Q2 2019 Earnings Call
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Good morning, and welcome to the restaurant brands International second quarter 2019 earnings Conference call.
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I would now like to turn the conference over to Chris Brig Club.
RB eyes head of Investor Relations.
Please go ahead.
Thank you operator.
Good morning, everyone and welcome to restaurant brands International <unk> earnings call for the second quarter ended June Thirtyth 2019.
As a reminder, a live broadcast of this call may be accessed through the Investor Relations Web page at Investor Dot RB <unk> Dot com and a recording will be available for replay.
Joining me on the call today are restaurant brands Internationals, CEO Jose sale and CFO , Matt Dhane again.
Jose and Matt will also be joined by our COO, Josh Kobza for the Q and a portion of today's call.
Todays earnings call contains forward looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings.
In addition, this earnings call includes non-GAAP financial measures reconciliations of non-GAAP financial measures are included in the press release available on our website.
Let's quickly review the agenda for today's call.
Jose will start with some opening remarks and highlights for the second quarter and then discuss our performance at Tim Hortons Burger King and Popeye's, Matt will then review financial results before opening the call up for Q and a.
I'd now like to turn the call over to Jose.
Thanks, Chris and good morning, everyone.
I'd like to start with a quick summary of the second quarter results and then spend some time sharing my views on the key drivers of our performance and the confidence we have in our plans for each of our brands to continue driving strong system wide sales growth around the world.
Overall, we had a strong quarter with nearly 8% consolidated system wide sales growth and surpassed 26000 restaurants worldwide, including over 18000 at Burger King.
Our system wide sales growth was led by Burger King at nearly 10%.
Tim Hortons at just over 1.5% and popeye's it nearly 9%.
Our results in the quarter were highlighted by strong global same store sales results at Burger King and Popeye's improved same store sales momentum at Tim Hortons and continued restaurant expansion around the world.
Before I jump into my detailed remarks on brand performance this quarter I'd like to once again, thank everyone, who was able to join us at our Investor day in May.
I enjoyed meeting many of you and appreciated the opportunity to share the excitement and confidence we have for our three iconic brands and details of our plans to continue growing all around the world for years to come.
Hopefully our discussion of sales drivers development opportunities technology, and digital progress and introduction to some of our leaders and Master franchise partners provided helpful context to assess our strategy and performance.
We have an exciting business model and an ambitious plan and look forward to sharing our progress with you each quarter.
Back to our Q2 results and let's start with Tim Hortons.
In Q2 global Tim's comparable sales were positive, 0.5% and positive 0.7% in Canada.
The Tim Hortons team continues to execute on the winning together plan that we shared with you in May and we're pleased with the positive momentum we have generated in the business over the past year.
As we've discussed in the past we're focused on investing in key areas of the business that will allow us to drive long term growth, including the continued rollout of our welcome image.
On trend product innovations advancements in the quality and consistency of our coffee experience and our exciting new loyalty program.
In the second quarter, we saw the positive trends in our breakfast platform continue the omelet bites, we introduced in the quarter performed well and we are working on new great tasting flavors to be showcased in our restaurants in Canada in the second half of this year.
We also launched the beyond meat breakfast sandwich towards the end of the quarter that is performing well and driving healthy levels of incrementality.
Some of the strength from menu innovation was offset by softness in our lunch daypart.
Particularly during the second half of the quarter, where we saw a gap in sales of our sandwiches unwraps versus last year.
We expected the introduction of our value chicken sandwich midway through the quarter to help drive growth year over year, but performance fell short of the volumes we expected.
We are taking steps to address this part of the menu with a variety of new innovation and continue to believe this represents a good opportunity for growth for the brand.
You may have seen a few weeks ago, we opened a new Tim Hortons innovation Cafe in the same building as our headquarters in downtown Toronto.
Initial feedback from our guests and early sales and product mix results have been very encouraging.
This innovation cafe will serve as a guest centric testing ground for new and exciting products technology and service modes that we believe will help us drive lunch and other day parts for Tim Hortons in the future.
In addition, our cold beverages lagged in May and June as compared to Q2 of 2018, which was one of our strongest quarters for cold beverages in recent memory.
Our Oreo Iced Capp limited time offer underperformed, our expectations and did not do as well as our offerings last year.
That said, we're encouraged by some of our recent cold beverage innovations like creamy chills, and flushes, which have been performing well.
We've also seen positive guest response as we started to introduce new flavor varieties, such as our Jolly rancher Slushy my personal favorite.
And we're excited to continue building on these beverage platforms with new and exciting options for our guests at our Investor Day, we talked about another important area of our plan, which is enhancing our coffee leadership in Canada.
And over the past few months, we have continued to make progress on our plans to rollout new fresh Brewers.
Our test markets continue to perform well and we have plans in place to rollout all over the country over the next year.
Our guests are noticing the improved consistency in our coffee and at the same time team members can be much more efficient and spend even more time, serving our guests. We're also using the new lids, which are functionally much better than our previous lids and are made with a 100% recycled material and even more restaurants around Canada.
We've tested them with millions of guests and they're getting overwhelmingly positive reviews.
We're also very excited about the success of our loyalty program Tim's rewards.
After a rapid ramp up phase over the course of about a month approximately half of all transaction swipe or click Tim's rewards. This reflects very strong adoption and buy in with more than 7 million people using the program every month after just a few short months.
We're really pleased with the level of engagement from our guests and believe we are establishing an exciting platform that we can use to drive improved guest experience and sales growth in the future.
As we've talked about before the overall impact of Tim's rewards on our comparable sales. So far has been neutral. However, it has helped us drive an encouraging level of incremental traffic, bringing more guests into our restaurants more often.
Our next step is to use the powerful insights were gathering from the program to offer our guests rewards and promotions tailored to their purchasing interests.
We believe this will provide a solid basis and valuable program for driving incremental sales across our large customer base overtime.
To wrap up on Tim's, we continued to make progress growing the brand around the world.
In the second quarter, we were excited to announce our latest partnership which will bring Tim Hortons to Thailand and represent our third market entry in Asia.
Thailand is a thriving coffee market and our partner has a deep understanding of the market as well as local guest wants and needs and is building a top notch team all of which we believe will position us well for success in this country.
We've already begun work to develop a compelling menu based on our global beverage platform and unique food offering.
We have also continued making good progress with our partners in China, where we have now opened our 14th beautiful Tim Hortons restaurants since launching the brand in Shanghai in March.
Overall I'm confident in the team and plans we have in place to drive the Tim Hortons brand in the second half of the year and beyond both at home and Canada and around the world.
Turning to Burger King in the second quarter, we generated system wide sales growth of nearly 10% globally, including comparable sales growth of 3.6% and restaurant growth of nearly 6%.
Our results were primarily driven by strong international system wide sales growth of approximately 18%.
Where BK has now grown to over 10000 restaurants around the world and continues to deliver exciting growth for our business with 6.5% comparable sales growth and nearly 10% unit expansion this quarter.
This performance was broad based across international regions, but we saw particular strength in markets like China, India, Brazil and Spain.
We believe our compelling growth in these markets is a combination of factors.
A strong team a balanced menu offering of great tasting products that resonates well with our guests and a fast growing digital and delivery business.
A large portion of our sales are digital in many of these international markets and we're beginning to share best practices, all around the world and right here in our home market as well.
We also benefit from a growing presence in these international markets as we expand our footprint increasing brand awareness and convenience and consequently sales.
At home in the U.S. comparable sales were positive 0.5% slightly ahead of our performance in Q1.
Our chicken parm sandwich, and the four or five six whopper junior Whopper and double Whopper promotion performed well.
But we had a sales gap and value.
We know that the best way to grow our business is a balanced core premium and value offering that caters to all guests and it seems that we did not have strong enough value offers and messaging throughout most of the quarter.
We addressed this gap in the beginning of July with the launch of our dollar tacos and the early results are encouraging.
Yesterday, we announced the national launch of the impossible Whopper, starting next week.
As leaders in the plant based space. We're excited that Burger King is the first national brand to make a unique cravable product like this available throughout the U.S.
In our test markets, we've been pleased with the reaction from gas to this great tasting product that features are one and only flame grilling heritage. The iconic whopper build freshly made to order and all at an incredible value for money.
It's attracting new guests to the BK brand and proving to be incremental to whopper sales. If you want to try for yourself, we're running a cool promotion, where you can get an original whopper and the impossible whopper together for just $7.
So you can try to figure out, which one is which.
But this promotion is only available on the BK App and door Dash, we're really excited about the impossible Whopper and think it's a great way to continue evolving the BK brand expanding our reach and bringing in new guests.
Our global net unit growth for Burger King was 5.8% down slightly versus last year, driven in part by the timing of openings as well as the closure program in the US that we discussed at our Investor day in May the good news is that we are working together with our franchise partners in the U.S. closing lower volume restaurants that are being replaced with new great looking Burger King of tomorrow restaurants that generate significantly higher average sales.
In 2019, we expect Burger King to remain at the top of the list of growing brands in the U.S.
Internationally as I mentioned, we saw strong unit growth of nearly 10% on our base of about 10000 restaurants as we work closely with our great network of partners around the world to drive continued expansion.
Including in markets, like China, Russia, Spain, Korea and India.
Overall, we feel good about our full year openings pipeline for Burger King in the U.S. and around the world driven by the quality of our partners significant market opportunity and the strong returns on capital highlighted at Investor Day.
Finally in Burger King I'd like to take a minute to recognize our talented marketing teams, who brought home an incredible 40 Con line awards in June .
For the groundbreaking creative work around the world over the last year Burger King was also named the number one creative brand for 2019, beating out a number of respected global powerhouse brands for this honor.
This edgy impactful marketing has been instrumental in rebuilding the BK brand here in the U.S. and growing it all around the world and I'm proud that our teams and our franchise partners are getting the recognition they deserve for their outstanding work.
Now, let's take a look at the results for Popeye's, we've been talking for a few quarters now about putting in place the foundational building blocks to drive long term comparable sales growth in us and we're starting to see the benefits flow through.
In Q2, we grew comparable sales positive 3% globally.
And positive 2.9% in the U.S.
We've been building a layered offering for guests which has gained traction.
Our bone in chicken business is a consistent solid platform for guests coming alone or in small groups.
Late in 2018, we identified a gap in the important family segment, and we were able to stabilize and then begin to grow that layer in Q2.
On top of that in the boneless chicken category. We had some strong limited time offers in the quarter, including our hot Honey Crunch tenders.
We also benefited from the rollout of our delicious new chicken sandwich across several new markets. As a result of the encouraging initial results. We have significantly expanded availability in recent weeks and we continue to see a favorable response from our guests with positive incremental sales.
This should put us in a position to rollout the sandwich to the remaining popeye's stores in the us in the coming months with National media support.
We also saw incremental contribution from delivery in Q2, which we continue to roll out to more locations as we expand the integration of our new Pos systems across the U.S.. There's a lot of hard work left to upgrade the entire Popeye system, but just about two thirds are done and we're on track to complete this important initiative in the coming months.
Even at this stage were just under one third of the system remaining already seeing the benefits of higher quality more granular sales and product mix information from our restaurants.
We've been using this increased visibility to strengthen our sales and marketing plans, including our approach to the many layers limited time offers and digital sales I mentioned.
That contributed to the improved comparable sales performance this quarter.
And we're excited to continue expanding and improving our market and restaurant level insights to help drive topline growth overtime on the development side, we continued expanding the popeyes brand in the second quarter with global net unit growth of 6.1%.
This reflects a slight reduction in pace versus last year, However, as with Burger King we build our development plans on a 12 to 18 month basis and continue to feel very good about our openings pipeline for the balance of the year, especially in the us where like Burger King we generate very strong returns on capital and are one of the fastest growing QSR brands in the country.
Outside the U.S.. We were also super excited to announce two new very important partnerships for the Popeyes brand in China and Spain.
China is one of the largest chicken QSR markets in the world and a huge opportunity for popeyes will be working with the same partner TIFIA and the crew Douglas brothers that have built our Burger King China business into one of our largest and fastest growing markets internationally with over a 1000 restaurants.
They also have a great track record with popeye's, having already built the largest international market for popeye's in Turkey, and we're excited to extend this partnership to China with a goal of over 1500 restaurants in the next 10 years. In addition, we were also very excited to announce that are longtime partner in Spain, Gaudio Humana's, we'll be adding popeye's as well.
Spain has been a very strong growth market for us over the past years and were eager to expand this market opportunity to our popeye's brand.
These new partnerships. In addition to the significant white space in our home market give us conviction that popeye's can be one of the fastest growing QSR brands in the world over time.
So to wrap things up we believe the fundamentals across the business remain very solid strong comparable sales growth in many regions around the world combined with the continued strength of our global expansion model allowed us to deliver another quarter of strong top line growth with our consolidated global system wide sales increasing by nearly 8%.
We continue to make good progress delivering against the key pillars of the growth plans, we shared at our Investor day across all three of our iconic brands and are looking forward to a productive second half of the year.
I'd now like to hand, it over to Matt to take you through our profitability and cash flow results for the quarter.
Thanks, Jose and good morning, everyone.
In the second quarter system wide sales growth across each of our brands led to consolidated adjusted EBITDA of $580 million of more than 6% organically year over year.
This quarter AD fund revenues exceeded expenses by 2 million more than they did in the second quarter of last year and impacted our consolidated organic adjusted EBITDA growth rate by approximately positive 0.3%.
As we have mentioned in the past while in some quarters there may be a mismatch in the timing of revenues and expenses in the long run these add funds or managed such that the total cumulative revenues equal expenses at the segment level, Tim Hortons second quarter, adjusted EBITDA was $287 million, which represents a 3.5% organic increase year over year.
This increase was driven by systemwide sales growth of 1.6% and the expansion of our retail business, which has grown meaningfully over the last few years.
Also substantially all of the positive $2 million year over year impact to consolidated adjusted EBITDA related to the timing of ads on revenues and expenses was attributable to Tim Hortons.
At Burger King second quarter, adjusted EBITDA was $252 million, representing a year over year organic increase of 10%.
This increase was driven primarily by system wide sales growth of just under 10%.
Driven by continued momentum in global net restaurant growth of nearly 6%, including nearly 10% internationally and global comparable sales growth of 3.6%.
Finally at Popeyes this quarters, adjusted EBITDA was $41 million, which is up 4.6% organically year over year. This increase was driven by system wide sales growth of about 9%.
Including net restaurant growth of over 6% and comparable sales of 3%, partially offset by slightly higher segment DNA.
Primarily related to the year over year timing of certain expenses as well as some costs related to organizational changes.
Our second quarter adjusted net income was $331 million.
This compares to second quarter 2018, adjusted net income of $313 million.
The year over year increase was attributable to adjusted EBITDA growth and a favorable tax rate due to stock option exercises in the quarter.
Partially offset by unfavorable exchange rate movements higher interest expense related to the annual step up in our interest rate swaps. We noted in the first quarter.
And higher stock based compensation expense.
Our adjusted diluted EPS for the second quarter was 71 cents compared to 66 cents in the prior year.
Included in this increase is a headwind from unfavorable foreign exchange rate movements that accounted for approximately three cents per share.
Our first and second quarter 2019, adjusted effective income tax rate was lower than the range. We had provided earlier this year.
However, it is important to remember that the timing and amount of stock option exercises can vary materially quarter to quarter and can thus have a much more material impact on a specific quarters tax rate on a full year basis. Our view on the adjusted tax rate has not changed from the low 20% range. We shared earlier this year.
Now, let's discuss our cash generation and capital allocation for the quarter.
We generated free cash flow of approximately $312 million.
Calculated as the sum of cash flows from operating activities less payments for property and equipment, including the results of the second quarter, our free cash flow generation over the last 12 months totaled approximately $1.3 billion during the second quarter and prior 12 month period. We also paid a total of $230 million.
And $858 million, respectively in common dividends and partnership exchangeable unit distributions.
We also continue to make progress on key investment projects, including our previously announced remodel programs at Tim Hortons and Burger King.
As well as the expansion of our Tim Hortons supply chain network in Canada.
Based on the timing of our remodel pipelines and construction projects, we anticipate our spend to be more substantial in the second half of the year as we complete more Tim Hortons and Burger King renovations and advance the build out of our distribution centers, which we expect to complete in 2020.
As of June Thirtyth 2019, our total debt outstanding was $12.2 billion.
Our net debt calculated as total debt less cash and cash equivalents of $1 billion.
Was $11.2 billion.
And our net debt to adjusted EBITDA leverage ratio was five times. This morning, we also announced that the RV AD Board of directors declared a dividend of 50 cents per common share and partnership exchangeable unit of RV LP payable on October Threerd, 2019, which is consistent with our previously announced target of $2 per share in total dividends to be declared in 2019.
And reflects our strategic priority of maintaining a balanced approach to capital allocation.
Thank you everyone for joining us on the call. This morning and for your continued support I'd now like to open the call for questions operator.
We will now begin the question and answer session.
To ask a question you May press Star then one.
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Once again, all callers are limited to one question.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Dennis Geiger of U.B.S. Please go ahead.
Good morning, Thanks for the question.
I was just wondering if you could talk a bit more about plant based and what you're seeing I think you noted a healthy levels of incrementality and new customers I'm at a at the brands, but just wondering anything on on anything more incrementality on repeat orders other relevant feedback and a and data points and then I just I guess related you've got a bunch initiatives that you've put in place.
Especially at Tims to drive sales and franchisee profitability. Just wondering if you could help frame kind of what you view as as having the greatest potential for Incrementality. Thank you.
Hi, Dennis Thanks for the question on plant based as Weve kind of mentioned over the last few quarters since the launch of or the test of impossible in St. Louis back in April .
Yeah. We're excited we've done a lot of research on this and spoken to a lot of guests and it was a an insight that our teams are found in the research that there was an opportunity to kind of address a real strong and growing demand in our business at Burger King we saw the same thing with Tims in Canada.
Because guest are demanding and looking for more options and alternatives and so its kind of core to our marketing teams and the way we look at the business that we we try to understand in a in as much detail as possible. What it is that guests are looking for and we give that to them in with the great tasting quality and and an option that we have in our business at Burger King at Tims.
And popeye's as well for for different products. So.
We feel really good about it weve tested both oh impossible at Burger King in the U.S., we've tested other plant based products and in other markets in the <unk> in Europe , and we're seeing really really good response from from our guest and we see that there's two types of.
Behaviors, taking place were seeing existing guests come more often.
And actually changing their orders and try different it's kind of the same product, but with different proteins and so that's exciting and then we're seeing new guest as well younger guests were seeing a shift as well in the end demographic. So so we feel really good about the potential at this that this platform has for for Burger King and we're seeing the same thing with a with Tim Hortons in Canada with a with breakfast options that include beyond meat. So we're really excited about it which is why we announced yesterday that were launching nationally next week.
Impossible in the U.S. and look forward to seeing how our guests react to that over the next few weeks and months.
Now as it relates to Tim Hortons, where were we continue to be very excited about the long term at times Weve. As you mentioned, we're working on some very key initiatives to drive the business forward. We have we have amazing restaurant owners, we have very loyal guests.
And we have an awesome business and we had some really good.
Momentum in in Q2, we saw breakfast anytime continue to work we saw the the breakfast innovation, including beyond meat work loyalty and contend Tim's rewards continues to.
Really amaze us in terms of the potential that it has for the business long term. So we're really excited about those initiatives coupled with the other.
Initiatives that we've talked about on a in our winning together plan focusing on continued on trend innovation coffee leadership.
Which is serving roughly eight of the 10 cups of coffee in in Canada everyday we know we're already way in front, but we need to continue to drive that with great consistency, we changed packaging, we're going to be leaders in a sustainable packaging long term.
And then we continue to focus on on loyalty and digital and and welcome image. We think those initiatives, which are really long term initiatives and continue our strength and dominance in the market are going to help us continue to grow for the long haul here in Canada. Thanks for the question.
Your next question comes from Mark Petri of CBC. Please go ahead.
Hey, good morning.
You called it the positive impact of your efforts on digital and delivery in some of your international markets for for Burger King can you just recap where you're at in the U.S.
The impact it had on your business so far in 2019, and how you can accelerate that.
For the rest of the year and then into 2020.
Yes, Mark its Josh Thanks for further question.
So we're really pleased.
About how we've done with both on both those fronts, particularly at Burger King and I would say on and also about the potential for the second part of the year.
Now lets say on on delivery, we've made progress on rolling out delivery through a large part of our system and we're in about 3500 restaurants today with with Burger King and we've seen.
Pretty significant growth in terms of of the sales per restaurant per day, and as we've continued to grow coverage and as we go through the rest of the year I'd expect to see that to continue to grow.
You have seen we have started to work with Verizon and <unk> and we're working on expanding.
Our rollout with reeds quite rapidly over the next few months such that we'll have really significant coverage with multiple.
Aggregators within just the the next few months here. So we think we've made a lot of progress with delivery and we expect to make a lot more progress over the next quarter in the remainder of the second half I think even even more broadly.
I think you've seen us focus a lot on on growing the importance of our mobile app and engagement through the mobile App. We did that at the end of last year with Whopper Detour and we've continued to focus a lot on on engagement through through the App in the beginning of this year. We've continued to grow app downloads in our monthly active user base out we've had some pretty compelling offers and the app and I would say that engagement in the app and presence of that in our business has grown very systematically throughout the year. So we're excited about making add digital an even more important part of our everyday business and think we've made some pretty good progress throughout this year so far.
The next question comes from Eric Gonzalez of Keybanc capital markets. Please go ahead.
Hey, Thanks for the question good morning.
It seems like you had a lot of success on the on the Tims mobile App and the loyalty program drawing customers in Red aggregate I'm. Just wondering if you could talk about the user growth and how that's trended since the last update and then you mentioned personalized marketing is on deck with that program can you talk about maybe when that.
We'll launch and then related to that you mentioned that same store sales was neutral, but it was driving traffic wondering if you could bridge that gap for us. Thanks.
Yeah, Eric It's Josh again, thanks for the question.
To your point as a as we've ramped up the loyalty program, we've seen a significant growth not just in the users of a loyalty program, but also with that engagement on on the mobile app. So weve seen really dramatic growth in terms of our monthly and weekly active user base on on the on the mobile App, which is great.
And.
And in terms of the program and using personalized marketing.
I think.
Well the way that we think about it is that our goals for the for the beginning of the program, we're really to reward our most loyal guests and to drive a very large level of engagement with the program and I think we've been really successful on both of those fronts and we moved very quickly to adding about half of our daily transactions on the program, which is great and also all of the consumer research that Weve done has shown that our guests are really appreciating the program and it's driving a really big improvement in terms of all of our brand metrics that we've seen so really big success on on that front.
In terms of traffic as you pointed out.
We have seen a big improvement and in traffic, which is great. It's another one of the goals that we set for the program and as Jose pointed out as it's been roughly neutral on on sales the time being I think what's really exciting about this program.
And I think this is consistent with what you've seen of many of our peers programs is what we can do with it over time and this gets a little bit to your point of personalization and it's something that we're already working on I think this is just the start of our loyalty program and we're working on on ways to evolve the program over the next coming quarters and years to figure out how we make it work even better for for our guests and for our brand and for our system. We're very excited about the potential for that.
The next question comes from David Palmer of Evercore ISI. Please go ahead.
Thanks, Hi, Thanks on Tims, Canada.
How much do you believe weather held you back on your cold beverage and overall sales for tims in the second quarter.
And are you are you already seeing significantly better results, thus far in the third quarter not just driven by.
Whether becoming more normal and driving that cold beverage, but also perhaps the help of beyond breakfast sandwich and the neuberger. Thanks.
Hey, Thanks for the question, David as I mentioned last quarter I hate to talk about weather as it relates to.
Business performance, but certainly with a high frequency business and.
A strong beverage business hot and cold. It does have an impact we we saw a little bit of that throughout the quarter.
But but nothing to comment on in terms of what what impact if any it had.
We continue to focus on things that are going to drive guest into our restaurants, whether it's cold and rainy or hot and and beautiful out like it is today in Toronto. So our plan as I mentioned earlier is is strong we're focused on on capitalizing on the strength of the the amazing strength of the Tims brand here in Canada.
Making restaurant owners loyal guest and a really really.
Strong and an awesome business that has a super high frequency and our focus is on things that are going to keep our guest excited while them on a regular basis and we think a lot of the innovation that we're doing on the product side a lot of the work we're doing.
On the on the quality side and consistency side on product as well as the coffee.
And then some of the work, we're doing on image and including our new innovation Cafe here in Toronto I think those things are going to be the drivers of long term growth for the business and.
And we're excited about that and we don't I mean, weve occasionally shared information around performance within the quarter, but.
We're excited about the the plan long term and look forward to sharing more with you in the coming quarters.
The next question comes from Sara Senatore of Bernstein. Please go ahead.
Thank you I wanted to ask about Burger King you asked and I understand.
At the global conference quite strong, but I think.
Hey, you flagged in the U.S.
Kevin the bank competitors virtually everybody said, yes.
Feeling about value as you can.
You know I know you've launched that tackle Burger king, but it's not really a core menu item and I guess.
I was trying to understand if the issue is that your franchisees won't let you get more aggressive on value or if you really think that this sort of incremental.
Product offering is going to be that the the appropriate driver. So I feel like we had a little bit of a head fake at the beginning of this quarter, where it looked like things might be getting better.
And then they kind of settles into the slower pace. So just trying to understand what levers you can pull because it doesn't feel like value is going away and in most of your competitors are being aggressive kind of across the board on their menu. Thanks.
Yeah. Thanks for the question Sarah.
We've said it before I've mentioned in quite a bit in the last few quarters.
We do best.
Burdening, the U.S., when we and really Burger king across.
The globe when we have a good balanced offering that that focuses on our core.
And also highlight some of our strength in in how we cook and prepare the food flame grilled as well as on premium and then having a good value offering everyday that drives.
Consistent traffic into the business and I think we've.
We do have a strong balanced offered at Burger King in the US we work closely with our franchise partners in the us on councils each quarter going through plans and looking short term and long term it and how we drive the business not just from a.
And advertising and product innovation standpoint, but also in other key initiatives that drive the business forward technology image et cetera.
And so we have a good plan I as I mentioned in my comments, we occasionally have.
A bit of of of imbalance on media allocation and maybe some of the promotional activations weren't as strong as as it could have been but we feel good about the plans we have long term we feel good about what we're doing.
In the US were excited about the innovation that we're doing encore.
Including impossible Whopper, which starts next week and we think over time, we're going to be able to continue to drive traffic and sales and grow the business as we have.
The last many years thanks for the question.
The next question comes from John Glass of Morgan Stanley . Please go ahead.
Yeah. Thanks, Thanks, very much on the on the Burger King International comp trends and you cited certain markets and kind of general Causalities in terms of management et cetera, but can you talk about specifically if digital and delivery is a meaningful component of that acceleration in comp kind of what some benchmarks are in terms of penetration of either digital delivery in aggregate or specific market. Examples if you want compared to the U.S., we can get a sense of that and just as a follow up and and the Tims, Canada business and lunch you Didnt mention the beyond meat Burger, but is that do you view that as a significant lunch driver.
Similar to what you're experiencing or think you experienced at Burger King with impossible Walker.
John Thanks for the question on International Burger King comps, we as I mentioned in the prepared remarks, we saw some really good performance and we've seen it.
Consistently over the last.
Many quarters in China, India, Brazil, Spain, and we have really good teams in those markets. We should we shared some of the insights and and some of their perspectives that at Investor Day. So you had a chance to see.
Some of the leaders and partners that we have in some of these markets and they are doing a good job in each of these markets focusing on a balanced menu offering they're doing really good work in terms of image and we're also seeing in many markets really strong growth from a digital standpoint deliveries a strong driver of growth in many of these markets we have.
Over 8700 restaurants today with.
Delivery.
Globally.
In China for example, more than 90% of our restaurants have delivery and it represents a big part of our business in in that market north of 30%.
Korea, we have 80 80 plus percent of our restaurants with delivery in Spain, we have a really big business as well and delivery. So so it becomes.
A really strong part of our business, it's a great way to address.
Dayparts, where where we have growth opportunity and there is a lot of incrementality from a from a sales standpoint. So we're excited about.
Where we are from a digital standpoint kiosks or big part of.
Our European business and growing.
Apps and.
Other engagement digitally and in Asia, as well as Europe or big parts of our business. So we feel we're just in the early days of growing top line and engaging with guests in in Europe , Asia, and Latin America as well as obviously in the Us and Canada and we're excited about the business from a from a delivery standpoint, as well as digital and in those markets.
As it relates to the tims and lunch. We we look we have a lot of work to do there to to continue to grow we have a strong lunch business, but we think its a.
It has ample room for growth both in terms of.
The product side as well as in terms of the beverage side. So we're excited about that we're doing.
Work now too.
To rethink how this can can drive sales long term for us we we looked at the beyond meat Burger as well as.
As a as a kind of limited time offer to see how it would react and were.
Were encouraged by some of the behavior there.
But in the end, we're really at a coffee and baked goods business with very strong sandwich offerings with soups and other products that are that are natural to our.
Restaurants, and we are going to continue to work on that and and we'll have more to share with you in the coming in the coming quarters.
The next question comes from Brian Bittner of Oppenheimer and company. Please go ahead.
Thank you good morning.
Just from a capital perspective give a billion dollars of cash on the balance sheet. Your net leverage is trending to below the five turn level, which is pretty low on a relative basis.
So how do you want is thinking about this opportunity for a capital event moving forward. How do you think about the trade off between doing a more aggressive share repurchase plan first M&A and separate to that can you just confirm on the U.S. Burger King side, whether the impossible rollout is in LTL or whether this is a new permanent menu item.
Urban new platform. Thanks.
Thanks, Brian .
It's around here thanks for the question.
Just on capital allocation.
I think we're really fortunate.
We have a business model, that's that's very efficient.
In terms of delivering strong growth in cash flow and and consistent delevering.
As we execute on the core business plans and grow our system wide sales.
And to US the most important thing about our approach to returns, which I think we've been pretty disciplined about over time.
Is making sure we deploy our capital in a thoughtful and balanced way.
Which really means providing shareholders I think with a good foundation of returns through a strong dividend that we've been able to grow over time as we grow the business.
Along with some thoughtful investments back into the brands as we've been doing with our remodeling initiatives at both Tim's and Burger King.
As well as infrastructure investments, we've been making tims in our supply chain business.
But also at the same time I think it's important for us to preserve flexibility to execute on attractive investment opportunities over time.
Which has allowed us to add great brands.
Some points in the past or company, but also to invest back in ourselves through meaningful share repurchases.
So I think we believe this is the sort of balanced approach.
That will allow us to drive the best returns for shareholders over time, and we'll continue to maintain this flexibility and balance.
Thanks, and regarding Brian regarding the question on on impossible.
All all of our product launches, particularly here in the us.
Our inherently limited time offers and we being brand led and being guest centric, we let our guests decide which items should earn a permanent place on our on our menus and so.
We're very excited about the launch we're very excited about the prospects of.
Building a platform.
With with plant based.
Burgers and other menu options, but we are starting as we always do and let's see what happens.
The next question comes from Andrew Charles of Cowen and company. Please go ahead.
Great. Thanks, two questions if I may because it can you talk about the health of Tim.
Canada franchise system comps are encouraged really starting to move in the right direction relations are better falling Dunkin' tiring, a year ago, but there seems to be several polls and franchise cash flows around remodels can you coffee Brewers and the loyalty program, which you alluded to that boost traffic, but presumably weighs on check.
Get wall sales have lagged the other two segments and then Matt when we look at Tims gross margin seasonally from one Q2, Q2 019 showed the lowest seasonal step up since you guys acquired the business can you talk about any headwinds we should be aware of that restrained supply chain margin expansion twoq be on same store sales.
Thanks for the question.
Duncan is in the room is really excited about the.
The call out so I'll have to deal with that later.
Yes.
What we're really pleased and excited about the progress, we're making with with our partners in restaurant owners here and in Canada.
We have a really healthy strong business in Canada. It's it's it's one of the most profitable.
Franchise businesses anywhere in North America, and probably around the world.
We have been working closely with our advisory boards on on.
At the Tim side on many initiatives that are critical to the business long term.
Franchise, and restaurant owner profitability being front and center as well as guest experience and satisfaction and what we're seeing is really strong engagement with our restaurant owners lots of really good dialogue.
And a lot of progress.
Working together.
Shoulder to shoulder to drive the business forward and so we're excited about it we continue to work at it. This is not a once in a while seeing in franchising. It's in all the time thing, we just had our advisory board and town here in Toronto.
This we got a chance to speak to some of the the restaurant owners and they continue to be excited and encouraged by a lot of the winning together.
Initiatives that we've been putting in place and implementing over the last.
Several quarters, including loyalty, including welcome image, including a lot of the innovation. So we're really.
Excited about that and positive about the long term health of business here and I think a restaurant owners are as well.
Yes.
Andrew just regarding your question on on the margins.
I think what we have seen margins remain relatively flat year over year.
And as we look at the margins sequentially from quarter to quarter.
As if they were up a bit which is typical for us.
Given sales seasonality between the first and second quarter.
And nothing really specific to call out.
I think the margin has remained relatively consistent.
Over the last few quarters within within a reasonable range.
And again I think it was up a bit in the second quarter versus the first.
The next question comes from Gregory Francfort of Bank of America. Please go ahead.
Hey, guys I had two questions. The first is just going back to.
Plant based me with the.
Possible launch can you just maybe frame up in test.
Sort of how big of a lift was to the business and.
I guess the Incrementality there I know it got asked earlier in the call, but and then the other question I had was on China.
And I think you have 14 stores open now what are the early learnings with tims there and.
I guess anything you're calling out in terms of performance would be helpful. Thanks.
Hey, Thanks, Greg.
We don't share specific numbers on how tests perform.
We obviously, if it didnt perform well we would have put it.
In the waste basket and moved on so we feel good about.
The Incrementality, we feel good about the guest reaction to it both existing Virgin gas coming back for another visit to try a new product that is innovative and craveable and also as I mentioned earlier.
Theres, new guest coming in I guess that havent been a burgeoning awhile.
Ill try this product and we're seeing some really good attachment as well with ancillaries and and and beverages and desserts as well. So we feel good about it we feel we feel this is a long term opportunity for the business we launched it.
Limited type basis, and we want to see how guests react to it but we feel really really encouraged.
And strong about what we think this can be for the business long term.
And as it relates to tims in China, we open.
Actually I got an email.
Earlier today that we opened our 15th store in Shanghai. So were we continue to open a really good.
Restaurants, there the images is awesome. The team there has been an amazing job with kind of translating.
The Canadian heritage of the brand and making it relevant to the Chinese consumer.
Beverages are doing really well as I've mentioned in the past they continue to do well weve innovated on Tees and other.
Beverages that are more relevant in China, and then the food offering.
Baked goods sandwiches and others have have done well, we've kind of made some adjustments to that to that part of the menu and continue to be encouraged and as I mentioned on the BK side for international in China with Tims, we're seeing tremendous engagement from from our consumers on the digital front as well and so we're really excited about the business there the team is awesome.
The team at Tims, China.
I know many of them from the past and they've they've done a good job of getting the brand going in the right direction and we look forward to sharing more with you in coming quarters.
The next question comes from David Tarantino of Baird. Please go ahead.
Hi, Good morning, just a couple of questions on Tim Hortons first.
One clarification on the on the second quarter same store sales number the traffic.
Outpace the comp.
And.
Just wondering sort of the dynamics around this loyalty program.
And if you could if you could talk about.
Whether that sorta off to the traffic growth you're seeing related to the program is a function of the accruals.
The discounting or the actual discounting itself during the quarter and then and then I guess more broadly Jose a bit interested to hear your perspective on what you think the biggest impediment.
They are growing comps at Tim Hortons I've been over the last year I appreciate.
The initiatives you have going forward, but it seems like you've thrown a lot at the business over the last year or so and comps have remained relatively shallow. So just wondering to put it in the context of what you think the biggest impediments have been over the last several quarters. Thanks.
Thanks, David for the question on on Tims in the.
And the performance, we don't breakout traffic in.
And check so we don't have any insight to share with you on that.
Today, but we as we mentioned in our remarks.
Or as I mentioned in the remarks, I think Josh touched on it earlier as well.
We are encouraged by the the adoption rates of the loyalty program. We are seeing a lot of of repeat business coming in and acceleration of.
Have guessed it already come in on a regular basis because of loyalty and we it's how it's doing exactly what we thought it would do and it's giving us confidence that we can do much more over the long haul and so we always felt that when we launched when we tested the loyalty program and then launch it in March.
That this would be evolutionary.
But but initially its been revolutionary for us in terms of the amount of information we have the engagement that we're able to create with our guest and and we think we can do a lot more with this over the long haul. So we're really encouraged by it and I look forward to sharing more with you in the coming quarters in terms of the progress we're making on on loyalty and with respect to the overall Tim's business as I mentioned earlier I'm really.
Excited and encouraged by the progress we're making in some of the initiatives that we put in place since last year.
Working together with our franchise and restaurant owners.
We have a really really good business, we have amazing restaurant owners, we have very very loyal guests that come very frequently we sell.
Eight out of 10 cups of coffee in Canada in our restaurants, and what we're trying to do is build on that.
Over the long haul to to create an even stronger business and I think the initiatives that we're working on are not.
Things that were there are flashes in the Pan we need to continue to work closely with our restaurant owners.
These are initiatives that include.
Transforming the image of our restaurants. They include transforming the way people engaged with our restaurants through technology. They include innovation on on the food side for breakfast as well as lunch and other dayparts and obviously enhancing and continue to innovate on our beverage side. So I'm very encouraged and and look forward to seeing the business in Canada continue to grow in the coming quarters and years.
Thank you.
The next question comes from Jeffrey Bernstein of Barclays. Please go ahead.
Thank you very much.
Question on Burger King Us.
Now the comps were modestly positive, but it does seem like.
Labor inflation is large and commodity inflation, presumably on the comps Im just wondering if you could talk a little bit about.
Franchisee sentiment conversations you're having with them on profitability, whether you can share anything around what the inflation levels are currently for commodities and or labor and how they think about menu pricing in response to that.
And then just one last side I know you mentioned kind of thinking that you are lagging a little bit this past quarter on value.
I'm just wondering how you could think about hurricane other than value versus premium maybe think about it by day part just wondering where you're seeing the greatest strength or maybe opportunity where you might be lagging some of your peers. Thank you.
Thanks, Jeffrey on on the BK us profitability front weve.
We don't break out our profitability at the restaurant level quarter over quarter, but.
Do it more.
On an annualized basis, and we continue to see the business at healthy levels in terms of sales as well as restaurant level profitability certainly it has been a lot of.
Of.
Reports on on inflation, whether its on the on the wage side or on the commodity side.
Our focus and working closely with our franchise partners in the U.S., our focus has always been on driving.
The topline driving the topline through a balanced approach with with core premium and value offerings and we continue to be focused on that we have a very good.
Working relationship with our franchise partners in the US similar to what we do in Tim Hortons in Canada.
We have regular routines.
With with our franchise councils in the us working through marketing initiatives operations initiatives equipment initiatives that are helping us be more efficient in the restaurants as well as image and other.
Projects in key.
Platforms that are going to be driving the business long term. So we continue to.
Enjoyed positive working relationships, there and continue to work closely with them to drive the topline and bottom line of the business in the us.
And as it relates to Dayparts.
I've mentioned in the past, we talked about it at Investor Day breakfast.
In the U.S. is an important day part I think we have a.
A solid business there that can be much bigger and we've launched.
And started to make progress on on beverages and breakfast as well as.
As other innovation on the breakfast side, and we think Thats.
Long term an opportunity for us to continue to grow topline and given the profitability levels of a breakfast daypart. We think it will be a big driver of franchise profitability as well and then as Josh touched on earlier on delivery and we see delivery being a big driver of.
Of incremental growth in day parts, such as dinner and late night and we continue to work closely with our partners on that and are excited to to be adding a new.
Delivery partner into breeds to help us drive that business as well thanks for the question.
Thank you and now I would like to turn the conference back over to Jose still for any closing remarks.
Thanks, again to everyone, who joined US this morning, as I mentioned before the fundamentals of our business are strong now we had strong comp sales and continued restaurant expansion this quarter, which enabled us to drive strong topline growth of about 8% in Q2, but more importantly, we're really excited about the long term prospects for our business driven by our great teams are great brands and great partners around the world and we look forward to updating you on our progress again in a few months have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.