Restaurant Brands International Inc. (QSR) Earnings Call Transcript & Summary

Welcome, everybody. I'm Jeff Meli. I'm the Head of Research at Barclays. I'm very pleased to be joined today by Jose Cil, the Chief Executive Officer of Restaurant Brands International. Restaurant Brands owns 4 well-known quick-serve brands: Burger King, Tim Hortons, Popeyes and Firehouse Subs, with 28,000 restaurants and operations in over 100 countries. Jose has had a long career in this industry, including 20 years in leadership positions at Burger King before his current role and I think he has a unique perspective on many of the big questions that we've been grappling with on inflation, both the current surge and the path forward. So thanks very much for joining us, Jose. It's great to have you.

Hey. Great to be here, Jeff. Thanks for having me.

Great. Well, let's start in the U.S. A lot of commentary, including some of our own research here at Barclays, has identified wage pressure that is particularly severe for hourly employees in the service sector. It's a big enough issue that we found that it's even affecting the equity prices on average for companies that rely particularly on that type of labor. Can you comment on wage pressure that your franchisees are seeing and whether you're seeing nationwide, regional? Any trends that you're seeing on that front?

Yes, Jeff. Look, wage pressures and staffing issues are certainly impacting the entire industry and it's not just the restaurant industry. It's cutting across retail, manufacturing, distribution and other industries. And this is well documented and known, and we're not -- we're certainly not immune to it. We have teams at each brand here in the U.S. and Canada and across the globe working together with our franchisees on this topic. And the issue is more acute in the U.S. with pockets of outsized impact in some regions and throughout certain dayparts of our businesses. It's less of an issue in Canada and Europe, and we have incredible franchise operators out there. And what's encouraging is that the best operators are typically experiencing less pressures from staffing, more likely to be attracting people and remaining competitive with wages. They're doing a better job, in many cases, managing and engaging people in their restaurants. We're also seeing that our franchisees are benefiting from restaurant remodels and investments in the back of house. This is not surprising, and it's helping attract people to work in the restaurants because the environment in those restaurants is more positive. Now despite these well-documented labor challenges, we actually saw some improvements in satisfaction across our brands in the second half of 2021. I think wages are an important piece to the puzzle and are already taken into account in many instances. We've -- it's been reported widely that hourly wages are up around 10% for 2021 across our industry, and we're seeing that as well. There's a lot more to staffing, though, and to retention than just raising wages. Some of it has to do with the environment in the restaurant, as I mentioned earlier. Is the restaurant well maintained? Is the culture in the restaurant a positive one? Are team members engaged? Are there opportunities for growth? And we're also seeing some issues and feedback from our team members around transportation, child care, which are serving a big important factor in staffing as well as in retention and restaurants. Now we're speaking with a lot of talent and hourly employees across QSR and the -- and other industries. We're talking to consultants as well, trying to determine the most important factors for hiring and retention. Paying benefits obviously is important, but also there are many more. And we continue to address and work with our franchisees to share best practices and solutions, some that we've already put in place and some that we're working on. And one of the things that we're trying to do and I think others in the industry are doing the same is trying to be a resource to our franchisees with tools and best practices, developing staffing tool kits together with our franchisees. We're investing in our field teams. I've mentioned this in previous quarters over the last 12 to 18 months that we're investing in field training and operations teams as well to support our franchisees in their journeys to staff, retain and deliver better service to our guests. And one of the key things that we're working on is developing an employee value proposition for our restaurant teams and trying to address the evolving labor landscape by creating a proposition on compensation and benefits for sure, but also on the job experiences, training, career development, and even the values that we share in the restaurants. And obviously, the franchisees in our business were 100% franchised here in North America, essentially, with a few exceptions across the globe. The franchisees make the decisions. It's their business, but it's our job, we feel, to help provide tools and best practices to the franchisees so they can make better decisions for their businesses and what benefits and programs to implement for their employees, provide guidelines so they can create a better culture within their restaurants, all things that we think are impacting staffing and retention. It's not just a wage issue. It's not just a benefits issue. That's important, but there's much more. And this employee value proposition, we believe, serves as a platform also to be able to start communicating campaigns, media campaigns. We've done this in Canada, which will help create a halo for the brands and help create a better perception of the work experience and the environment in our business. We're also -- and I think others have talked about this. We're spending a lot of time on reducing -- and simplifying and streamlining operations reducing SKUs, simplifying and helping ease the burden on team members in the restaurants to work better and provide better services to guests. Kitchen automation is a big part of it as well. Automated fryers, broilers, the beverage dispensing and others to simplify prep and allow for a much more focused hourly employee in the restaurant. And then finally, leveraging technology, which we've done through mobile order and prepay, delivery, outdoor digital money boards, all of it helping to improve the experience. I don't want to be too dramatic here, but we believe there's a war for talent out there, not just at the corporate level, but at the restaurant level as well and that's key. Staffing and retention is key to driving exceptional guest experiences. And so we're doing everything we can, understanding that it's not just the wage and benefits issue. It goes far beyond that. We're doing the best we can, working closely with our franchise partners to continue to make progress in this important area.

It sounds like you're not finding that there's a genuine lack of workers out there. It's more about competing to find the right workers and putting together the most holistic sort of approach to attracting and retaining that. Is that right?

I think that's right. That's exactly right. There's always been a challenge around staffing. It's -- the best of operators do a great job with it and those that struggle don't. And so we believe this is going to continue to be a challenge and a responsibility for us in this industry, and that's why we're focused on a long-term approach to creating the right environment in our business for our franchisees and for their team members to be able to drive good strong staffing levels as well as retention.

Now there's a lot of commentary about food price inflation as well. Jeff Bernstein, who's our restaurant analyst here at Barclays, estimates that the basket of restaurant commodity costs is rising at a rate -- actually over 20% a year, although that's a spot market, and obviously, an actual operator may hedge some of that or lock in prices at various points. Obviously, food costs are going to be the other big input price that your business, generally speaking faces. How do you rank what's happening with those sorts of input prices versus what you're seeing on the wage front?

Yes. Look, there are various factors that affect price, and it's difficult to rank these different impacts and pressures. And of course, for us, it differs by brand. It differs by product, differs by daypart as well in terms of products that we serve throughout the daypart -- the different dayparts in our business. I think the good news is we've -- the challenging things, we've seen some short-term impacts and pressures, but we've also seen, in some cases, stabilization begin to take hold. Our view on this and obviously with the size and scale that we have in North America and internationally, diversifying our sourcing is an important part of how we manage through these challenges in the industry and the challenges that we face from a commodity inflation standpoint. And it helps -- this diversification of sourcing helps alleviate some of these pressures. And our scale is critical and helps smooth out some of these spikes from -- that happen from time to time. Diversification, as I touched on, it's really important for us. We're global. We're multi-brand, and we're essentially 100% franchised. Procurement for us is obviously a big focus. Our scale is an important advantage for us and really for our franchisees when considering our ability to source different products from different vendors. For the most part, we're essentially third-party sourced. The only meaningful exception is Tims coffee. And we utilize our scale and buying power throughout our supplier network to be able to ensure quality -- best quality and cost for our franchisees and for our guests. And I think one of the things that's been important for us throughout the last couple of years is the long-standing relationships that we have with our suppliers. We have an exceptional supplier network here in North America and across the globe. This is important all the time, but especially when facing the challenges that we faced in the last couple of years. On coffee, we have a number of tools in place to -- kind of to manage thoughtfully buying as well as any inflationary pressures that may arise from time to time. And we work closely with our franchisees and maintain a transparent process on that front. There's a number of different things involved here. I think the purchasing power, the scale, the diversification that we have allows us to weather these challenges in an effective way and efficient way for the benefit of our franchisees and for our guests. And I think the evolving product mix and service mode and different investments we made in the business over time, technology as well, I think, also helps us manage through this. But certainly, we're working through it as many are in the industry to make sure we do the right thing in terms of having the right products at the right price and also delivering it to the guests at a price that's affordable and drives frequency and traffic into our business. So that's how we think about it, and that's how we look at the commodity side of things.

I want to get to the scale issue in a minute. But first, I wanted to touch on something you said about the -- maybe the differences in the experiences across countries. So with either -- with respect to either the wage side where I suspect there's maybe more to say or the input -- non-wage inputs, how typical is what's happening in the U.S.? And -- or how would you -- like -- it sounds like maybe there's some jurisdictions where the wage pressure is much less acute. Do you have any insight into what's going on across the globe.

Yes. So wage and commodity pressures are being felt certainly all across the globe. But as I mentioned earlier, I think these pressures are being felt much more acutely here in the U.S. The experience internationally varies from region to region. I think the good news is, for us, is that we have local expertise with our master franchisees and our teams and capabilities in a bunch of different areas across the globe. The master franchise model, something I've touched on quite a bit, as one of our -- we believe one of our key competitive advantages has been a key element of driving continued value for the shareholders and for investors in our business over the last many years. In our case, internationally, the master franchisees, they have their own procurement teams, and they work closely with our global procurement team to ensure that we have consistent supply and making sure that it's some of the highest quality as well as best cost. And I think we're well positioned to adapt in many markets to any changes that may happen from time to time. We're seeing more of an impact internationally or across the different regions and markets. We're seeing more of an impact on the wage side. As examples, we've seen wage inflation in China. Our master franchisee has shared some of those circumstances there. Collective bargaining agreements are being negotiated in some markets like France, which essentially is for the entire industry. It's not unique to a brand. It's how they manage their wage and salaries in those particular markets. And in other markets, we've seen less of an impact. Spain, Portugal as an example, we've seen low single-digit increases in wages. In Italy, we've seen very little impact in wages, although they have some modifications taking place on incentives for their team members and the restaurants. Generally speaking, we haven't seen the same impact on staffing internationally as we've seen here in the U.S. And we do see some pockets of pressure happening as a result of COVID and workers calling out sick, similar dynamic to what we've seen here in the U.S. And we see -- one example of that is in Australia where there's been some -- not just the tennis example, but in the restaurant industry as well, due to government-imposed restrictions and border controls, there's been some staffing pressures from time to time. I think the larger impacts in the markets we've seen more in North America. And again, one of the benefits that we have from our business is the diversification and the fact that we have such a fast-growing international business as well as the fact that we have multiple brands. And we also are strong in terms of the mix of franchise versus company stores. Another element on this front that we've seen internationally as a benefit and we're seeing more and more here in North America is the impact of digital, which has been a big part of our international business. We've seen strong automation and kiosks for front counter service to be a big part of the business there. And our international business has a fast-growing and strong digital sales, which have helped from a labor standpoint as well. And I think internationally, we're well positioned. We just opened our 400th restaurant in -- for Tims in China. This is a tremendous achievement in less than 3 years. And we opened our first Popeyes in India last week in Bangalore. And we continue to work closely with our master franchisees to be able to provide them best practices and key learnings so they can continue to keep that momentum internationally going for our brands.

I want to ask you about how these various input pressures translate into the prices that your franchisees charge. So far, it looks like margins are holding up, which suggests that either they've been able to pass on higher input costs or they've been able to drive efficiencies, maybe through better use of technology like you mentioned a couple of times. Is that true? And if that is true, is there a limit on how much more can be passed through before it starts to affect affordability or customer retention?

Yes. Look, I think we've seen -- and it's well documented as well, the pricing that brands have taken here in North America and some of it internationally as well. We work with our franchisees and with third-party experts to figure out that right balance between pricing to address wage and commodity inflation and also making sure we don't get ahead of our -- of the consumer on certain pricing. We price and we look at the competition. We look at CPI. We look at inflation away from home as well as food at home inflation. We try to get as much data and do a lot of analysis to ensure we make the right recommendations and provide that information to our franchisees. And we focus on ensuring that we don't impact the demand out there and impact traffic levels or transaction levels, which are so key to our business long term. We provide pricing analysis and recommendations to our franchisees. They have pricing control in the majority of instances with certain exceptions, including national promotions that we do. We're much more closely involved in pricing -- in restaurant pricing, in particular, in Canada. In the U.S., our franchisees have taken price mid high single digits in 2021. That's been communicated as well. And a lot of this is driven by the factors that I touched on earlier, looking at what's happening with the peers in their neighborhoods, essentially in the same trade area as well as taking into account CPI and other inflationary data, managing to traffic, right? We balance these pricing moves with impacts on traffic, making sure that we don't see an impact in the transactions and the demand that exists out there because long term, as I mentioned earlier, that's critical for us. One of our largest franchisees here in the U.S. and others in the industry have talked about this openly, and we haven't seen much of a pushback from consumers yet on the pricing that's been taken in 2021, but we continue to monitor and stay really close to this. Now the other piece is commodity movements are cyclical. We think, over time, inflation has proven to be a structural component to the business and to pricing, something we always consider. I'm confident based on the data and the information we've seen so far that our brands have pricing power here in the U.S., and we've seen the same in certain markets internationally where we've taken price. We're comfortable with the ability to take price as we've shown historically, but we continue to look at this carefully. And we look at other levers that exist on a pricing standpoint, including mix and basket size and add-ons to be able to manage blended margins and help drive cash flow ultimately to the bottom line. And as I said earlier, the key is not to get ahead of your skis or get too far ahead of the customer on pricing because that, over time, has an impact on demand, and that's, for us, something that's critical long term for the health of the business.

How worried are you that inflation pressures are going to stay high enough that, that traffic issue becomes a big worry?

Well, I'm not worried, but we monitor and we look at this very carefully. And we think over time, the best brands with the best product and best service at the best most affordable pricing will continue to grow both in terms of traffic and overall sales. And that's how we're building our marketing and sales plans across our brands here in North America, and we do the same internationally.

You mentioned scale a couple of times. I wanted to touch on that because you're continuing to acquire new brands, most recently Firehouse Subs. It sounds like scale is an important part of your strategy. And I guess one is, is the scale -- what kind of economies of scale are you actually able to generate? And then how do you think about what you with those, like how much of that flows down to the price versus how much that flows into the bottom line?

Yes. Our -- Jeff, our -- the starting point for everything we do is the dream that we have to build the most loved restaurant brands in the world, and we're focused on meeting our guests demands in evolving taste and likes with great products, with great service, with great technology. And we want them to engage with our purpose-led brands. So scale is certainly beneficial from a procurement standpoint or, as an example for franchisees. Scale drives a significant benefit, and it's a natural part of our value proposition. It helps drive the compelling unit economics that create the demand for our brands from a franchising standpoint and the growth that we've seen over the last many years. But scale is not the purpose. It's not the goal. It comes down -- for us, it comes down to finding exciting unique opportunities from a brand standpoint that fit well within the existing brands that we have and give us an opportunity to drive growth and see -- and meet more demand from a consumer standpoint here in North America and internationally, which is why we're excited about Firehouse. It's a great brand. Firehouse is a purpose-led brand that guests absolutely love and has a tremendous path for growth ahead of us. We believe that our strength, as I touched on earlier, in terms of scale gives a benefit to the franchisees. It's one of the value propositions that drives so much interest in demand and the brand it allows us to drive the growth that we've seen domestically as well as internationally. But we also see scale benefiting our brands by allowing us to leverage the network that we have of master franchisees around the world, which gives us a path to continued growth. It gives us an opportunity to grow Popeyes and Tim Hortons as we're beginning to do. And we shared in Q3 that this 2021 was a year where we saw record levels of growth internationally for Popeyes -- up until Q3 for Popeyes and Tim Hortons. And we think we'll be able to do the same with Firehouse. And obviously, Burger King still has a ton of white space and opportunity for growth internationally. So the size and the scale that we have is a benefit to our investors, and it's a benefit to our franchisees and operators around the globe. It's not the purpose of our company. It's not the end goal. The end goal is to build great brands that have a ton of reach and have a ton of interaction and engagement with our guests and become the most loved restaurant brands. And we think we're well positioned to continue to benefit from that over time.

I wanted to touch briefly on some of the technology investments that you mentioned, just to pivot to that. It's an interesting question about whether the sorts of investments that you're talking about in aggregate across the economy, if they tend to scale up in periods like this when labor is harder to come by, right? I mean it's just -- even at any price, I think a lot of folks have had to dig deep to think about how to keep themselves staffed, right? And that could be a time when people start to think about investments in technology that might change their eventual demand for labor, right? How do you think about -- like is that an evergreen topic for you guys as you think? Or have you noticed the sort of sense of urgency now as staffing has become more of a question for your industry?

Yes. So we started the journey of doubling down on technology as a driver of our business years ago. Prior to the pandemic back in 2018, 2019, we made significant investments in the business in our teams from a capital standpoint, on the consumer-facing side, on the restaurant technology side, all of which we believe was -- were important long-term investments to be able to drive growth in years and decades to come. It was fortuitous. And as much as when the pandemic hit, we were well positioned to be able to kind of grow and benefit from the off-premise jump that we saw with delivery and preorder and payment and all the other technology-driven wins that we saw in the business over 2020 and 2021. But we don't think this is a short-term issue. We don't think this is an issue or an investment in technology that's been driven by the pandemic and/or some of the labor and staffing discussions we've had earlier. We think this is the right direction long term. It's the reason why we've continued to invest in technology. And over time, we think the brands with the best product and the best service will continue to win. We're really excited about the quality of the products that we have. And obviously, the consumers are quite excited about that as well with Popeyes and Burger King and Tim Hortons as well as now Firehouse delivering best-in-class products in their categories. But we think technology over time will be a key driver of benefits to the consumer beyond the food and beverages, but with service and prepayment and just convenience that they're looking for off-premise as well as in-store. And we'll continue to make those investments in an effort to drive growth for our franchisees, growth for our brands and ultimately strong shareholder returns for those that invest in RBI.

Great. Great. Well, Jose, thanks very much for joining us with a view from the front lines here on some of these hot-button issues. I really appreciate your commentary, and have a great day.

Jeff, thanks a lot. Appreciate it. Have a great day.

Thanks.