Restaurant Brands International Inc. Q4 FY2020 Earnings Call

Good morning and welcome to the Restaurant Brands International Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chris Brigleb, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International’s earnings call for the fourth quarter ended December 31st, 2020. As a reminder, a live broadcast of this call may be accessed through the Investor Relations webpage at investor.rbi.com, and a recording will be available for replay.

Thanks, Chris and good morning everyone. Thank you for joining us on today's call for the fourth quarter and full year ended December 31st, 2020. I hope everyone is doing well and staying healthy. It's been almost a year since the start of the COVID-19 pandemic and our response to mobilize behind a clear set of priorities to confront the crisis. We've seen considerable progress in our objectives over the past year, and the recovery in our business 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 incredible hard work from our restaurant team members, franchisees, and employees to reopen restaurants and get back to safely serving delicious food and coffee to our guests. Burger King, Tim Hortons, and Popeyes are all leaders in their respective categories and offer high-quality craveable food and beverages combined with convenience that few can match. We also offer familiarity and comfort as well as great value, characteristics we've seen consumers gravitate towards in more trying times like those we face today. We've reopened nearly 6,000 restaurants globally since the peak of the crisis. And as of the end of Q4, over 96% of our restaurants were open worldwide with substantially all of our restaurants open in North America and APAC and approximately 94% open in EMEA and Latin America. Although, I would note that in regions like Canada, EMEA, and Latin America, many of our restaurants are open; but with continued limitations on dining rooms or walk-in traffic.

Thanks, Jose, and good morning, everyone. We continue to make significant progress this quarter on our goal to build an industry-leading technology platform and grow sales across digital channels. During Q4, digital sales in the U.S. represented 8% of total sales of Burger King and over 16% of total sales at Popeyes. And at Tim Hortons in Canada, digital sales represented 23% of total sales during the quarter. Digital sales in our home markets more than doubled versus a year ago. This continued momentum reinforces our belief that the wave of digital adoption we've seen in the wake of the pandemic has represented a step change in terms of how our guests interact with our brands and how we serve them going forward. Delivery remained a key driver of growth, with delivery sales at Burger King and Popeyes up over two times and three times in 2020 respectively versus 2019. At Tims, delivery sales are now up about 14 times versus 2019. We’ve achieved essentially full coverage across our brands in home markets, with approximately 10,000 restaurants offering the service via multiple aggregators and through our own apps. This year, we are bringing greater focus to our white-label delivery program, which allows our guests to order food directly through our own brand app or website with delivery fulfillment from third parties. In Q4, we made important advances in our Tims Rewards program as well. We've shared with you previously our focus on increasing registration amongst our guests, so that we can actively engage with them and offer tailored rewards. We successfully shifted to a fully registered program and are encouraged by positive trends we are seeing on registration. We are still very much in the early innings, but we are actively refining our features and segmentation so that over time, we'll be able to drive increased engagement and share more compelling offers with our guests. At Burger King, we've made great progress with the app, improving the user experience, increasing monthly active users, and we think a great next step for Burger King could be loyalty. We are currently testing a program in select markets, and we're excited about its potential for the brand in the long term. In our efforts to deliver an improved and more personalized experience to our guests, we continue to make significant progress with our initiative to upgrade our drive-thrus, with the installation of outdoor digital menu boards. We've now installed them in over 1,700 Tim Hortons drive-thrus across the U.S. and Canada, and over 1,900 Burger King drive-thrus in the U.S. and expect to have completed the considerable majority of the remaining installations by the end of this year. We will also install units at the majority of our Popeyes restaurants in 2021. Though it's still early days, we're encouraged by the impact on speed of service, as guests can more easily read our menus on the bright, easier-to-read screens. As a result of this and other improvements, we have seen meaningful increases in guest satisfaction in many of the locations where we brought this new and improved experience. And we've also seen an uplift in check in locations where our new predictive selling technology has been implemented. As we look into 2021 and beyond, we'll be focused on integrating the mobile experience with the drive-thru and our menu boards across our brands. We have been on an exciting digital journey to become a leader in our industry, and we have attracted strong digital and technology talent to join our global team and work on these strategic projects. We've made investments in e-commerce platforms that now support both home markets and an increasing number of our international markets. Intelligent selling technology is being rolled out across a rapidly expanding number of our drive-thrus and other digital consumer experiences as well. And we will also be investing to improve restaurant operating systems that drive efficiency and guest satisfaction as well as rapid integration with our e-commerce channels. I look forward to continuing to provide updates on our progress in the coming quarters and years, and we'll now turn things over to Matt to provide additional detail around our financial results.

Thanks Josh and thanks to everyone on the call for joining this morning. In 2020, our full year consolidated system-wide sales were approximately $30.7 billion, representing a 9% decrease year-over-year and reflecting the impact of COVID-19 on our results across regions. Consolidated adjusted EBITDA was $1.864 billion, representing a nearly 18% organic decrease year-over-year. In the fourth quarter, consolidated system-wide sales decreased 8% to about $8.2 billion, while consolidated adjusted EBITDA was just over $500 million, representing a 20% organic decrease year-over-year. Historically, our consolidated adjusted EBITDA growth rate has been closer to our system-wide sales growth. However, in 2020, we saw increased volatility related to the impacts of the pandemic as well as the steps we've taken to reinforce our plans by investing behind our people. More specifically, in the fourth quarter, there were several factors that contributed to the difference in our consolidated growth rates. First, our year-over-year performance across all three brands reflected proactive G&A investments in our digital and technology initiatives as well as adding strong new hires in key areas of the business like marketing, field operations, and technology. As we've discussed, building out best-in-class technology assets is a top strategic priority, which we believe will unlock exciting new avenues for growth over time. Together, these investments, combined with some year-over-year timing shifts in G&A, affected our growth rate by about negative 3% in the fourth quarter. Looking ahead, we expect to continue investing across these key areas of our business in 2021, including the important technology initiatives Josh just mentioned. And while there were some timing impacts in Q4 that will roll off, we think that overall, the annualized level for the quarter is fairly representative of capturing the investments we plan to make this year.

Thanks for the question, Chris. It's important to highlight the development of our business at RBI and our three brands. Our franchisees, whether they have been with us for decades or just a few years, are focused on creating value for themselves, their families, and their investors. They have confidence in our brands and prioritize being customer-centric. There is a strong demand for our offerings in the food and beverage sector, including chicken, coffee, and burgers. Our franchisees recognize the various opportunities in their markets and understand the potential for growth through investment. This isn't simply based on contracts or promises, but on the genuine opportunities we see together. Although the industry has faced significant challenges, particularly with independent and smaller chains struggling, real estate opportunities have become more appealing. Each of our brands has strong and compelling unit economics in both domestic and international markets, which has led to considerable interest from our franchise partners in these opportunities. We closely monitor the development processes of our franchisees and collaborate with them to ensure they have the necessary support and resources for their plans. This work is ongoing, and while it is a long-term effort, we have been actively engaging with our partners since before the pandemic to strengthen their capital structures and teams. We've also been exploring new formats and off-premise capabilities, ensuring we locate our stores in urban areas. The fact that we managed to grow and open new high-demand stores even during the peak of the pandemic in 2020 gives us confidence that we can return to our performance levels from 2017 to 2019 this year and continue toward our goal of reaching 40,000 locations, a milestone we set for ourselves in May 2019.

Thank you and good morning. Thanks for the great update. I have a lot of questions. I'll ask just one, and I'll ask it on digital. So we now are starting to see brands at scale flex pricing power in the marketplace. I'm thinking about Chipotle, let's say, last week talking about 13%, right, in the marketplace. And then, holding price steady to really have a value opportunity when you go direct to the app, on the brand app. So what is your point of view in terms of the ability to price your flexing power, now that you're going to have more digital tools? And is it different by brand? Thank you.

Hey, Nicole, thanks for the question. I think on pricing as it relates to digital, we continue to be very surgical there with our franchisees in different markets around North America and around the globe. Pricing through our app and white label, we think we have some pricing power there, certainly, and we've tested various different opportunities to look at pricing as a driver of transactions through our mobile app versus through third-party aggregators. I think it's an important element that our teams are working closely with our franchisees on, and we continue to test and adjust to see what can drive more consumer demand, while at the same time addressing our owner profitability. Josh, you might have something additional to add there?

Yes. Hi, Nicole. Good morning. I think, just to add to Jose's comments. One of the other things that we think is interesting on, as we think about developing further some of our own apps is the value that we can deliver to our guests on our apps through our loyalty programs potentially. One of the things that we mentioned this morning is that in addition to our loyalty program, we have through Tims Rewards that we're testing a loyalty program at Burger King. And I think that's just another way to think about the value that we can deliver on our own platforms when our guests interact with us on bk.com or via the app. And whether they're ordering and picking up at the drive-thru or at the restaurant or ordering through a white-label delivery offer, we think we can deliver a great experience and a lot of value to our guests in that channel.

Hi. Thanks for taking the question. So, I wanted to return to the topic of development, and thanks for all the details so far. So, could you talk a little bit more about what gives you confidence in the reacceleration of development in 2021? And I know you mentioned strong unit economics, but is there anything else you would point to specifically as it relates to growth this year? And then any detail on which markets specifically you expect to see a reacceleration of growth? That would be really helpful.

Jose, I appreciate the question. It's crucial to highlight that in our business and at RBI with our three strong brands, franchisees worldwide, whether they have been with us for many years or just a few, are focused on creating value for themselves, their families, and their investors. The positive aspect is their confidence in our brands and their commitment to being customer-centric. There is significant demand for our food and beverage offerings in chicken, coffee, and burgers. They also recognize numerous opportunities in their markets and understand the importance of investing for growth. We anticipate a reacceleration of growth, especially given the positive signals from our franchisees and the bottled-up consumer demand.

Thank you. Good morning. I'm curious about the net unit growth and how the inputs for that in 2021 were influenced by 2020. I'm particularly interested in understanding this by region, as it seems you may have higher franchise revenue in the U.S. compared to regions like Asia Pacific. If that is the case, we should consider the closure rates in those areas versus the U.S. Could you provide any insights on this and its potential impact on the model for 2021? Thanks.

Thank you for the question, David. We provided some details in the prepared remarks regarding openings and closures, indicating that by 2020, we had essentially reached the same restaurant count as we did in 2019. We encountered a mix of closures and used the situation to optimize our portfolio in various markets worldwide, both internationally and domestically. We had already initiated a closure program at Burger King in the U.S., which we mentioned in 2018 and 2019, and we continued to accelerate that in 2020. Additionally, we executed some opportunistic closures in international markets, including Europe, Asia, and Latin America. This approach was crucial in achieving a flat net restaurant growth number for 2020.

Yes, I think that all makes sense. It's a good summary. Jose mentioned the Burger King U.S. closures. We discussed that at our Investor Day in 2019. We were already working through that program and have continued to make great progress this year. Overall, we feel really good about our execution of the proactive closure plan we talked about over the past couple of quarters.

Thanks and good morning. Regarding the digital menu boards, could you share more about the lift you're seeing? You mentioned a check benefit; could you specify what that has been for the two brands? If there’s a throughput benefit, could you elaborate on that as well? Additionally, in the Tims business, do these impacts influence the distribution business in terms of revenue and potential margin? I know this might seem a bit demanding, but concerning the G&A commentary, I want to clarify that despite the changes in the fourth quarter, is that the appropriate run rate to consider for 2021? Or will there be adjustments that indicate a lower run rate? I just want to ensure I understand your approach to G&A in 2021. Thank you.

Hey, John. Good morning. It's Josh. Thanks for the question on the ODMBs. Yes, we're really pleased with the progress so far, especially in Burger King in the U.S. and Tims in U.S. and Canada and we've made a lot of progress over the past year or so in the rollout of the physical hardware and software and getting to over 3,000 locations so far. And so, I think we feel really good about sort of the pace of rollout and the quality of our installations and it gives us a lot of confidence in our ability to continue that program and execute on the time line that we've set out there.

Hi John. Thanks for the question. Just maybe to provide a little bit more color on my comments around G&A. I talked through the impact that it had in the quarter of about a 3% drag on EBITDA. And I think the impact is roughly split between the items that I called out versus some timing and non-recurring items in the quarter. And the comment that I was making about the annualized level is that because we are continuing to invest behind some of these important initiatives that we talked about, especially on the tech and digital side, we will continue to grow our investments there to drive our plan for this year and beyond to drive sales generating and topline growth.

Good morning and thank you for the question. José and the team, I appreciate your insights on the Tims' performance for the quarter. The flat drive-thru performance at various times and the strong performance of comparable US stores clearly indicates the impact of COVID. José, could you elaborate on what these factors suggest about Tims' recovery this year as restrictions lift and mobility improves? Additionally, considering the new menu items, loyalty programs, and customer experience initiatives you mentioned, how do you view the recovery? You also mentioned gaining market share during the year; how do you see that developing as we progress through 2021? Thank you.

Hi Dennis. Thanks for the question. Look, there were some encouraging signs in Q4 for Tims. Our December exit rate was high single-digit negative, which is the best performance we've seen since the onset of COVID. Obviously, we're not doing cartwheels on that, but we are encouraged by the performance and the improvement sequentially that we've seen in the business. We saw the drive-thru business perform better and continue to perform better throughout the quarter. And it got to about flat in various points of the fourth quarter. And drive-thru continues. We have about two-thirds of our business in drive-thrus in Canada and we've seen continued momentum there from the beginning of the pandemic through the fourth quarter, and that momentum continues today.

Thanks. Good morning. I have a question regarding the Burger King U.S. business. The U.S. sales performance for Burger King has shown a significant underperformance compared to the industry and major competitors over the last couple of quarters. I understand that January is showing improvements along with the industry. Can you share your specific insights on the reasons for this performance gap seen in the Burger King U.S. business in relation to the peer group? Additionally, what do you believe is the key strategy needed in 2021 to narrow this gap or potentially turn the situation around for better performance?

Thank you for the question, Brian. I believe the root cause of our weaker performance in the Burger King U.S. business compared to our expectations has been pretty clear over the past few quarters. The main issue lies in our promotional strategy for both value and new products. Specifically, our approach to value has been inconsistent, which is crucial in the quick-service restaurant sector, especially in fast food hamburgers. We've experienced inconsistency in how we promote value, relying heavily on bundling and various promotional tactics like paper coupons, which haven't connected with our customers as effectively as we hoped. Furthermore, there have been lapses in our value offerings, resulting in a lack of a dependable everyday value proposition that our consumers could trust for a significant period.

Hi, this is Leo for Sara. Thanks for taking the question. I would like to ask about Tims. As we look to boost comparable sales in the future, now that the main coffee offering has improved, what potential do you see for specialty beverages like espresso in Canada? Additionally, what have you observed regarding plant-based beverages, and what does that indicate about Tims customers' acceptance of new beverage offerings? Thank you.

Thank you for the question. Yes, we believe that the definition of coffee is expanding beyond just brewed coffee. We've made significant investments in various initiatives related to our core offering over the past year. I've mentioned our fresh brewers and water filtration along with dark roasts, which are crucial for getting the core right. Additionally, we've broadened our offerings with dairy alternatives over the past year, including almond milk and skim milk, which help us reach a wider range of customers and allow them to enjoy our Tims coffee in their preferred way. These have been important developments we've made recently. Great. Thanks so much, Rocco. We've made a lot of progress in 2020, a year which none of us expected. But we're even more excited looking forward in 2021 and beyond and believe our three brands are on the right path to emerge from the crisis even stronger. We're excited to get back to growth this year with our partners around the world and look forward to sharing more with you as the year progresses. Thank you again for your time today. Stay safe and stay healthy. Thanks everyone.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.