Restaurant Brands International Inc.

Good morning and welcome to the Restaurant Brands International Second Quarter 2021 Earnings 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, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. You will hear a tone to confirm that you are in the queue. To exit the question queue, you may press star, then two. All callers will be limited to one question. Please note this event is being recorded. I would now like to turn the conference over to Stephen Lichner, RBI's Head of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the second quarter ended June 30th, 2021. As a reminder, a live broadcast of this call may be accessed through the Investor Relations webpage at investor.rbi.com, and a recording will be available for replay. Joining me on the call today are Restaurant Brands International CEO Jose Sill, COO 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. Throughout the call today, we will be referencing two-year comparisons for system-wide sales growth and comparable sales to provide a cleaner indication of how the business is trending versus a more normalized period. These two-year comparisons are calculated on a geometric stacked basis by using the 2020 and 2021 disclosed growth metrics. And now I'll turn the call over to Jose.

Good morning everyone. Thank you for joining us on today's call. I hope everyone is doing well. We're pleased with the results this quarter and the progress we've made on several key initiatives, including driving development, improving system-wide sales growth, and enhancing our digital platforms. Our franchisees, our teams, and our restaurant team members continue to amaze us with the incredible work they're doing and their dedication to our brands and our guests. We remain confident in the strength of our long-term value proposition anchored by our guest-centric focus, three iconic brands, scalable franchise model, growing digital channels, commitment to innovation, and relentless pursuit of maximizing value for all stakeholders. We have a strong track record of driving growth, and our prospects looking forward are bright. As we advance on our path to 40,000 digitally integrated restaurants, our scale, our growing digital business, and our agility expands our capabilities, deepens the strength of our brands, and positions us well for exciting, compounding growth in the years to come. And even with investments in digital and across the business, we remain highly cash flow generative, a testament to the strength of our business model, which has enabled us to consistently return significant capital to shareholders over the past years. In connection with this, and given our increased confidence in the outlook of the business, we announced that our board of directors authorized a new, significantly expanded share buyback program of our common stock for up to $1 billion over the next two years. We also paid a 53 cent quarterly dividend on July 7th, resulting in one of the highest dividend yields in our industry. And our board of directors declared a dividend for the third quarter of 53 cents to be paid in October. Now, before I dig into our brand level performance, I'd like to discuss the highlights from the quarter starting with development. Around the world, we feel very good about the robust pipeline we've built with our franchise partners. And during the quarter, we opened a new restaurant on average every six hours. Overall, for the first half, we generated net restaurant growth of 378, one of our best first halves ever, giving us confidence in our ability to return to our 2018 and 2019 levels of growth this year. What's more, our growth this year has been well balanced across markets and brands. It's been especially encouraging to see both existing and new franchise partners around the world building even more conviction in the power of our brands and business model than before the pandemic. Over the past decade, we've built up a very strong and differentiated foundation for growth with our master franchise network around the world. One great example of this is Burger King France, where we've effectively built the brand in that market from scratch through a strong partnership with our master franchisee group Bertrand. And earlier this month, we reached an incredible milestone, opening the 400th Burger King in the country, which puts us on track to generate over a billion euros in system-wide sales in France by the end of this year. But France is just one of many examples of how quickly our brands can scale into large businesses when we create the right foundation for growth with strong, ambitious partners. That's why we're so excited for the growth potential of our brands around the world, especially as we continue building relationships with new partners who are eager to move along a similar path and create exciting new pipelines for our business in high-growth markets. A great example of this is Tim Horton's China, where we're seeing a pronounced acceleration in our development growth curve and remain on track to double the size of that business by opening over 200 new restaurants this year alone. These are just two examples of the many markets around the world where we're working with partners to develop our brands. And that includes the U.S., where we experienced the record second quarter energy for Popeyes, reflecting a strong demand to expand Popeyes across new and existing markets and with new and existing franchisees. With restrictions easing, we've also been excited to get back out in the field and meet with our global franchisees. I recently traveled to Switzerland and Spain to visit new sites with our partners, including new Popeyes locations in both markets, and was encouraged to see our franchisee partners' enthusiasm to extend the footprint of our loved restaurants in these markets. The second headline to highlight is that we had a solid quarter of system-wide sales growth, up 32% year-over-year and plus 4% versus 2019, a sequential improvement compared to our first quarter. This is one of the benefits of having diversified brands across global markets. So regardless of lockdowns that continue to restrict mobility in some regions, we can still drive solid system-wide sales growth from a global perspective. I'll offer some more color on Tim's in a moment, but even with a large population in Canada still working from home, it's been encouraging to see sequential two-year sales comparables continue to improve every month and now into the negative mid-single digits in July. The third headline from the quarter that I'd like to call out is our progress on digital, a key focus area as we enhance our omnichannel guest experience through loyalty and other initiatives to form deeper, more valuable long-term relationships with our guests. In our home markets, our digital sales are up 60% year on year, and we think this is just the beginning. We've seen the importance of digital in driving stickiness and check in traffic with delivery sales, for example, growing sequentially compared to last quarter. Loyalty programs are a key driver of enhancing digital sales as well. Last quarter, we highlighted the success we had with Tim's Rewards. This quarter, we continue to grow our digital sales at Tim's in Canada to more than 30%, while at the same time doubling known diner sales. While still early days, these are exciting levels of digital penetration and engagement, which demonstrate the power of what our digital platforms can deliver. Last quarter, we also launched Burger King's loyalty program, Royal Perks, across the nation on digital ordering channels while testing Popeyes rewards. As of the end of this quarter, we've now launched loyalty programs nationally across all three brands in our home markets. We're in the early innings with our loyalty programs at Burger King and Popeyes, and we continue to see great progress, which we think will be a big unlock to help us on our journey towards building a strong and growing digital sales base. Before moving on to each brand's performance, I wanted to take a moment to address commodity cost increases and labor pressures. It's been well documented that the restaurant industry, like many other industries, is facing rising commodity costs and wage inflation. We're confident we have the right tools and processes in place to thoughtfully manage the current inflationary environment, and we're working closely with our franchisees to do so, like we always do. Like most others across the restaurant industry, staffing continues to be a challenge. While the situation is evolving daily, we're working closely with our franchisees to provide tools and share best practices, including recruiting and hiring initiatives, employee retention programs, and technologies that simplify the hiring process. For example, certain franchisees have piloted a process to receive job applications by text message, which has led to an increase in applications, interviews, and hires. We're also supporting our franchisees' recruiting efforts by leveraging our social media scale and providing more targeted support, including an upcoming national media and in-restaurant campaign in Canada. Let's turn the discussion to Tim Hortons in our home market of Canada. Overall, we saw three points of sequential improvement in two-year comparable sales during the second quarter, with each month better than the prior month on a two-year basis. And these trends continue to improve into July, with two-year comparable sales performance now in the negative single digits across every province, including Ontario, which had previously been closed for most of the second quarter. It's important to remember Canada, and especially Ontario, remained under strict lockdowns throughout the second quarter, even as vaccination rates improved. And while transit mobility remains far behind pre-COVID levels and where the U.S. is today, overall mobility did trend upwards as lockdown measures eased throughout the quarter. we continue to see a clear link between vaccine rollouts and market reopenings and our path back to pre-pandemic traffic and sales levels. In addition, we saw sequential improvements in both traffic and sales overall during the quarter, primarily driven by growth in breakfast, lunch, and coffee share. These improvements largely reflect the continued execution of our multi-year back-to-basics plan, under which we're prioritizing creating high-quality products in the categories we're famous for and extending those categories to a few strategic areas that are a natural brand fit where we can drive long-term growth, such as lunch and cold beverages. Last quarter, we executed one of the biggest shifts in our morning-day part in the history of our brand, introducing fresh-cracked Canadian eggs in our breakfast sandwiches. In the second quarter, we built off this new platform by enhancing the quality of our bagels for our delicious hot bagel breakfast sandwiches, featuring our fresh cracked Canadian eggs, and our guests loved it. We saw a continued recovery in our morning day part despite continued mobility restrictions, while also gaining share in both breakfast sandwiches and the morning day part overall. Our Craveables lunch platform, which is one of the highest rated food items by our guests, drove a recovery in the lunch day part with high average check and high incrementality. In fact, during the quarter, our sandwich incidents reached its highest levels in recent history and drove our lunch day part in June back to pre-pandemic levels. On the beverage side, we remain focused on maintaining our leading position in hot beverages. highlighted by our dark roast launch earlier this year, and enhancing our meaningful market share in cold beverages where we see continued opportunity for growth. To capitalize on this, we introduced new lines of cold beverages this quarter, starting with a successful Canadian launch of a cold brew coffee in May made with 100% ethically sourced premium Arabica beans. Our cold brew launch drove both incremental traffic and sales and increased our iced coffee market share. We followed this platform with one of the most successful launches in the past number of years in the cold beverage space in Canada, our real fruit quenchers. And we've seen them not only contribute strongly to sales performance, but also drive traffic back to our restaurants. The real fruit quenchers are a great example of our commitment to provide guests with menu items that are made without artificial colors or flavors, a benefit that is increasingly important for our guests. Related to this, we've continued to see improvements in our brand perception ratings, including food and beverage quality, driven by a renewed focus on food quality, taste, and strong product delivery across the new platforms we're building. Also, limited edition offerings like our NHL Superstar Collectible Sticks launched during the Stanley Cup playoffs this year strengthened consumers' connection to the brand by building on our strong sports heritage. Taking into account overall advancements in market share, the strengthening of our brand metrics, and continued enhancements in our digital experience through Tim's rewards and the accelerated rollout of our outdoor digital menu boards, we believe we're well positioned to capture the return of the Canadian consumer as the country reopens. In addition, and importantly, we've retained a majority of our $80 million Canadian ad fund support to continue driving key initiatives in the back half of this year. Let's now turn the discussion to Burger King, particularly in the U.S. We've done a lot of good things with the brand in recent years. Cut through award-winning advertising, industry-leading category innovation like the Impossible Whopper, improving our menu quality with delicious natural ingredients, and introducing our Dollar Your Way value menu. These accomplishments have helped us get back to growing against pre-COVID levels. However, we're not performing at the level that we expect from ourselves or aspire to. We understand our biggest areas for breakthrough opportunity. So our underlying issue has really been focus and pace. We haven't put enough focus on the few priorities that will have the biggest impact. And we haven't moved fast enough on these priorities to accelerate the business performance to the level we know we're capable of. I know the Burger King business well. and I know what we're capable of. Our franchisees, they know what we're capable of. I've talked with about 30 of our largest franchise partners in the last few weeks, and they have no doubt we should be leading the QSR industry here at our home market. I've been working closely with the team, and they have a focused mindset to move with velocity on our most important priorities. So more than anything, I'm eager to get at it, the journey of transforming Burger King into the leading and most loved QSR in the US. First and foremost, we're focused on driving innovation in our core menu and accelerating day part and category extensions that will become core to our full-time menu. The Hand-Breaded King Chicken Sandwich is an example of this focus. This great-tasting chicken sandwich continues to show healthy volumes in restaurants around the country, double the previous chicken sandwich, and has expanded Burger King's demographic, attracting new guests to our restaurants, including those with higher incomes and spending power. We're excited to have this new platform in the BK menu and expect it to be a driver of sustainable growth for years to come. We've also remained dedicated to offering great everyday value to our guests with our Dollar Your Way value menu, which continues to be an important driver of traffic to our restaurants. In addition, we launched our BOGO plus $1 offer during the quarter as an alternative to the two-for-five platform, supporting guests who rely on our bundled value platforms with our iconic core offerings at a tremendous value while maintaining healthy margins for franchisees. While we are pleased with our recent progress around menu innovation, real ingredients, and everyday value, as I mentioned last quarter, we recognize significant opportunities remain in key categories and day parts, such as breakfast. So you'll be seeing us doing a lot more focused work in the coming months to develop highly incremental parts of our menu offering. Second, we're working collaboratively with our franchisees on consistent, high standards of operational execution. and we've invested to enhance the capabilities of our field teams with strong talent to make sure we have the support that our franchisees need to train their teams and maintain a consistent high standard of execution. Third, we're committed to becoming an industry leader in fully integrating digital into the restaurant and online ordering experience. We've seen the rapid benefits of scaling a successful digital program at Tim Hortons in Canada, and it gives us even more confidence in our roadmap for Burger King in the U.S. Josh will speak in more detail on our digital initiatives shortly, but I will say that we're pleased with the early results of Burger King's Royal Perks loyalty program rollout and continue to prioritize driving program enrollment as we know that, in addition to providing us with valuable data and insights, loyalty members typically show higher spending and frequency as compared to non-members. We have also received positive feedback with over 80% of members likely to recommend the program. Fourth, we're working on upgrading our entire portfolio of restaurants to provide an exceptional guest experience and a high ROI for our franchisees. We have an incredible group of franchise partners, and as we focus on accelerating the business, we're committed to continue growing their profitability. We know having a modern guest-centric and digitally integrated restaurant design is critical to driving further profitability for our partners, and we're dedicated to working together to accelerate our image transformation in the Burger King system over the next few years. Finally on the brand, we believe we can translate our global advertising creativity into even greater brand loyalty that drives long-term traffic and sales momentum in our home market. And ultimately, it's the combination of a powerful menu, reliable operations, integrated digital and restaurant experience, and great advertising that results in long-term brand loyalty and visitation. Looking at Burger King internationally, these markets have been the largest drivers of our growth for the brand over the last decade. While there has been fluidity to the changes in restrictions in many of our international markets, we were quite encouraged to see a strong rebound in markets where we saw restrictions lifted somewhat. For example, some of our largest markets, including Australia, Korea, the UK, and Japan, saw comparable sales increase double digits versus 2019, giving us confidence in our plans and in our recovery as markets continue to reopen. With the high-quality growth markets and franchise partners we have in place internationally, we see an attractive path to continue driving exciting long-term system-wide sales growth for many years to come. Now let's turn our attention to Popeyes. We see significant runway for long-term growth at Popeyes, which continues to generate an average of over $1.8 million in annualized sales per restaurant in the U.S. versus just $1.4 million prior to 2019, the year we launched the chicken sandwich. This game-changing launch and resulting sales increase has continued to drive interest and development from both existing and new partners in the U.S., leading this second quarter to be our best second quarter of net restaurant growth since 2017. We continue to build a strong pipeline of restaurants to go along with a strong pipeline of new partners with great QSR experience to grow Popeyes in parts of the country that are currently underdeveloped. When compared to 2019, Popeyes has grown system-wide sales by over 40% year-to-date, a truly remarkable feat thanks to the collective efforts of our franchisees and their teams. As a reminder, we had one of our strongest quarters in Q2 of 2020 at Popeyes, with sales growth in the positive 30s and 40s last year as we entered the height of the pandemic. We were fortunate to see our drive-through in growing digital businesses more than compensate for lockdown restrictions during the beginning of the pandemic. While we did see some pressure over the course of the second quarter here in 2021 from competitors launching new chicken sandwiches themselves, coupled with industry-wide labor challenges, our nominal sales remained strong, and on a two-year basis, our comparable sales were up a robust positive 25%, with the majority of this growth driven by the continued strength of our chicken sandwich. While a lot of our success over the past 18 months can be attributed to the overwhelming guest response to our chicken sandwich, a core product in a core category that we took our time to innovate, we're not standing still and are focused on what's next. Earlier this week, you saw us launch our Nuggets platform, adding an entirely new complementary category to our menu while leveraging key learnings and product innovation from our chicken sandwich launch. With this launch, similar to the chicken sandwich, The key to success is an extreme focus on operational performance and execution at the restaurant level. Just a few weeks ago, we sent over 110 corporate Popeyes employees from our office, along with our field teams and trainers, to more than 1,200 restaurants across the U.S. to work with our franchisees and their teams on operational execution in advance of our launch. While still early days, the mainstream media campaign starts the first week of August. Nuggets are already providing to be incremental in our market tests and have attracted new guests in an attractive demographic, and that's kids and families, in an underutilized day part, the afternoon, and in a previously untapped occasion, and that's snacking. It's just the beginning for this amazing brand, and there's a lot of work ahead of us, but the brand is stronger than ever and has some of the best unit economics in the industry to build on. We remain focused on continuing to make Popeyes more accessible to everyone and addressing gaps in our menu architecture to drive long-term sustainable sales. I'll now hand things over to Josh to update us on our digital journey across the company.