Restaurant Brands International Inc. Q2 FY2022 Earnings Call

Good morning, and welcome to the Restaurant Brands International Second Quarter 2022 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’d now like to turn the conference over to Stephen Lichtner, 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 second quarter ended June 30, 2022. As a reminder, a live broadcast of this call may be accessed through the Investor Relations web page at rbi.com/investors, 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. Please note that consolidated growth metrics discussed during the prepared remarks, including consolidated system-wide sales growth, net restaurant growth, and organic adjusted EBITDA growth, exclude results from Firehouse Subs, which we acquired on December 15, 2021, to reflect comparable year-over-year growth figures. And now, I'll turn the call over to José.

Thanks, Stephen. And good morning, everyone. Thank you for joining us on today's call to discuss our results for the second quarter of 2022. Before jumping into our results, I'd like to give some perspective on what we are seeing from a macroeconomic standpoint. We recognize the uncertainty and at times difficult environment that we are facing as a result of ongoing commodity and wage inflation, rising interest rates, and broader macro uncertainties impacting our industry and many others. While many of these pressures are out of our control, we have been focused on working closely with our franchisees to take thoughtful action to alleviate those within our and our franchisees' control. Together, we're strategically placing prices across each of our brands, always being mindful of traffic and the guest experience. And we continue to leverage our scale to assist where we can. We also know our franchisees' team members are key assets in delivering a great guest experience, which is why we are providing franchisees with tools and practices for staffing and retention, updated easy-to-follow training resources, and simplified back-of-house processes where possible. These and many other operational, labor, and procurement initiatives are important steps we're taking to help offset macro pressures that are impacting franchisee profitability. I've had the pleasure of getting back out on the road more and more, and have had a chance to meet with a number of our franchisees across the U.S., Canada, and Europe. Throughout my travels, it's been incredible to see our franchisees' hard work, their energy, and focus to deliver on our big dream to build the most loved Restaurant Brands in the world. I'm even more encouraged to see this translate into our strong results for the quarter with consolidated comparable sales up 9% year-over-year, 14% growth in system-wide sales, and 9% organic adjusted EBITDA growth. These results were primarily driven by a strong acceleration in sales growth at Tim Hortons Canada, sustained momentum across many of our international markets, steady improvement at Burger King U.S., continued growth in digital sales, and development strength at Popeyes. We're incredibly proud of the work our team and our franchisees have done to date. And while there is still a lot more to do, we feel our strong portfolio of diversified global brands and resilient business model are well-positioned as we look ahead. We also know many of you are excited to hear more about our plans for Burger King U.S., including investments we plan to make alongside our franchisees to accelerate growth, and we are looking forward to sharing details with you after we share the plan with our Burger King U.S. franchisees at our upcoming National Franchise Convention in early September. Turning to a few highlights from the quarter, during the second quarter, we grew consolidated year-over-year comparable sales by 9% driven by 14% comparable sales at Tim Hortons Canada, driving our Tim Canada sales above 2019 levels for the quarter and 18% comparable sales growth in our Burger King International business. At Burger King U.S., we continue to narrow the gap versus industry performance this quarter, and across Popeyes and Firehouse home markets, we saw steady sales on top of the transformative last few years. We continue to drive growth through our digital channels this quarter as well with global digital sales up double digits year-over-year to over $3 billion, reaching roughly one-third of consolidated system-wide sales. We also saw good development progress within the second quarter and have a clear path to accelerate unit growth relative to 2021 levels. Popeyes made notable development advancements in this quarter and remains on track to deliver a record year. This is an example of our strengthening development mix as our growth at Popeyes and Tim Hortons accelerates, while our development engine at Burger King ramps back up to historical levels. To put some context around this, our combined Tim Hortons and Popeyes footprint outside home markets has reached nearly 2,500 restaurants, up from approximately 1,500 restaurants just five years ago and grew over 20% year-over-year in the second quarter. In parallel, we're building development capabilities at Firehouse in the U.S. and globally to drive another pillar of growth in the coming years. The combination of comparable sales and net restaurant growth helped drive Q2 system-wide sales to $10.1 billion, up 14% year-over-year, excluding Firehouse Subs, and organic adjusted EBITDA growth of 9%, which included a negative 2% or $11 million impact on adjusted EBITDA growth related to Russia. These results, coupled with our fully franchised cash-generative business model, allowed us to continue driving strong shareholder returns. In the second quarter, we delivered over $400 million of capital through a combination of share repurchases and/or dividends. Before diving into brand results for the quarter, I want to touch on sustainability, which continues to be central to our goal of operating and building the most loved Restaurant Brands in the world. We recently released our second annual Restaurant Brands for Good year-end review report, which highlights the achievements our brands made across sustainability in 2021. I encourage you all to take a look and learn more about the progress we made across our three pillars: food, planet, and people and communities. I'm confident that what we achieved in 2021 will make a lasting difference in the world and I'm excited to continue the positive momentum on sustainability initiatives across our brands. Turning to our brand performance. We'll start with Tim Hortons Canada. During our first-ever Tim Hortons Canada Investor Day earlier this year, Axel and our Tim Hortons Canada leadership team walked through the journey that brand has taken since 2019 that has allowed us to transition to Phase 2 of our Back to Basics plan, which is focused on accelerating growth in the coming years. On this front, we were pleased with the progress we made accelerating sales growth during the quarter, with comparable sales of 14% year-over-year and positive 2% versus 2019 for the quarter. This performance was a result of continued improvements in our core breakfast, baked goods and coffee offerings, extensions to our PM food and cold beverage lineup, and our second collaboration with Justin Bieber, all of which have been aided by increased mobility and targeted strategic pricing initiatives. It's clear that the groundwork we laid during Phase 1 of our Back to Basics plan is paying off with guests as they return to Tims following the easing of restrictions in late Q1. Sales during the second quarter sequentially improved versus 2019 levels across all dayparts, formats, and regions. All product categories, excluding hot beverage, were also positive versus 2019 levels during the second quarter with our movement into high growth categories such as cold beverage and PM food fully offsetting the headwind from hot beverage sales. Our extension into the higher ticket, higher growth categories with PM food and cold beverage continues to gain traction. In May, we introduced one of our loaded platforms which is the Loaded Wraps initially available in cilantro lime and Habanero chicken flavors, and we are encouraged by the early results. To build on this exciting platform on June 15, we introduced Loaded Bowls, prepared fresh to order, filled with hearty grains, tasty chicken, and mouthwatering sauces, which are also driving incremental sales to PM dayparts. Not only has the loaded platform delivered strong sales, it's also benefited our customer mix. These new PM menu items have allowed us to drive improvements in preference measures for Tims with younger guests and have reengaged existing guests that historically frequent attendance for breakfast and snacks only. At our Investor Day, we also outlined our goal of being guests' most sought after option for the category: hot, cold, and specialty. During the quarter, we made further progress against this goal innovating on our high-quality Cold Brew platform with a new roasted hazelnut cold brew, which helped grow cold beverages by double digits versus 2019. Another valuable lever to accelerate growth is modernizing our brand. This quarter, we introduced the sequel to our collaboration with Justin Bieber with the relaunch of our fan favorite Tim Biebs. Tim Biebs was designed and developed by Justin himself, along with the addition of the French Vanilla Biebs Brew, another delicious innovation on our Cold Brew platform. The partnership helped generate incremental visits from existing guests while also attracting a younger, more digitally inclined guest. We remain very focused on our digital journey at Tims, which already generates over one-third of its sales through digital channels, illustrating the growing importance of technology to the brand and its guests. We continue to make progress enhancing our capabilities and driving more guests to our platforms, both in-store and from home, which resulted in a double-digit year-over-year percent increase in digital sales during the quarter. I'm very proud to see the combined efforts with our restaurant owners and how they're resonating with guests. That said, we're still early in the journey and look forward to continuing to accelerate growth through the second phase of our Back to Basics plan in the quarters and years ahead. Turning now to Burger King U.S. We made encouraging progress in the quarter, narrowing the comparable sales gap to peers while working closely with franchisees to solidify our multi-year plan to reclaim the flame. The team is gearing up for an important milestone in early September at our National Franchise Convention, where we will discuss the plan and investments we expect to make with our franchisees to springboard compelling long-term growth at Burger King U.S. As I mentioned before, we look forward to sharing the details with all of you as we come out of convention, aligned with our system on the path forward to reclaim the brand. In the meantime, I'm pleased with the important progress we've made across a number of our near-term initiatives to enhance the guest experience and drive long-term sustainable and profitable sales growth. During the quarter, we saw notable improvements in key operational metrics, steady progress across our digital capabilities, and consistent execution of our marketing plan. On operations, you heard us stress the importance of precision and creating a culture of operational excellence at Burger King U.S. We continue to see the benefit of recent menu and process simplification efforts that are driving efficiencies in the restaurants, resulting in favorable operational outcomes and an improved guest experience without a near-term negative impact on sales related to product reduction. We're also focused on exploring ways to assist our franchisees as they navigate through ongoing pressures as a result of the current operating environment. We've already taken a number of steps to bolster franchisee support, including developing and rolling out an employee value proposition, improving our feedback framework with the introduction of our franchisee success system online dashboard and expanding our field teams. I am pleased to see the franchisees actively utilizing the employee value proposition guidebook and implementing best practices into their hiring and retention routines, both of which we believe have helped drive a quarter-over-quarter increase in average hours of operation. In addition, our franchisee success system operational framework is providing our franchisees with valuable insights into their performance by comparing key restaurant-level metrics to the system average as well as the top 10% of the operators. Once an area of opportunity has been identified, whether order accuracy, speed of service, or training related, among others, our expanded field team is then able to develop an action plan to assist franchisees in their efforts to improve. Collectively, these initiatives are driving improvements in guest satisfaction, which has improved sequentially over the last four quarters. As a reminder, we have a significant growth opportunity from improving this metric in particular as we've seen a clear positive correlation between guest satisfaction and higher comparable sales. Burger King's digital progress is steadily advancing. Our mobile app with white label delivery capabilities and loyalty through Royal Perks is getting faster through improvements our engineers have made. We're learning more from digital guest interactions and we're finding new ways to drive engagement and platform adoption through integrated marketing campaigns. Take, for example, the Frequent Fry'ers campaign we ran during the second quarter where we offered members the option of free fries every week for the rest of the year. The campaign has proven to be incremental to digital sales since its launch and stands as an exciting step in expanding our regional audience. Finally, in marketing, we're focusing our media firepower on fewer, well-tested, high-quality, and high-impact messages, and we've seen our purposeful shift in this area begin to resonate with guests. And while still early days, we're actively working with our new creative agency on ways to modernize our brand positioning and communications to further engage and connect with today's guests. Now to briefly touch on our results for the second quarter, we saw a 0.4% increase in comparable sales in the quarter, driven by a net benefit from our focus on core offers, including removing the Whopper from the core discount during the first quarter, a strong value platform with a $5 Your Way meal and a positive contribution from digital and delivery channels. These benefits were partially offset by the impact of lapping stimulus in April and May of 2021. Our efforts this quarter helped sequentially narrow the comparable sales gap to our peers, a reflection of the hard work of the Burger King U.S. team, our franchisees, and restaurant team members. I look forward to seeing continued progress across the business in the coming months and to sharing updates on our long-term plan with all of you in September. Now turning to a valuable growth engine for the Burger King brand, the International business, which contributed 60% of the brand's global system-wide sales and over 55% of adjusted EBITDA during the second quarter. Burger King's International business continued to gain significant traction across key global markets and delivered another quarter of robust system-wide sales growth expanding 28% and adding about $600 million of sales year-over-year. These results were driven by strong momentum in comparable sales at 18% year-over-year, coupled with solid net unit growth and strengthening pipelines. Since the last quarter of 2021, with the exception of lockdown challenges faced in China, our largest international markets have performed well beyond pre-pandemic sales levels. And during the second quarter, we saw the trend continue; and in some cases, accelerate. Four of our largest markets, France, Spain, Germany, and Brazil generated double-digit comparable sales growth and collectively contributed over $1.2 billion to system-wide sales during the quarter. Burger King's strong brand positioning has served as an incremental growth driver above and beyond the macro recovery many of our markets are currently experiencing. Guests in markets like France, Spain, Germany, the UK, and Switzerland ranked Burger King in their top three preferences. On top of that, our guests in France, Germany, the UK, and Italy consider Burger King as their top QSR preference. We attribute the strong brand affinity we've established to the hard work our teams and our franchisees have done to deliver a memorable and enjoyable guest experience. Our modern brand positioning has also contributed to fostering a positive experience for guests. We have strong digital capabilities internationally with many of our largest markets generating over 50% of sales through digital channels. Digital sales are a win-win for franchisees, our business, and guests, driving sales with a measurable uplift in check, higher margins per ticket for franchisees, improved operations and a more seamless and better guest experience. We expect our digital sales to continue to grow over time given the significant development runway we see in key international markets. We have an incredible business internationally and one that we expect will continue to be a powerful growth driver for the brand for the years to come. Turning now to Popeyes, another exciting long-term growth engine for our business. Popeyes' meaningful transformation over the last few years, with U.S. comparable sales of 25% versus 2019 levels, continues to drive interest from franchisees to bring our delicious Louisiana style chicken to more guests in the U.S. and around the world. The brand is on track to accelerate off a record 2021 development year with the majority of openings in North America being drive-thru locations that typically have average restaurant sales levels over 10% higher than the system average. Outside of North America, Popeyes is making notable progress across existing markets like Turkey and Spain, and we're seeing traction in new markets like India and the UK. This strong development momentum translated into net restaurant growth of over 8% for the second quarter and helped drive system-wide sales growth of nearly 10%, including 6% in the U.S. Popeyes U.S. comparable sales were relatively flat after three years of incredible growth. This quarter, we also celebrated the brand's 50th anniversary in June with memorable activations such as our 50 Years of Love campaign and thoughtful and relevant promotions, including offering 2-piece bone-in chicken for the original 1972 price of $0.59 if ordered through Popeyes' digital channel. Making Popeyes more convenient for guests is an important priority for the brand. Aside from continued net restaurant expansion, the team is also focused on enhancing the brand's digital presence to make it more accessible to guests across service modes and platforms. We were pleased to see a positive contribution from these efforts during the quarter with delivery sales increasing 8% year-over-year on top of a robust 27% increase in the prior year period and helping to drive digital sales penetration to 18%. Looking ahead, we will continue to grow by building convenience through restaurant development and digital capabilities while driving guest service improvements. Popeyes is a brand with a rich culture and history offering delicious high-quality food and has an exciting long-term growth story ahead. And finally, Firehouse Subs sustained all-time high average unit volumes of approximately $920,000 on a trailing 12-month basis, up from a consistent level of approximately $700,000 in 2020 and the years leading up to it. This continued strength has been driven by notable outperformance from new units, generating higher average unit volumes than the system average, giving us more confidence than ever in the exciting growth opportunity ahead for this unique brand. In June, I had the pleasure of attending my first Firehouse Subs convention or Family Reunion as the Firehouse Subs team calls them and met over 300 of our franchisees and their families that have helped make Firehouse Subs the success it is today. We had the opportunity to introduce franchisees to our compelling growth mindset and algorithm at RBI, and I was very pleased to see the message embraced and the team energized to deliver. It was clear from our time together that we have a passionate and dedicated group of franchisees at Firehouse Subs, committed to their public safety mission and dedicated to delivering on our big dream to build the most loved Restaurant Brands in the world. For the second quarter, Firehouse Subs saw a net unit growth of 2.5%, which offset softer comparable sales of approximately 1%, resulting in a 2% year-over-year increase in system-wide sales. The second quarter was a tough comp to the prior year period, which benefited from stimulus and where Firehouse posted an incredibly strong comp sales performance of 31%. The team worked to offset this by creative traffic-driving initiatives such as May's Name of the Day promotion to keep Firehouse Subs top of mind. Looking ahead, we're focused on accelerating the brand's development and continuing to enhance Firehouse Subs digital capabilities, specifically as it relates to enhancing the loyalty program and e-commerce infrastructure. We're excited to keep you updated on our progress in the months ahead. As you can see, it was an action-packed and exciting quarter where we made solid progress across all brands and in all regions. Now I'd like to turn it over to Josh to walk you through a quick update on our progress on the digital and technology fronts.

Thanks, José, and good morning, everyone. I'd like to share a few highlights from the quarter that show consistent progress against our goal of enhancing guest experience through technology. Results this quarter show us guests are using digital channels more than ever. Home market digital sales were collectively up in the low double digits year-over-year with the international business well above that. This growth spans across channels, notably delivery, loyalty, and mobile order and pay. We're seeing benefits from collaboration between our marketing and digital teams. With exclusive online offers such as the Frequent Fry'ers campaign at Burger King, performance enhancements we've made to our e-commerce platforms that reduce the time it takes to place an order and important reliability upgrades to restaurant technology that help create an overall seamless experience for guests and our team members. With the common tech stack powering our mobile apps and other e-commerce platforms, we're able to take features and performance upgrades and deploy them across our brands with ease. For example, this quarter, we moved the Popeyes app to a more modern code base, improving loading times by up to 52% thus far. A statistic importantly is highly correlated to app usage and orders. We're planning to roll out similar speed upgrades to Burger King and Tim Hortons in the coming months. Restaurant technology is increasingly important as restaurants have evolved from essentially only having point-of-sales hardware to working with multiple delivery aggregators having indoor and outdoor digital menu boards, mobile app integration, and likely more technology touch points in the future. We want all of this to work seamlessly for our guests and for team members in the restaurant so they can focus on excellent service. One of our larger ongoing efforts in this area relates to standardizing key elements of in-restaurant technology. This quarter, we made progress rolling out a common network provider in our home markets. Fast and stable networks mean more uptime for all elements of our technology. We also advanced efforts to ensure we have modern POS hardware and software across our system, enabling greater agility when adjusting our menus, prices, and content. These are just two examples of the many things our technology team is working on to set ourselves up to do much more in the future. While we are making progress in guests and restaurant technology, we're thinking about how we can evolve our restaurant designs to facilitate digital orders and unlock more throughput as more transactions come through the drive-thru and other off-premise channels. We have restaurants piloting a number of these format innovation tests around the world. We're testing express drive-thru lanes for mobile order and pickup, tandem drive-thrus with two sets of menu boards and order points in a single lane, and restaurants with above-lane conveyor systems, allowing two cars to receive their orders at the same time. With delivery growing significantly each year, the experience of delivery drivers has become an increasingly large priority as well. So we're also testing walk-up windows that can reduce wait times for both delivery drivers and guests who place mobile orders. All of these features have speed of service in mind, which is an important part of their overall experience at our brands. While I wouldn't expect these innovations in all of our restaurants in the near future, it's important for us to continuously test new concepts that could be deployed at scale in the coming years.

Thanks, Josh, and good morning, everyone. For the second quarter, excluding Firehouse, our global system-wide sales grew 14% to $9.8 billion, and our adjusted EBITDA increased about 9% organically to $618 million. As José mentioned, Russia had an approximately $11 million negative impact on our year-over-year adjusted EBITDA, which was about a negative 2% headwind. Beyond this, our increased segment G&A of $89 million, excluding Firehouse, reduced our adjusted EBITDA growth rate an additional 2% as we continue to invest in our teams and add talent in key areas such as operations and digital. We believe this is an important piece of the approach we're taking to support our brands and deliver better multichannel experiences to our guests, which we view as a key growth unlock for the future. As mentioned over the past few quarters, we'll continue to be proactive on this front and expect to see a modest ramp in core segment G&A in the back half of the year. Before turning to EPS, I'd like to touch on the current inflationary environment. As José mentioned, similar to others, during the quarter, we saw continued commodity volatility and elevated levels of inflation. We've been working closely with each of our systems to drive sales including by taking a measured approach to pricing to offset some of these pressures as well as identifying other restaurant profitability initiatives through our focus and investment in our field teams. Inflation has also had a flow-through impact on our P&L, increasing both our sales and cost of sales line items as market increases in commodity costs are generally passed through. This grossing up of commodity costs in both sales and cost of sales has had the effect of diluting our percentage margins. However, the underlying health of this business is ultimately driven by our progress in driving sales and volumes at Tim Hortons in Canada, which we continue to see improve based on the strong execution and progress of our Back to Basics plan. Shifting to EPS. Our second quarter adjusted earnings per share was $0.82 compared to $0.77 last year, representing an increase of approximately 6%. There were also factors in the quarter that affected this growth rate, including an unfavorable foreign exchange rate impact, which reduced our growth by approximately 4 points and a higher adjusted effective tax rate as we lapped a discrete benefit from Q2 of last year, which reduced our growth rate by an additional 8 points. Excluding these two factors, our organic adjusted earnings per share growth was approximately 19% year-over-year. It is also worth noting that equity-based compensation increased year-over-year to $32 million. As a reminder, in 2020, we changed our equity-based compensation framework to shift from five-year to three and four-year vesting. And this process of shifting to the new framework has contributed to the increase in our equity-based compensation over the past few quarters. In addition, for comparability purposes, the prior year period was also reduced by discrete forfeitures of long-term incentives. Turning to our cash flow and capital structure. During the quarter, we generated $417 million in free cash flow, allowing us to execute on key aspects of our capital allocation policy, including making important investments in our business and returning over $400 million of capital to shareholders, including through our industry-leading dividend, which we declared again for Q3 at $0.54 per common share in unit, consistent with our previously announced target of $2.16 for the full year of 2022. In addition, during the second quarter, we repurchased and retired approximately 3.2 million shares of our common stock for $165 million. We also ended the quarter with a liquidity position of $1.8 billion, including over $800 million of cash, and saw our net leverage sequentially decline to 5.4x. As we look forward to the second half, we are now starting to see strong sales momentum from Phase 2 of our Back to Basics plan at Tim Hortons Canada. At the same time, as our international business continues to fire on all cylinders, our digital capabilities accelerate and our global unit growth picks up steam across all brands. While we are pleased with the near-term progress we've made at Burger King U.S. to stabilize the business and continue closing the gap to peers, our top priority is finalizing the long-term plan with our system and locking in the important strategic investments we will make together over the next few years to accelerate our growth. As José mentioned, we're looking forward to sharing the details of this plan with you all in September following our Burger King U.S. convention. And with that, I'd like to thank everyone again for your support and for joining us this morning. We'll now open the line for questions.

Our first question is from John Glass of Morgan Stanley.

I'm curious about development, particularly at the Burger King brand and what you think the unlock is, understanding you had a COVID period that was impacted, but sales now are strong and above COVID levels. Is this an issue of equipment location and availability? Is it the willingness of franchisees, or maybe there are certain markets where it's lagging? Just what do you think the unlock is to get Burger King international in particular development back to historical levels and over what time frame do you think that may occur?

Thanks for the question, John. On the development side, we're well positioned to boost overall unit growth this year. We're pleased with our progress and the opportunities ahead. Our pipelines are robust, and while we may experience some quarterly fluctuations, we remain optimistic about our potential for growth. The dynamics of our growth are changing, with Popeyes experiencing increases both domestically and internationally. North America has seen record growth, and we're gaining momentum in international markets like Spain, Brazil, the Philippines, and Mexico. We believe this is just the start for Popeyes globally. We're also seeing international growth at Tim Hortons in the Middle East, Mexico, and the UK, with significant potential in China. Burger King's international business is strong, with impressive same-store sales growth and a clear path for future expansion. However, we're still working to reach pre-pandemic development levels. We've identified two major markets to focus on: one is progressing well, while the other, Russia, is currently stagnant due to geopolitical issues. China has faced challenges due to macroeconomic conditions and COVID policies. Over the past five years, we had about 80 net restaurants in Russia and even more than double that in China. We're investing in China to strengthen our presence there, which is crucial for returning to pre-pandemic growth levels for Burger King International. Overall, we're experiencing strong growth and enthusiasm in our business, with well-capitalized partners actively seeking sites. We're confident in our pipelines and focused on ramping up development in China while feeling positive about our overall progress. Thank you for the question.

Our next question is from David Palmer of Evercore ISI.

The same-store sales growth for Burger King Rest of World seems to be outperforming other global chains internationally. I assume some of this may be due to your regional weighting compared to competitors. However, it would be helpful to know where you are experiencing the most growth and where you believe you are gaining market share, as well as the reasons behind that. On a different note, regarding the supply chain business, your margins in that area are about 300 basis points lower than they were a few years ago. Should we consider this an area with upside potential? Or should we think of it as generating $0.5 billion in absolute EBITDA, regardless of whether nominal sales are higher or lower? In other words, it seems that margins may not be the focus, but rather that EBITDA should remain consistent moving forward.

Thank you for the questions. I'll address the first one regarding Burger King Rest of World, and then I'll hand it over to Matt to discuss the supply chain. In terms of Burger King International, we've observed strong performance since the end of last year. Throughout the pandemic, we experienced significant improvements in our off-premise business, including drive-thrus, delivery, and other service modes that became essential. This off-premise business has proven to be resilient, especially in delivery and drive-thru, which are both expanding. As markets in Europe and other areas reopened, customers returned to dine in at our restaurants. This combination has resulted in robust overall performance. We are seeing strength across the international region, particularly in Western European markets such as Spain, France, the UK, and Germany. Additionally, we have seen positive results in Asian markets, with the exception of China, and Latin America has also rebounded strongly. The growth internationally is not solely due to the easing of restrictions; we are benefiting from a robust calendar and exceptional digital performance, which includes increased delivery, mobile ordering, pre-pay, kiosks, and other digital services that are driving frequency and accelerated growth. We are seeing a balanced growth in our menu offerings, with premium items performing well alongside our core products. Operational improvements and excellent service from our franchisees also contribute to this success. The combination of these factors, along with our strong international image and expanding off-premise service modes, is a key driver of our performance. It is encouraging to see broad-based growth across regions and markets, and we will continue to build on this foundation, which supports our development pipeline for the future. Matt, would you like to address the second part of the question?

Yes, Dave. Thanks for the question. As it relates to the supply chain, I think as I mentioned, commodity prices have created real volatility in our business. There's no doubt we're seeing that just like our franchisees. I think we're monitoring that closely, and we're working through things with the system, to minute through a pretty tough environment, a pretty tough volatile environment. And we're taking measured pricing actions out in the market to offset some of this. But also, as you pointed out, we're seeing some volatility impact our P&L with commodity price increases, that inflate both our top line revenue and our cost of sales, which consequently creates the effect of reducing our percentage margins. So similar to what you just described, I think we're focused on creating a sustainable path for volume growth in that business, which we know over time, is going to allow us to grow our dollar profit as the business grows and as we drive successful execution of our plan in Canada. So I think that's the primary driver of the long-term health and growth of that business, and that's what we're focused on.

Yes. And I would add to that, Dave, that we are focused on the supply chain side, ensuring that we have the best cost and the highest quality for our franchisees, which is critical to their success in driving their profitability.

Our next question is from Dennis Geiger of UBS.

I appreciate all the comments on the progress against the Back to Basics plan and the resulting momentum that you're seeing. Wondering if you could speak to the pricing actions that you've taken across your brands and if you've seen any resistance to that pricing? And I guess, specifically on Tim Hortons, curious not just about the menu pricing, but the overall ticket and given all the enhancements that you've made across the menu and the brand broadly, how important is this to this ticket component, perhaps to the growth as you think about looking ahead from premiumization, attach, et cetera?

Thanks for your question, Dennis. Regarding pricing across our brands, we've discussed this previously. We carefully consider pressures from commodities, wage inflation, utility costs, and market competition while keeping the consumer experience in mind. We rely on third-party assessments to evaluate the situation by market, brand, and locality, and we collaborate with franchisees to ensure strategic pricing that remains aligned with consumer expectations and mindful of traffic and profitability impacts. Our pricing generally aligns with the Consumer Price Index, with a noted gap between the U.S. and Canada of about 200 basis points. In relation to Tim Hortons, we're excited about our progress. We have shifted our focus to core improvements and accelerated growth opportunities in PM food and specialty beverages, alongside our traditional brewed coffee. We saw a 2% increase in comparable sales compared to 2019 in the second quarter, with an overall 14% rise in comparable sales for the quarter, mostly driven by our core offerings. Our PM food platform and expanded cold beverages showed strong performance, contributing to high check averages. Our goals for Tim Hortons in Canada, as well as for Popeyes, Burger King, and Firehouse, are centered on balanced growth. We aim to attract new customers and encourage existing ones to visit more frequently by offering appealing menus, excellent service, and positive digital experiences, all while ensuring healthy check growth that maintains customer interest. Tim Hortons exemplifies how focusing on fundamentals and introducing exciting menu enhancements can attract diverse customers throughout different times of the day. Thanks again for your question. Matt, do you want to add anything?

Yes, Dennis. I mean just to put maybe a couple of the data points on what José was just describing. I think we had some really great highlights in the quarter in terms of our progress on the second phase of our Back to Basics plan in terms of innovating for growth and seeing some increasing proof of concept there in terms of how we're executing that plan. So on the main food side, looking on a three-year basis versus 2019, we were up 30%. And José also mentioned a big category for us being cold beverages and specialty beverages. In the quarter, we were up double digits, 12% or so on cold beverages versus 2019. And we also saw some really good diverse growth across dayparts as well, including lunch being up 9% versus 2019. So I think we're starting to see some really good response in the market in terms of how we're driving forward our plan and innovating our products and our menu and delivering for our guests in Canada, and we're excited to continue that.

Our next question is from Brian Mullan of Deutsche Bank.

Focusing on Tim Hortons in Canada, I have a question regarding the PM daypart opportunity. During the Investor Day, you mentioned it represents an $8.5 billion market with a 5% compound annual growth rate. Currently, you hold only a 4% market share. From an outside perspective, it appears there is significant potential for growth with your brand and asset base. Can you discuss the roadmap for this? What is a realistic market share goal? How are you approaching this internally? Is there a target for reaching a certain percentage of market share over the years? Any insights on your ambitions for this time period would be helpful for investors as you execute your plans.

Yes, Brian, thank you for the question. As we mentioned at Investor Day, this represents a significant opportunity for us given Tim's widespread presence across Canada. We already have a respectable share in the lunch segment, but it has primarily been driven by beverages. We are seeing growth in afternoon food offerings as well as in the lunch segment for food. As Matt noted with some data points, we have internal goals regarding where we want to go. While we haven't disclosed those publicly, we firmly believe this is a substantial opportunity. The way we are rethinking our menu, coupled with our recruitment of culinary experts over the past 18 months who specialize in creating products that people love and seek out, is beneficial. We also have strong value for money perception in Canada, even while managing some short-term commodity pressures, and we are recognized as Canada's most beloved brand. All these factors enhance our capacity to capture market share. Our focus will be on executing well, and we look forward to sharing more in the future. We have ambitious plans for our lunch and dinner segments, and we're just beginning.

Yes. Maybe just one other quick point to add to that. I think just on dinner in the quarter. Looking back to '19, I think we saw that dinner daypart as the largest sequential improvement in terms of sales performance. So another good indicator for us in terms of the progress that we're making on the food side and expanding further into the PM dayparts. Thanks for the question.

Next question is from Chris Carril of RBC Capital Markets.

Thanks. So I wanted to ask about Burger King U.S. Can you perhaps expand a bit more on what you're seeing in the underlying demand trends today that's giving you confidence that the time is right to move forward on the strategy you're planning to share with franchisees in September? The comp trends are pointing to improving stability in the business, and that's encouraging. But was hoping you could provide any additional color on what you're seeing more recently as you and franchisees prepare to take the next steps here with the brand?

Yes, Chris, thank you for your question. Overall, we are observing that consumers in the U.S. are facing significant pressure from rising commodity prices, fuel costs, and increasing interest rates. This situation is certainly creating challenges. We have approached the Burger King business and other brands with careful consideration, making sure that any price increases are consumer-friendly and do not outpace their ability to pay. We are focused on ensuring franchisees see the benefits of our strategies. Additionally, we have implemented operational improvements and simplification, including adjustments to our product mix such as moving the Whopper away from core discounts. These efforts have helped mitigate margin pressures despite the considerable volatility we’ve experienced over the last six months. We are confident in the long-term growth of the business and the roadmap we are developing with our franchisees, which assures us that investments in marketing, advertising, restaurant branding, and enhancing efficiency in our drive-thrus are worthwhile. We intend to provide detailed updates on this work to our franchisees at the beginning of September and share further insights with the broader audience soon after. The performance of the business, even amid these challenging conditions, reflects our belief in the potential to drive sales and profits for Burger King. We are excited about the progress made and look forward to what lies ahead for the Burger King brand and the team we are building alongside our franchisees.

Our next question is from Jeffrey Bernstein of Barclays.

Great. One follow-up to an earlier question and then a separate question. The follow-up, José, is just on the unit growth for the system, which you addressed earlier. I'm just wondering your expected growth for this year and your ability to accelerate for next year. It does seem like, I think you mentioned Burger King is going to get back to historical and then Tim's and Popeyes are going to reach relative to the historical 5% long-term target? And then my main question was for Matt, in terms of G&A. I know there's no formal '22 guidance, but any directional thoughts you can share on spend? I know you mentioned a couple of point headwind to EBITDA in the second quarter, and what your thoughts are on the back half spend or whether you look at it as growth versus revenue targets or whatnot? How you think about G&A in the back half?

Thank you for the questions, Jeff. Regarding unit growth, we are optimistic about our pipeline and development plan for this year. We see a path to accelerate growth this year, next year, and in the future. Our franchise partners for all brands internationally are strong. We're experiencing unit growth for Popeyes in the high single digits and Tim Hortons in the mid- to high single digits. Burger King's international development has also historically been strong. We are concentrating on one specific market to return to historical levels while pursuing new partnership and development opportunities, particularly for Popeyes and Tim Hortons in international markets. We have recently established new development deals and master franchises in locations such as the UK and Mexico for Popeyes, along with others in the Middle East. These initiatives take time to develop and require gradual pipeline building. However, our long-term confidence in the pipeline and our development targets is robust, and we will continue to provide updates each quarter. I look forward to sharing those updates.

Yes, and Jeff, just jumping in here quickly on your question related to G&A. I think for us, it's all about investing in areas we know that are critical to driving long-term results. And we've talked about some of those key investments that we've been making over the past year or so in areas like technology and operations and marketing. And we also see that many of those investments are starting to pay off. If you look at some of the progress we're starting to see accelerated at Tim Hortons in Canada. And so we're confident that we're prioritizing the right things and investing in the right areas to drive the business. And that's always how we approach G&A and how we spend our G&A and how we focus it. It's bottoms up. It's prioritizing our dollars where we think they'll make the biggest impact for the business. And that's how we'll continue to manage it. I think in Q2, the G&A was a bit softer than expected as a result of some timing that we would expect to reverse in the second half. And I mentioned that's why we'll see the quarterly G&A figure ramp up modestly as we move through the second half, and we continue to fully load those investments that we are making as we head toward the end of the year.

Our next question is from Brian Bittner of Oppenheimer.

I want to revert back to the Tim Hortons business. Clearly, the results were very impressive this quarter. It's great to see you puncture through those 2019 sales levels as you execute this Back to Basics plan. And what I'm trying to understand is how much potential traffic upside is left in the tank as we move past this quarter. So the question is, do you believe just overall consumer mobility in Canada is already back to pre-pandemic levels or is there room to go on improving mobility in Canada and therefore, room to go as you plug your share gains? And what I also wanted to ask is just, can you talk about your outlook on the Canadian consumer? We don't really get a good beat on the current state of the Canadian consumer and maybe how that shapes your view on whether this 2% trend versus '19 is sustainable in the Tim Hortons Canada business as we move through the rest of the year.

Thank you, Brian. I appreciate your question. Regarding mobility, we were under significant restrictions and lockdowns about three to three and a half months ago at the end of Q1. Those restrictions have been lifted, and as we noted last quarter, mobility has improved throughout this quarter, positively impacting our business. The 14% growth we reported in the second quarter is encouraging, and it's not solely due to mobility; our overall business plan remains strong and we are performing well across all segments. We are seeing solid performance in PM food and cold beverages, along with our core breakfast offerings. We believe there is still more growth potential in mobility. For instance, more offices reopened in the second quarter, and people are returning to hybrid work arrangements. However, Downtown Toronto is still gradually returning to work, and some restaurants there are experiencing sales down by high teens percentages. So, mobility in the downtown area is still a work in progress, giving us confidence that, if it returns to pre-pandemic levels, it could support our business growth. Your question about the Canadian consumer also ties back to mobility. There are certainly ongoing inflationary pressures in Canada, similar to what we see in the U.S. and other places, but we haven't observed a significant change in consumer behavior so far. It's important to note that Canada is at a different stage in its post-pandemic transition compared to the U.S., with restrictions having just recently eased. There are still indications of pent-up demand and accumulated savings in the market. With that said, as Canadians make dining choices, they are aware of these macro pressures, keeping pricing, service, and convenience in mind. We excel in those three areas, positioning us well even if the consumer environment in Canada becomes more challenging. Thank you for your questions.

Our next question is from David Tarantino of Baird.

A couple of questions on the investments you're making. First, on G&A, historically, you've operated with a very lean G&A structure, if you look at it maybe as a percentage of system sales relative to peers. And it seems like you're now moving a little higher in terms of kind of the support infrastructure. And I guess my question is, as you think about longer term, is this a trend that you think will lead to just a higher G&A infrastructure to support the business and the growth initiatives you need to support the brands? Or do you think this is kind of a temporary increase where you'll get leverage on it over time? And then relatedly, I guess, separately, I wanted to ask, you mentioned making an investment in China to recapitalize the business there, if I heard that correctly. I was just wondering if you could elaborate on what you did and why that was needed.

Yes, David, thanks for the question. I'll let Matt touch on the G&A question briefly. On the investment in China, we kind of noted this last quarter and then this quarter was when the investment was made. We resolved some issues in China with Popeyes and with Burger King. And following that resolution, we made a capital contribution to the business in China to fund the business and accelerate growth there in the coming years. That's what I was referring to in my comments around China and the confidence that we have long term to be able to get back to growth there as restrictions ease and the Zero COVID policy hopefully shifts into a different approach going forward. We think we're well positioned there with the team that we have, with the relationship that we have with the franchisee, and the cash available to develop to get back to historic levels of net restaurant growth in China. Matt, you want to touch on G&A?

Yes, David. Thanks for the question. We feel very positive about the level of general and administrative spending we've added to the business over the past year. We believe it's focused on important areas to strengthen our teams and talent, enabling us to execute the plans we've set for Tim Hortons in Canada and Burger King in the U.S. and beyond. These are essential investments in technology, digital marketing, and analytics, which we anticipate will provide long-term benefits as we expand those teams. Comparing our spending to that of our peers is somewhat challenging for a couple of reasons. Nearly all of our restaurants are franchised, and given the size of our international operations, it's important to consider our master franchisee structure globally. Overall, we are pleased with our investments and the direction we're taking the business. We expect to see a modest increase in our spending on a quarterly basis for the second half of the year, and we will continue to be strategic in our G&A investments, making them where we see opportunities to grow the business and enhance sales and profitability. Thanks for the question.

Our next question is from Sara Senator of Bank of America.

I just wanted to ask quickly about Tim Hortons, a couple of things. One is the Tim Hortons mix. I know you said hot coffee was maybe the only exception. I was curious. Are you seeing a trade substitution in your existing customer base versus bringing in new customers? That may be fine because the profitability, I suspect, is better. But just some update on loyalty and whether that's evolved further.

Thank you for the question, Sara. I'll briefly address the mix issue and then turn it over to Josh for loyalty. We did note in our prepared remarks that the hot coffee segment has not experienced growth compared to 2019. We are observing a shift toward specialty and cold beverages. This trend is evident in our loyalty data, with some existing customers either adding cold or specialty drinks or completely switching to new products. We are also attracting new customers through these platforms, which is very encouraging. It reflects the evolution we've seen in the U.S. coffee market and some international markets where the traditional concept of coffee is expanding and modernizing in response to changing consumer behaviors and innovations from brands. Our confidence in successfully making this transition, while reinforcing our core offerings and introducing new opportunities with cold and specialty beverages, gives us assurance that we can attract new customers and increase frequency with our current ones. Thank you for your question. Josh, would you like to discuss loyalty?

Yes. Thanks, Sara. I hope you're doing well. I'd say just as a reminder, we're now at just over one-third of our system-wide sales in Canada are digital, including loyalty, and we've seen a lot of great progress and we're continuing to innovate and evolve. Both the mobile app and some of our in-store touchpoints and how some of those digital and loyalty guests interact with the restaurant. We're seeing continued progress in both in-store loyalty and Mobile Order & Pay. Our in-store loyalty sales grew double digits year-on-year, and our mobile order and pay was actually up about 2x year-on-year. So we're seeing a lot of progress there, really happy with it. And the team is thinking of even more innovative things that we can do with how we evolve the app over the rest of this year and into next year to drive even more engagement from the loyalty base. Thanks.

Our final question is from Gregory Francfort of Guggenheim.

And I appreciate the details and the plan that's coming next month on the Burger King U.S. side. Can you maybe talk just a little bit about franchisee profitability? And maybe as you've looked at trimming the portfolio on the U.S. side, kind of how big that could be as a portion of the store base, just any way we can ring sense that would be helpful.

Greg, thanks for the question. As I mentioned in prepared remarks and we touched on quite a bit, we're working closely side by side with the franchisees to develop a really strong and thoughtful plan to accelerate sales growth at BK in the U.S. and also ensuring that we're focusing on guest experience and their franchise profitability. And as part of this, we've been doing a deep dive on our restaurant portfolio and what investment opportunities exist. And we're going side by side. I think different from what we've done in the past. We're going side by side to determine the best path for each restaurant. We're considering remodels versus scrape and rebuilds versus relocations or offsets. And this is centered on kind of the guest experience on digital and also enhancing our throughput or the capacity for us to serve more guests in our restaurants. Ongoing closures is a natural part of this process, a natural part of the business as we look at portfolio optimization. From where we stand today and based on a lot of work that the team has done and a lot of discussions and collaboration with franchisees, we do not expect significant shifts from historical closure levels, which over the last five years, have averaged just under 200 per year. I'd note that many closures include trade market repositioning or relocations, as I said earlier, which means that in certain trade areas where the closure will be offset with a brand new opening, which is like a remodel, only better. So the goal from any closures is to continue to drive a healthier overall portfolio to improve guest experience and to drive franchise profitability. So we're working closely with franchisees on this. But to give you kind of a framework on how we're thinking about it and what we think the impact will be, hopefully, that provides some color. Thanks again for the question. All right. Thank you, everyone, for your questions and appreciate everyone joining the call. As I mentioned earlier, the second quarter was truly action-packed. We're incredibly proud of the meaningful progress made across many fronts. Our performance reflects the direct benefit from our investments across a number of important areas of the business. As you can tell, we're excited about the momentum at Tim Hortons Canada, driven by the success of our Back to Basics plan and the continued strength from our Burger King International business. We're encouraged with the steady improvements at Burger King U.S. and look forward to sharing more details in September on how we plan to accelerate growth of the business. I'd like to close by thanking our team, our franchisees, and their team members for their continued focus and dedication as we work towards our big dream of building the most loved Restaurant Brands in the world. Thanks again for joining us, and have a great day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.