Restaurant Brands International Inc. Q3 FY2020 Earnings Call

Good morning, and welcome to the Restaurant Brands International Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Chris Brigleb, RBI’s Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International’s earnings call for the third quarter ended September 30, 2020. As a reminder, a live broadcast of this call may be accessed through the Investor Relations web page at investor.rbi.com, and a recording will be available for replay. Joining me on the call today are Restaurant Brands International’s CEO, José Cil; COO, Josh Kobza; and CFO, Matt Dunnigan. Today’s earnings call contains forward-looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings. In addition, this earnings call includes non-GAAP financial measures. Reconciliations of non-GAAP financial measures are included in the press release available on our website. Let’s quickly review the agenda for today’s call. José will start with some opening remarks on our performance during Q3 and our ongoing recovery from the COVID-19 pandemic before providing additional detail around our performance at Tim Hortons, Burger King and Popeyes. Josh will then provide an update on technology at RBI, and to conclude, Matt will review our financial results before opening the call up for Q&A. I’d now like to turn the call over to José.

Thanks, Chris, and good morning, everyone. Thank you for joining us on today’s call for the third quarter of 2020. I hope everyone is doing well and staying safe. Since the onset of the COVID-19 pandemic in March, we’ve mobilized behind a clear set of priorities to confront the crisis and our considerable progress behind these objectives over the past seven months has helped drive a significant recovery across our business. The recovery we’ve seen since March highlights the resilience of our three iconic brands and our network of strong and well-capitalized partners around the world. It’s also a testament to the incredibly hard work of our restaurant team members, franchisees and employees to reopen the restaurants and continue serving our guests through this difficult time. In the third quarter, our continued recovery reflects the strength of our platform and positioning, and we shared some of the key details around our performance in the pre-release we issued ahead of a refinancing earlier this month. Through September, we’ve reopened nearly 6,000 restaurants globally, since the peak of the crisis and as of the end of Q3 over 96% of our locations are open worldwide. As of September, substantially all of our restaurants are now open in North America, APAC and EMEA, and approximately 92% are open in Latin America. In our international markets were approximately 50% of our restaurants were closed at the peak of the crisis. We’ve seen a significant improvement in sales, as markets have reopened. At Burger King, which represents about 85% of our international restaurant footprint, comparable sales outside of the U.S. improved from negative 18% in Q2 to negative 10% in Q3 with September comparable sales improving into the negative mid single-digits. Given our steady progress on reopening and the recovery in sales we’ve seen across regions, in Q3 we generated over 94% of prior year consolidated system-wide sales, a significant sequential improvement versus the second quarter. As we noted in Q2, the strength of our off-premise channels, particularly in our home markets has been an important differentiator for our systems and a key component in our recovery...

Thanks, José, and good morning, everyone. This quarter, we continued to make important advances in building out our digital capabilities and deploying them across brands. With many elements of our technology infrastructure now in place and fully integrated, we’ve increased our focus on improving and personalizing our interactions with our guests through our digital platforms. We believe this type of tailored interaction will be an increasingly important differentiator as digital adoption continues to increase over time. One key example of our efforts around personalization ties into our initiative to upgrade our drive-thrus with the installation of outdoor digital menu boards. These updated menu boards offer a variety of advantages versus the legacy paper-based menu boards. Key among them is the ability to adjust displays in real time to account for anything from weather patterns to the basket of items a guest has just started to build while ordering. As José mentioned earlier, we’ve now installed outdoor digital menu boards in over 800 Tim Hortons drive-thrus across the U.S. and Canada. We’ve also installed them in over 1,500 Burger King drive-thrus across the U.S., where in Q3 we started to rollout our predictive selling technology designed by our Guest Intelligence team. Though it’s still early days, we’re really encouraged by the increases to check and overall sales we’ve seen at both brands...

Thanks, Josh, and good morning, everyone. Our results for the third quarter reflect a continued recovery across our business. Consolidated system-wide sales were approximately $8.3 billion representing a 5% decrease year-over-year, but a nearly 30% sequential increase versus the second quarter. In the third quarter, consolidated adjusted EBITDA was $561 million representing a nearly 6% decrease on an organic basis year-over-year, but an increase of over 55% versus the second quarter. In addition, our adjusted EBITDA growth was approximately in line with our system-wide sales growth in the third quarter. We did see a continued impact to adjusted EBITDA growth from our ad funds in Q3. Although, we saw a reversion of the trend we’ve called out in recent quarters. In Q3, growth in ad fund revenues exceeded growth and expenses by nearly $14 million resulting in an impact of approximately positive 2% on our consolidated organic adjusted EBITDA growth rate. Offsetting this impact was the shift we saw in sales mix across brands, reflecting a relatively greater decline in sales at Tims, where in addition to franchise royalties, we also generate EBITDA from property and supply chain activities...

We will now begin the question-and-answer session. Please go ahead.

Good morning, and thank you for the update. In terms of franchisee cash flow, I’m wondering what level of comp makes them whole either on a year-over-year basis? Or maybe what the prior plan was pre-pandemic, if you could just compare and contrast, what might be standalone margin or labor benefits, I’m thinking it’s less comp than we might think, and could even be a negative comp? And then you have a very committed pipeline for development. So when you think about that playing out what is likely to happen, first to return the 5% plus global BK growth? Or a possible acceleration for Popeyes into the double digit range? Thanks.

Nicole, thanks for the question. It’s Matt here. I think on the first part here, in terms of your question around franchisee profitability and cash flow, I think it’s really both sides. We’ve seen a good recovery in sales from the lows of the peak of the crisis. But that’s also been combined with some really strong operational adaptation by our franchisees, plus the work that we’ve done together with our franchisees and some of the support programs that were put in place in the early days. And I think, where we see ourselves now is, we’ve gotten back to pretty healthy average restaurant sales across our brands with strong unit economics. And then on top of this, there’s been some cash flow savings, as we mentioned earlier in the year...

Thanks and good morning. First, I had just a clarification, then a question. The clarification, José is, I think you gave some color on September for some of the brands, but could you just be clear what maybe the exit rate was for the Burger King U.S. business and the Tims Canada business, if there’s any way you want to kind of color what you think September – October looks like. And then the question I have is, how do – how are the menu board installations funded? Is that through the franchisees? Is it through the ad fund? Is it through – is there a corporate contribution? What’s the cost and how is that funded for those menu board installations?

John, thanks for the question. We’ll start with the second question on menu board installations. So Matt, you want to touch on that briefly? Yes, sure. John, so on the menu boards, as we mentioned we have a really big push and what we think is a critical and important strategic project for both BK and Tims with some big goals here. I think we’re already well underway as we talked about earlier this year and rolling out our ODMB’s across the Tims system. We’re at about 800. We have a few hundred more to go this year and we think we’ll complete the system sometime next year. We talked about that being about CAD120 million investment in the past which has been funded through the ad fund and access that they have in terms of liquidity from the float of gift card cash that exists there...

Yes, John, I think on the menu boards, we’re also moving pretty quickly here and very excited about rolling out ODMB’s across the system. We’ve been making good progress. I think Josh touched on that in the prepared remarks. We’ve had a good alignment with our partners around the business case and the opportunity of rolling out ODMB’s. And they’re excited about the project and aligned with the timeline...

Thanks, Matt. And John, on the first question as I discussed in my prepared remarks, we saw a strong quarter-over-quarter recovery for Tims in Canada from a low of about minus 30% in Q2 in same-store sales to about 14% negative in Q3. What we saw in Q3, the continuation of the factors we noted in Q2, obviously breakfast being the most impacted and that being an important high-frequency routine-based visit for the Tims business. We saw that continued to be an impact in the third quarter...

Good morning. I wanted to follow-up on the topic of net restaurant growth, and obviously, there’s lots of moving parts and unknown factors. But two things, I guess, do you expect closures are largely captured in 2020? Or do you think some of that spills beyond sort of typical run rate would spill into 2021? And also in 2021, do you expect, you’re going to be able to get back to sort of the previous expectations on opening pace, or should we think of that – think of it as more of a transition year and how might that vary in each brand's home market versus international? Thanks.

Yes, Mark. Thanks for the question. I think as we talked about this year, it was heavily impacted by COVID obviously, and we had a CapEx pause, and as part of that, we really wanted to focus with our partners on optimizing the portfolios and setting ourselves and our partners up with the best base to grow from as we move forward and get back to development...

Good morning. Thank you. José, thanks for the commentary on the Tim Hortons strategic plan to drive further improvement from here. Just wondering if it’s possible to talk a bit more about that recovery, and if you’re kind of able to isolate the COVID impact to some extent and talk about how the brand is positioned now, relative to the beginning of the year...

Thanks for the question, Dennis. Yes, look, I touched on in quite a bit of detail of our Q3 performance, I think despite some of the near-term challenges, we’re making significant progress behind the long-term initiatives that we laid out at the beginning of the year. As you’ll recall it the three areas we talked about and are focusing on quite intensely our quality of our core platforms, modernizing of – or modernization of the brand via technology at the drive-thru as well as through our loyalty program and then innovation in high impact products and platforms that support the core...

Thank you very much. I also had a question on Tims. You did talk a lot about the mobility, I guess. It’s sort of a two-part question one is, is there any risk that there are kind of longer-term implications in terms of work-from-home, that kind of thing, that’s a category that seems to be most likely to have a structural change, if there is one. And secondary to that, are there – do you contemplate things that you could do to mitigate the exposure? And as Matt pointed out, your EBITDA exposure is a lot higher than to some sale. So, whether it’s the real estate or the supply chain, ways to unlock value and then maybe return cash to shareholders, which I think is something that a lot of your shareholders would advocate.

Thanks for the question there, Sara. I think the dog had a question as well. Anyhow, I’ll touch on the first point and Matt, maybe you can touch on the second point. I think as it relates to mobility in Canada, it’s really – it’s hard to – I’m not in the business of predicting and projecting. So hard to tell how this is going to evolve in the coming quarters...

Yes. Chris, thanks for the question. Just with respect to the question of drive-through efficiency and capacity, certainly the shift to more off-premise and more volumes in the drive-through, where we’ve seen a ton of growth does put some pressure on the drive-through. And I think you’ve seen us have a lot of focus on operations and a lot of focus on simplicity of our offering and less innovation that allowed us to work with our franchisees a lot more on operations and speed in the drive-through...

Thanks. And thanks for your color on Tims. Just a follow-up to your answer to, I think it was Dennis Geiger’s question. You mentioned improving coffee share. Are you back to growing coffee share in Canada and is that translating to a broader share gain within Canadian quick service? Any color there would be helpful. And then when you do update drive-thrus at Tims and Burger King with better technology and the better AI-enabled functionality, not just the hardware, but also some of this new software...

David, thanks for the question. Yes. On the question of coffee share, as I mentioned, we’ve seen some progress over the last seven, eight months since the beginning of the year on coffee share. I think overall the pod gotten smaller given mobility and all the other issues that I touched on earlier. I think our brand being well positioned in the country with drive-thrus 2,700 – approximately 2,700 drive-thrus throughout the country, gives us the ability to continue to serve Canadians even in the most difficult of circumstances...

Hi, David. Good morning. And thanks for the question on the drive-thrus. So just a couple of thoughts on this one. I’d say that when you look holistically at the investments we’re making in the drive-thrus, so I would look at the combination of – especially with Burger King, where we’re doing a lot of conversions of single drive-thrus to double drive-thrus, we’re upgrading to digital menu boards...

This concludes our question-and-answer session. I would like to turn the conference back over to José Cil for any closing remarks.

Great. Thank you so much. We’ve made a lot of progress over the past seven months in our confidence. We’re advancing in all the right areas to emerge from the pandemic, well-positioned for the long-term. Thank you again for your time today. Take care and stay safe.

The conference has now concluded. Thank you for attending today’s presentation. And you may now disconnect.