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

Yes, it's meaningfully over is on the AM piece, and we're quite a bit quieter in the PM as you go off into the evening. So that is the big opportunity to use the assets even more and bring people back later in the day. Around half of the business is before 11 a.m.

Have the business [indiscernible]. Well, Okay. Thinking more beyond Canada, but just the international aspect of the portfolio outside of North America. Maybe you could just share and again, it's difficult when you got 100-plus countries. So generalizations I can totally understand are not helpful, but maybe color on the strongest few markets that you're most proud of? And maybe not everything is rosy, I can imagine. So maybe a couple of markets where there are some challenges and structural changes that are required? Like how do you think about that over the next 12 months or so?

Yes. Going back to one of the original questions when you talk about sort of underappreciated parts of the business, I similarly think our international business doesn't often get the type of credit that it should it's almost half of our business, a little more than half of our business from a restaurant count perspective and almost up. Getting closer to 50% of our system sales and growing incredibly, right, growing system sales year-on-year double digits, growing operating income double digits. So a large, fast-growing business for us. I think when we think about kind of the broader sort of international growth story, we tend to focus on paybacks, right? Ultimately, top line AUVs relative and bottom line profitability relative to the capital invested. And we look at often our top 10 markets and our top 10 markets. From a growth perspective, they have roughly 4- to 5-year paybacks right now. And those are unlevered paybacks which is really strong, right, when you think about 4- to 5-year payback and improving kind of every year. So our goal is to continue to kind of get that 4.5-year payback down to ultimately kind of drive that flywheel of growth. When you think about the top 10 markets, they're markets like France, they are markets like India, Korea, Japan, a bunch of kind of markets really all around the world, which kind of just highlights how diversified it is in terms of an international business. When you think about kind of some of the opportunities I think because of that point on diversification, there's not really a sort of a single point of failure or anything like that in the model. I will say the one that we spent a lot of time on over the last couple of years was China, which as you know, for Burger King in China, it was a big focus area for us. We stepped in and took control of that business and are so pleased with kind of the results we've seen in really less than a year through the first 2 quarters of this year, comping double digits getting those paybacks to a better place and ultimately kind of kicking off that growth flywheel. So I think we continue to be excited about it. Josh spent a lot of time. I think you were in Korea last week?

Korean or Japan [indiscernible] but that's an interesting -- it's an interesting window into this business. Both markets actually the Korea business, we have a similar amount of units to our biggest competitor. So we go head to head there, and we've got a number of -- increasing number of markets where that's the case. But also Japan has been one of the most incredible stories that we've seen over the last 10 years. When we brought in a new partner there, a little bit less than 10 years ago. And at that time, I think we were sub 100 locations, and our biggest competitor was a few thousand. And we've now turned that into one 1 of the best and fastest-growing markets anywhere in the world. We're pushing towards 400 restaurants stay on our way to 600 in a couple of years. And to one of Sami's point from earlier, the paybacks are down to like 2.5 years. So it's incredibly compelling for our local partner. And they've done a great job building the brand and the business. I think I've shared a couple of anecdotes on the same-store sales there, but we've been double digits on double digits on double digits. So we -- I say that just to point out, we've got some really big markets across international for Burger King and for the other brands that are still relatively small versus what their ultimate potential will be. And so our focus is on building the brand in those markets, making sure that our partners have compelling paybacks and then supporting them to build the business out to its potential. And we've got 125 markets of that. But I've got a long way to go. We've got a lot of those still to work on. And that's exciting to us because it means we have a long runway ahead of us of structural growth in the business.

With 100-plus countries, I'd love to borrow some of your frequent flyer miles. Definitely I imagine where you're going...

[indiscernible] would like that, too. He's always on the road.

That's a tough one. You mentioned that one of the brands that had been a little softer recently was Popeyes in the U.S., but yet since your acquisition, you're very proud of the direction that's going, especially with the international growth. I was hoping you can give us an update just on how that turnaround is progressing, having a multi-brand portfolio, the ability to hopefully say, hey, Burger King has done really well turning around these 3 aspects. Let's share our best practices from Burger King with Popeyes. So what's working well? What still needs to be revamped? Kind of what's the -- I think you said the return to positive costs in the second half of the year was kind of the line in the sand. So any color you can share on Popeyes U.S.

Yes. Look, I think we still feel good about returning to positive comps in the second half of the year, most importantly. I think as we look at the business, we're seeing a lot of early kind of leading indicators of things getting better in the business. I know folks like to draw the parallels to Burger King. And I think there are some parallels though, I think the two sort of big distinctions in my mind is, number one, as you think about the profitability and the health of the franchise system. The Popeyes franchise system is fundamentally healthy when you think about the balance sheet it was just a few years ago that average 4-wall profitability was over $300,000 per box. So it's come down a little bit since then, but our franchisees have made money and their leverage really continues to be under control, which was sort of a different story when we first started to turn around at Burger King. I think the second really important point as you kind of think about the Popeye system is the vast majority of the restaurants have been built in the last 10 to 15 years. So when you think about the asset base -- average asset, the average restaurant at Burger King was over 30 years old when we started to reclaim the flame plant, right? That's a big difference. I think it then sort of dictates the capital requirements for the franchisees. So those are kind of the differences. I think Peter, who was Chief Operating Officer at Burger King and is now President of Popeyes, really did work closely with Tom and learned a few things. I think it kind of comes down to probably consistency in value, which Peter has been working on, consistency in operations and then probably consistency on the core menu. And so when you think about value and Josh just hit on this is it's really expensive to introduce new value mechanics every 3 or 4 months. So 1 of the first things Peter did about 9 months ago is introduced this $5 paves and we've stuck with the $5 paves menu for quite some time now. And we're actually seeing our value perception get better. Our value perception, our value-for-money perception has improved 3 points year-over-year, just kind of from launching that consistent value platform. I think on the second piece around consistency of operations, similar to Burger King, we've expanded field resources. We've added more touch points to the restaurants, to the franchisees, more trainings for restaurant general managers a lot more hands-on field activity. And what you're actually starting to see is guest complaints, which we track very closely guest complaints are trending down in the Popeyes system, which is great to see. It's an early sign that the turnaround is really underway. And then lastly, kind of on core execution, I think Peter has really leaned into we have 3 core platforms that we're known for. Our Bonafide bone-in chicken, our tenders and our chicken sandwich, and we want -- back to the operations point is we want to be the best at those. We already know we have the best tasting product, but we want to be the best at executing that product. And we're seeing there is actually product satisfaction in those 3 categories is getting better on a year-over-year basis. So all of these stats putting together, which we track regularly are showing us and giving us confidence that guests are starting to see changes in the restaurants. It will, of course, take time. But like I think this is fundamentally different than the Burger King turnaround. And we're really excited, and I think that's just highlighted by our confidence in kind of returning to positive comps in the second half.

Yes. It's exciting to see different brands at different stages and to see what brand will be talking about next year or I'll be listening to talk about next year is exciting. I think a step back because you said that we don't get as much appreciation for the broader RBI portfolio rather than individual brands, your algorithm pulls for 3% plus system-wide comp growth on an annual basis. I think you said you were running just 3.5% for the first half of this year. So it seems like a reasonable target. But you're confident in sustaining that. Obviously, there are better years, more difficult years. And within that comp, how do you think about maybe traffic versus check, obviously, people would love to see just endless traffic growth. But just high level, the ability to sustain 3%-plus global comp growth across the portfolio.

Yes. So as you both pointed out, we feel pretty good about the year so far. We're above that 3% and did that in both the quarters. So I think you can see kind of the net of all the things going on in the portfolio is a pretty good outcome. I think we said on the last earnings call that we felt good based on where we were about how the rest of the year looked. So I think we're doing pretty well this year and hope to continue that. In terms of the check versus traffic I think we're always going to want to be mindful of CPI kind of market inflation rates. Those should -- are generally targeted at less than 3% and 2% to 3%. So the way we always thought about that was we want kind of flat to a little bit positive ticket growth or kind of actually transaction growth, sorry, and then to have our pricing be more or less aligned with inflation because we're cognizant that there will be some inflation in those core those core inputs. So that's sort of how we've always thought about that target.

And being that you're not running most of these restaurants that franchisees are running these. I'm just curious, conversations you have with franchisees their confidence, their partnership with you and would you say the overall health of the system and the franchisees kind of the alignment.

I think it's pretty good. We've spent a lot of time over the last few years I would say, even deepening our relationships with our franchisees. I think it's been core to the success that we've had, especially going through tough situations like we had at Burger King. And I think the alignment in that system is better than it's ever been. I think if you go back, there were a few structural things that we did that really helped that. When Patrick joined, we started publishing our franchisee profitability every year. We're one of very few companies that does that. And we also put our franchisees profitability in our own team's bonus targets. And that creates a lot of alignment, a lot of trust. People know that we're going to be publicly held accountable to what's happening with the franchisees' profitability. And our team's economic outcomes are tied to the franchisees' economic outcomes. And incentives aren't the only thing. There is a lot to the relationships and I think people also just -- after we did that, we've built trust through cycles. Folks work together through years in different campaigns and initiatives and they start to -- you earn trust over time through how you do things. And I think our teams have done a really nice job building the trust with their respective franchise system. So a lot of things coming together to generate, I think, really productive dynamics in our franchise networks. And as you all know who work in this business, that's one of the most important things you can possibly have in a fully franchised system. You need to be rowing in the same direction. People all need to be excited about the plan and the elements, and that's what allows you to deliver big results like we're seeing in some of our businesses today.

We often think of a franchise system is kind of a house of cards. So if you don't have a strong foundation, you could have all the best ideas in the world of corporate, but if the franchisees aren't executing it and aren't feeling good about the system, what's the point of that?

For sure, the more excited the franchise system and the restaurants, the managers, the team members are that makes stuff go -- and that's one of the -- I would tell you that's 1 of the magical things about some of the elevation work that we've done this year at Burger King. When our teams are more proud because they're serving a beautiful whopper that looks great. It's in a box. It's all -- they're serving nuggets that they know that they're better, they're more proud of the products that they're serving. That changes the interaction at the point of sale. And that's going to change your sales and the effectiveness of all these new initiatives we're doing. So I think really in these systems, you can't underestimate the power and the importance of bringing the whole system along.

Investors tend to focus a lot on comp or same-store sales growth. That tends to be a little bit more volatile, obviously, demonstrates the health of the business, so you want to focus on that. But what we often feel is underappreciated is the unit growth side of things, which is the more stable, you have pretty good line of sight for multiple years. And that actually comes up a lot on RBI because the unit growth has slowed down for a bit as a portfolio. Just wondering if you could talk about your confidence and reaccelerating that unit growth from '26 to '27 and ultimately getting back to, I believe, the 5% plus in '28. I mean, obviously, the consumer environment is challenged. I don't see you make a promise, but then it's hard when you're surprised by things. But what are you most excited about and your confidence to getting back to that 5% net unit growth.

Yes. If you look over the last few years at our net unit growth, the biggest win factor had really been BK China. As Sami referenced it earlier, we had a tough time there, and we ended up stepping in and now found a local partner. So that is -- if you kind of -- if you pull that out, the net unit growth was actually much more stable than you would see in the aggregate. So that's why we focus a little bit on what's going on with BK China. And I think the good news is now that we brought in a new partner, we're doing fantastic. We're doing much better than we had even hoped. And the same-store sales and the profitability of the restaurants in that overall business have improved considerably. And I think that really reinforces and our excitement and our local partner, CPE, their excitement about the trajectory of unit growth. And I think that will be the biggest single swing factor from last year to this year and future years. and we feel really good about it. We had cleaned up some restaurants. A couple of years ago, we're starting to get the benefit of lapping that. You're starting to see that in the sequential changes in the net unit growth. And as we look into the back half of this year and into the future years, now I think we can start to see the big ramp-up in net unit openings. I think we shared when we did our Investor Day that we expect to get to just over net new units in 2028, and we're feeling really good about that. And hopefully, we can go even further if we continue to see really good momentum in the business, but we've been very pleased with what we've seen so far there.

That's 200 net new in China and then in aggregate, by 2028, around 1,800 net new units across the business, which is around 5%.

I've got another 10 questions here, but I have 60 seconds. So I just wanted to ask about capital allocation. It's an asset-light model. It sounds like you're refranchising the almost 1,000 Burger King units, and that's going well. But you talked about at your Investor Day, a big topic was leverage easing getting out towards an investment-grade credit rating. How do you think about that progress on that future use of free cash in that regard?

Sure. Yes. Quickly on capital allocation. I think when we last spoke about it, and I think really for the last couple of years, we've had a pretty balanced capital allocation strategy where we've been able to invest in our brands, even with some of this more ramped up investment in Burger King with [indiscernible] we've still had ample cash flow to have a healthy and growing dividend. We've been able to actually take leverage down on the company, and we've been able to buy back shares. And I think our big announcement at our February Investor Day was really twofold. I think number one was our desire to keep deleveraging to get to between low and mid 3x net leverage, which solidly positions the company as an investment-grade company. And number two was to start using excess cash flow to repurchase shares. So on the investment grade side, we just think this is the best, deepest, most stable pools of capital, largest pools of capital really in the world. And from the rating agency side, we've had great conversations with all the rating agencies, S&P and Fitch already have our first lien debt as investment grade rated. And our corporate rating will kind of -- we're one notch away from being corporately investment grade with those two rating agencies. And you may have seen yesterday at Moody's upgraded us as well. So we made one step closer to investment grade with them. So we are making progress on this. We expect to be at these investment-grade leverage levels by 2028. And then sort of the second part of that is using excess cash flow and really returning the bulk of cash flow to shareholders. So we've had, I think, over 50 consecutive quarters of a growing dividend now and that's around a 60% payout ratio on our earnings. And the remainder of cash flow for this year, around $500 million is now going into repurchasing shares. We think it is a compelling time to be buying back our own shares. And especially as we see the path to simplification. And the business is simplifying, we anticipate that by the time we get to 2028, it's a really exciting time from a capital allocation perspective. You can imagine a world where we're continuing to grow earnings and EBITDA, we're investment grade and we can use excess leverage capacity to effectively return that to shareholders, keeping our dividend and payout in place and also with the share buyback. So it's a pretty exciting time to be a shareholder.

Yes. I think that's what has us, I think, very excited is this vision of where we can be in 2028, which is it's not that far away of getting back to this 5% unit growth, delivering consistent 3% plus same-store sales. So you get that organic kind of 8% AOI growth. So you've got consistent organic growth, distributing a lot of capital back to shareholders through both dividends and share repurchases that gives you a pretty compelling total shareholder return and a stock that has a very low beta. So it's really uncorrelated from a lot of other things. And then we think that's a pretty compelling vision of the world and a pretty compelling place to be invested.

Well, I mean, congratulations on this year thus far, I mean, you've been one of our best-performing names this year. And we are out of time, but we wanted to thank Restaurant Brands International for joining us. Hopefully, you get a chance to meet with management at some point during the day today. But we want to very much thank Josh and Sami and the team for joining us. And thank you all as well. Have a good day.

Thank you.