the call today are restaurant brands International's Executive Chairman, Patrick Doyle, CEO Jose So, COO Josh Capsa, and CFO Matt Zennigan.

Today's call, earnings call, contains four looking statements, which are subjects of various risks set forward in the press release issued this morning and in our SEC filings. In addition, this earnings call includes non- GAAP financial measures. Reconciliation of non- GAAP financial measures are included in the press release available on our website.

growth and comparable sales, which are calculated on a geometric status basis by using the 2020, 2021 and 2022 just close growth metrics.

In addition, the consolidated growth metrics discussed during the prepared remarks, including consolidated system-wide sales growth, net restaurant growth, and organic adjusted eBizal growth, exclude the results from Firehouse subs, which we acquired on December 15, 2021, to reflect comparable year-over-year growth figures.

And now I'll turn the call over to Patrick. Good morning, everyone. I'm excited to be part of my first earnings call at RBI. It's been about 90 days since I joined the company, and I've been so impressed by the teams I've met and the franchisees who have welcomed me into their restaurants in Miami, Toronto, Jacksonville, Zurich, and...

and Madrid. I know you've all seen our press release this morning, announcing Josh Cobza as our new CEO as of March 1st.

Both Josh and Jose are here with me on the call today, along with Matt as we get into the details of the quarter.

Jose, on behalf of the entire board of directors and literally thousands of employees and franchisees who you work with over more than 20 years. I want to thank you for your tireless hard work, enthusiasm for our brands and huge contributions.

We're a stronger company today because of the many roles that you've led over the years and I can't thank you enough.

Jose has agreed to stay with us for the next year at the advisor and he's committed to helping me in Josh in every way he can.

I'd like to now hand the call over to Jose to say a few words.

Thanks, Pastor. Again, good morning, everyone. First off, I want to congratulate my friend and partner, Josh, on this exciting new opportunity.

Josh has been an invaluable advisor to me over a number of years. He has the talent, the experience, and all the right instincts to continue to drive great results for our brand and our company.

I'm very proud of the team we've built here at RBI. I'll put this team up against any other in the business, any day.

Our team has been delivering great results, and this quarter is just another example that they're hard to work, and that of our owners in franchisees is paying off.

I want to thank our owners in French, I've even Canada, the US, and around the world for investing their capital.

for investing their passion and commitment, and for investing their trust in our amazing iconic brands.

And I want to thank our Board of Directors for their continued support and valuable advice over the years.

When they asked to stay on as an advisor of the next year, it was an easy yes.

I love this company, the people, our food and beverages, and the excitement of working together with our teams and franchise owners to create great experiences for our guests.

I'm looking forward to working with Patrick and supporting Josh as we accelerate our business further. And with that, I'll turn it back to Patrick.

Thanks Jose. Throughout my career I've discovered the value of full transparency and whenever there's a leadership transition to company people speculate what is driving that and I believe it's just easier to tell you. So here's the answer.

We have great leaders in place. We're making good progress.

and we have the whole team including Jose to thank for that. This is a business that's already moving in the right direction.

This is about setting ourselves up for an accelerated pace of growth for the next five to ten years.

The Board of Directors has been disciplined about succession planning. We have an exceptional leader with all the relevant experience we need here in Josh. And he's ready to drive what we believe will be a new era of growth for the company.

I know he's going to do a terrific job. I have an enviable opportunity at this point in my career to be an advisor to Josh as he takes on his new role. My own mandate here at RBI is to rapidly accelerate the growth of the company by identifying areas that can deliver outsized results as we lean into them even more.

Aside from my mandate, the growth opportunity we have in our brands is also why I invested $30 million of my own money on my way in the door and locked it up for five years.

opportunity we have in our brands is also why I invested $30 million of my own money on my way in the door and Locked it up for five years. So I'm all in

We built ambitious plans that we believe in. We have talented teams. The job now is to accelerate the speed and quality of execution, focusing on some big bets, and deliver exceptional results.

One of the themes you'll hear a lot from us going forward is the importance of franchisee's success at the heart of everything we do.

And more specifically, that means strong and growing franchisee profitability.

When restaurant level profitability is strong and growing, it means our franchisees increasingly have more money to invest in their restaurants, in modern digital menu boards, refreshing kitchen equipment, opening new locations, and feeling the pride of creating exceptional guest experiences and providing meaningful employment to hundreds of thousands of their team members.

Previously in my career, I saw the powerful change that's possible within a corporate culture when we put franchisee profitability at the center of everything we do.

Already, nearly 80% of our brand teams have a portion of their personal compensation tied to improving restaurant-level profitability.

As a publicly traded company, we can elevate our accountability to our franchisees even further by publicly reporting on our progress. And that's exactly what we'll do on an annual basis starting today.

For Tim Hortons, Burger King, and Popeye's home markets, profitability is down from what we last disclosed in our 2019 investor day. The reasons are well known to most of you, recovering traffic post-pandemic, all-time high commodity cost increases, generationally high inflation, and so on.

Those aren't excuses. And what matters in my opinion is our baseline today and how we grow from here.

Tim Horton's in Canada remains one of the industry's most loved restaurant concepts with roughly 220,000 Canadian of average four-wall EBITDA in 2022.

There's an opportunity in Canada to improve profitability across all formats and regions.

As we continue implementing the plan, the team has already delivered so much success on.

We've now reported seven quarters of strong sales growth at Tim's.

and we've seen good momentum continue into 2023.

Burger King US average for Wal-Ebotton 2022 was approximately 140,000.

We're seeing early positive impacts from our investments behind reclaim the flame plan as reflected in our results.

We've previously announced that we have signed a new spending agreement with 96% of our US franchisees that says if we're at a minimum of 175,000 of average fall for-wall EBITDA by the end of 2024, then our franchisees will invest in incremental 50 basis points.

into the advertising fund for 25 and 2026. So obviously the team is focused and motivated to achieve this target at a minimum. And we believe there is a lot more upside there in the coming years.

At Popeyes US, average four-wall EBITDA in 2022 was roughly $210,000.

with pressure versus prior years related to commodity and labor costs.

A big focus of the team this year is working with our franchisees to streamline their kitchens and improve restaurant operations, which we believe will contribute to growing restaurant profitability over time.

And at Firehouse, we're working to fully integrate the different systems and will include their profitability as part of our annual disclosure in the future.

As you hear us talk about the big areas for growth in the company, this is a good baseline to measure our progress against over the next five plus years.

Our long-term growth as a company is tied to the growth of franchisee profitability. You'll see us do our part in menu innovation, marketing, restaurant, design, technology, and digital.

and will work closely with franchisees who need to do their own part to improve their profitability, particularly delivering excellent and consistent execution and a positive team member and guest environment in their restaurants.

We are all in with franchisees who share our ambition for the growth we know we are capable of delivering. And along the way, it's likely that a few people will leave the system.

and transition their restaurants to franchisees who share our long-term mindset for success and growth.

I believe that franchisees who are all in working in their restaurants and leading their teams are going to be excited by and rewarded for their confidence in the team we have here at RBI.

We are fully committed to those franchisees' success. I'm looking forward to speaking with you all in more detail on February 22nd, answering your questions, and sharing some more on why I'm so excited to return to the restaurant industry and especially our BI.

What I will say today is that after my first 90 days here, I have even more conviction in the opportunities we have across all four brands to accelerate our growth.

Now, Josh will take us through the results of the corner and then Matt will make some comments before we open things up for your questions.

Good morning everybody.

Thank you very much, Patrick, for all of your support so far. And I'd like to thank Jose, who's been a great leader and a friend of me for my entire time so far at RBI.

It's still early days for me and sticking through priorities in my new role. And I plan to spend the next few months listening to our teams, our franchisees, and you all, and making sure that our plans for the future incorporates all of your perspectives on how we can be the most successful together in the coming years.

That said, I do have some initial reflections.

One is that we have an amazing business, fantastic people and a lot of tailwinds.

I think this is really a question of how we can make our business move faster and operate even better.

And one of the most straightforward ways to allow our teams to move faster is to give them more autonomy and ownership within our global company structure.

I'm looking forward to sharing more of my thoughts on these and other topics in the coming months and quarters.

I feel very fortunate to have the support of Jose, who has been in this role for the last four years.

And I'm also very fortunate and thankful to have Patrick as a leader and a mentor to learn from and work with as we take our next step towards this phase of growth.

But let's be efficient and get into the results that we're here to talk about this morning.

We closed out the year with momentum, having made great progress across a number of important initiatives, including driving strong sales growth at Tim Horton's Canada. Launching our Reclaim the Flame Planet Burger King, US, increasing our net new restaurants year over year, improving operations and enhancing the digital guest experience.

We also continue to make strides in our ESG journey, including being named to the Dow Jones Sustainability Index for the first time. We finished the year on a strong note. Growing fourth quarter consolidated comfortable sales 8% year over year, and net restaurants over 4%, which led to system-wide sales growth of 11% year over year, excluding firehouse subs in Russia.

Our comparable sales included double digit growth at Tim Hortons, Canada, and in our Burger King International business, as well as sequential improvements in Burger King, Popeyes, and Firehouse Sub-Fold Market.

These results were aided by continued growth in our digital channels, with global digital sales up 24% year-over-year to over $3.5 billion in the fourth quarter, representing over a third of consolidated system-wide sales. For the full year, we grew digital sales 31% to $13 billion.

We also closed out 2022 with some improved momentum in development, delivering 754 net new restaurants in the quarter and 1266 net new openings for the year.

We saw the benefits of having broad-based development opportunities, with Popeye contributing 30% of our total net restaurant growth in 2022 and Tim Hortons driving nearly 25%.

Tim Horton's added close to 200 net new units during the quarter and surpassed the 1,700 store mark outside of Canada, including China which crossed the 600 store mark.

Popeyes had a solid development year in North America while also ramping up internationally.

including opening its first stores and fast-growing chicken QSR markets like South Korea and Indonesia.

Meanwhile, Firehouse subs kicked off its development journey as a member of the RBI family, signing new agreements to expand in western Canada.

In total, we saw over 700 net restaurants open in international markets in Q4, and still have an opportunity to bring birching international back towards pre-pandemic levels.

We see plenty of opportunity to bring our brands to new markets around the world and combine with our existing growth markets, places like Burger King, India, Brazil, France, and Spain. I think this dynamic sets us up well to continue accelerating our net unit group in 2023.

Before turning to our brand result, I'd like to acknowledge the devastating earthquakes that impacted Turkey and Syria last week.

We have a large business in Turkey with nearly 700 Burger King restaurants and more than 250 Popeyes restaurants.

Our team has been working closely with our dedicated Master franchise partners and the UN Refugee Agency to provide real-time updates on the situation.

Our thoughts are with all of our team members, their families, and the people of Turkey who have been impacted by this unfortunate tragedy. Now, it's turning to brand performance for the quarter. We'll start with Tim Hortons, Canada.

Axel and his team at Tim Horton's Canada closed out a great year, with our highest level of annual comparable sales since acquiring the brand in 2014.

The team drove double-digit comparable sales of 11%, even while lapping a strong prior year period, which included our 10-bibs promotion.

During the quarter, we grew comparable sales nearly 9% versus 2019, including sequential improvements across all day parts, formats, urbanities, and regions. With super-erven locations notably up 2% versus 2019, the first positive quarter of result in this format since the pandemic.

Our results were driven by thoughtful calendar initiatives, targeting high growth, PM food, day parts, and the cold beverage product category, as well as momentum from our core offerings and digital platforms, all of which were rated by mobility improvements and strategic pricing.

Our efforts to strengthen our PM food day parts, like lunch and afternoon snack, continue to benefit from our loaded platform plus the addition of any time snackers, a savory baked good option.

Our loaded bulls and wraps and any time snappers contributed to an increase in traffic will also attract a younger guess.

We're excited to continue to build on these platforms, including with the recent launch of our new Chipotle stake bowls and wraps.

Although we're still in the early phases of our journey, we grew sales in our PM Food Day Parts nearly 30% versus 2019, and expanded our total PM Food Sales mix to approximately 24% in 2022 versus 22% in the prior year.

This represents about 8% market share for the year, meaning we have plenty of room to grow further as we aim to increase our share of the $10 billion GM food market in Canada. Over the past two years, we've also focused on extending our position as a leader in hot-root comedy in Canada to leadership across the broader beverage category.

As part of this journey, we have introduced new cold beverage platforms that complement our food offerings, including our cold brew and quenches.

The cold beverage category is one that's been growing quickly for us. This quarter, cold beverage sales grew 11%. Comprising 23% of total beverage sales up from 17% in 2019.

In 2022, we held nearly 25% of the $4 billion Canadian dollar cold beverage market, and we see a clear path to build on our recent innovations to capture even more share.

Digital, which represented over a third of system wide sales in 2022, also remains a core long-term growth engine for Tim's in Canada.

We know that digital guests visit more often and have a higher check on average, resulting in five times more spend over the course of the year versus non-digital guests.

In October , we rolled out our new Scan and Pay feature, which allows our 4 million monthly active Timz reward members to use just one scan to pay for orders, earn loyalty points, and redeem rewards.

Looking ahead, we see opportunities to enhance the Tim's digital experience even more, by improving the look and feel of our app and adding more rewards options in reasons to engage with our platform every day.

Our teams and restaurant owners have also been focused on operational improvements.

We saw the benefits of hospitality and speed of service workshops, enhanced field team visits, and trainings, all translating into restaurant-level operational improvements this quarter, including a 12% sequential improvement in guest satisfaction and shaving a second off speed of service.

I'd like to thank our restaurant owners and their team members for remaining focused on driving operational excellence and delivering a great experience in the communities they serve, helping to solidify Tim Horns' place as the most loved and trusted restaurant brand in Canada.

Thank our restaurant owners and their team members for remaining focused on driving operational excellence and delivering a great experience in the communities they serve, helping to solidify Tim Horns place as the most loved and trusted restaurant brand in Canada. Turning now to Burger King, US.

In our first quarter of the new Reclang with Plan Plan, the team delivered a sequential improvement in comparable sales to 5% year-over-year.

Tom and him is team's focus on operations, menu innovation, and enhancing our digital capabilities. We're further aided by our reclaiming a stronger share of voice with our fuel-to-plane marketing investment.

You've heard us highlight again and again the correlation between operational excellence and sales and profitability.

Since sharpening our focus on operations in mid-2021, Burger King has achieved an over 40% improvement in guest satisfaction, with six consecutive quarters of progress.

We have accomplished this by supporting franchisees through several initiatives, including expanding our field team, implementing our new franchise success system to provide consistent data and key metrics and holding targeted goal standard service and water training sessions across the system in the fourth quarter.

We kicked off 2023 with royal round tables, which are bringing together more than 8,000 Burger King restaurant general managers in over 40 cities across the country.

Our goal is to rally the system behind reclaim the flame, providing them with hands-on education and instilling a sense of pride for the valuable work they're doing to deliver an exceptional guest experience in our restaurants.

I had a chance to attend the Miami session last week, and the enthusiasm from our restaurant general managers is truly inspiring and rewarding. During the fourth quarter, we kicked off our Royal Reset program, spending approximately $17 million of the $250 million program.

This included allocating an initial $15 million to royal refresh for new point of sale terminals, kitchen display screens, and indoor digital menu boards, which will start deploying this month.

These investments are matched dollar-for-dollar by participating franchisees who have chosen to invest in kitchen equipment like friars and broilers, as well as property enhancements like improved lighting and signage.

Given strong interest from our franchisees and a better capitalized on the momentum we're seeing in the business, we've decided to accelerate our timeline and now expect to deploy the majority of our announced $50 million Royal Refresh spend in 2023.

We also continued working through applications for our Royal Reset Remodel Program.

which provides up to $200 million of funding for high-quality remodels, prioritizing restaurants, operators, and remodel scopes that offer the greatest potential to deliver the highest returns for our franchisees. We've mentioned before that quality over quantity is a key priority for this program, and I'm pleased to see franchisees also embracing this mindset.

Nearly a quarter of the remodel applications are for scrape-in rebuilds. Wally scrapes are the most intensive, capital intensive project type. They also see the highest sales uplift and position the brand for success in their markets for decades to come.

The Royal Reset Program, team member trainings, and Royal Roundtables, help to ensure our restaurants are ready to welcome guests as we drive traffic to the system with our $150 million fuel-to-plane marketing and digital investments, which also be getting Q4.

I'm really proud of our team's new U-Rule campaign highlighting the builder and Seanilik, Joe, palms and palms.

I won't attempt to sing the jingle here and you all probably have it stuck in your heads by now anyways. But this is a truly iconic campaign highlighting one of our strongest brand equities.

We've already seen early indications of success from this campaign.

including sequential improvements and brand health metrics like top preference during the fourth quarter.

Now to move on to our results.

Our 5% increase in comparable sales was driven by our focus on the walker. Sustainable management role, Chris B. Chicken, and thoughtful value positioning.

Our calendar initiatives were further enhanced by $13 million of spending against our fuel to flame program, including $9 million on marketing investment, which included brand communications to reintroduce our guests to our core equities like the WAPER and have it your way.

In addition, our ongoing efforts to improve our digital capabilities help drive fourth quarter digital sales growth of 36% year-over-year, reaching approximately 11% of system-wide sales.

Before I shift to Burger King International, I want to touch on the health of our franchise eBay. We know this is a key focus for investors, especially given a recent insolvency in the system.

We have hundreds of franchisees across the country, many of whom are experienced local operators.

We have families who have been in the business for decades and are important contributors to their local economies and communities. That said, it's also clear that we have operators who are struggling and we're actively working to help them improve or transition their portfolios to more engaged, operationally strong franchisees, all with the goal of positioning the system for long-term success.

As Patrick discussed, we know that one of the best ways to improve the financial health of our franchisee is to drive traffic and top line sales while thoughtfully implementing initiatives to improve the bottom line.

We also know that strong operations are highly correlated with franchisee profitability. That's why Tom has been so focused on operations as we work to drive traffic back into the system. We are seeing this translate into improvements in franchisee profitability with Q4 profitability up about 40% year on year.

A good first step towards surpassing our 175,000 average 4-wall EVA target by 2024.

That said, we're pleased to see early indications that are dedicated operations, improvements, efforts, and it will claim the flame plan or driving results. We'll keep you updated on our progress in the year ahead.

Now, shifting to the Burger King International Business, which is an important growth engine for the brand.

David and his team delivered comparable sales growth of 11% year over year and system wide sales were up over 16% for the fourth quarter.

These results were driven by strength in five of our largest markets, France, Spain, Australia, Brazil and the UK, which all saw double-digit comparable sales versus 2019 and helped to offset continued COVID-related pressures in China.

France, our leading international bird king market, saw over 25% of system wide sales growth year-to-year, reaching $1.6 billion in system wide sales in 2022, and Spain reached $1.3 billion in system wide sales.

For the fourth quarter, Digital Sales and Burger King's international markets comprised over 60% of system-wide sales and grew approximately 27% year-over-year, driven by kiosks and delivery.

China's Austria generated over 90% of sales through digital channels, with France, Spain, and Italy reaching over 80%, Brazil at over 50%, and the UK, Saudi Arabia, and UAE generating over 30% of sales digitally this quarter.

We're very excited about the potential of our international business and look forward to extending this momentum into 2023 and beyond.

Turning out to Popeyes, our development momentum resulted in net restaurant growth of 10% and coupled with the sales of nearly 4%, including 1.5% of the capital sales in the US, led to system wide sales growth of over 11% per quarter.

Throughout 2022, we've been commenting on the strides the team has been making to bring the brand's unique Louisiana flavors to more and more guests around the world.

We were recently named the number two best franchise and entrepreneur's franchise 500. And we believe the strong value proposition of this brand is becoming more and more recognized in the broader franchise D community.

Our emphasis on entering into long-term agreements with high-quality partners, who the ambitions and values are aligned through own, coupled with the business transformation we've experienced over the past few years, are major contributors to this development journey.

We ended the year just shy of 4,100 restaurants globally, up from roughly 2,700 when we first acquired Popeyes in 2017.

This year we saw over 200 restaurant openings in North America alone, featuring the greatest number of new franchisees and highest percentage of free standing single or double drive-through locations in the past five years.

We also started to see the brand's global development pipeline take hold.

In 2022, we opened over 180 net news stores outside of North America. That's a nearly seven times increase versus 2017 levels. With growth coming from existing markets like Turkey, Spain, Brazil and the UK, as well as exciting new market entries like South Korea, India, and Indonesia.

In the US, the launch of our Black and Chicken Sandwich in November proved to be a great extension of our chicken sandwich platform. Offering guests another delicious, high-quality product, well-positioned for a more everyday consumption without sacrificing the flavor of the classic chicken sandwich.

This edition resonated well with guests and helped drive a healthy rebound in overall chicken sandwich performance.

As I mentioned, Sam and his team have also been focused on enhancing operations at Popeyes in the US.

In this quarter, we saw continued improvement in gas satisfaction levels.

We know that top operators, or those who score the highest on key metrics like guest satisfaction, speed of service, and brand standards execution, generated over 30% higher for Wall-E-B-Dawn in 2022 than the system average, which is why improving operations is such an important aspect of our long-term strategy.

We were also pleased to drive approximately 20% of our sales through digital channels at Popeyes US this quarter, up over 30% year over year, driven by strength in delivery and mobile ordering pay.

As we look into 2023, we're focused on delivering another strong development year, innovating around key menu items and enhancing the guest experience through improved digital capabilities and operations, including making our restaurants easier to run for our team members.

And finally, moving to Firehouse Subs. We rounded out Firehouse Subs' first full year as part of the RBI family, making meaningful progress positioning the brand for future growth.

Throughout 2022, we worked on integrating Firehouse and continued to transition from an area representative model to a more traditional corporate and franchisee-led development model like our other brands. All's position Firehouse for higher unit growth in the future.

In addition, we've identified areas of opportunity to enhance the brand's digital capabilities, including around our mobile app and loyalty program, and we'll have more to share on our digital path in 2023.

Firehouse subs ended the year with average unit volumes of nearly $925,000 on a trilling 12-month basis. That's up about 25% versus 2020 levels.

During the fourth quarter, firehouse subs on net unit growth of 2.4% in relatively flat comparable sales, resulting in a 3.9% Euro-euring freeze in system wide sales.

Successful digital initiatives, including Name of the Day, help drive a third of sales through digital channels for the quarter.

The Firehouse Sub's Public Safety Foundation also remained active this quarter and surpassed $73 million of grants awarded since inception.

The brand's commitment to this foundation is a key driver of its resonance with guests and strong brand health metrics, including number one in support communities and has value similar to my own. We look forward to ensuring Firehouse Hubs remains an important fixture in its communities for many years to come.

Now, I'll turn it over to Matt, who will discuss our financial results for the quarter.

Thanks, Shosh. Good morning, everyone.

For the fourth quarter, excluding Firehouse in Russia, our global system went sales to 11 percent and our adjusted EBITDA grew approximately 6 percent organically.

Our fuel-to-flame investment in Burger King, US, was a $13 million headwind to our Justice Debatat, reducing our year-of-year growth rate by approximately 2%.

Our growth rate was also reduced by another 4% related to a few additional drivers, including a $9 million decrease in cash distributions received from various joint ventures, a $7 million year of your increase in bad debt at Burger King, largely related to the recent BKUS franchise the Insolvencine Josh mentioned.

and a $5 million increase in segment GNA, excluding firehouse.

As we've discussed, over the past few years, we've been making proactive investments across key areas of the business that we believe will help accelerate our plans to enhance the guest experience and drive long-term profitable growth for us and our franchisees.

We feel confident we have the resources we need to drive our plans forward, and as we looked at 2023, we currently expect to see a significant moderation in the year-of-year growth of our core segment GNA.

During the quarter, as a result of depreciation in both the Canadian dollar and the Euro versus the US dollar, we saw our adjusted EBITDA FX had wind increase versus third quarter levels to $31 million a year-to-year.

As a reminder, on average, for every 100 basis point change in the Canadian dollar versus the US dollar, we see a roughly $3 million quarterly EBITDA impact.

And for every 100 basis point change in the year-o, we see a roughly $1 million EBITDA impact per quarter.

Before turning TPS, I'd like to briefly discuss our sales minus cost of sales margin within our Tim Horton segment.

As Patrick mentioned, our industry has experienced significant levels of inflation.

And as a result of our pass-through approach to commodity price increases, our percentage margin decreased in the fourth quarter. As a reminder, the way we manage our business is designed to provide visibility and stability to our restaurant owners, including adjusting prices at designated times during the year.

As an example, we typically buy coffee 9-12 months out, and as a result, in Q4, we were working through inventory that was purchased at more elevated price levels.

Given these timing dynamics, we believe looking at our sales minus cost of sales margin on a full-year basis is a better indicator of the business.

Now, shifting to EPS, our fourth quarter adjusted earnings per share was 72 cents and grew approximately 5% organically year-to-year, excluding an FX headwind of 5 cents per share.

Our just the EPS also included a one-cent per share net benefit related to discrete non-cash tax items, which was offset by a negative six cents per share headwind from the combined impact of our Burger King U.S. fuel-to-flame investment, removal of Russia from our earnings base, and the decrease in cash distributions received from joint ventures.

Taken together, these items had a total net negative impact of 5 cents per share, resulting in a negative 7 percent headwind to our Q4 organic growth of 5 percent. Our EPS growth rate in the Q4 was also impacted by an additional negative 5 percent.

Due to our higher average depth balance related to our acquisition of firehouse subs, as well as rising US benchmark rates.

which flow through the cost of our floating rate debt. As a reminder, our proactive refinancing and interest rate hedging has allowed us to effectively lock in fixed rates on approximately 80% of our debt over the next six years. However, we do still have exposure to rising rates on approximately 20% of our outstanding debt.

Finally, during the quarter, our equity-based compensation increased year-to-year to $43 million. In part, driven by the changes to our incentive compensation framework in 2021, toward market standard three and four-year investing from five-year cliff-vesting.

We expect this shift, as well as the addition of recent equity awards, will result in continued elevated levels of equity-based compensation in Q1 and 2023.

Turning to our cash-alone capital allocation priorities.

During the quarter we generated $375 million in free cash flow, reaching nearly $1.4 billion for the year.

Our strong free cash-lican version allowed us to continue executing on key aspects of our capital allocation strategy.

including commencing our reclaimed flame plan at Burger King U.S. and returning roughly $240 million of capital to shareholders through our industry leading dividend, which we declared for Q1 at $0.55 per common share unit. With a full year target of $2.20 per share in 2023, marking the 10th annual year of a year increase in our dividend.

As part of reclaim the flame, we also deployed $17 million of capital toward our Royal Reset Program this quarter, and $13 million toward our fuel-deflamed advertising and digital investments.

We ended the year with the liquidity position of approximately $2.2 billion, including nearly 1.2 billion of cash, and saw our net leverage sequentially declined at 5.1 times, keeping us on track to reach our target net leverage ratio of the mid-4x area over the next two to three years. Going forward, our capital allocation priorities remain a-

term we intend to prioritize de-levering and believe a mid-4x net leverage ratio will provide us with plenty of flexibility to execute on both organic and strategic opportunities in the future, with the added benefit of reducing our cost of debt over time. With that, I'd like to thank everyone again for your support and for joining us this morning.

and we'll now open the line for questions. Operator? Thank you. We will now start today's Q&A session. If you would like to ask a question, please press start followed by one on your telephone keypad. Now, if you change your mind, please press start followed by two.

Our first question today comes from David Palma from Evochal. Your line is now open. Thank you. Congrats, Patrick and Josh. And thank you and all the best to you, Jose, after this transition year. Patrick, obviously your priority, as you said, is going to be around maximizing long-term

see the the plans investments in people there in those big two brands as sort of underway or do you think there's changes that need to happen in investments or other and then on the international front you see opportunities obviously unit growth over the long term is going to be a big deal do you see regions or brands where you have the greatest

Unicrofic celebration opportunity. Thank you. Sure. Thanks, David.

Look, I think in terms of the first question around the teams and the investments that we're making, I think we're in a very good place.

So, you know, we certainly may be shifting some things around as we find areas where we think we can invest that are going to generate a great return, but we've got great teams in place and we are certainly investing into those business to get things moving. That Reclaim the Flame initiative you can already see is starting to move us to the right place.

to levels and now past levels from pre-pandemic, feeling very good about the momentum in that business. The leadership we've gotten the business there, Matt talked about the supply chain margin in fourth quarter, which honestly was...

was kind of more an issue of costs of coffee going up and our flattening out pricing for our franchisees to kind of help remove some volatility for them in their earnings.

which is certainly going to help them feel great about their investment of time and resources into Tim's. So, you know, those two big home markets in the Tim's case, I think, is in very good shape, really moving strongly the right direction.

BK, we've still got work to do, clearly, but we are absolutely on the right path. I think we mentioned the fourth quarter profits for the franchise these up very meaningfully. So that really gets to the international side. And I was over with David and his team last week in Switzerland and then Spain.

I am really impressed with that team. I think we've got the team and the resources we need there. We've done a really good job of choosing strong franchisees around the world. The pandemic certainly.

You know, slowed some things down most notably, I think with BK in China and we've got to figure out a way to get that growing again. But overall, you know, when you look at the scale and scope of the BK business outside of the US, we've got a big base of business that is going to continue.

economics in our international businesses, which ultimately, you know, if you combine great franchisees who are well capitalized with strong unit economics, that's what's going to drive your new store growth. And so most of the store growth is going to come ultimately from outside of the U.S. Popeyes doing...

place and how that's going to generate store growth going forward.

Our next question today comes from Brian Bittner from Open Hiner & Company. Your line is open.

Thank you. Good morning and congratulations Josh and

and Jose and welcome back Patrick. You're to hear from you.

As it relates to improving franchise profitability, which is obviously a huge part of your mandate, the company's mandate.

Franchisee profitability is obviously down a lot from when it was last disclosed in 2018 I believe at that time Tim Hortons was at 320k. It's now 220k Burger King was at I think 180k. It's not you know 140k So outside of improving sales and improving comps

What do you believe are the other more controllable opportunities, again, outside of sales leverage as it relates to executing against this mandate to improve franchisee profitability?

Yeah, good morning, Brian . Thanks so much for the question. I think a few different thoughts on this one. I think it's been a great initiative from Patrick to bring franchise profitability, kind of even more to the forefront here. It's something we've focused on for a long time. But now we'll be talking about with you all as well and a bunch internally.

I think, to the points you made, first of all, sales and traffic are the start of this equation. So we do need to focus there. And I think the good news on that front is that we have quite a bit of momentum in some of our core markets. We had a great quarter at Tim's and we're starting to see some of the results in the BKU from our reclaimed the Flame Plan. So I think we've got some good momentum on the sales side.

If we can put together the combination of driving some sales and traffic back into the restaurant, plus have some moderation in some of those cost lines. I think that's the formula that will be focused on going forward, and I think can drive some meaningful improvement in franchise profitability this year.

Our next question comes from Dennis Geinger from UBS. Your line is open.

Great. Thanks for the question and Patrick and Josh, congratulations and a best of luck on the transition. I appreciate all the detail and the commentary on the franchisee profitability and the strategic focus here. Just specific to DeBurger, can you ask and perhaps Tim's Canada? The focus is on improving floor wall profitability, but wondering if there's any thoughts to add with...

yeah more than thank you so much for for the question you know i i i'd say on uh... uh... particularly on bk u-s you know that's the been the most focus on on this run you know i'd like i said we uh... i think we're it's really encouraging that we're seeing some good momentum on the sales side replying to play looks like it's working some of the advertising and it's focused on the walkers working

And that's helped both sales and as I mentioned profitability, which was up about 40% in the fourth quarter. So we'll be open to build on that momentum. That said, as I also mentioned, there are some franchisees who are going through some difficulties, whether it's operational or capital structures and we saw one of those situations with an insolvency that happened here recently.

And I think our goal is, as we look through those situations, we'll be to make sure that we're thoughtful about all the different stakeholders and make sure we get to the right outcomes through those processes to make sure that all of those businesses are set up to be operationally and financially successful for the long run. Part of that may be closures and we'll work through each of those individually and make sure we get to the right outcomes for the long run. And we'll keep you updated on any of those outcomes.

Josh and would also like to say thank you and best wishes to Jose as well. So encouraging results out of BQS and it seems like they're positive early results from and reception to reclaim the flame. So Patrick, you highlighted the opportunity to expand for Wally, but over the next couple of years.

And Josh, we heard you highlight the acceleration of some of the investments spent in the plan. But given early results you're seeing and given your new roles, Patrick and Josh, it would be great to hear any additional thoughts on the plan here going forward and whether you see opportunity to kind of rethink.

Investment levels just given the early momentum you're seeing. Thanks So, you know, I'll start look that we are excited by the momentum in the business I think we're getting a lot of things right. We've got you know real progress that we need to make To continue to drive that success in the in the BK system

You know, very different situation. I'll loop back to the previous question a little bit then, you know, with Tim's, which, you know, you've got a lot of franchisees in Canada, debt levels are low, the, you know, general health of the franchisee base is good overall. There's certainly exceptions, but.

the level of profitability in Canada overall is strong. We want to get it back to the highs where it was and even higher than that and make a great progress on that.

But in the US system, you know BK, I think the highest level of profits in the history of the brand was something like 184,000 in EBITDA. 175 gets us close to that. But you know we've really got to get it higher than that. So we've got to generate ongoing growth.

in the top line and in the bottom line for that business. We've got to work through some situations, as you talked about with some of the franchisees. But, you know, ultimately, if we've got the averages moving the right direction.

The health of the system is continuing to get better. It certainly makes it easier to work through with some that have got capital structures that are not what you want them to be and kind of work through those situations. But from a level of investment, the reclaim the flame, I think what it did for us is give us an opportunity.

So if you've proven a good return on investment, then it's most directly linked with the marketing, which we already have an agreement from the franchisees. Once we've gotten to the $175 in 2024, then they commit for an extra 50 basis points.

in the following two years. And you know, that's, we will have at that point proven that increased investment in marketing. It is a good, is a good generator of return for them and then they take over the investment there. So we feel good about where we are, about the progress we're making.

More to be done on the BKUS business, but early results are certainly very good. If I can just add their quick Chris, I feel really good about where we're going. There's definitely a lot of work left to do. I think we have a tremendous leadership team there on Under Tom. And I think their plan is really good in a very thoughtful one.

I think they have initiatives that they can kind of action in the near term, which is what we already started to do with some of the new advertising. And we're going to do with some of our refresh where we're getting a lot of investments into the restaurants quickly with equipment and some of our technology. And then over time, we transition to doing some more of the heavy lifting of some of the big asset upgrades. So I think the contours of the plan are right. It's great to see the initial success.

You may see us tweak little things around the edges like we mentioned today on accelerating some of that early investment all into 2023. But I think by and large, I think it's a very thoughtful plan and I'm really pleased to see some of the initial progress under Tom and the team.

Our next question comes from Brian Harbour from Morgan Stanley . Your line is now open.

Yeah, thank you. Congratulations again to all of you. I'll just ask about the BKUS side as well. We can see that the sales performance picking up there and you noted better profitability.

in the fourth quarter. Is there anything else you can provide in terms of metrics on customer satisfaction, maybe in terms of market share? What else are we kind of seeing that's showing the traction in that business and in helping to drive some of that profitability improvement?

Yeah, Brian , thanks for the question. I think you hit on some of the main things that are giving us confidence, things like the sales and the profitability moving in the right direction. But we're also seeing a few other things. We're seeing in some of our brand metrics, we're seeing some improvement. I mentioned that in Q4. I think that to me is a sign that some of the advertising

and really focusing on some of those core equities like the Womper and Habit Yearway. That's working and resonating with our customer bases. I think we are also seeing improvements in customer satisfaction. Our guest satisfaction metrics have been improving and that's not new that it's actually it's been pretty consistent over the last year and a half or so. I think that's certainly a positive sign.

It's no accident. It's an outcome of some pretty deliberate efforts we made to make investments back in the field team and make sure that we had a really clear system that the franchisees believed in of how we would grade performance and manage that performance. So I think that's really encouraging. And the other stats we keep an eye on, we're keeping an eye on both our sales performance versus the industry and increasingly our sales performance.

You see that pretty clearly linked to all the efforts Tom and the team have been making across the system to improve the guest experience and improve operations at the restaurant level. We know that our top operators in BK and our other brands as well drive much stronger profitability as a result of those efforts and actually grew profitability year over year despite

the macro headwinds. I think gas satisfaction was up something like 20% from Q3 to Q4. So I mean we are moving the right direction.

Next question comes from Sarah, Senator from Bank of America. Your line is now open.

Thank you.

Thank you. Ah. And.

We're not quite getting you.

Oh Sarah we're not quite getting yet. Oh is this better?

There you go. Sorry. Okay. Sorry about that. Just a quick question on the outlook for GNA and also on TIM. So I think I just wanted to clarify on GNA that the expectation is that growth will be slower than it was in 2022. I don't know if you have any more color you can give.

On Tim's in Canada, I think Matt mentioned that the margin was compressed. Guess could you talk about how do you think about pricing in Canada? Presumably the franchisees are under similar pressures you talked about with inflation. Thinking in the US, we've seen pricing be relatively elevated across the industry. It is.

Are you looking at it the same way in Canada or the idea you take share by keeping pricing relatively low versus inflation?

Hi Sarah, thanks for the question. It's Matt here, just on the first part of your question related to GNA. Yes, I think the message is, and it's Patrick described earlier, we've invested a lot over the past couple of years. We've built some really amazing teams, world class teams here across the company. And we think we have all the assets that we need to really drive forward the initiatives that are most important to the business.

I'll touch on tennis pricing. I would just say that I think, actually, and hope and the rest of the team, there are very thoughtful and very mindful of pricing that we take. We know that it's core to our purpose and our proposition to our customers to provide great taste and great value every day. And so we wanna make sure that we're upholding that promise for all of our guests, and we're pretty thoughtful about that.

But of course we have seen cost pressures and I'd say we keep an eye, careful eye on what's happening with inflation in the broader market, what's happening in grocery and restaurants, what's happening with our competitors. And we try to put all those things together to get the right balance of pricing and value in our business over time.

Talk about this maybe from a US perspective, but also from an international perspective, where leverage might be lower. And then as you look out to the pipeline for store development this year, you think you have a chance of accelerating overall store growth despite those headwinds.

Thanks, Greg. I appreciate the question. My perspective on this, I think at the end of the day, development always comes back to ROI. We need to have a really strong set of unit economics across our concepts, and that's what will cause franchisees to want to invest. That's what we're really focused on. So unless we just do a little bit more in our discussion of

a lot of amazing partners around the world and we have very strong unique economics and a lot of those markets and that's why I mentioned a little bit earlier in my prepared remarks that we're excited about the year ahead and feel like we're on a good path to try and improve the pace of growth around the world.

Our next question comes from Mark Petrie from CICB. Your line is now open. Yes, thanks. So I just wanted to follow up actually on specifically on the team supply chain operations and

Are there any other pieces of noise that you will be cycling through with regards to higher price commodities in the upcoming quarters? My question on pricing was already asked, but perhaps when you look back on 2022, anything you can provide with regards to how you might have compared to the industry or to CPI.

Yeah, thanks, Mark, for the question. I'll jump in on the first part there related to supply chain. Yeah, look, I think as we talked about, you know, there's given all the volatility and elevated commodity prices that has created, certainly created volatility in our quarterly results in terms of the percentage margin. And we've talked about that a bit over the past few quarters.

And also, as I mentioned, we did see continued elevated commodity costs continue into this year. And we have, as we mentioned, higher cost inventory that we were working through in the fourth quarter and a bit into this year. So there is a bit of noise there. But overall, we think the most fundamental kind of...

about volatility. Again, I think it's helpful to look at the margin on a full-year basis to sort of normalize for some of that quarter to quarter volatility that we called out. Yeah, and Mark, I'll take the one on pricing. As I said, a couple of questions go. We certainly keep an eye on both those things. We do look at competitor pricing and we're keeping an eye on

Your line is now open. Thank you very much. I wanted to just follow up on the accelerating growth. As we frame the priorities, is the near-term focus more about accelerating confidence and franchising profitability and then that ultimately unlock accelerated growth over the medium to long-term? Or can this be done in tandem? So you have franchisee profitability more in the home market.

and also accelerating international unit growth in tandem. Thank you. Yeah, you know, I'll handle that one. All of the unit growth we're getting today is a function of strong unit economics and so it's kind of a, it is certainly the answer is both.

And it depends on the market, but where we're getting good growth in units, it's because we've got really strong unit economics and we've got the right franchisee partners, where well capitalized, etc. There are other areas where we can accelerate the growth, either by introducing new brands into new markets in international or by working on franchisee for Wal-Ibata.

to improve it so that it is going to generate a good return for them. So it really comes down to a function of which market and where they are in the pace of development of that market. But both. So where we're getting it, it's because economics are good and where we're going to accelerate it, it's going to be by improving the economics and getting capital into those markets to build more units.

Yep, I totally agree Patrick. I would just say I think one of the greatest gifts that Jose has left me with is exactly what he said. I think we have incredibly talented teams across all of our business units around the world and they're working on all of those things. We have amazing teams in our home markets. We're working on driving same-source sales and franchise profitability and the growth of those markets. And we also have an amazing team in international.

who's working on developing our footprint around the world. I think there's a lot of exciting stuff, and as I said at the beginning, a lot of tailwinds for us, and we'll be working hard on all those things throughout the coming year.

Great, well thank you all very much for your time this morning, we really appreciate it. Appreciate all the questions as well. We'll see everybody next week in New York at our upcoming investor day. Thank you for your time today and have a great day.