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

Good morning, guys. So I'm Brian Harbour. I'm the restaurant and food distributor analyst at Morgan Stanley. And thank you all for being here at the conference. And I'm happy to be here with Patrick Doyle, Executive Chairman of Restaurant Brands International. Josh has a new baby, so he couldn't join us.

You're stuck with me.

But, we're -- it's an honor to have you, rights'?

So I have sort of a broader industry question before we talk about RBI. You were at the Restaurant Finance & Development conference recently. I was there as well. There was a lot of talk about labor, right? And no doubt that seems to be kind of the hardest part of operating a restaurant, I've never operated a restaurant myself, but I think it's fair to say that, right?

I hear it's hard.

And it seems to be continually getting more difficult, right? And now you have, I would say, new regulations, you have what's going on in California, maybe you have other states that follow California. That was sort of -- there's unionization. It just came up a lot as a topic. And I'm curious what you think about that. Is it just that much harder to be a -- not just a franchisee, but an operator of any restaurant these days? Is there any sort of hope you could perhaps offer us given your kind of extensive experience in the industry?

Yes. So the experience that probably matters the most on that is, as I spent a lot of my career in international, and -- Burger King, in particular, operates in 120 countries around the world. We operate in countries where labor is far tougher than it is in the U.S., where the wage rates are higher than in the U.S., even than where California is going to be, and we do incredibly well. And so the real answer is when changes come from a government, when there are structural changes, there's going to be dislocation for 12 or 18 months, while everybody kind of adjusts, I will tell you everywhere in the world, the higher the cost of labor, the more efficient the restaurants are. And when labor is very low cost, it tends to be pretty inefficient. People figure it out. They get more efficient when the cost of labor goes up, and what they can't figure out from an efficiency standpoint winds up coming through in price. And so it takes some time for that to all kind of shake out. But a year, 18 months, we just went through a whole bunch of inflation that thankfully is backing off and everybody had to kind of adjust around that, everybody did. And the most important thing is that you've got great franchisees who are connecting with the employees in their restaurants, that are keeping great people in who are more productive. And so -- look, you always would prefer as an operator that the market is just kind of setting rates. And if there's higher wage rates out there that you need to pay to keep great people that you're kind of doing that when it comes from a state or from a national government somewhere. It always causes a little bit more dislocation when it happens, but everybody adjusts over time.

Right. Yes. Are we sort of at the tipping point for more automation, right? I think it's always been sort of a tougher economic calculus, but maybe we're there at this point, right?

Well, look, the restaurant industry is, I think, been the biggest -- the restaurant industry has really failed to drive efficiencies in restaurants for a long time. Most industries have gotten far more efficient. They have found more interesting ways to automate. I think the big near-term opportunity that everybody is kind of looking at is how to automate ordering, kiosks are just a better way to -- for the customers, for the restaurant. It drives profitability, it drives all the things that, Brian, you know very, very well. So you're going to see that accelerate, I am sure, across the industry. In terms of automation in the kitchens, I don't think the fully automated way is necessarily going to be the path that you see near term. I think you're going to see people finding things that make their people more productive, but not necessarily just fully automating the process.

Yes. Okay. That makes sense. So let's talk about your businesses and maybe just start with Tim Hortons. In Canada, in particular, what do you think has really worked the best over the last couple of years? And then I think looking forward, this is sort of a modest same-store sales growth business in the past. Do you think it sort of escaped that, and there's really a lot more to come from some of these initiatives that you put in place?

Yes. So first of all, I mean, Tims is -- in Canada is just absolutely extraordinary. It is the most loved market -- the most loved brand in its home market of any restaurant business that I've ever seen anywhere. I mean, it's really extraordinary. And Axel and the team have been in place now for 4-plus years, terrific team, been doing really well. And they built a plan 3 or 4 years ago that they've been executing against. And it really has been elevating the quality of the food overall. And then it's been getting into cold beverage, cold brew, and the later daypart, and it has been working just spectacularly well. I just -- I've got tremendous confidence. And yes, I think over time, you're going to see it grow at a faster clip than it did in the past.

And they have been taking share consistently. And I think what's also interesting, right, is several companies, including ones that will be at this conference are new to Canada and trying to grow quickly there. I mean does that present a challenge for Tims at all?

Yes. Look, all new competitors are always going to present a certain level of challenge. The strength of the brand, the efficiency of our distribution business, the quality of the team that we have running it, our advertising strength, the quality of the franchisees that we have, it is going to be tough for somebody to directly compete with Tims.

Okay. Makes sense. Is U.S. expansion still important, right? What's kind of the unlock for Tims?

Yes, absolutely. Absolutely. There is a great opportunity. We've just opened a couple of new markets, going very well. We've opened in Texas and in Georgia. There are some more to come. Katerina Glyptis is now running that business for us in the U.S. She's terrific. She took over 4, 5, 6 months ago. Very optimistic about that business in the U.S. There is a rumor that some coffee chains are doing decently in the U.S., and we think we've got a really great one that there is still a need for a Tims in the U.S., and I'm pretty optimistic about it over time.

I mean, how do you think it differentiates itself, right? Because like it is a -- there's a lot of growth in that segment, right?

Yes. Yes. Well, first of all, the quality of the coffee is exceptional, and it does start there, right? Then we've gotten very good at the cold beverages now and really bringing that from Canada into the U.S. But the thing that has always made Tim special, beyond just the brand in Canada, is the quality of the food. And it's something that Tims has always done well and is now doing even better. The food quality is really exceptional, and I think that's a differentiator against some of our competitors.

Okay. Makes sense. How about China? How do you think all of this China coffee competition plays out? What's really the differentiating factor for Tims there in your view?

Yes. So it's -- really, it's the same answer. So there is a lot of competition growing very fast right now in coffee. The question is, do they have the food quality and the breadth of offerings that Tims has? And I think we do that uniquely well. If you look at the competitors in China today, that is the big differentiator for Tims.

Do you know how much of it will be express units? I know they're starting to lean into those there.

Yes, we're going to see over time. I mean it's interesting. Those are smaller, lower volume, but drive penetration, drive brand presence. So we're kind of working with our partners there on that. And we're going to look at that, see how that works out over time, and it's something they've been experimenting with and we're interested in.

Okay. And lastly, just I think a general question on franchisee profitability, I mean, you'll update us in a few months. But obviously, you control the supply chain in Canada. I mean is there anything you can do through that to continue to improve franchisee profitability? What's the key to that besides just driving sales, which is kind of the obvious answer, right?

Yes. But there are absolutely opportunities. So the biggest thing -- I mean, first of all, just Tims with its own supply chain, it's very efficient. The scale of our business, it gives us a real cost advantage in our supply chain that we're able to deliver to the franchisees. That's why their cash-on-cash returns are really good in Canada. But the big opportunity that we're starting to work through, and you've seen some announcements on this is really using our RBI procurement team to buy across the brands. And less of that was being done than, frankly, I probably expected when I came in. There's a big opportunity there. We're starting to get some nice results from that. And it's one of the ways that we can leverage the RBI business. There are things that are done best at the RBI level, that's one of them. A lot of things, more things than maybe before we've pushed down into the brands to give the unit presence more authority, responsibility to make decisions move faster in their businesses. But procurement is something that at an RBI level makes an awful lot of sense. And I think there are some opportunities that we can generate from that.

Yes, that's interesting. So you've centralized that more recently.

Yes.

Yes. Okay. Maybe let's talk about Burger King in the U.S. I think many of us have heard from franchisees, right? It's clear that they're happier. They're in a better position today. I mean, when you've talked to them, what do you think has been kind of most impactful for them?

Profits. Look, I mean at the end of the day, I mean -- first of all, they have heard from us and seen in our actions that we care about their profitability more than any other metric that we're looking at. Driving cash on cash returns for them is the magic in the business. It is what makes a franchisor in this business successful. So they know that we have put that at the top of the list when we announced that and that we were going to release their earnings. Some of them, particularly in Canada, kind of did a little bit of the tilted head, it's like, really? And they totally get it now, number one. And second, and most importantly, is how long does it take for them to believe from our actions that, that is really what we are doing, it is where we are putting the resources. They believe now. And so they're seeing the results across all of the brands, but particularly within Burger King, they're seeing really strong improvements in the profitability. They're excited about the business, I think, more than they were certainly a year ago. It was tough. I mean the fact that they weren't happy a year or 2 years ago, that was on us, right? I mean we weren't where we needed to be. We are making lots of progress. We are not where we need to be yet, but the progress is terrific, and they're getting excited as a result of that.

What are you most excited about for the coming year in terms of key Burger King initiatives?

Yes. So look, we're going to start to see a lot of the reimages getting done. That takes a while to kind of build towards that. We still have an awful lot of the advertising dollars that we committed that are yet to be spent, that gives us some confidence around our ability to drive sales. There are lots of things that we're looking at from a pipeline standpoint on product. But honestly, the thing that's been driving it the most is execution by our franchisees. Just pure operational execution, the excitement that they have for the business is causing them to execute at a higher level, and it's driving results. And everybody talks to investors about that. And I think often, people like, yes, of course, you're going to tell me that better operations is going to drive sales, better operations drives sales and profits, it just does. And they were beaten up enough because of the profit levels that I think it was hard for them to execute at the level that they wanted to be executing at. Labor has -- availability has gotten easier. Turnover is down, but just the energy level from the franchisees is higher, and so execution is getting better, which is driving results.

And on the product side, you have made some changes recently, and you've -- I think value is probably a little more important now than it was a year ago, right? Are they kind of happy with value mix currently? Do you think that will be a bigger part of it as you go into next year?

Yes. I think they're very happy with the overall approach that we've been taking. Look, this is a great product. The Whopper is the best burger in the business. We truly believe that and see that in our research results. We should be able to sell that at a good price, and they should be able to make good money on it. And we've had a lot of success with the launch of our chicken wraps. And there's just -- there's a lot of good things happening that are driving value, but we don't need to do it through our core product. And so that's what we're working on.

Okay. Do you think there's a need to invest further in kind of physical assets beyond what you've already talked about?

Well, so we haven't done that many of the reimages yet. We're looking at how those are doing. We're very pleased with how they're performing so far. We want to see that a little bit more. We've made a commitment, a big one to help support more of those reimages. We have to get the whole asset base. All of our restaurants need to look great. That's going to take some time. But we also want to look at the results that we're getting from the investments we're making, see if there are any tweaks that we need to make. So far, it looks very, very good. But once we -- I have more confidence in exactly the lifts and the returns we're getting, then we'll look at that and say, okay, how do we get this done for every restaurant?

Okay. Yes, makes sense. Maybe let's talk about the international side for Burger King a bit. The same-store sales growth has been very strong. It's decelerated a bit. I think you said more due to pricing. Are you still seeing traffic hold up in -- it's hard to generalize, of course, because it's lot of markets, but...

Hard to generalize...

Are you -- in some of your bigger markets are you still seeing traffic hold up there? Are you happy with kind of your share position? Are you taking share, in fact, in a lot of those markets, right?

Yes. Well, if you look back over the course of the last 10 years, in our biggest markets, most of them we have taken share. And Burger King has been doing very, very well outside of the U.S. So look, long term, I am very confident. You're always -- as you said, we're in 120 countries, so there are always going to be things that are doing great. We've had, particularly in some of the Western European markets, we've had terrific success. Actually, China has been moving nicely coming out of COVID. There are always going to be markets that aren't doing quite as well. So it is hard to kind of generalize. Overall, long term, very confident.

Okay. Is there anything common about those markets that are lagging perhaps or...

No. No, I mean it's just -- yes, I mean it's -- you've got different economic situations around the world right now, right? And there are some markets and economies that are growing nicely. We've got great partners, they're driving great results, and other places where it's a little bit more challenging.

Yes. Okay. And I mean you've expressed confidence in this, but just maybe talk about kind of your confidence in unit growth for Burger King International next year? How do some newer markets ramping kind of factor into that?

Well, in terms of newer markets ramping on Burger King, that's probably less of the story on growth. We've got a lot of markets that are growing nicely. Most of the biggest markets that are going to generate the most growth we've already got a scale business in those markets. So it's -- we're just in a really good growth curve. There aren't many places around the world that I look at and say we're constrained from a growth perspective. I think where you're going to see the accelerating growth in International is from the other 3 brands, as those are moving in. And you're already seeing that with Popeyes, particularly, which is booming, with Tims, and then, Firehouse where that first store is doing really well.

Good so far, right?

So far, great.

Well, maybe let's shift to those other brands. So Popeyes, I personally have not spent much time behind the counter at a Popeyes. Could you just talk to us about some of the operational changes that you've kind of alluded to? What's actually happening there? What's -- how impactful do you think that could be for the operator?

It's extremely impactful. So Popeyes has the best food in the chicken category. It's -- the food quality is amazing. It is hard to make. And we've got to figure out ways to make it easier for the restaurants to execute at a high level so that it's consistent and that it's faster. And frankly, that employees have a better experience working in the restaurants because it's easier. And so that's everything from equipment to make things easier. So there are things that can auto-mix the batter. There are things from a hot hold standpoint that we're doing that we're getting really good results with. There are things we're working with that we've been doing outside of the U.S., interesting that we're bringing in, that we can pre-marinate instead of marinating in the restaurant. We can marinate with our supply partners and bring it in, the same marination process just not happening in the restaurant. And then just a kitchen -- production system that is going to drive efficiency that a lot of folks have had and that we're still rolling out. And it's going to help, it is helping. We're seeing it. We're not in a lot of restaurants yet in the U.S. with it. But I will tell you, if you visit a Popeyes outside of the U.S. and look at the efficiency of their operation versus the Popeyes in the U.S., there's a big difference. And we know how to do it. We have a lot of restaurants operating more efficiently outside of the U.S., need to bring it back here.

Are you asking them to make any sort of like equipment investment as a part of this? Or is it just about practices and processes?

Yes. No, there's going to be some investment in the equipments. And yes, but it's the high returns on those.

Right. Makes sense. Do you think that's kind of the limiter -- like chicken is a very competitive category, we know that there's several very fast-growing chicken chains...

A couple of them doing pretty well. Yes.

No doubt, right? Is that sort of the limiter for Popeyes? And also, I mean, look, like the chicken sandwich was a big hit, and then, everyone else kind of launched its chicken sandwich. So how do you kind of like stand out in the chicken category?

Yes. Well, look, start with -- I mean, to me, the 2 businesses' brands that I look at today that are in, I think, very different stages in their development. So look at Chick-fil-A that everybody spends a lot of time looking at and saying, okay, why are they doing so well? Chick-fil-A's units are incredibly efficient. They have hundreds of industrial engineers in Atlanta that are finding ways to make those restaurants more efficient day in and day out. And they've done a terrific job at creating a very efficient box. So they executed at high level, number one, because they train and hire well, but also because they've just made it easier for them to do it. I think our food is better. I know our food is better, right? That's a big statement. There are people out there who have told me I'm crazy when I say it. I'm not crazy, our food is better. We've got to get better at executing, both in terms of the people who are doing it in the restaurants and how we train them. But frankly, a lot of it's on us. We have to make those restaurants easier to run for them to be able to produce at a level and a speed of service and a consistency, and we are not where we need to be on that. And so we know what we need to do, the path is there. It's going to take a bit of time, but that's going to generate a lot of growth.

Okay. And fair to say you assume that, that can drive better sales growth going forward? You unlock throughput, you bring more people through the door.

If it doesn't do that, something has gone off the rails.

Yes. Exactly. Right. Yes. How fast would you expect -- you've signed, I think, a few new agreements a year, I don't remember exactly the pace, do you expect that, that will kind of continue as you take Popeyes outside of the U.S.?

Absolutely. Yes.

What -- how fast might you start to see double the unit growth you're seeing today or something like that?

Well, I mean systems sales growth for Popeyes last quarter was up north of 40%, rolling over north of 40% the previous year. If we can keep it going 40% a year, I think in 10 years we're bigger than the entire global economy. So I think it compounds...

Well, you never know, right? Take over the world.

Eventually, we won't be able to grow 40% a year. It's growing very, very fast. And look, the success of those markets means you wind up with a lot of demands from great operators in new markets. And so we're going to continue to launch in new markets. And from a scale standpoint, there -- look, there are 20, 30, 40 markets that are going to wind up having 90% plus of the restaurants over time. So we've got to have each of the best operators in those markets for all 4 of the brands over time. And the fact that we're generating the kinds of results that we are means terrific operators are calling us saying, can we be the ones to introduce this brand into the market?

Yes. Shifting to Firehouse briefly, is that kind of the case there, too? Outside the U.S., do you think it works anywhere that Subway does? Like what's kind of the opportunity there?

Yes, absolutely. And look, there is good competition in the sandwich category in the U.S. I mean, Jersey Mike's has had a great run the last 5 or 6 years. You've got other players. Obviously, Subway has had its struggles. But Jimmy John's, I mean, you've got a good competitive set in the U.S. We're doing very well. We hope to accelerate, and I think we are going to be accelerating the unit growth there in the U.S. The interesting thing is outside of the U.S., it is only Subway today. So we think there is an opportunity, and it's a unique strength of the RBI model being multi-brand. We're in 120 countries. We do business -- I think the number is between 3,000 and 4,000 supply partners around the world. So we take Firehouse into a new market. Number one, we already know who the 3 or 4 or 5 best potential operators are. It's easy for us to get to them, talk to them because we're operating there already with Burger King. We already have relationships, do inspections, quality control with the suppliers who are going to potentially be our partners in those markets. And we've got a terrific scale team in our international business based out of Switzerland that know how to bring new brands into new markets. And it is a real strength. It is a reason to look at the RBI model and the business with these 4 brands to believe, yes, there is more value that can be created here because of the multi-brand concept.

Right. And do you generally have a preference for kind of your existing franchisees in those markets? Or are you looking at brand new?

No. I mean I think over time you're likely to see us with at least a couple of different partners in most countries. That's probably the best answer. There's somewhere -- I think the most in the market is 3 brands with 1 partner, but we've got markets where it's a different partner for every brand.

Yes. So it's a case-by-case basis.

Yes.

I had sort of a more general question on technology. I mean in setting aside kind of consumer-facing things, we talked a little bit about this, right? But anything you're doing specifically kind of back of house operationally that you think is impactful for franchisees? How does that kind of benefit you, of course, as the parent company? Are these things that you can charge for as a tech vendor to your franchisees? Some companies have talked about this, but I'm curious what you guys are doing.

Yes. Look, the real value-add over time, so they're -- I really look at it in kind of 3 parts. So one is can you use technology to make it easier for your customers to access the brands, to order from the brands? And that is clearly a path that is there for all of our businesses, all of our brands that we're going after fast and hard. The second is a system for operating the restaurant, for managing it, managing labor, managing the supply chain into the restaurant. All of those sorts of things, and the core POS system that's doing that well is also going to drive results and efficiencies for the franchisees. That's become more table stakes than it used to be. There are good opportunities, good suppliers, vendors out there that can do that. The third one is what you do with the data. And that's ultimately, I think, where the most value gets created. The first 2 you've got to do -- at some level, it's table stakes that you've got to be good at that. What you do with the data to find insights into how to drive more loyalty, to drive -- it increasing your check to make your marketing more efficient, all of that, that winds up being a great creator of value over time.

Well, you came from a single brand company before, and now you're kind of a platform company. What -- we've talked a little bit about this, too, but what do you see as kind of the key advantages of that?

Well, I think the most important thing is the advantages are clear. So there are some things you can do centrally, talent, but you've got to have visibility on talent and be able to move talent amongst the different businesses centrally. Procurement is clearly a big opportunity. The international growth and the platform we have there, we can grow faster with these -- the 3 other brands kind of then -- because we've got the scale business with Burger King, that is a huge advantage for us. So if you look at kind of the best or healthiest competitors in our categories, in sandwiches right now in the U.S., it's probably Jersey Mike's that's been having the best run in the last 5 years. In chicken, it's probably Chick-fil-A. Neither of them have any kind of meaningful international business. Today, it's going to be hard for them to move into international. I ran international at Domino's for 5 years. I know what it's like to be the one pioneering the brand into a new market where you don't have the connections, you're calling every service provider and vendor and partner that you have saying who can you introduce me to in this market that might be a nice partner? It's a huge advantage for RBI that we already have the scale outside of the U.S. that we can then use and leverage with these other brands. So that's the big advantage. What's important, and I think we're getting very right now, is that you have empowered presidents of those businesses that are going to move quickly that you don't lose the entrepreneurialism that you might have as a single brand company by having them be part of an umbrella. And what Josh has been doing really well is kind of moving the authority down to those presidents to move faster with their businesses, make more of the decisions there as opposed to kind of at the RBI level. There are things that we do from a support standpoint that are going to generate better growth, better returns, maybe efficiency. There are some things that -- legal and FP&A and things that, that you're going to do that are going to support those businesses that will drive efficiencies and margin in the business, and then, those things that will help you grow faster, et cetera. But most of the decision-making around marketing product, operations, all of that needs to be development, needs to be done in the businesses.

And is that -- it sounds like you've completed most of that. Has that gone as well as you hoped so far?

Yes. Extremely well. Yes. We've got great leaders in those businesses.

Yes. Speaking of platform companies, RBI does have a history of buying things. When you say M&A is tougher today, maybe there's not as much capacity to do a large deal, the financing environment is obviously different. Maybe on the flip side, I think the industry is entering a more stable operating environment perhaps. Is that more conducive as you start to think about that?

Look, I think the important thing is we've got 4 brands today. We need to prove that those brands being part of RBI makes them more successful than if they weren't part of RBI. And I absolutely see it and feel it today. We need everybody to believe that first, right? We need the market to look at it and say, you know what, because those brands are in RBI, they operate better, they grow faster, they generate better margins, better returns for shareholders. I absolutely see it, it's there, but the market's got to believe that before -- and we've got to prove that in the 4 businesses that we own before we look at doing that with anything else.

Yes. Okay. Makes sense. Do you think there's been -- franchise businesses have historically run at fairly high leverage? They've paid dividends. That's made them attractive to a lot of investors. I mean, do you think that's shifted somewhat? Is there pressure to run at lower levels of leverage? I mean RBI has indicated that it will run a little bit lower over time. Is there a pressure to pay more of a dividend these days?

No. I mean look -- I mean for RBI, I think it's pretty simple, just because the scale of our business, we've reached the point where moving leverage down some, and we put some guidance out there around what we're going to do on that, we kind of need to because the depth of the high-yield market is just not big enough. If we grow a bunch more for us to maintain that, it's going to make sense for us to get down to leverage somewhat. And so that's what we're doing. When you're a smaller business, then I think the math may work a little differently.

Yes. Makes sense. We have these couple of lightning-round questions then where we're asking with every presentation today. So they're standard.

I hope I don't screw up.

Okay. It's all right. So just demand backdrop for the year ahead relative to recent trends, you think accelerate, hold, decelerate, what would drive that?

Yes. I think pretty consistent. Look, you're coming out of a lot of inflation. An inflation shock kind of went through the market. Everybody had to take price and/or tickets. You're getting to probably a healthier place, but I think overall demand stays pretty consistent with where it is.

Okay. And then margins, up, down, neutral, and maybe in your case, we think at the consolidated level, probably?

Meaning, at the RBI level?

I think that probably makes most sense, yes, for standardization of the question.

For standardization of the question. Look, as we grow, we ought to be able to leverage the scale of the business.

Yes. Okay. And then capital allocation, prioritization between CapEx, buybacks, dividends, debt pay down, and -- have any of those kind of changed relatively and importantly?

Well, look, the -- I mean we did buybacks for the first time in a couple of years recently. But what we will always do first, any healthy company should do this, is we're going to look for high-ROI investments that we can make in the business first. That's always going to generate the best return, right? So we always start with that. What are the things we can be doing that are going to generate faster growth, that are going to generate a high return for our shareholders by investing in those things? Then the rest of it, honestly, I mean, we've talked about the guidance on our debt and working the leverage down a bit over time. The rest of what we do is going to be a function of math.

Yes. Right. Okay. We'll leave it there. And thank you very much. Appreciate it.

Brian, thank you.