Q2 2023 Restaurant Brands International Inc Earnings Call
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Good morning, and welcome to the restaurant brands International second quarter 2020 free on its conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after today's presentation.
That will be an opportunity to ask a question.
Talk a question you May press Star then.
One on your telephone keypad, you will hear I tied to confirm that you are in the queue.
She likes at the queue you May Press Star then two all callers will be limited to one question.
Please note. This event is being recorded I would now like to turn the conference over to Kendall Peck.
B I head of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to restaurant brands Internationals earnings call for the second quarter ended June 30th 2023.
As a reminder, a live broadcast of this call may be accessed on the Investor Relations webpage at RBI Dotcom 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 , 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 reconciliations of non-GAAP financial measures are included in the press release available on our website.
During portions of the call today, we will be referencing franchisee profitability measures that are based on unaudited self reported franchisee results.
In addition, the consolidated growth metrics discussed during the prepared remarks, including consolidated system wide sales growth comparable sales net restaurant growth and organic adjusted EBITDA growth exclude results from our franchise restaurants in Russia as we did not generate any new profits from restaurants in Russia in 2022, and do not expect to <unk>.
Any new profits in 2023.
And now I'll turn the call over to Josh.
Good morning, everyone and thank you for joining us on today's call to discuss our second quarter of 2023.
Our franchisees and teams helped deliver another solid quarter with year over year consolidated system wide sales growth of 14% driven by nine 6% comparable sales and four 1% net restaurant growth.
This top line growth translated to 10, 3% organic adjusted EBITDA growth and six 6% organic adjusted EPS growth.
We saw strong comparable sales at Tim Hortons emerging including 12 with 5% growth at Tim Hortons, Canada, 11, 6% and our Burger King International businesses and eight 3% at Burger King U S.
In addition, popeye's U S grew four 2% and firehouse U S was up two 6% for the quarter.
We were pleased to see these topline results as well as continued moderation in overall cost inflation helped deliver another quarter of year over year growth in franchisee profitability.
Improving franchisee profitability remains one of our most important priorities and I'm confident in the plans we have in place to continue driving restaurant level EBITDA growth this year for each of our brands.
As it relates to our own adjusted EBITDA growth this quarter. It was a little bit lower than our system wide sales growth, which was largely due to previously discussed investments we are making in the Burger King U S system.
Those investments are already delivering the expected results in topline growth and franchisee profitability and Matt will provide more detail later on.
We opened 169 net new restaurants in the second quarter and overall restaurant count grew four 1%.
Development is always more heavily weighted towards the second half of the year and our teams are very focused on delivering their full year pipelines. While also setting in place plans for 2024.
Before I turn to our brand level results I'd also like to highlight that we released our 2022 restaurant brands for good report last week, which discusses the achievements of our brands made in becoming more sustainable.
I encourage you to read about the progress, we're making across our food planet and people and communities pillars.
While I'm very proud of the work our teams are doing I'd also note that this space is evolving quickly and we are continually adapting to make sure we do the same.
Now, let's turn to performance by brand starting with Tim Hortons in Canada.
We saw a healthy mix of check traffic and strong calendar initiatives drive comparable sales of 12, 5% in system wide sales growth of 12, 8%.
These results were driven by strength in our core offerings continued expansion into cold beverage N. P. M food improved speed of service and a record year for Smile, Cookie, which shifted from Q3 into Q2 this year.
Results for the quarter were also aided by improvements in mobility.
During the quarter, we sustained our market share leadership across our core categories, including over 70% in hot brewed coffee and over 60% in breakfast.
In addition to the growth opportunities in cold coffee and beverages, our market leadership in hot brewed coffee is higher today than it was in 2019, demonstrating the team's progress across all categories.
The team is making good progress with its efforts to become a bigger player in the high growth cold beverage category and saw a cold beverage sales grew 16, 6% year over year.
Cold beverage results. This quarter were aided by the expansion of our <unk> platform and innovation across our specialty cold coffee offerings.
<unk> proved to be highly incremental to beverage sales and serves as a good contributor to ticket growth this quarter.
We also further expanded our PM food offerings with improvements to our anytime Snappers and unit innovations around our loaded bohlen reps, including barbecue crispy chicken, which attracted new younger guests to our restaurants.
These offerings contributed to 14, 2% year over year growth in our PM food sales.
Moving to operations restaurant team members have done a great job balancing. The addition of our new food and beverage offerings with strong restaurant level execution.
Our teams improve speed of service by two seconds year over year, reaching just north of 36 for the quarter.
Faster speed of service combined with our new offerings helped drive increased guest satisfaction and an increase in our <unk> traffic share.
We're really proud of the digital experience Tim Hortons offers its guests and believe it can continue to drive growth for the brand.
With $4 9 million monthly average users this quarter, we have the number one food and beverage App in Canada and has sustained a digital sales mix of roughly 33%.
To further engage Canadians and make it even easier to earn rewards we partnered with two payment service providers to launch at Tims credit card that is fully integrated within our app.
It's still early but we're excited for this new way to engage and drive further loyalty with our members.
At Tim Hortons, we pride ourselves in being a community led brand.
This quarter, our beloved Smile Cookie campaign raised a record breaking amount of almost 20 million Canadian dollars for more than 600 local charities.
Following smile Cookie, Tim Hortons restaurant owners team members and volunteers raised an additional $13 million Canadian dollars.
During the month of July for Tim Hortons Foundation camps, our signature charity that turns 50 years old next year or after helping more than 300000 children in Canada and the U S over the years.
I'm really proud of the results excellent team continued to deliver on Canada. I also recognize the work. The team is doing to sustainably grow the brand is really made possible by our incredible restaurant owners their team members and the support of their local communities. So I'd like to thank our restaurant owners and guests for their continued support and dedication we've got an amazing brand at Tims in Canada.
And a long runway for growth ahead.
Turning now to Burger King the international business grew second quarter system wide sales by 18, 4%, adding over $500 million of incremental sales year over year to represent nearly 60% of Burger King's worldwide sales in the quarter.
These results were driven by net restaurant growth of five 3% and continued top line strength with comparable sales of 11, 6%, reflecting positive traffic as well as higher check.
We saw good performance in some of our largest markets like France, Australia, the U K and Spain, as well as markets, where the brand is growing more quickly such as Japan.
We were also encouraged to see Australia joined France, Germany, and Spain, as the fourth international market to surpass the $1 billion system wide sales mark on a trailing 12 month basis.
Our teams and Master franchise partners take a guest centric approach to everything for menu innovation to marketing in general we have newer restaurants overseas and as a result, more modern brand positioning with enhanced digital capabilities in both the front and back of house. These.
These capabilities also help unlock operational improvements in the business, enabling the teams to deliver an even better guest experience.
Our success internationally gives us confidence to leverage key learnings as we enhance burger King's brand positioning and its home market as well.
So shifting now to Burger King in the U S comparable sales increased eight 3% year over year and systemwide sales grew seven 9%.
Our total net restaurants declined two 2% year over year as we carry out our commitment to enhance the overall health of the system. We are making good progress on this front and have continued to see meaningful improvements in franchisee profitability.
Growth this quarter was driven by thoughtful calendar initiatives focus on our flagship flagship equity the Walker as well as benefits from more effective marketing aided by enhanced marketing analytics and continued operational improvements.
Our ways to offer campaign reminded guests that they can have it their way and choose between one of the over 220000 ways to build the Walker.
We layered this campaign with the Whopper junior duo our core discount initiative and the Spider verse Walker promotion, both of which were targeted towards building. The next generation of Walker lovers. These.
These campaigns drove higher average tickets and attracted younger guests without impacting core Walker volumes.
During Q2, we spent approximately $12 million of our $150 million fueled the flame advertising and digital investments.
These investments coupled with our continued focus on enhancing operations helped drive another quarter of underlying improvement in traffic. Although we are still not in positive territory.
I am confident that further improving operations with will ultimately support growth in traffic, which is one of the most significant near term opportunities we see for the brand.
When it comes to operations, we saw another quarter of guest satisfaction improvements at BK U S. But still believe we are only at the beginning of our journey here Thomas.
Thomas dressed and I fully agree that the path towards excellent operations as continuous because the goal should always be to execute even better than you did the day before.
This is at the center of everything we are doing as the BK team works with franchisees to raise our brand standards and deliver a better guest experience.
Some of the ways. We are achieving this are through gold standard service trainings, which have driven encouraging results, including higher Walker product satisfaction scores.
Another example is the addition of gasolines visits to our franchise success system, where our restaurant is evaluated through the lens of our customers experience capturing some of the nuances of formal restaurant visit may Miss.
As part of our $250 million Royal reset program in Q2, we deployed 9 million towards the $50 million short term refresh component to equip restaurants with the technology they need to deliver a great.
Great experience for both team members and guests.
Participating franchisees have matched our spend dollar for dollar with investments in a central kitchen equipment, like toasters, and broilers, which will largely rollout in the back half of the year.
The $200 million remodel program is also underway and we're pleased to see franchisees prioritizing quality with over 75% of committed projects locked in for full remodels or scrape and rebuilds.
Q2 represented another important step towards our greater goal of driving traffic back to the system and delivering a strong value proposition for our franchisees. These.
These early results from our claim to fame and our talented team and dedicated franchisees give us confidence in the trajectory of the brand and we look forward to continuing to execute against our plan and drive further growth this year.
Turning now to Popeye's U S, where sammy and team are in the early stages of the brand's multiyear strategic plan easy to love, which is coming to life through core menu extensions operational improvements and the development of easy to run kitchens.
Popeyes in the U S grew comparable sales for 2% and net restaurants, five 1%, resulting in system wide sales growth of nine 4%.
Offline momentum was driven by the extension of our chicken Sandwich platform Ghost Pepper wings innovation across our beverage and dessert categories and 22% growth in digital sales.
This quarter featured the return of our black and chicken sandwich, a delicious lighter unbred adoption that is well suited for the everyday occasion.
We are also now giving guests the option to add bacon and cheese to all of our chicken sandwich offerings, including blackened.
Outside of our core we brought back ghost Pepper wings to our menu and built on dessert and beverage offerings with strawberry biscuits and mango eliminate.
At our Popeye's U S restaurants team members prepare marinate and hand grid, our bone in chicken to produce the Louisiana chicken guests know and love.
We're in the early stages of rolling out opportunities to make our kitchens easier to run for team members by leveraging the learnings from our international markets to help reduce back of house prep times and enable more consistent product execution.
While we improve the capabilities of our existing restaurant base. We are also positioning the brand to capture more opportunity across North America with both existing and new top tier operators I am confident that the team and priorities. We have in place are pushing forward on the right path and we're excited to continue expanding.
Finally, firehouse subs, which grew comparable sales two 1% and increased system wide sales by five 1%.
In the U S comparable sales of two 6% included an approximately 1% negative impact from a major outage affecting our main third party technology provider NCR.
This resulted in several firehouse sales channels being down throughout April and May we and our franchisees are disappointed by the impact of the business and slow recovery by our vendor partner, but are highly focused on improving system resilience for guests and our restaurant team members.
Moving forward one of our top priorities since adding firehouse. The RBI family has been to position the brand for higher growth by enhancing its development capabilities, we really leaned into this key focus outlining an exciting long term development path for franchisees at our recent firehouse subs family reunion in July .
It was great to spend time with nearly 300 franchisees and their families over the course of a few days in Orlando.
It's clear to me that we have a passionate group of franchisees ready to realize the growth potential of the brand.
During the quarter in the U S and Canada, Mike and team completed the transition from an area representative structure to a more traditional corporate and franchisee led development model, which mirrors the framework over the rest of our brands.
This quarter also marked the start of the brand's global expansion with the opening of our first overseas firehouse location in Zurich, Switzerland.
The restaurant offers guests the firehouse menu, we know and love with a re imagined guest centric restaurant design, including 100% digital ordering and serves as a great showcase for future International development opportunities.
The team also established the firehouse subs public safety foundational, Switzerland modeled after our existing public safety foundations, which has surpassed $80 million of grants awarded since inception.
Lastly, we were pleased to announce a long term development agreement in Mexico recently and are working hard to bring this I can't iconic brand to even more countries all around the world.
With that I'll turn it over to Matt to discuss our financial results for the quarter.
Thanks, Josh and good morning, everyone for.
For the second quarter, our global system wide sales grew 14% year over year, our adjusted EBITDA grew 10, 3% organically and our adjusted EPS was up six 6% organically.
The difference between our system wide sales growth and organic adjusted EBITDA growth. This quarter was primarily due to the $12 million a fuel the fuel that flame investments at Burger King U S.
In addition, our adjusted EBITDA growth was impacted by the lapping of $5 million of net bad debt recoveries in Q2, 2022 as compared to $3 million of net bad debt expense this quarter, primarily at Popeyes.
As a reminder, 2022 saw quarter to quarter volatility and bad debt.
Including nearly $6 million of net bad debt expense in Q3 of 2022, which primarily impacted our Burger King segment.
Now turning to G&A.
We remain focused on driving solid cost discipline across the business and saw segment G&A come in at $100 million this quarter, which was relatively flat quarter over quarter and up approximately 3% year over year.
I would note that the $7 million increase in segment G&A at Burger King U S. This quarter was partially driven by the lapping of a nearly $4 million compensation related benefit in the prior year period.
As I've mentioned on prior calls we expect our segment G&A growth will moderate significantly in 2023 versus <unk> 22, and have seen this come through so far this year.
That said, we anticipate a modest sequential increase in the year over year rate of segment G&A growth.
Largely related to higher compensation and technology expenses.
In the third quarter.
Shifting to EPS, our second quarter adjusted earnings per share was <unk> 85.
Compared to 82 last year, representing an organic increase of six 6% year over year, excluding an FX headwind of about 3% or <unk> <unk> per share.
Our adjusted EPS also included a headwind of <unk> <unk> per share from our Burger King U S. Fueled the flame investment, which was offset by <unk> <unk> per share net benefit related to discrete non cash tax items.
Our adjusted net income was also impacted by higher adjusted net interest expense of $125 million and equity based compensation of $47 million. We continue to expect 2023 equity based compensation to be between $190 and $200 million.
Turning to cash flow and capital allocation during the quarter, we generated over $360 million of free cash flow.
Our cash flow this quarter was impacted by $22 million of reclaim the flame investments at BK U S, which included about $12 million.
Toward fueled the flame and.
An $11 million toward Royal reset.
In addition, we saw higher cash interest as a result of increased market interest rates as.
As I mentioned last quarter, although effectively 80% of our debt is locked in at fixed rates over the next five years, our free cash flow metric does not reflect the benefit of both the interest rate and FX hedges, we have in place, which were a positive cash benefit of over $45 million in Q2.
We also returned $249 million of capital to shareholders through our dividend, which we declared for Q3 at <unk> 55 per common share and unit with a 2023 full year target of $2 20 per share.
We ended the quarter with available liquidity of approximately $2 2 billion.
Including $1 2 billion of cash and our adjusted EBITDA net leverage ratio was four nine times with a clear path to reach our target of the mid <unk> level ahead of schedule.
With that I'll hand, it over to Patrick for some additional thoughts on the business.
Thanks, Matt and thank you all for joining us this morning.
<unk> been with RBI for nine months, it's been amazing to get to know so many leaders that are doing exceptional things amongst our franchisees and our brand teams when.
When we had our investor events in New York in February I told you all that I still had the benefit of being new and bringing an outside perspective to the business.
Been here long enough now that I'm starting to Noah level.
Big part of my role as executive Chairman is to represent the interests of all of our shareholders and that starts with giving you direct insight into how the businesses are performing and what I see is there are opportunities.
Broadly the businesses performed very well in the second quarter same store sales came in just under 10% system wide sales growth was 14% adjusted EBITDA at the RBI level was up 10% organically and our franchisees average profits were up even more than that and most of our.
Brand metrics are moving in the right direction, reflecting brand strength improving operations by our franchisees and good marketing efforts from our brand teams I'd put the quarter solidly in the win column.
But we also still have lots of opportunities net store growth was solid but not what we aspire to that said as restaurant level profitability continues to improve I am confident that will accelerate.
Tim Hortons and our brands International businesses, both had a very nice mix of order growth and ticket growth.
The growth in our home markets for Burger King Popeye's, and firehouse were all ticket with order counts flat to slightly negative.
Ultimately, bringing in more customers over time as the best measure of the strength of our brand.
Comparisons on order counts will get easier in the second half, but we need consistent growth across each of our brands and businesses.
And finally, while we're making very good progress on store level profitability I want to be clear that we aren't where we need to be the progress is good but greatness for each of the brands requires that we generate a great return for our franchisees, we have a very clear focused understanding of how to grow each of our businesses.
If I were just still be as down for each brands' home markets I'd say for Tim Hortons, Canada PM day, part and broadening our beverage offering for Burger King U S. Its operations and modernization.
For Popeye's U S easy easy easy and for firehouse development and for each brand internationally I think the word is pretty clear grow grow grow and for each of these it's wrapped and constant focus on store level profitability.
Let me start first with our home markets and then turn to the rest of world opportunities.
At Tim Hortons in Canada, It's all about growing the PM day, part and giving Canadians, even more reasons to love and engage with the brand we've made great progress improving our market share in lunch afternoon, snacking and dinner and Thats because of both new food platforms and beverage platforms that take us well beyond.
What originally made us famous.
We also continue to wind back traffic in our morning day part and ensure tims remains Canada's most loved breakfast destination.
In my view with Axel and the team's long term plan well underway for the PM day part coupled with our unparalleled convenience across Canada, we have a long runway of traffic and sales growth for this amazing brand.
I simply can't Overstate, how strong Tim Hortons is in Canada, and how optimistic I am about its future growth.
At Burger King in the U S. It's about operational execution and modernization.
All the fundamental work the team and franchisees have done is paying off led by wins in both operations and marketing.
We already have our $400 million reclaim the flame investment being put to work and I think that long term. There is more we will consider doing especially around digital centric remodels as Tom and the team continued to deliver strong results and returns on our investments.
In the meantime, the team is working to grow traffic as we continue to refresh this amazing brand.
At Domino's and the U S. We're focused on easy, making our restaurants easier to run our food easy to crave and our products easy to access.
As part of our easy to Love plan, we're committing to redesigning the kitchen, and we unveiled the new kitchen remodel at our franchisee convention earlier. This summer we have a handful of locations that already have this in place and Sami and team are working closely with franchisees to gather feedback simplifying our kitchens means offering.
Our guests faster more accurate service and taking a big load off our team members, who will be more likely to stay with the brand for longer as their overall kitchen experience is simplified.
At Firehouse U S. We just need way more people to have access to it you've heard me say before that I think we have absolutely the best food and beverages in <unk>, including the subs at firehouse.
Mike and team is mission is straightforward build a lot of restaurants with a lot of quality franchisees and do it quickly.
I believe youll see a ramp up in our home market starting in 2024.
As we look to the rest of world opportunities. The focus is on accelerating development with quality partners and generating great returns for those partners David in the International brand teams are leveraging our best in class development capabilities to bring Tim's popeye's and firehouse to new markets, while further growing <unk>.
<unk> King in existing markets, we have a diverse set of well capitalized master franchise partners and on average the sales and unit economics in our international markets are really good.
Between the improvements we're driving in our home markets and momentum we are seeing internationally I am confident we will get our net restaurant growth to the 5% plus level in 2024 and beyond.
I remain committed to having our most important measure of success across all of these areas being franchisee profitability and attractive paybacks for their ongoing investments each one of our brands is on track to deliver year over year performance improvements on this basis, and we will share that with you in our Q4 earnings call.
In February .
As a final comment I am very pleased to see the entire team's hard work paying off and our business results.
Very encouraging to see the brand teams moving the average is up and our franchisees getting more and more excited about investing their resources and time and giving customers a great experience that partnership is what generates the magic in our business.
I'd like to thank everyone again for your support and for joining US. This morning, now I'll hand, it back to the operator to take your questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you wish to ask Joel Your question. Please press star two.
Callers will be limited to one question and one question only.
Our first question comes from the line of Andrew Charles TD Cowen. Your line is now open. Please go ahead.
Great. Thank you so much Patrick question for you.
And then your comments for considering more investments and reclaim the flame grilling birds in the U S performed exceptionally well on both the sales and the franchisee profitability I am curious what you need to see to execute this potential second invest into continue to accelerate the turnaround there.
Call It turn it off at this point.
As well.
The comment on the on the digital renovations, what those potential looks like.
Yeah. So Andrew Thanks for the question. So early on in the process of doing these re images, we're seeing very promising results.
From doing those re images lifts that we're getting in sales, it's generating a good return for us and the franchisees, but it's early and so what we've got to see is more results and a good return for the franchisees and for us and if we become convinced that its definitely generate.
<unk>, what we both need to see then we're certainly going to consider more and thats fundamentally yet.
Maybe Patrick if I can add a couple of things.
Good morning, Andrew and thank you for the question. This one I think we are.
We intentionally set up they were claimed the flame plan to focus on the first two years here on 2023, and 2024 and I think the goal as Patrick said was to prove out that we can generate both compelling and consistent returns through remodels and we're just a little bit into that experience. It's a small sample size, so far but I think we're accomplishing both.
Are those goals and I want to see us do that at larger scale now over the next year or two but in the longer term I think our point of view is we need pretty much every burger king all across the country to be modern convenient and competitive with the with all of the other concepts out there that have new and modern buildings. So I do think we need to go farther in the subsequent year.
And as importantly, really prove out the kind of the early returns here now and I think if I can maybe take a piece on the on the modern and digitally enabled restaurants.
There's a couple of different ways that we can do that one of the ones. We've been focused on recently is we're spending a bit more time on kiosks.
We've done another pretty big test here in our company restaurants and.
And we're seeing much better guest reception to kiosk than we might've seen say five years to seven years ago in the U S. So we think Thats an interesting avenue to explore further and Tom and the team are going to be expanding some of that testing over the rest of this year.
I also need to point out it was just pointed out to me by a few people that I said dominoes during the script incentive popeye's I'm, sending russell $20 by venmo to fix that.
Sorry about that.
We can take the next question. Please Kenneth thank you.
Thank you. Our next question comes from Brian Bittner of benign Maam. Your line is now open. Please go ahead.
Thank you good morning, I thought I heard that Patrick you.
Can you confirm that.
So.
Thanks.
You suggested.
That unit growth.
Could reach the 5% plus level in 2024, I think that's a pretty.
Pretty important comment in half.
To see a pretty measurable acceleration in Burger King to get there just given its size and given its contribution to Rbis unit growth what do you anticipate to drive this.
<unk> acceleration in the Burger King business moving past this year and separately, Matt just as it relates to 2023 do you still anticipate 2023 unit growth to accelerate versus 'twenty, two or has that changed.
Yes so.
Brian Thanks for thanks for the question. So there are really just a few things I mean first of all if you. If you look at the closures that we've talked to you about on Burger King in the U S.
As that picture improve.
In the U S. You've already got half a point to push in a point of improvement from that so we're already.
A bit over 4% if you just eliminate.
But over time any any reduction in net stores in Burger King in the U S. The <unk>.
Matt says you are now in about the five range.
And then if you look at.
Well I think it's pretty extraordinary story within all of this.
If you look at the net restaurant growth in the rest of the world.
For the other concepts.
You've still got rest of the world growth north of 5% for BK in the rest of the world, but you are at <unk>.
24% on Tim Hortons, 27% on Popeye's.
48% on fire House.
Those are big businesses and as they continue to scale plus.
Plus hopefully getting some incremental growth from fire house in the U S and from Tim Hortons in the U S. I mean, it just the picture says.
That 5% starts looking very very doable.
Yeah, Brian I'll, just take the other piece of your questions Josh.
Yes, we do still expect 2023 growth to be higher than 2022 for restaurants.
Thank you.
Thank you.
Our next question comes from the line of David Palmer of Evercore. Your line is now open. Please go ahead.
Thanks, Patrick.
Patrick you mentioned getting back to 5% unit growth in 2024, and beyond and I know, it's ancient history now, but there was an analyst day back in 2019, where you talked about where the company talked about 5% unit growth, 2% to 3% same store sales growth, 7% systems system sales growth and mid to high single.
Digit.
EBITDA growth I'm wondering how.
You all feel about those that full slate of targets as you look to the next few years what are the key variables areas of upside downside as you think about those.
Those targets are they relevant thanks.
Well.
Say, a couple of things that I'll kick it to Josh since Josh was actually here in 2019 when that was said.
But yes look I think the biggest thing Thats changed is as inflation I think when we said 2% to 3% comps.
We were probably expecting 1% inflation in <unk>.
Clearly.
Ticket growth has been.
Higher as a result of overall inflation levels around the world over the last.
Year or 18 months, so that has clearly changed from from where we were but from.
Our store growth standpoint, I think it's very much on and as I just.
Brian I mean, you work through the math and.
5% plus.
It certainly looks very doable I think we've put out a 40000 restaurants target over the course of.
I think it was four or five years and you look at that and it certainly looks very very doable.
Yes, David I would just reiterate what what Patrick said and I think we need to see how inflation evolves over the rest of this year and what the outlook is into next year and I think maybe once we get to the end of this year, we can have a little bit more normalized view on what we think some of those some of those growth statistics look like going forward.
Our next question comes from the line of Dennis Geiger of UBS. Your line is open. Please go ahead.
Thank you and congrats on the strong results I'm wondering if you could talk a little bit more about Burger King U S traffic momentum and the ability for the strategic plans to continue to drive that traffic improvement going forward I think Josh and Patrick you. Both spoke to kind of the continued improvement in operations as being a key support for the improvement.
Traffic trends. So just wondering if anything more there on on how to think that operations improvement trajectory as well as sort of other critical drivers to continue to strengthen those traffic trends. Thank you.
Yes. It does thanks, so much for the question and for sure our Burger King U S. Traffic is a big focus area for us It has been and will be into the remainder of this year I mentioned it a little bit in the prepared remarks, but we have seen improvement sequentially in that same store traffic. So it's getting better but it's still slightly negative I think are.
We'll for sure in the next several quarters as turn that to flat and then positive over time and I think a couple of the big structural things that we're doing to improve that one we've been really focused on our advertising both the quality of that and as you saw in the second quarter. We are starting to ramp up that fueled a flam investment we haven't spent that much of it yet we've been starting to ramp up some of that.
Spending so some of those advertising dollars are definitely important element. There. We're also extremely focused on operations and how we deliver and the restaurants. Every day is what brings the guests back more often and the Tom and the team have really put a lot of effort into training at the restaurants.
Especially around producing incredibly incredible whoppers everyday every time and you've seen us focused a lot in Walker Whopper Junior Spider verse Whopper. So we're really trying to make sure that the product we deliver everyday is excellent and bring back our guests and then you haven't seen this too much yet, but youll see more and more.
Of the Remodels.
We're going to do really high quality remodels investing the proper dollars into those and I think you should see that kind of becoming an increasingly important part of the equation later this year and into next year. So those are some of the big factors that I think are helped.
Helpful to us to turnaround the traffic equation.
Yes, so essentially anything you want to add there.
Perfect.
Our next question comes from the line of Brian <unk> of Morgan Stanley . Your line is now open. Please go ahead.
Yes. Thanks, Good morning, maybe I'll ask about Tim Hortons in Canada.
You quantified some of the initiatives certainly and how they're working but could you could you kind of separate out how much is still been kind of mobility driven do you think that we're mostly past the mobility of recovery at this point and then just also on the supply chain. There I know in the past we've talked about.
Working through some of that higher cost inventory or are you, mostly past that at this point, where we will start to see more normalized kind of supply chain profits.
Yes, Brian Thanks for the question I'll take the part on the same store sales.
Competition some of the drivers there and I'll, let Matt take the one on supply chain in terms of what drove the performance. There is a little bit of mobility benefit, but I think that started to level out a lot. What we see from Q1 to Q2 is relatively stable. So I think we're back to a little bit more normalized world, there and where it is not changing so much quarter to quarter.
I really think the bigger drivers of what we saw in this quarter are a lot of the big initiatives that we have on where we're taking the business. So you saw things like pull beverage was a really big contributor we've been very focused on things like venture has launched sparkling ventures, which is it's a sparkling water version of our existing venture platform.
That proved to be very incremental to the business. We've also been focused on a lot of the PM food.
Initiatives that we've talked about with our loaded bowls and reps, we launched the barbecue chicken version of those this quarter, which is very fitting for the summer and performed really well and youre seeing those things move our business. So we're moving in market share in some of those day parts and they are becoming a bigger mix in the business just one once that to give you a little bit of a reference.
Cold beverage used to be about 30% when you could go back about four years ago now, it's 40% of our mix. So we're starting to see pretty big movements in the composition of the business as we get traction in some of those those categories.
Matt you want to say, yes.
Hey, Brian Thanks for the question Yeah on the supply chain I think as you all know we had quite a bit of volatility to work through last year into this year with higher commodity prices.
<unk> and increasing both sales and cost of sales and therefore margin percentage I would say we start to see things normalize this quarter margins were fairly flat sequentially.
At levels, consistent with where we've been trending and kind of what we expected.
And I think overall at this stage our focus is on the underlying business, which we think is doing very well as you heard from Patrick and Josh and driving volumes through that business through the strategies they talked about.
And as a result gross gross profit dollar growth, which was up about 7% year over year organically in the quarter for the business.
Our next question comes from the line Eric Gonzalez Keybanc. Your line is open. Please go ahead.
Hey, Thanks, Congrats on the progress this quarter, maybe another one on the Burger King U S business quite a few of the flame advertising investment. It would seem like you are taking a more measured approach to deploying those resources. This is maybe a bit different than what we saw at Tim Hortons and what some of your peers have done with celebrity endorsement. So I was hoping you could speak to that strategy a bit and talk about how you are building a multi year plan.
To reposition the brand versus the maybe the blasted out of a cannon strategy that we've seen elsewhere.
Yeah, Eric Thanks for the question and I do think you characterize well that our plan is to be steady and build the business over time.
Lesson.
We're really trying to focus on a lot of the core equities and billing that building those progressively over a couple of years, we're focused a lot on the quality of the advertising how they resonate with guests and I think the good news is youre seeing it work in the results. The same store sales have moved in the right direction.
And to your point, we've got a lot of firepower left.
We've got a year and a half or so left in that initial two year period end.
We still have a lot of the dollars left to spend.
We're not in a place to give a exact cadence on how we'll spend that over the next couple of years.
But it will be somewhat evenly.
Our next question comes from the line of Chris <unk> of RBC Capital. Your line is now open. Please go ahead.
Thanks. Good morning, So maybe just following up on the longer term development in 'twenty four and beyond can you maybe expand a bit more on the popeye's brand in particular.
Yes.
Growth there for the Popeyes brand was the strongest contributor in the first half.
Maybe with a new easy to web strategy in place for the brand. How are you thinking about the pacing of when the brand can be a maybe a more meaningful contributor to overall global consolidated unit growth.
Longer term thanks.
Yes, Chris Thanks.
Thanks, and good morning.
We are very excited about pop is both the result, I would say in the long term development outlook I think if you look at the U S business, while we are making improvements on the easy to run the kitchen, we've been growing at a really good clip and we continue to do so we're one of the fastest growing freestanding drive thru concepts out there and we've.
Had pretty consistent and strong growth in the U S. I think whats evolving right now is the international piece of that growth and if you look at it in the in the quarter, we're now up to 27% year on year growth outside of the U S. So we're really starting to ramp up the pace of development in many other countries around the world.
And I'd say, that's pretty broad based.
We're growing in places like Brazil.
Spain, India, the U K, France.
Canada, it's all over and we're really starting to get a lot of traction some of those markets are starting to get to scale and we're seeing really good results in terms of the sales of those restaurants. So I think that's what started to evolve we're getting more and more traction and more places around the world and Thats one of the reasons why we have a lot of confidence in terms of where our overall.
All net restaurant growth is going to go in 2024 and beyond.
The only thing I'd add to that is the number that Josh just gave you are the restaurant growth numbers. If you look at system wide sales growth for the rest of world for Popeye's were up 47, 9% year over year in the.
Second quarter lapping 38, 8% the previous year I think people have discovered that popeye's is pretty good outside of the U S.
Yes, I think <unk>.
If we look globally at all the segments. The chicken segment is obviously very compelling around the world to Big segment is a growing segment and we've got a concept and popeye's that really resonates with guests all over the world and I think youre, just starting to see that show up in some of our numbers.
Our next question comes from the line of Sarah Genital of Bank of America. Your line is open. Please go ahead.
Great. Thank you just two quick follow ups. One is about Tim you said, you've maintained leading market share.
I just wanted to understand is that to say that it.
The Kenny business grew with the industry elsewhere I know you compete in a lot of data.
Day parts and segments, but yes, as we think through kind of the benefits of mobility versus market share gains and China decompose that and then just on Burger King.
You asked if I could.
Sorry, a little bit more detail whats I guess the event paths from here in terms of <unk>.
<unk> traffic.
Need to bring more people in for trial I know youre improving operations is that it's just about the frequency of bringing lapsed guests just trying to understand.
The drivers and how we should think about it with the recognition that compares to ease in the back half. Thanks.
Yes, good morning, Sarah.
On Tims I would say we had in the aggregate are growing faster than the market, we're gaining market share and what I referenced in terms of maintaining market share is more than some of our core kind of legacy categories.
Things like breakfast food and our heartbeat coffee, but on top of that we're gaining market share in some of those higher growth categories that we've been focused on things like cold beverages and PM food. So those are the dynamics of some of the things we are maintaining market share and growing market share, but in the aggregate, we think we're growing faster than the market.
On Burger King in the U S.
I would go back and probably just reiterate what I said before in terms of what we have left to come we've got more and more advertising dollars that we're going to be prepared to spend I think that Tom and the team are making really great improvements on operations working together with our franchisees who are increasingly engaged in driving higher quality operations. We see this in our all of our.
Our metrics across the business that are things like speed of service and guest.
Guest feedback are all getting better and they have been for a number of quarters and I think we're in a layer on top of that.
Some of the capital that's going to go into the business I don't think you've really seen that yet, but you will over the next kind of four to six quarters Youll start seeing the new technology in the restaurants Youll start seeing upgrades to the equipment in the back of house and you're going to start seeing more high quality Remodels and I think those all all of those things give us confidence in the direction of the business.
Okay.
Our next question comes from Danielle <unk>.
Dan Your line open. Please go ahead.
Thank you.
Can you please give us some color on the evolution of the expansion of your brands in China in particular, some brands had some challenges in the past so what's different this time and maybe in particular, if you can talk was awesome team evolution.
Are they reacting to intensify coffee competition in China. Thank you.
Yes.
So I'll address each of the brands in turn I think if you look at BK. We grew at a really rapid pace for a number of years through the teams and then we slowed down a bit during COVID-19 and I think we are starting to come out of that we're starting to see improvements in the pipelines and the outlook for growth at BK, China I think the team there is increasingly engaged.
And focus on ramping back up the pace of growth and.
We're seeing improved sales performance as well if you look from Q1 into Q2, the same store sales picked up both for Burger King and for Tims, we had double digit comparable sales at both of the brands in the second quarter I think the sales performance is picking up to at Tims has been a huge growth story, we've ramped up our store presence.
Pretty rapidly over the last few years since we entered to your point. It is a competitive market, but we're very focused on providing a differentiated product and experience that some of our competitors don't offer over there and lastly, with <unk>, which we're incredibly excited for.
You will see and we signed a new Master franchise partnership a few months back and we're really excited to open some of our first restaurants again, we expect that will happen in the next couple of months.
We can't wait to see the reaction to having Bob is in China. It's one of the things that we think is some of the most potential anywhere in the world for our business.
Our next question comes from the line of Brian Melton.
Piper Sandler your line is now open.
Please go ahead.
Thank you just a follow up on Tims, Canada specific to the loyalty program.
That is starting to become a more meaningful driver of the topline versus what we've seen in the past and then even if not just yet maybe could you just talk about how you see the program evolving in the coming years and whether you believe this represents a future tailwind to the transaction growth from your very large user base in the country any thoughts would be great.
Yeah, Brian Good morning, and thanks, we're really proud of the work that axle and his whole team and the folks that.
That are working on the digital business have done.
In a country of 38 million people, we have $4 9 million monthly active users its really something tremendous and I think I think tims rewards has evolved to become a really important part of the business and I think it has been important in driving customer loyalty and some of our sales I think what <unk> seen happened recently is we've been expanding what tims rewards means.
So we have more contests.
You can play in that and now you probably saw very recently, we've expanded into a co branded credit card program and I think what you can expect over the next couple of years as more of that will expand what tims rewards can be will expand the reach of that into all of our other parts of our guests' lives.
And we think it's going to become one of the it already is but we think it will become an even bigger presence within the Canadian loyalty market across a lot of different banners.
Our next question comes from Joshua Long of Stephens. Your line is now open. Please go ahead.
Great. Thank you for taking my question in your prepared comments you noted the opportunity, particularly in leveraging learnings from Popeyes International curious if thats something that is still an opportunity across the other brands in the portfolio. That's already kind of largely come to bear or just where were out there in terms of being able to cross pollinate ideas.
<unk>.
Global unit base.
Yes, Joshua helped make couple of comments.
Patrick has anything to add to.
And popeye's were absolutely bring some of the learnings that we had on making the kitchens easier to run to the U S. Patrick and I actually visited one of the first easy to run kitchens here in Florida Fantastic franchisees restaurants, just north of our office here.
It is early days, but we're really excited by both some of the ideas that are being brought in and the impact they're having on the kitchen and the pace at which the team is working.
The team is doing a great job, bringing those bringing some of those ideas to life in our restaurants here I think the other biggest place that we can bring learnings from our international market, probably at our Burger King business.
On the impact that that modern restaurants can have on the brand perception.
That's a really powerful thing that we see all across the world with our Burger King business, but also how digital can transform the business. If we go to some of our restaurants, whether it's in Asia or Europe increasingly in Latin America. They are much more digital, especially the in restaurant transactions, which are almost entirely run through kiosks. So some of those learnings are.
Absolutely impacting how we think about where the BK U S business can go and really the opportunity for that business.
To move the brand perception of the quality of operations.
Yes, I mean, the only thing I'd add to it is.
Couldnt agree more on that on the Burger King side of that I mean, it just you go to Burger King restaurants outside of the U S. They look terrific.
The food offering the menu looks great.
Operations are great Theyre very digitally focused.
We did a little over $4 billion in system sales at Burger King in the second quarter, and we grew that 18, 4% year over year, we have clearly got some things figure it out on the Burger King side.
Outside of the U S and I think Theres a great opportunity.
To bring those learning in some of the operational systems.
Systems that they've put in place what theyre doing with the food I mean, there is there is a lot to learn the Burger King business.
Outside of the U S is overall in great shape, and we certainly want to bring some of that back into the U S.
Our next question comes from the line Jeffrey Bernstein of Barclays. Your line is open. Please go ahead.
Yeah.
Great. Thank you very much.
Just a question on the global franchise sentiment.
Patrick or Josh I mean, it sounds like it's moving in the right direction for both BK, Tim Hortons in the home markets.
Wondering what's the top topic of conversations with the largest franchisees, maybe any kind of pushback you're getting.
Patrick I think you said youre thinking the franchise level profitability improvements still has lots to go but just wondering how you are having more and more of those conversations now and maybe things are moving in the right direction.
Is that greatest area of focus from our franchisees side of things. Thank you.
Yes, so ill share a couple of thoughts.
<unk>.
I would say that improvements in franchise profitability are very much a front and center topic and the good news there is we've been making progress across the board. So.
We've seen improvements in franchise profitability across all of the concepts and that really helps a lot we talked about a lot. It's great to see the results coming through and I think that resonates really well with the.
With our franchisees and I think from there once we've now that we've made more progress there and we will continue to be focused on that I think a lot of the conversations we're having are returning to the future where we can take the brands and some of the biggest growth opportunities and how we go after those may.
Make compelling investment investments for both ourselves and our franchisees.
To drive the business forward and win in the marketplace.
Yeah, and I guess.
The only thing I would add to that is I mean, it really depends on where you are in the development of.
That business within each country and I think what we've seen is as we are proving out the theory that having these new brands that we can take into international with the knowledge base that we have across those markets, sometimes with some of the same partners is.
A real advantage and a real differentiator for US there is a lot of growth yet to come on the international side of the business, but you almost have to put those markets into kind of three groupings right the markets.
That are just opening or have opened yet and we're looking for the right partner.
And getting things right for the launch.
In that market then you go through a period of time, when youre kind of refining the business.
Youre, making sure that you are getting the returns right at the store level.
And that happens over the first couple of years that the market is open as you learn about kind of specifics of applying that brand into each market and once you've got that right. Then you go into a fast growth mode and.
And so we've got lots of markets in each of those stages, where we're just getting them launched or we're not there were kind of refining it if we're already in and it's early in the first couple of years and then once you've got those unit economics right.
You just to add lots of fuel and accelerate that growth.
If you look at the results of each of the brands outside of the U S. You kind of see that happening you see.
Very big very successful BK business outside of the U S.
And what are now at a run rate.
Both popeye's in Tim's are now north of $1 billion run rate system wide sales growing very very fast. So it's exciting but the answer is really a market by market answer depending on where they are in their evolution.
Our next question comes from the line.
Alright.
This is Dan Hynes Securities. Your line is now open. Please go ahead.
Hey, Thanks for the question. My question is you guys have talked a little about just the vertical work down the Burger King U S side.
Two to improve.
The quality of the food customer perceptions and I think you guys are focused awful lot on the all complaints ratio can you maybe dig down into kind of other metrics and kind of the improvement either in taste or quality or just anything else that could help us frame how much that has changed and if it's being driven by customer frequency or anything of that.
That would be helpful. Thanks.
Yes. Good morning, Thanks for the question.
A couple of the things that I think Tom and the team are doing really well to drive taste and quality perception one of them I referenced a little bit earlier, we've done a lot of training that's very focused on water quality.
And that like that actually it makes a huge difference. We've also been a lot of the promotions that we've been doing has been focused on the Walker. So those things are allowing us to produce a better product every day and.
We see that in the product satisfaction data. In addition to our overall guest satisfaction data or some of that ACR data. So.
We're seeing across the board and whatever the data sources.
We're seeing pretty consistent feedback that guests are proceeding the products better and the other thing that we're doing that helps us some of the work on the equipment side. So just making sure that all the equipments and proper shape and we're upgrading equipment that all hasnt really big impact on the quality of the product that we're able to produce at all the restaurants. So a lot of things going on primarily operation.
All initiatives.
That drive better quality and better quality perception for guests.
Our next question comes from the line of David <unk>.
Your line is now open. Please go ahead.
Hi, Good morning, I had a couple of questions about the Burger King U S average check trends and.
Obviously elevated for Burger King in the second quarter like it was for a lot of other brands, so with inflation starting to ease.
I wanted to I wanted to get your thoughts on when we should expect to see the average check growth for Burger King start to normalize and perhaps be more consistent with what you've seen historically and then the.
The second part of my question is we've started to hear from a few others that as inflation has come down.
Rational activity in the industry has started.
It's higher and just wondering.
Kind of your thoughts on on that dynamic and what your strategy would be if the environment were to get more promotional in the near term. Thanks.
Yes, David.
Couple of thoughts on this one one in terms of the average check trends I do think we'll see some moderation in some of those two probably two main things going on one we are seeing some moderation in terms of our input costs.
So we've seen them coming down over the course of this year and the outlook for the full year moderating so I think that will lead.
So a little bit less.
Price taking it for the back half of this year and then we will also start to lap some of the reduction in discounting that we did in the back half of last year. So if you remember we made some really important changes things like taking the whopper off of two for $5.
We will start to lap some of those things as you get through the back half of this year and I'd say the combination of those two things will probably cause.
Cause you to see a bit of a reduction.
The reduction in the size of the.
The Czech Delta year on year, as we move through the back half of this year and into 2024.
In terms of promotional intensity, we haven't seen a big change in promotional intensity across the industry, yet so nothing really too.
Nothing to share there that we've seen yet.
Our next question comes from John from Pyrite Akshay.
Your line is now open. Please go ahead.
Great. Thank you good morning, My question's on Tims, Canada, it's nice to see brewed coffee increased to above 2019 levels. I was hoping you could expand on the traffic commentary that tim's, specifically, how that looks compared to 19 and in particular, the breakfast day part and obviously PM food is the main focus or at least a primer.
Focus, but just like to get a sense of how much of your breakfast traffic as the remaining opportunity. Okay. Thank you.
Yes, John .
As I mentioned earlier.
We had fantastic comps and a meaningful part of that was traffic year on year, which is great.
We still are at a little bit lower traffic levels than we saw in 2019 and I think to your point some of that is in breakfast and I think a lot of that is driven by changes in patterns of working from home.
I think that we'll have to see how that evolves in Canada I think.
What are the patterns have sort of settled out for the time being a little bit different patterns than what we saw three or four years ago.
But we'll have to see how that evolves over time.
Our next question comes from the line of Jim Sanderson.
Chris Research. Your line is now open. Please go ahead.
Hey, Thanks for the question just following up on the prior comments about Tim Hortons can you provide us with a sense of what part of the same store sales in the second quarter was related to menu pricing and just more broadly your philosophy on how you look at pricing going into the back half of the year as inflation starts to moderate for the Canadian marketplace and for Tim Hortons.
<unk>.
Yes, Jim.
Part of the same store sales was coming from pricing, we're generally looking at CPI and what our competitors are doing so we're not too far off of any of those metrics I do think to your question.
We'll see some more moderation as we get through the back half of this.
This year, we're seeing some of the input cost start to come down and so are our pricing that we take at the restaurant will probably decline as well I think the other good thing that's happening good dynamic that's happening within the space in Canada is that our pricing continues to be lower than what you'd see at grocery.
And I think that helps traffic trends in the restaurant industry as well.
Oh, sorry, no additional questions, Mike and at this time I would like to hand the call.
Call back over to Josh Kobza.
Great. Thank you very much I just wanted to thank everybody for joining us today I'd like to extend a thanks to all of our teams around the world for the great work that contributed to the quarter wish you all a great day and look forward to speaking more on our Q3 call.
Ladies and gentlemen, this concludes today.
International Inc, second quarter two.
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Thank you for joining you may now disconnect.
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Second quarter.
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