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

All right. Good morning, everyone. Thanks for being here. My name is John Glass, restaurant analyst at Morgan Stanley. Welcome back to our Global Consumer Conference live first time in 2 years. I know everyone is excited to be back in person and not doing this over Zoom in your bedroom. I do need to quickly give you a disclosure before we jump into our first presenting company. I do need to remind everyone that for important disclosures, please see Morgan Stanley's research disclosure website at morganstanley/researchdisclosures. Okay. With that out of the way, it's my pleasure to welcome Jose Cil. Jose is the CEO of Restaurant Brands International. It's the parent company of Tim Hortons, Burger King, Popeyes and now Firehouse Subs. Jose, thank you so much for coming out today.

John, great to be here. Thanks for having us. Looking forward to good conversation today.

So I thought I would say we would start with the topical news, which is that most recently, a few weeks ago, you announced that Patrick Doyle, the former CEO of Domino's, a well-known quantity from an investor standpoint will be your Executive Chairman. So I'd like to spend a few minutes talking about this, so maybe in a couple of different angles. I'd first just like to ask you how this came about, how did Patrick Doyle end up at Restaurant Brands. What was the connection made? And what was -- if there's a back story. I'm really curious what the back story is.

Yes. Look, it's really exciting news. And when I first found out about it a couple -- probably 2.5 months ago or so, I was -- there were 2 reactions I had. One was, wow, that's awesome, great news. I mean we've obviously heard a lot about Patrick over the years and the accomplishments that he had as a CEO of the Domino's business from, I think, 2010 to 2018, those statistics and results are quite well known. The second piece was kind of recognition of one of like the hallmarks of our culture at the company is humility. And the recognition that you can always get better, stay curious and really push yourself to learn from others. And I think the -- bringing of Patrick into the Executive Chairman role is a highlight kind of that element of our culture. And Patrick and Daniel Schwartz, who's our -- one of our Co-Chairman and with 3G Capital now as CEO of BK and RBI for some time, have known each other for about a decade plus, and the conversation evolved over the years. One of the things that we've brought into our company and we've had it in place for many years, is a focus on franchise success and franchise profitability. And it's one of the key metrics that we measure ourselves on as management at the brand level and have a KPI as well on that front for bonus purposes. And that came about from a conversation that Daniel and Patrick had probably a decade ago. And so the relationship has existed for a while, and they've had conversations over the last several months about a possible collaboration. And then thankfully, from our vantage point and from mine, in particular, it came together well. And they came together, I think, in the best possible way with Patrick joining, not just as a Board member, as Executive Chairman, having some really close involvement with us in terms of strategy, capital allocation, but also he came in as an investor. He put his own hard earned cash and capital because he believes in what we're doing and believes in the long-term growth opportunity that we have with our amazing, iconic brands. He's excited about our international business, excited about the plans we have in Tim Horton's in Canada, at BK in the U.S. The amazing growth that we've had with Popeyes in the U.S. and the opportunity that we believe we have with Firehouse in the U.S. and internationally. So that's how it came about. If you ask him, there's probably a little bit more to it, but those are the high-level thoughts on his joining the Board.

Did you know him before?

I did not. No.

And maybe what was the -- so I understand how we got there. Why is he there right? What's the why as to why Daniel, why you and the Board thought it was necessary to bring in an Executive Chairman?

We've been on the journey the last several years to accelerate growth in the company. We have 4 amazing brands. We think we have one of the most exciting opportunities in the restaurant space around the world with iconic brands like Tim's, Burger King, Popeyes and Firehouse. We've been on a journey to accelerate our digital presence. So we now have about 1/3 of our business is digital around the world. And in the last quarter, we reported about $3.5 billion of our sales came -- system-wide sales came through digital. We've also been focusing on becoming very brand-led focused on making decisions around the customer. And we've also been pressing hard on improving the franchise success and profitability, which is what drives that virtuous cycle of growth when they win, we win and we see this opportunity for growth. And Patrick built an amazing playbook at Domino's and executed it for many years. A lot of those thoughts and ideas and examples we looked at as we built our plans over the last several years. And so I think the combination of us being able to work with him and learn from his experiences over decades at Domino's and our -- and his opportunity to be part of the fast growth journey that we have, I think, is a really good marriage. I've spent the last probably 4 weeks, 5 weeks with Patrick as we were kind of getting ready for the announcement and also getting ready for our planning exercise for 2023, sharing our plans, sharing -- meeting our team, looking at the progress that we've made in our business. And I get more excited as I spend more time with him and he spends time with the team as well. And I think we're really in a good place in terms of being able to accelerate the plans and the path that we're on at the company.

I guess in so would like -- is there an example you could give an area you think, for example, would it be recruitment of new executives? Are there areas maybe he identifies in the business, say like new talent here or recruitment of franchisees? Or what are the spectrum of things? What are you talking about? And where do you think is impact will first be noticeable to investors?

Look, I think that we've made a lot of progress on our -- on building our team over the last many years. We've brought in strong leaders at Burger King as an example with Tom Curtis, who joined a couple of years ago. We've also grown our own talent internally and have done that consistently for many years. And so we believe we've made a lot of progress on the quality and the talent that we have in the organization. I think Patrick can help and give us thoughts and ideas in terms of what targets to set for the organization, especially on things like digital and international growth. We've also been just in the early days of sharing with him our plans and kind of the details in the business. So it's still really early days in the process. I think we announced it 3.5 weeks ago or so. But I expect him to be very helpful for us in terms of clarifying our vision and our dream for the company, looking at specific plans, especially around digital, especially around franchise success and helping us accelerate growth domestically as well as internationally. We'll also work closely with them on capital allocation as well as with the rest of the Board. And just to be clear, Dan, and Alex, who are co-Chairman today, they're not going anywhere. The 3G has -- and they have very clearly said that they want to be part of this long term. They're not going anywhere. They view this as an opportunity to continue to be part of a fast-growing business that has long-term really exciting growth prospects.

Last question on this then we're going to move on. Is it going to play a role with interacting with shareholders directly? Or is that not what its purview is?

I think so. I hope so. I think he's done that well over the years. And so our -- historically, we've had Executive Chairman for periods of time. We've had non-Executive Chairman for periods of time. And so our -- my hope is to be able to continue to share and be transparent about our long-term growth plans, how the historical algorithm works, where we see opportunities to accelerate, how our exciting international business can go even faster. The progress we're making domestically at Tim's in Canada as well as Burger King in the U.S. And to the extent Patrick and others can help sharing that story, of course, we'd love for that to be the case.

Perfect. We're going to move on now. Okay. We're going to talk about Tim's, your largest business, Tim's Canada, primarily, but I just want to talk a little bit about the international. First, can you just remind us -- so Tim's has gone through this transformation, right, this back to basics plans you've talked about. For the benefit of this audience, kind of -- what does that encapsulate, this back to basics thing -- where are we -- so if we think about '23, what are the key components of that plan that have driven the sales recovery you experienced so far? And what sort of furthers that in the next -- in the new year?

Well, as I shared in our last quarterly update, we're super excited about the progress we're making at Tim's in Canada. We've been on a journey for some time since the end of '19, beginning of '20 where we communicated the changes in the team and changes in the plan and kind of our focus on back to basics. And the first part of that plan was to get -- to address very basic things like ensuring that our core offering was the best it could be, and we had done a bunch of research and the consumers told us, look, we don't want you to change who Tim's is -- we just want you to deliver consistently the things we love about Tim's, the coffee, the breakfast items, the baked goods. And so we spent a bunch of time and effort and resources on improving the quality of our products, and we've seen really good progress even in the face, and it was hard to communicate this, especially in 2020 and 2021 with the lockdowns that Canada was going through, which were much more extensive than what we've seen here in the U.S. and it had a direct impact on our morning daypart business at Tim's in Canada, which is about nearly half of the business there. And so we made progress in Hot Brew coffee. We made progress in our baked goods as well as breakfast items, and we saw market share for those items grow. And then in end of '21, we shifted once we felt that we were in a good place on the basics. We -- and continuing to grow our digital business, we shifted our focus to what we considered the growth opportunities. And there are 2 main areas there that we've been focused on, plus digital. The first is on PM Foods. And we have massive penetration in Canada, one store for every 9,300 Canadian. And our fair share for lunch and dinner, we're way under that fair share. And so our focus on PM Foods is to create craveable food. Historically, what we've done is we've just used our network of stores to be able to try to capture some launch or dinner business. but it wasn't really driven by the quality of the food is just driven by our convenience. And so we hired chefs. We brought in experts in the culinary arts, and we've developed a platform around PM Food, which is now driving significant sales growth. And so we've seen our tickets or incidence of PM food growth from 7% to 10% in the last few quarters. We've seen our loaded platform, which is loaded wraps and loaded bowls, become one of the top items on our menu in terms of product satisfaction, and they've driven growth over the last 2 quarters. from -- versus 2019, the last 2 quarters, we've seen sequential improvement, and we've seen positive sales versus 2019 for the first time since the pandemic. And we feel we're just getting started in terms of the progress we think we can make on PM food. Another category that was big for us is cold beverages. And we've gone from essentially having just one item, which is Ice Capp, which is a dominant amazing product in Canada, but we've expanded that category now to cold brew, iced coffee. We've added some seasonal innovation to be able to drive additional transactions in that category, if you exclude Ice Capp has grown 80% since the third quarter of 2019, and it's an important part of our growth. But just to give you the kind of the opportunity here, we have north of 70% share on hot brewed coffee. So we have -- we're still in the early days of cold beverages being a big part of our market share. So we're in the -- if you include soft drinks, we're in the 20s in terms of market share. So the opportunity is significant. And we're just in the early days as well. We've brought in category experts in innovation on cold beverages. So those 2 areas are big focuses of this current phase of the back-to-basics plan, as is continuing to invest in digital. We've got the #1 food and beverage app in Canada. We have tremendous engagement and usage from our consumers and our monthly active users are growing consistently each quarter. We think we can create more engagement, providing more features on the app and really creating that app as the main app or the #1 app that consumers have on their phone for all experiences, they can wake up in the morning to check out the weather and they can play hockey games on the app. So there's a number of activations that we believe are available and that we're working on to be able to continue to invest and drive engagement with our app.

Just before leaving Tim's Canada and making sure we have time for the rest of the business, where is the morning business relative to pre-COVID? How recovered is that understanding the afternoon and the cold beverage is interesting, but where is the morning?

So the morning daypart is still the daypart that from a traffic transaction standpoint is not quite at levels from 2019. And -- and if you think about it, our super urban business, our downtown corridor business is still the most impacted. It's made progress over the last 2 quarters. So we're -- about a year ago, we were down 40% versus 2019. And now we were down in the last quarter, down 5% in terms of same-store sales comparison to 2019 in those downtown corridor stores. So we have seen progress. Mobility is helping that business, but it's not quite yet at levels that we were seeing in 2019 of prepandemic and hot brewed high frequency, low check customers, the one that's most impacted by that level of reduced mobility, which we believe may come back over time. It may not, but we're not waiting for it. We think that long term, the opportunity for Tims in Canada is to be the best brand for hot brewed coffee, for breakfast items for baked goods, but also be -- claim our fair share, at least start with the goal of claiming our fair share of PM food and cold beverages in the PM and snacking dayparts.

Let's quickly turn to Tim's internationally just before moving on. So China is a big opportunity. And in fact, there are now, what, 500 stores in Canada, is that right?

And growing.

And growing -- so can you just talk about what -- how do you know that there's a lot of stores there. So you've got data points, but I think it's a different positioning from a brand perspective. I think there's average difference in average unit volumes. Just what is Tim's China versus Tim's Canada look like? And why do you think this is a big idea in China?

China is one of the fastest-growing markets in terms of coffee consumption in the world. And if you compare where Canada, as an example, today, average Canadian consumes per capita, about 700 cups of coffee a year, which is 2 cups a day. I had 3 this morning before this session. I'm not Canadian though. And in China, it was about a year or 2 ago, it was around 2.5, 3 cups of coffee on average per capita per year, but it's growing at a significant double-digit pace. And so I'm not sure it will ever get to $700 per year per consumer up in China, but we think there's an opportunity there for a long time to come, which is why we believe in China long term and why the brand is so vested there. We have great partners in China. They're well capitalized. They have a really good local team that leads that brand there, both in terms of real estate as well as marketing and product innovation. -- and a great leader that we've worked with for many years. He was with the BK business for some time and then transitioned over to Tim Horton's. And so the business is strong. It's well capitalized, and they've done a really good job of creating a multitude of image and design elements for the brand to make it relevant to the consumer in China. The product -- the beverage offering is pretty consistent with what we offer internationally with some unique flavors because it's China. The food offering is a bit more localized, and that's what we've seen in most international markets that the beverage offering translates well, but you've got to be flexible and localized when it comes to food offering. Our formats tend to be more in line. We don't have any drive-throughs there. And we've seen -- we have flagship locations. We have kind of the format that we use for most in lines. And then we have some smaller express formats that we can use to infill throughout the big cities, and we're beginning to see the combination of all those formats be quite useful and quite strong in terms of returns for the franchise partner. And so we think we've got a long runway there. We were positive in comps the last quarter even in the face of all the lockdowns that are happening there. We -- most of the restaurants that opened for Tim's in China opened during the pandemic. I think it's north of 90% have opened since 2020 since the beginning of 2020, which suggest that they're capable of addressing and understanding consumer behavior and kind of mobility patterns even in tough circumstances. And we're already north of 75% digital in that business. So it's -- for us, it's a very exciting opportunity. It's a long-term plan. And it's also a validation that the Tim's brand has significant legs for growth internationally. But it's not just China. We're seeing it as well in the U.K. We're seeing it as well in Mexico. We're seeing it as well in the Philippines and other markets internationally. And so we're excited about Tim's being a long-term driver of growth internationally for RBI.

Is it ever going to work in the U.S. Or what is the unlock?

I think the U.S., we already have a 650 restaurant business here -- store count business here. It's one of the largest coffee chains in the U.S. we're not excited about that, but it's -- just to give you perspective in terms of the size of the business here, it's mostly today in markets that are close to the Canadian border. So we're in Rochester, we're in Buffalo. I think we have 200 restaurants in Buffalo. If you watch a Buffalo Bills game on TV, you'll see Tim Horton's advertised in the stadium. I'm a Dophins fan, so I'm not really a big Bills fan. We're big in Michigan. We've got a bunch of stores in Ohio as well, and we just recently opened our first restaurant kind of south of those markets in Texas, in Houston, Texas, and it's doing well. And we have plans to build out the market there. And that's made us excited about the growth prospects in the U.S. is that we spent some time a couple of years ago, rethinking the format and the design of the restaurant. And so we were building the format essentially the same size and the same approach as we had in Canada. So it was a really big footprint with a full offering. And what we concluded after some testing and some research is that we should be -- we should focus on what we're known for and what we're really good at, which is coffee, beverages, baked goods and breakfast sandwiches. And so we built a smaller footprint format in Ohio and some properties that we own, along with the franchisee, and we tested this new look and feel and also new menu -- and we've seen really good success both in terms of the capital outlay, the top line growth and the flow-through, which turns out to be really strong from an ROI standpoint and a payback standpoint, which is now giving us confidence and giving franchisees confidence that we can get back to growth. And so we had -- we expect to start seeing positive growth there at Tim's in the U.S. And we think over time, we could be -- it could be a significant driver of growth for Tim's outside of Canada.

Another important announcement you made this fall is on Burger King U.S. So this is probably the crux of a lot of investor discussions about the business, although it's not the majority of the business, obviously, it's a key brand, it's a home market. So can you first just outline for us, very briefly, I think it's complex or comprehensive, just reclaim the claim process and program, the key investments you are making as a corporate entity. And how to just size those, right? I think some investors might say, sounds interesting, but not a lot of money. And how do you respond to that in terms of is this sufficient enough to catalyze the turnaround in the brand in the Burger King U.S.

All right. I think $400 million is quite a significant commitment from the company. We spent a lot of time with Tom Curtis, who runs our BK U.S. business and his team kind of thinking through what the priorities of the business in the U.S. should be. But most importantly is that we didn't decide what to do and how to do it in a closed room in our offices. Tom and the team then spent quite a bit of time with a core group of franchisees as well as kind of came see the market throughout the U.S. to make sure that we built a comprehensive plan that tackled the issues that we had in the business and allowed us to address all the possibilities that we see from a growth standpoint there and focusing on the guest experience, focusing on franchise profitability and allowing us to move forward and accelerate growth in the business, which we think we can do with the plan that we've built. And so there are a number of elements to it. The first is really getting kind of stabilizing the business. We made investments in our field organization. So we added 50% more folks into the field to be able to support our franchisees, both in terms of franchise success and also training and making sure that they have the resources necessary to focus on what they needed to focus on, which is running good restaurants. We had -- we added multiple projects to address simplification, which we hadn't done a good job of during the pandemic, which created more complexity in our restaurants and slowed us down in an important time when drive-throughs were that much more important for our business. Then we started to look at other opportunities around marketing. So we -- there's one component of the plan, which is $120 million commitment from us to support the advertising fund. It started in October of this year, so 1.5 months ago, and it will run roughly for 9 quarters. There's another $30 million, which is related to digital investments, and then there's $200 million for long-term remodels and $50 million for the refresh, which addresses digital improvements in stores, technology improvements and restaurant technology in particular, equipment, elements of the drive-through and it's a match. The $50 million is a match to franchisee investments. And the $200 million on remodels, which is a little bit more long term, will also be matched by several fold by franchisees as they invest in remodels throughout the market and over the next couple of years...

When I say is small, by the way. What I mean is this the McDonald's system, the Wendy's system put a lot of capital with their franchisees. So if you say 400 or let's say, the $500 million, which is the contribution of yours and the franchisees, the comparable number of McDonald's is like 10x that, right? Just -- look, to be clear, they remodel all of their stores. So what proportion of your estate now is in the current form that you'd like versus what is needed? And what portion of the estate does this plan touch?

So about 1/3 of our restaurants in the U.S. are -- have been fully remodeled. And we think this plan, the $400 million -- the $120 million that goes into the advertising fund will -- is also what was amazing about this plan is that we had 96% support from the franchisees on the plan, which committed them to an additional 50 basis points of investment in the advertising fund over 2 years if we met certain milestones in terms of profitability in the stores. And so we're getting back to pre-pandemic levels of franchise cash flow in the restaurants, which is a very significant and I think remarkable commitment from the franchisees, given the journey that we all believe we need to be on, and we're excited about that. As it comes -- as it relates to remodels and the equipment investments, the franchisees will invest additional funds. There's a one-to-one match on the equipment on the short-term $50 million investment. So that's collectively 100. But as it relates to remodels, some remodels will require 2 to threefold additional investment from the franchisees. So the collective investment to the system will be much more than the $400 million. And we believe it's a significant start to the journey that we're on. Remodels will always be part of the process. We think this plan will get to over the next couple of years, about 800 locations in terms of the full remodel program and another 3,000 or so that will be touched by the equipment and technology investments that are a part of the Royal Refresh.

Do you think the Burger King U.S. system needs to shrink before it can grow again? There's a lot of systems that have done that. I think it's -- not -- I don't want to call it an honorable tradition, but there is a tradition in the industry, right, is sort of going through and really finding those assets and franchisees that are no longer interested in investing in the business. Do you see that?

I think our system -- Burger King system in the U.S. will have, as any mature system in the U.S. will have, opportunities for either relocations or offsets as we call them. There'll be some occasions for closures in markets where -- or trade areas that no longer seem viable. But it's part of the ordinary course of managing a business like ours. And so I don't expect any accelerated closure program. We had significant closures in 2020 that we addressed actually in 2019 and 2020 that we're a little bit ahead of the pace of closures that we've had historically. And we don't expect anything too drastic here. We think it will be part of the process. But what we're seeing is that there's a -- in terms of the remodel program, I think historically, we've taken a view that you -- regardless of where the site is, if the restaurant is up for remodel, it needs to be remodeled. Today, we've taken a much more bottoms-up approach with our teams, and we've looked at side-by-side along with the franchisees, and we're making determinations around sites that maybe are in a good trade area, but in the wrong location. So rather than spend money on remodeling that store, we're going to look at it at relocating that store to a better site within the trade area to be able to address any shifts in consumer behavior or traffic patterns that we can then find the investment will have a better return because of that shift in approach to the real estate.

Before leaving the U.S. and talking about international, just final financial conditions for franchisees in the Burger King system. -- lot of inflation impacted restaurant margins across the industry. You probably started to lower -- I guess, is a lower starting point just given where the volumes in the restaurant business have been, and that's the whole reason you're retaining the plan. How do you feel about the financial condition and their ability to execute against this plan, just given that they're doing this at this moment?

Yes. Look, the system -- our franchisees are very excited about the plan. They certainly have faced difficulties like many franchise partners in the restaurant space have faced over the last many years. We've seen coming out of the pandemic, the inflation, the commodity and wage inflation that most businesses have faced have impacted margins and cash flows. Our system, broadly speaking, I think, is there are some franchisees that have opportunities and challenges that they're facing, and we're working closely with them that might -- that either have higher kind of balance sheet leverage levels. We're working closely with them. We're working closely with the bigger and smaller franchisees as well. What's very positive years that we've seen momentum over the last 3 quarters in terms of top line sales, that's meant improvements in cash flows and the commitments that we're making in terms of the advertising fund as well as the commitments that we're making behind the near-term Royal Refresh as well as the remodels has brought many of our franchisees to the table looking for partnership on investing in the restaurants, which everyone believes is the right path forward for growth.

Thank you for that. I want to turn to Burger King International for a moment and then save a couple of minutes for the Popeyes business, 4 of the largest markets, Spain, France, U.K., maybe there's one other producing double-digit comps in the most recent period. Macro is not good in those regions. What is your perspective on that in terms of are we just still recovering reopening from COVID? What makes -- what drives that performance if it's not that dynamic? And maybe what are you seeing right now from a consumer standpoint, particularly in those more pressured markets like the U.K.

Yes. We've seen really strong growth internationally the last 1.5 years or so. We've seen double-digit same-store sales and system-wide sales growth. I think the basis for that is that we have really good master franchise partners in many of our markets around the globe. We've -- many of them are several years into their journeys. They're investing in the business. They're well capitalized. They have great teams. They feel good about the investments. The returns in our international business are quite strong. And so we're seeing a lot of excitement and momentum in the business. We were prepared with a strong digital platform and off-premise capability for the pandemic. And so while there was a hit in the first few months of the pandemic. There was a significant uptick in off-premise, whether it was delivery or drive-through or curbside. And as mobilities come back, we've seen that off-premise business to maintain and we've seen improvements in our dine-in or on-premise business. We've also done really well in terms of positioning the brands in many of these markets, the product innovation, the strength of our operations and as I mentioned, the digital platforms as well. And so we believe we're -- and the data suggests that we're growing at a faster pace than most of our competitors in these markets. We've done that for several quarters already. And that's in large part because of the investments our franchisees are making and the strong operations and the image and modern look and feel that the restaurants provide. And yes, there are -- certainly, Europe is facing a lot of pressure on energy inflation and also commodity inflation. Wage has been a challenge there for quite some time. And our franchisees are well positioned to be able to manage through those challenges even if we face near-term pressures, which everyone is dealing with at the same time.

And can we quickly just talk about the Burger King international development. It's fallen behind historical paces. We understand what's happened in Russia. To some degree, it's understandable in China, although your peers don't -- it's not even in terms of what everyone is experiencing in terms of growth of China. How do you explain what slowed the development down ex Russia? And what -- do you think you get back there in '23 to historical growth rates? Or does this take longer just given where you are today?

Yes. The principal GAAP pre-pandemic growth from 2019 to where we are today is essentially Russia and China. And so China has obviously been dealing with a very significant lock down and the local pressures there are different than any other market internationally. We also are working through a dispute that we had with our master franchisee there, which we communicated a few, I think, a quarter or 2 ago that we resolved that. The business is now capitalized, and we're working with the partner to get back into a growth mode with the business there. They believe in the long-term prospects of China. We do as well. We have a good team there. So we continue to work with them. And as we come out of that, the resolution of the dispute in China, we think we'll get back to levels of growth in China that will be exciting. I don't think we'll be at Burger King prepandemic levels in '23, but we think over time, we can get there and beyond.

Thank you. We didn't get to Popeyes, -- my apologies. We didn't get to Firehouse. We did cover, I think, 80-plus percent of your business though -- thank you for that. If anyone has breakouts later on with Jose. I'll be sure to hit on those. Thank you, and thank very much for coming out today. It's our pleasure.

John, thank you so much. Great to be here. Thank you.