Restaurant Brands International Inc.

Good morning, and welcome to the Restaurant Brands International third quarter 2023 earnings conference call. All participants will be in listening 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 confirm that you're in the queue. To exit the queue, you may press star, then two. All callers will be limited to one question. Please note this event is being recorded, and I would now like to turn the conference over to Kendall Peck, RBI's Head of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the third quarter ended September 30th, 2023. As a reminder, a live broadcast of this call may be accessed on the Investor Relations webpage at rbi.com forward slash investors, and a recording will be available for replay. Joining me on the call today are Restaurant Brands International's Executive Chairman Patrick Doyle, CEO 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, organic adjusted EBITDA growth, and organic adjusted EPS growth, exclude results from our franchised restaurants in Russia, as we did not generate any new profits from restaurants in Russia in 2022, and do not expect to generate 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 third quarter of 2023. We delivered another solid quarter, including 7% comparable sales and 4.2% net restaurant growth, which drove year-over-year system-wide sales growth of 10.9% and organic-adjusted EBITDA growth of 9.3%. Our comparable sales this quarter were driven by 8.1% growth at Tim Hortons Canada, 7.6% in Burger King International, and 6.6% at Burger King US. In addition, Popeyes US grew 5.6% and Fires House US was up 3.9%. Our development teams are focused on closing out the year with Q4, as always expected to be the biggest development quarter of the year. That said, we are now expecting a higher mix of smaller format express units at Tim's China. which drive brand awareness and penetration, but we will not be including in our restaurant count or net restaurant growth results given their lower ARS levels. As a result of this, as well as smaller movements in other markets, we now expect 2023 net restaurant growth to be around 4%. Looking to 2024, we are confident we can drive 5% plus net restaurant growth as we stabilize Burger King U.S., ramp up Burger King China and Firehouse U.S., and see Tim's, Popeye's, and Firehouse International accelerate. We are also focused on driving traffic and franchisee profitability growth at each of our brands, and we're pleased to make progress on both this quarter. Tim Hortons Canada drove positive traffic, tickets at Burger King International were flat, and while we still have plenty of work to do, we were very pleased to see progress in our Burger King and Popeyes US businesses with traffic improving to flat year over year. On franchisee profitability, strong top line results, moderating costs, and improved labor productivity help deliver another quarter of double-digit year-over-year growth in average restaurant-level EBITDA for each of our home markets. We look forward to providing you with a full year update on home market franchisee profitability on our Q4 call in February. Now let's turn to brand performance, starting with Tim Hortons in Canada. We saw a healthy balance of check-in traffic drive comparable sales of 8.1% and system-wide sales growth of 8.5%. These results were driven by strength in our core breakfast and baked goods, continued PM food and beverage extensions, and operational efficiencies, including improved speed of service. These results also more than offset the lapping of our Q3 2022 smile cookie initiative, which shifted into Q2 this year and impacted our comparable sales by over 100 basis points. We reinforced our breakfast and baked goods leadership with our smoky honey bacon breakfast sandwiches and the introduction of dream cookies, which built off our successful Dream Donuts platform. These new products drove trade-up from our core platforms while attracting younger guests in more urban areas. Dream Cookies helped us gain share in an important growth category that skews towards the PM day part. In fact, over 65% of Dream Cookie sales came in the PM day part, nearly 5% higher than PM sales for our core cookie offerings. We also extended our savory anytime snackers with the addition of twists, which have proven to be a great afternoon snack at an attractive price point. These initiatives, coupled with continued strength in our loaded bowls and wraps, contributed to 7% year-over-year growth in PM food sales and an increase in our lunch market share. Axel and team have also been thoughtful in capturing broad-based beverage growth to position the brand as the leading destination for both hot and cold beverages. We saw our cold beverage products, including our sparkling quenchers, continue to pair well with our food offerings. with an attachment rate of over 35%. This helped cold beverage sales grow 10% year over year and allowed us to sustain over 25% market share. While we still have plenty of opportunity to capture our fair share of the $4 billion cold beverage market in Canada, I am very proud of our progress and feel confident in the team's plan to continue our expansion. Our brand love and guest frequency has enabled us to build one of the most frequently used loyalty programs in Canada. with over 5 million average monthly active users that drive over 30% of our sales. Tim's loyalty members received attractive, personalized offers, including targeted offers to bring them back in the afternoon to try one of our PM snacks. Our digital and operations teams work cross-functionally and collaborate with restaurant owners to deliver a great guest experience. Our new scan and pay feature, which allows for a single QR code to scan for loyalty and payment, is creating a more seamless experience for team members and guests and is driving improvements in restaurant throughput. Our proactive operational initiatives, including coast-to-coast speed of service trainings, coupled with an improved labor environment and growing guest adoption of Scan and Pay, helped drive a 7% year-over-year improvement in guest satisfaction this quarter and nearly 10% better drive-through speed of service year-over-year. These advancements give us confidence that we can continue expanding into later day parts with innovative food and beverage offerings without sacrificing on excellent service. It's exciting to see another quarter of great results, which would not be possible without the hard work and support of our restaurant owners, their team members, and local communities. Turning now to Burger King, the international business grew third quarter system-wide sales by 13.3%. reaching over $14.5 billion in international system-wide sales over the last 12 months. These results were driven by net restaurant growth of 5.7% and comparable sales of 7.6%, reflecting solid performance in markets like Australia, the UK, Mexico, Japan, and France, which just crossed the 500-store threshold. While we did experience a sequential deceleration in the overall rate of comparable sales growth from Q2 to Q3, this was primarily driven by moderating price. Burger King's international business has been an important long-term growth engine. And in September, we had the opportunity to visit restaurants in Europe with David and his team. We saw firsthand why this business is well positioned overseas. Modern image, great operations, and the best products in our segment. Over 75% of our international BK restaurants have modern image. And with this generally comes a more digital guest experience, including having kiosks in over 50% of our international restaurants. This has helped drive over 50% of international sales through digital channels, and that number is closer to 90% in some markets like Korea and China. Digital sales are a win-win-win, as they deliver a better experience for guests and team members, and higher average checks and frequency for franchisees. Restaurants with modern image also typically see better operations, as they have more efficient back-of-house layouts, new restaurant technology, and improved team member retention. Our team is in the process of rolling out a new proprietary operating system that further streamlines back-of-house flow for team members and products, especially in a digital era with multiple order and fulfillment channels. We expect to have the dynamic service system, or DSS as we call it, in over 2000 restaurants by the end of 2023, with a path to 100% in the coming years. We've already seen solid results from DSS internationally, including 3% comparable sales uplifts on average, and mid-single digits improvements in speed of service versus non-DSS restaurants. On menu innovation, we have a number of distinctive platforms like plant-based, gourmet, and indulgent LTOs that are a key driver for brand consideration. We take a localized approach to menu development, like our masters du chef burger in France, always anchored by our distinctive differentiator of flame grilling. We recently hosted our international franchisees at our convention in Paris, and it was terrific to see so many of our international franchisees learning from each other and excited to help drive our next phase of growth. We're also taking a number of our key international learnings and bringing them to Burger King's home market through our Reclaim the Flame plan. So shifting to Burger King in the US. In early October, we hosted our franchisees here across the US and Canada at our annual convention. There was clear optimism in the room as we worked with our franchisees and their team members to reclaim the flame. Together, our BK team and franchisees reviewed the brand's recent progress, including improvements in franchisee profitability and the achievement of flat traffic this quarter. But as Tom reiterated multiple times, this is progress, not success. We have big aspirations and are aligned that we must be focused on the fundamentals of restaurant execution to achieve our goals. This is supported by continued growth in franchisee profitability conviction from the franchisees to reinvest in their restaurants, and the development of a new restaurant format known as Sizzle, designed collaboratively with franchisees to improve the experience for guests and team members while driving a better return for our franchisees. Turning to results for the quarter, comparable sales increased 6.6% and system-wide sales grew 6.0% year-over-year. Our total net restaurant count declined by 2.8% year-over-year as we close older and lower performing restaurants. to support a more modern system increasingly run by better operators. We saw flat traffic in Q3 and digital sales growth of over 40% year-over-year, resulting in a record digital sales mix of 14%, including 28% digital mix in our company-operated restaurants that have rolled out kiosks. Growth this quarter was driven by solid calendar initiatives leading into our core equities, like the Whopper and Urule, and the introduction of our Royal Crispy Wraps. The team's focus on operations has led to continued improvements in guest satisfaction and an increase in product satisfaction across a few key offerings, including the Whopper, nuggets, and fries. By layering this with high-quality marketing and targeted menu innovation, we've been able to improve our value proposition, attract new guests, improve retention, and drive our traffic gap to peers into positive territory beginning in mid-August. Turning now to our investment programs, as a reminder, we've committed to spending $400 million through 2024 across marketing, digital, restaurant technology, and image investments. While we did not book any expenses associated with our $120 million Fuel the Flame advertising contribution this quarter, we've spent approximately $25 million through September 30 and are on track to spend our full commitment by the end of 2024. Matt will touch on the drivers of Fuel the Flame some more when he walks through our financial results. As part of our $250 million Royal Reset program, we deployed $6 million this quarter towards the $50 million short-term refresh. We're in the process of deploying restaurant technology and back-of-house equipment to over 4,000 restaurants and are already seeing positive results, including improved technology stability, better guest satisfaction, and higher average restaurant sales compared to restaurants without new equipment in the same DMA. Within the $200 million remodel component, we are in early days, but have seen completed remodels driving uplifts and returns ahead of our initial expectations. I'm also happy to see that franchisees are leaning into quality over quantity, with over 80% of committed remodels locked in as either full remodels or scrape and rebuilds, more than we originally anticipated. Over the past 12 months of our Reclaim the Flame investment, the BK team and franchisees have made great progress in positioning the brand for profitable traffic growth and a healthy reinvestment appetite. This progress and the enthusiasm we're seeing from our franchisee base gives us confidence that we're on the right path to deliver a modern system with compelling unit economics. Turning now to Popeyes. Popeyes U.S. grew same-store sales by 5.6% and net restaurants 5.0%, driving system-wide sales growth of 11%. Comparable sales were driven by continued strength of the sandwich platform and our newest menu innovation, ghost pepper wings. which also helped the business achieve a record digital sales mix of approximately 25% in its highest levels of chicken QSR traffic share in over two years. We recently built on our successful ghost pepper wings launch with the addition of our new sweet and spicy wings. These ghost pepper wings tossed in a sweet and savory sauce have become the most popular menu item since we launched the chicken sandwich and have driven traffic across new and existing guests in addition to driving add-on to tickets. From an operations perspective, we are in the preliminary stages of implementing various initiatives, including a simplified and more efficient kitchen layout. A few Popeyes US restaurants are piloting easy-to-run kitchens, which feature integrated production lines and simplified processes modeled after our international stores. We're encouraged by the early feedback from team members as we look to optimize the layout and build a strong proof of concept. Popeyes has substantial opportunities to add more modern, digitally-enabled restaurants with easy-to-run features to its existing restaurant base and close the convenience gap. As we close this gap, we're prioritizing and incentivizing growth with top-tier existing and new operators in attractive locations across North America. I'm confident that these priorities will enable a better team member and guest experience, which will ultimately help drive franchise profitability and sales over the long term. Finally, Firehouse Subs. which grew home market comparable sales 3.9% and increased system-wide sales by 6.6%. At Firehouse, we have delicious subs, great franchisees, and lots of excitement to grow the brand. We continue to strengthen our long-term outlook by building strong home market and international development pipelines. In the US, Mike and team launched a development incentive program for franchisees, offering them a great opportunity to grow in key markets over the next few years. Internationally, we signed agreements to open more than 100 restaurants over the next 10 years across the UAE and Oman, and we expect to open our first restaurant in Mexico by the end of this year. The team did an amazing job developing a beautiful visual identity for the Firehouse International business. I had the chance to see it firsthand in Switzerland, and it made me even more excited about the overseas opportunity for this brand. We are also growing brand awareness in the U.S. and recently showcased Firehouse subs on NFL programming for the first time. giving national recognition to Firehouse and its hardy subs. The team is also committed to providing a great digital experience and delivering meaningful functionality upgrades to our app, which resulted in much faster load times and a better user experience, helping drive Q3 digital sales mix to 37%. I'm proud of the progress Mike and team are making across development, digital, and menu innovation. And I am most pleased to see this translating into improving home market franchisee profitability, which is on track to grow significantly in 2023. Before I hand it over to Matt, I'd like to share that I'm about nine months into this new role, and I've been assessing how we plan to manage the business across brands and geographies going forward. As a result, we are evaluating making changes to our segments, including potentially reporting our international business separate from our home market businesses. You can expect to receive more information on this in the next month or so. Now I'll turn it over to Matt to discuss our financial results for the quarter. Matt?