Restaurant Brands International Inc. Q3 FY2024 Earnings Call

Thank you, Bailey. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the third quarter ended September 30, 2024. As a reminder, a live webcast of this call can be accessed on the Investor Relations web page at rbi.com/investor, and a recording will be available for replay. Joining me on the call today are Restaurant Brands International's Executive Chairman, Patrick Doyle; CEO, Josh Kobza; and CFO, Sami Siddiqui. 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 and trending schedules available on our website. As a reminder, following our acquisition of Carrols Restaurant Group, which closed on May 16, 2024, and our acquisition of Popeyes China, which closed on June 28, 2024, we introduced a sixth reportable segment, Restaurant Holdings. This segment includes results from operations of Popeyes China business and the Burger King restaurants acquired as part of the Carrols acquisition. The consolidated growth metrics discussed during the prepared remarks, including organic adjusted operating income growth and organic adjusted EPS growth, exclude results from our Restaurant Holdings segment. And now I'll turn the call over to Josh.

Thanks, Kendall, and good morning, everyone. Thank you for joining us today. Our teams and franchisees are doing a nice job navigating difficult macro and competitive environments in the U.S., Canada, and many of our international markets. The brands winning today are consistently executing the fundamentals. They are serving fresh, delicious food and beverages in modern restaurants and providing excellent value to every guest on every occasion. We see the power of great fundamentals and great value in our own businesses, including Tim Hortons and our International division, which drove nearly 70% of our adjusted operating income. Tim Hortons, for example, remains number one in value for money in Canada, and it is one of the only major QSR brands in the market with positive traffic growth year-to-date. Our international business continues to outperform many of our largest global peers. Our goal is for all of our businesses to provide compelling value to guests the right way, with quality products, exceptional service, and unmatched convenience. If we can do this, we'll outperform the competition and deliver sustainable growth for our franchisees and our shareholders. Turning now to our results. Comparable sales were relatively flat, up 0.3% year-over-year, and net restaurants grew 3.8%, which translated into system-wide sales growth of 3.2%. Our cost discipline helped to offset softer system-wide sales growth, resulting in organic adjusted operating income growth of 6.1%. We've been encouraged to see the business accelerate in October, with consolidated comparable sales up low single digits, led by improvement in International, Burger King, and Popeyes. With only two months remaining in 2024 and year-to-date system-wide sales growth of 5.3%, we believe full year system-wide sales growth will come in slightly below the expectations we laid out for you in August. That said, our year-to-date organic adjusted operating income growth is over 7.5%, and the great work Sami and team are doing is keeping us on track to exceed 8% AOI growth for the full year 2024. I'll take a few minutes to walk through the performance of each of our business segments, starting with the largest contributor to AOI, Tim Hortons. Tim restaurants comprise 43% of AOI, and Axel and team continued to demonstrate the power of having high-quality food and beverages at a great everyday price, excellent restaurant-level execution, unrivaled convenience, and dedicated restaurant owners. Tims in Canada delivered a 2.7% increase in comparable sales, primarily driven by traffic growth. While we continue to see a softer consumer environment impact the broader QSR industry in Canada, Tims' top restaurant brand love and number one value positioning allow us to maintain our leading market share in coffee, baked goods, and breakfast sandwiches and wraps. Morning daypart sales grew in line with overall sales, anchored by mid-single-digit growth in breakfast sandwiches and wraps. We offered a hot breakfast sandwich for $3 with any size coffee purchase, which delivers great value for Canadians and was incremental to both traffic and gross profits for our restaurant owners. We continue to make progress in our PM food journey with our loaded anytime snacker and flatbread pizza platforms and grew PM main food sales 5.2% year-over-year. Flatbread pizzas are giving Canadians another reason to visit their local Tims, boosting restaurant traffic during historically slower dayparts and driving higher average checks. We've seen nearly 70% of flatbread pizza sales occur after 2:00 p.m. or on weekends, and the platform is generating 2.5 times higher average checks than non-flatbread tickets. We're balancing PM food extensions with a strong beverage lineup as well. Cold beverage sales represented 43% of total beverage sales this quarter, with some weeks reaching 50%. This is remarkable for a brand that is loved for its top root coffee. We continue to innovate around our cold brew and iced cappuccino offerings to bring Canadians fresh and exciting new options. Following the success of our Tiramisu innovation, we introduced the Nutella collaboration, which contributed to a 7% year-over-year increase in cold beverage sales this quarter. An important driver of our performance, in addition to our strong marketing calendar, is strong operations. Matt Moore, his team, and our restaurant owners delivered another quarter of year-over-year improvements in drive-thru speed of service. It's truly impressive to visit a drive-thru in Canada on a weekday morning and watch the car stack move so quickly. Our ongoing improvements in operations, coupled with our marketing initiatives, remain a consistent driver of traffic growth, and I'm proud to see the dedication of our Tims teams and restaurant owners driving positive sales growth and industry outperformance. Moving now to the International segment, which drives 25% of our adjusted operating income. We saw comparable sales in International grow 1.8% with net restaurant growth of 7.6% and system-wide sales growth of 8.0%. While a bit slower than earlier in the year, our results were nicely ahead of some of our largest global peers and reflect some great work from our partners around the world. Burger King remains the largest driver of our international business and grew in key markets like Australia, Spain, Korea, the U.K., and Japan, each of which accelerated from Q2. This helped offset softer results in France and continued pressures from the difficult operating environment in China and the conflict in the Middle East. I recently joined Tiago, Tom, and about 20 of our country-level Burger King leaders, capturing over 80% of the brand's global system-wide sales, for a CEO Summit in Italy. It was a very engaging and interactive forum for our top CEOs to connect and share marketing, development, franchising, and operations best practices. It's clear that Burger King has already established itself around the world. We still have a long runway for growth and tons of appetite from our master franchisees to deliver the best burger in each of their markets. While overall development in 2024 is going to be at the lower long-term target of 5%, which Sami will address in a bit, I want to give some perspective on where our international net restaurant growth will come from in the years ahead. There is so much opportunity to capture, and one of the best examples is Japan, which I visited two weeks ago. Our performance has improved dramatically in Japan over the past few years, and we are now the clear winner for best burgers in the market. I tried some amazing local offer innovations there, and it's clear why they're doing so well. We now have almost 250 locations in Japan with an enormous runway and are growing between 40 and 50 locations per year. We're also working to accelerate development in many of our Popeyes markets, and Popeyes U.K. is a fantastic example. We recently spent time with Tom Crowley and his team in the U.K. and tried some of the best Popeyes chicken I've eaten anywhere in the world. They're operating beautiful modern restaurants with exceptional service and are generating great sales and returns. Popeyes U.K. already has over 55 restaurants in just three years and drives our efforts in China, where you've seen us take meaningful steps on Tim Hortons and Popeyes this year. We're also actively working to find the right long-term path for Burger King. We know the consumer is momentarily pressured in China, but we are positive on the mid- and long-term opportunity for each of our brands in the market. Turning now to Burger King in the U.S. and Canada. Burger King U.S. comparable sales were down 0.4% and net restaurants declined by 1.6%, resulting in a 1.5% decline in system-wide sales. Sales were softer than we'd like this quarter and were impacted by a tough consumer environment over the summer. Our calendar initiatives, including Fiery, were unable to cut through all the value messages in the market and were less impactful than our Royal Crispy Chicken wraps launch in the prior year. As a result, we saw our gap versus the industry take a slight step back, but we've been able to return to same-store sales outperformance relative to the burger QSR industry again. Taking a step back, there's a lot going well at Burger King, and it's clear the business is in a much healthier place today than when we launched Reclaim the Flame in September of 2022. At Convention last week, Tom and the team updated franchisees on the important foundational progress we've made over the past two years that is setting us up for long-term success. We have a new discipline in operations that our franchisees have embraced and are executing, which has driven notable control and even better improvements in franchisee profitability. We're on track to accelerate our pace of remodels and move towards our goal of 85% to 90% modern image by the end of 2028. Accelerating the modern image of our system is one of the primary motives behind our acquisition of Carrols, aside from creating new franchise opportunities for existing and new operators when we move to refranchise those restaurants over the next few years. Furthermore, our $120 million investment into the ad fund allowed us to break a difficult cycle, significantly increase our share of voice, and start regaining the market share since our digital team has made to our app and delivery capabilities are also driving strong growth in digital sales, which now represent nearly 20%. We are in a completely different and better place than where we were two years ago. We said on this call two years ago that our goal was to reach $175,000 of 4-wall EBITDA by the end of this year. We achieved far more than that, reaching $205,000 by the end of last year. We expect average franchisee profitability to be flattish to slightly up for 2024, a pretty great result considering the labor, commodity, and top line sales pressures facing the industry this year, and we have our sights set on reaching $230,000 by the end of 2026, with a longer-term commitment to drive the system to $300,000 in overall EBITDA. Tom, our time together at convention really highlighted the optimism, excitement, and confidence the franchisees share in Tom and his team's leadership to take us forward to great success. Turning now to Popeyes. Popeyes U.S. grew net restaurants by 3.6%, while comparable sales declined 3.8%, resulting in system-wide sales that missed some of the offers consumers were looking for, and this resulted in softer comps. Since September, we've introduced some great deals, like our delicious, freshly hand-battered and fried chicken. We know we need to provide better value, which we can deliver through better price points and a better experience. As an initial step, Jeff and his team introduced three pieces of chicken for $5 in mid-September and followed it in early October with a $6 big box, leveraging a strong existing brand asset. We're already seeing both offerings drive traffic and sales and that will come from more consistent operations. Easy-to-run kitchens are one part of a multiyear opportunity to improve operations and enhance the guest experience. We've identified easier and faster ways to install the upgrades, and we'll continue to incorporate feedback to optimize this investment before scaling it across the U.S. system. We also need to make Popeyes easier to access, and we're exploring two formats to infill in key markets and improve build costs. In the meantime, we continue to enhance our digital capabilities and drive strong growth in digital sales. Our franchisees have done a good job navigating a difficult environment. While unable to offset industry headwinds this quarter, we did bring back a firehouse fan and a personal favorite of mine, the hot sauce bar in mid-September. This is an incredibly unique and perfect brand fit for Firehouse, carrying 13 hot and flavorful sauce options with our hot subs. Overall, Firehouse saw system-wide sales decrease by 1.3%, driven by a comparable sales decline of 4.8%, partially offset by net restaurant growth of 3.9%. Mike and the team have been hard at work on new unit development and added 49 net new restaurants since Q3 of 2023. That's nearly 60% more than we were at this time last year. We're on track to further accelerate development in 2025 with a strong pipeline of new and existing franchisees. In August, I spent time that will allow us to keep opening new restaurants and introducing our delicious hot subs to more and more guests throughout North America. With that, I'll pass it to Sami to walk you through our financial results for the quarter.

Thanks, Josh, and good morning, everyone. Our results this quarter highlight the stability and strength of our businesses and our team's ability to navigate a tougher consumer backdrop while staying focused on our long-term goals. For the third quarter, global comparable sales were relatively flat, up 0.3% year-over-year. We grew global system-wide sales by 3.2%, organic AOI by 6.1%, and organic adjusted EPS by 4.6%. AOI growth outpaced system-wide sales growth this quarter for a few reasons. First, segment G&A, excluding Restaurant Holdings, saw a decrease related to lower equity-based compensation. As I mentioned on our Q2 call, incentive-based compensation is expected to decrease year-over-year. We've also been working closely with our business leaders to drive operating leverage in our P&L, and you're seeing the benefit start to flow through this quarter. Second, we continue to work through lower average cost of inventory in our Tims supply chain and CPG businesses, which contribute. Full year supply chain margins will be approximately 19%, meaning Q4 margins should be in the mid-18% range. These two factors, segment G&A and supply chain, were partially offset by incremental advertising expense at Burger King U.S. and net bad debt expenses in the quarter. We invested $7 million behind fuel to flame marketing at Burger King U.S. as compared to no direct investment in the prior year, with $2 million of net bad debt recoveries in Q3 of '23. Shifting now to EPS. Our adjusted EPS was $0.93, an increase of 4.6% per share year-over-year, excluding an FX headwind of $0.02 per share and a $0.01 benefit from Restaurant Holdings. Our adjusted net interest expense increased by approximately $18 million during the quarter, mainly driven by a higher debt balance following our Carrols transaction which closed in mid-May. In addition, we saw an increase in adjusted income tax expense due to a higher adjusted effective tax rate, which had a $0.03 per share negative impact on earnings. Our adjusted effective tax rate this quarter was approximately 17%, and we expect our full-year tax rate to be in the 18% to 19% range. We ended Q3 with available liquidity of $2.4 billion, including $1.2 billion of cash, and our net leverage ratio was 4.8 times. We continue to expect to reach mid 4 times net leverage by year-end, assuming a full year of Carrols results. In September, we issued $500 million of 5 and 5/8 first lien senior secured notes due in 2029 and used the proceeds together with cash on hand to redeem our outstanding $500 million of 5 and 3/4 notes, which were due in 2025. We feel good about our capital structure with no significant maturities until 2028. Turning now to free cash flow. We generated $485 million of free cash flow, excluding the benefit of our FX and interest rate hedges, which added approximately $46 million of positive cash flow this quarter. We continue to execute against our Reclaim the Flame plan at Burger King U.S., which is designed to engage new and existing Burger King fans, accelerate our path towards modern image, and drive franchisee profitability. This quarter, we spent $24 million on Reclaim the Flame investments, including $7 million on our Fuel the Flame marketing investment and $16 million towards Royal Reset. We have $41 million of Fuel the Flame marketing remaining in Q4. Since we are tracking well ahead of the 2024 Fuel the Flame franchisee profitability target, beginning in 2025, franchisees will increase their ad fund levy from 4% to 4.5% through at least 2026. Our advertising fund contribution, which has been $60 million per year over the last two years, will fall away. This will provide a nice tailwind to both AOI and adjusted EPS growth in 2025. And to close on our dividend, we returned $261 million of capital to shareholders through our dividend, which we declared for Q4 at $0.58 per common share and unit with a full year total of $2.32 per share. I'll now wrap up with an update on our expectations for 2024. Considering Q3 comparable sales and system-wide sales growth came in lower than anticipated, we now believe full year 2024 system-wide sales growth will be in the 5% to 5.5% range. Embedded within this are expectations for an acceleration in consolidated comparable sales from Q3 levels, slightly offset by tempered expectations for net restaurant growth to the mid-3% range, primarily due to Burger King China and some of the impacts we're seeing from macro and geopolitical challenges. To be more specific, about 100 basis points of our NRG shortfall this year are due to year-over-year deceleration in Burger King China NRG. As many of you know, Burger King China has been struggling. We have recently sent termination notices to our master franchisee, which they've disputed, and we are currently in a dispute resolution process with them. At the same time, we are in active discussions with the master franchisee in an effort to reach an amicable solution. We believe this is a short-term situation, and we are committed to the long-term success of the business in China. We will update you when we have more to share. Overall, we remain confident in achieving over 8% organic AOI growth this year. This confidence is driven in part by the improved top-line results we saw in October as well as our cost discipline initiatives, which have allowed us to tighten our 2024 segment G&A guidance to between $640 million and $650 million, including equity-based compensation between $170 million and $175 million. Finally, 2024 has obviously been a more complicated environment with more moving pieces than any of us had envisioned. As such, it's been important for us to provide more transparency regarding 2025 and beyond; we're committed to achieving our long-term outlook of over 3% comparable sales growth, over 5% net restaurant growth, over 8% system-wide sales growth, and over 8% AOI growth on average over the next five years. We will keep you informed of our progress along the way. In the meantime, I'm confident we will achieve our goal of at least 8% organic AOI growth for 2024. And with that, I'll hand it over to Patrick.

Thank you, Sami, and thank you to our teams and franchisees who are doing a terrific job delivering value to our guests through delicious products and improved experiences. One of my routines is to do a gut check from time to time: on average, are we doing a better job than we were a year ago? And I strongly believe that to be the case in each of our businesses. Our customers ultimately drive growth. While we all understand those elements to be the foundation for all restaurants, I believe our progress on these customer benefits sets us apart and is what ultimately drives great returns for our franchisees and our investors. We all know the environment has been more challenging, but we are not allowing that to impact our plans. We're outperforming our largest global peers. We are actively addressing the areas of our business that have fallen behind, and we are protecting profitability for our franchisees and our company, all while positioning our brands for lasting success. We have a remarkable business in Canada, one that I can't remind you enough generates over 40% of our adjusted operating income. Tims continues to outperform the industry and deliver strong absolute results. The discipline Axel, his team, and our dedicated restaurant owners have had executing against the multiyear back-to-basics plan has been paying dividends for the past few years. I am confident it will continue to do so for years to come. International has many pockets of strength, but there are a few markets where we're struggling a bit. In some cases, this is due to macro factors out of our control. But in others, there's more we can do to change our trajectory, and we are tackling them head-on. You saw us take control of Popeyes China. You saw us invest in Tims China, and I can tell you we're working on a solution for Burger King China. These two businesses, Tims and International, drive nearly 70% of our earnings and have solidly outperformed the competition from a top-line perspective. In fact, they've outperformed the industry for quite some time thanks to our teams and franchisees' ability to continue delivering great results. Now let's turn to the other 30% of our earnings. Burger King U.S., which accounts for 18% of our business, is only two years into its multiyear plans. While we work hard to navigate the current environment, which has been more complicated than we expected, there is still a lot more work to do. But I am confident we will get there. We have the right plan, the right team, and great resources. It is going to work. We are remodeling restaurants, improving service, and continuing to grow amazing Whoppers. Popeyes is fundamentally doing all the right things as well: improving operations, introducing quality menu innovation, enhancing its digital capabilities, and opening more restaurants. We simply need to entice more people to try our food. Firehouse's long-term value will come from opening more and more restaurants, and Mike and the team are doing just that. They've accelerated growth meaningfully this year, and their 2025 pipeline will bring another major step up. So overall, our business is trending in the right direction. Franchisee profitability is far stronger today than it was 18 months ago. Our year-to-date organic adjusted operating income growth is over 7.5%, which I view as great performance in this environment, and we are on track to deliver over 8% growth for the year. While we are already seeing signs of improvement in the U.S. and overseas in October, it may take a few more quarters for the macro environment to even out and for us to see consolidated same-store sales track towards our 3% plus long-term guidance. But if you're invested in this company for the long term, like I am, I assure you the fundamentals are better today than they have been in years. With that, I'll pass it back to the operator for questions.

Our first question today comes from Brian Bittner from Oppenheimer & Company.

I wanted to ask my question on the international business and focus specifically on Burger King International, where you had almost a 2% positive comp, which is nicely above our global peer set, as you talked about in your prepared remarks. Can you just unpack this outperformance versus your peer set a bit? Is it related more to just a better market mix of exposures across international, or do you actually believe you're taking share in most of your major Burger King international markets? And what do you believe is behind an improved international trend as we're moving into the fourth quarter?

Brian, it's Josh, and thank you for the question. I think our Burger King teams in a lot of our international markets are doing a fantastic job, and that's leading us to take market share in many of those markets. I'll give you just a couple of examples that I think really illustrate how we win in some of these places. We were in Australia a couple of months ago with the Hungry Jack's team led by Chris Green and Jack Cowen, who have owned that business for a very long time. They're doing a fantastic job getting all the basics right. They're really engaging their teams and their managers. They're delivering high-quality products. They've been really focused on quality enhancements and the perception of quality, communicating that quality across the menu and really elevating the perception of the brand, and they're outperforming by a healthy margin. I saw this in Japan two weeks ago as well. It was a market that was struggling; over the past 5 to 7 years, we had under 100 restaurants. The team just really got all the fundamentals right. They've driven product quality, and we track who has the best burger in the market; we win by a big margin in Japan. That’s the critical formula: getting operations right, high-quality locations, and winning on product quality. Thankfully, we have the best burger in the world with the Whopper. When we get that right and land it well with consumers, we have the opportunity to outperform meaningfully. We have a lot of markets like those two: Spain is another great example. Brazil is doing well. Our biggest markets are getting the basics right, outperforming, and taking market share. I think that's what you saw in the quarter.

Our next question today comes from the line of John Ivankoe from JPMorgan.

The question is on growing the Burger King U.S. franchisee base from 300 franchisees to 500 franchisees, which is obviously a very big change, especially considering I think you'll have a lot more than 200 new franchisees that enter the system. So that's just kind of like the big theme, but the specific question that I want to ask is specifically on the Carrols units that you presumably would have the most opportunity with. If there is discussion or plan or are we any further along in making general managers in a lot of cases actually more responsible for some of their specific units? That would really be more consistent with how other systems that I'll say remain nameless at this point but other systems have become very successful in the U.S. is making people that formerly worked in the restaurants to become franchisees.

John, thanks for the question. You're right about the significant changes we're contemplating in the BK U.S. system regarding the franchisee base, and we do expect to have many new franchisees. I think they'll come from a few different places, and we're in the midst of many discussions. We've already started discussing or executing some refranchisings. There are different profiles we have. Some of our new franchisees will be folks who are already on our teams, such as field team members within Burger King U.S. or on the corporate side or running some company restaurants. Some of them are interested in becoming franchisees, and we're in discussions for them to take over portfolios. We're also talking with some of the folks at Carrols, which could include general managers or district managers or directors of operations. Some of these team members have ambitions to run their own business, and they might take over a smaller portfolio of 2, 5, or 10 restaurants. We’re considering that deeply. I think there's something powerful about getting closer ownership of those restaurants, whether through compensation models for general managers or having smaller franchisees who have ownership of the business in their communities every day. I'll bake that into what we do at Burger King in the U.S. over the next few years.

Yes, John. What I'd add is that, obviously, my past life, I know what it's like to have local owner-operators in the restaurants, and it's a powerful thing. If we continue to make progress on franchisee profitability, the returns on building or buying Burger King restaurants, and all of our brands then capital will become easier. The hard part is the operations, and having great dedicated local owner-operators has to be the answer. Franchisees are often referred to interchangeably as owner-operators, and the owner aspect is relatively easy if the cash flows are there. The operating part is critical, and we’re dedicated to that. I’ve said this before; we’ll have big franchisees that are successful in the U.S., and there are many of them. We love having them in the system.

John, maybe just to add one last thought. It ties a little bit back into Brian's question too. I mentioned the outperformance of Australia. One of the things that I think Jack and Chris and the Hungry Jack's team have focused on is a program where they're doing a bigger profit-sharing program with some of their restaurant managers. I think that's really powerful to engage and empower our restaurant owners. Some of that thought process has started to influence our company restaurants, so we've begun more substantive profit-sharing programs with some restaurant managers in our company restaurants at Burger King as well. These restaurants are doing well. Our company restaurants, especially those we've acquired and operated over the last few years, are outperforming the system. We're seeing some exciting developments on that front and will continue to leverage those learnings.

The next question today comes from the line of Dennis Geiger from UBS.

I wanted to ask a bit more on the unit growth outlook. Maybe if you could speak to any key considerations or notable impacts for the rest of 2024 development beyond BK China, which you spoke to? At a high level, what does the global unit growth opportunity look like over the next few years and your ability perhaps to offset some of the BK China pressure with contributions from other market and brand combinations?

Dennis, I don't think we have too much additional to add on '24. Just as we think about looking out towards 2025 and beyond, I'll highlight a few areas we’re working on and where we see good progress. First, Burger King in the U.S. has made significant strides from a time when we faced closures to a point where we're close to flat now. I think a lot of that is driven by the progress we’ve seen in franchise profitability. As we mentioned earlier, we made substantial advancements last year, and we're continuing to do well this year. That should continue to be a tailwind as we look into 2025 and beyond. We're also making progress in a few other U.S. brands. Firehouse is really taking off. Our trailing 12-month net restaurant growth is up 60%, and we expect further progress this year and next. Tims in the U.S. is also starting a positive momentum, and we expect it to be a good year. Kath and her team have put together many new development agreements for that business. Growth in Canada is essential; there's more Tims opportunity. The team has been focused on particular areas, and I believe there'll be a notable benefit starting next year—especially in Western Canada, where we have lower density compared to Ontario. Additionally, we see exciting growth opportunities in international markets, such as India, which may become one of our biggest growth drivers in the next 5 to 10 years; we’re ramping up businesses like Popeyes there, and Burger King continues to grow well. Mexico has emerged as one of our best growth drivers globally, showing great sales and margins with a considerable number of restaurant openings. Japan remains a positive story, and we’re building a lot of Popeyes in the U.K., which has fantastic average restaurant sales and good margins.

The next question today comes from the line of David Palmer from Evercore ISI.

Just two areas that maybe you could comment on. With regard to China and Burger King China, I know that you may have limited ability to comment on this, but you mentioned that the 3.5% this year could have been the 5% without China being a drag. It would be great to have that situation rectified as quickly as possible. How long do you think it might take to regain growth trends in China? Also, regarding the Tims Canada business, it wasn't one of the markets that you indicated accelerated in the fourth quarter. You had a 3% comp, which was still quite healthy given the current environment, and traffic appears to be pretty good. What is your outlook for that brand's market share?

David, it's Sami. I'll just tackle the first part of your question. There is a slight correction on China: our long-term growth algorithm indicates that China represents about 100 basis points, meaning 1 point of that roughly 1.5 point shortfall. We are actively working on solutions there, and we will provide updates when we have more to share. I will turn it over to Josh for more context.

Yes. I want to add some perspective, Sami. The business performance in China has been challenging in the short term. Still, we are committed and optimistic about the long-term prospects of the Burger King business and all of our brands, for that matter, in China. It’s been the second most significant QSR market in the world. We believe we have brands with every right to succeed in that market. We ask for a bit of patience as we work through challenges, similar to Tims and Popeyes. It might take a little time for us to navigate this, and we will keep you updated as soon as we have material information to share.

Yes. I want to add some perspective on this. The China business is interesting. If you look at it overall, regarding our operations and where we stand, all three brands still have relatively early journeys. Compared to our larger competitors—Yum!, Starbucks, McDonald's—they're capitalizing on their growth. We’re still in a position where we need fresh capital to develop these businesses at the pace necessary to scale. We’re very bullish on the mid- and long-term outlook. Some things need to be addressed. I wish we were a little further along on that journey, but we're committed to improving. I believe in reinforcing that we won’t shy away from issues that need attention. We take seriously the areas we need to enhance, not just for transparency for investors but for our franchisees and team members, to understand where we need improvements. Regarding Tims, what's changed is fundamentally ticket growth. The majority of our growth this quarter came from increased order count rather than check growth, indicating a healthy business. We feel great about Tims's position in Canada. In previous years, when we posted more substantial numbers, inflation had impacted our results. As inflation has stabilized, current levels of growth remain sustainable.

Just to reinforce Patrick's comments, what makes me optimistic about Tims—both current performance and outlook—is that they're getting the fundamentals right. Operations are improving, we're remodeling stores for better revenue, and as I look into 2025, we see a great pipeline of new food and beverage innovations. If we keep doing what's working and continue introducing exciting new innovations to Canada, I believe we will maintain strong results.

The next question today comes from the line of Gregory Francfort from Guggenheim Securities.

I just wanted to dive deeper into Popeyes. I think it's around 30% of your international growth, and over 100% of your domestic growth, but comps were low in both regions this quarter. I'm just wondering what happened and how you plan to improve comps moving forward.

As I mentioned, we've probably had a bit of a gap in our value offerings, and that was noticeable. However, we saw improvements once we got back on track in September and October. That resulted in better global same-store sales performance, improving from nearly flat in Q3 to positive low single digits in October. Popeyes regained momentum thanks to enhanced value offerings. On the topic of cash on cash returns, franchisee profitability drives that. Last year, we reported a sizable increase in franchise profitability, and we're also progressing this year. Even if sales have been somewhat softer last quarter, we’re improving on the cost side, and that’s leading to healthily increasing franchise profitability.

The next question today comes from the line of Lauren Silberman from Deutsche Bank.

Just a follow-up on Tims. Can you talk about the cadence of trends you observed throughout the quarter? Are you seeing any changes in the competitive environment? Are you expecting similar trends in Q4 compared to Q3? My bigger question revolves around the 2025 guidance—thoughts on the contributing factors and challenges to growth?

Lauren, thanks for the question. I’ll handle Tims and turn it over to Sami for the '25 outlook. We won't delve too much into intra-quarter dynamics. Still, it's important to note we enjoyed solid growth throughout, with a strong emphasis on transactions. That's encouraging; our performance is being positively affected, especially in BK and Popeyes. As for details regarding specific business performance, we’ll hold off until we finish Q4.

In terms of looking ahead, keep in mind the implications of the Reclaim the Flame initiative for the outlook next year. Absolutely, the $60 million multiyear ad fund investment we put in will roll off next year, impacting our P&L, while franchisee profitability thresholds will adjust as well. As a reminder, the franchisees’ ad fund contribution will rise from 4% to 4.5% next year, and the advertising fund will still remain in a strong position overall. It’s also essential to consider capital investments alongside franchisees related to remodels. We anticipate remodeling activity to accelerate in 2025, so that funding will reflect on cash. A significant component of next year's adjustment will be the phase-out of the $60 million investment.

The next question today comes from the line of Danilo Gargiulo from Bernstein.

I have a two-part question regarding expanding our value messaging into 2025 and evolving our value menus. How do you plan to respond to the changing competitive dynamics? The second part pertains to healthy profitability expectations for Burger King this year and next—what are the expectations for other brands, and what are the most significant feedback and data opportunities you’re receiving from franchisees across the brands?

First, on Burger King in the U.S., we’ve observed good outperformance. In October, we discovered that we excel when we have strong value offerings paired with relevant innovation, like the $5 Your Way offering. We also embedded partnerships in our marketing, like Adams Family, which featured a unique Whopper and innovative sides. That's essential to driving performance. I believe we're positioned for success when we combine good value with innovation centered around the Whopper, which we believe really contributes to business performance moving forward. In terms of franchise profitability, the positive takeaway is that in three of our four domestic brands, we're making good progress. As discussed, Burger King has done well this year, and we’re already in a stable to slightly up trajectory. We're making strides at Popeyes as well, and we’ve had great sales at Tim Hortons, which has contributed to improved franchise profitability despite this year's more challenging sales environment.

The next question today comes from the line of Sara Senatore from Bank of America.

I have two questions: one focused on Burger King U.S., and another regarding Tims Canada. For Burger King, I've noted some strong outperformance in October. It seems like there has been a rise in shifts and competition in the market more than historically. Are you seeing any overall improvement in category demand? Can you confirm that your franchisees can meet their EBITDA goals? It appears you may have gathered a lot of low-hanging fruit, making it more challenging to obtain operational profits. Conversely, regarding Tims, can you comment on your breakfast performance?

Thank you for the questions. First, on Burger King U.S., we do see some signs of improvement in the category. Our marketing efforts in October had a positive impact, notably in our partnership with the Adams Family, which resonated well and allowed us to capitalize on the Whopper's appeal. Additionally, where costs like inflation seem to be trending downwards, we've also noted a recent decline in gas prices and interest rates which reflects potential positive demand for the industry. Regarding Tims, our business has been thriving overall. For instance, breakfast food sales rose 5.8% year-on-year in the quarter. We are confident proceeding into Q4 and 2025.

Tom and his team are doing an outstanding job. More importantly, our franchisees are seeing some variability in performance based on promotional activity. However, what reassures us is that systemic improvements in service levels are leading to stronger sales. We're witnessing mid-teen lifts as remodels progress. The fundamental improvements across our system mean we can continue enhancing sales from an operational standpoint. We need more of our Burger King franchisees to join the top half of our operators, as those core improvements are driving results, which indeed gives me confidence that despite short-term fluctuations, we have significant operational potential ahead.

The next question today comes from the line of Jon Tower from Citi.

I have a couple of quick questions regarding the Burger King U.S. business. First, I want to confirm that you’re still set to launch the $1 million Whopper campaign in November 2024? Secondly, can you share the returns you’re seeing from your remodels? You mentioned that the sales lift was above forecast, but I'd like to know the aggregate investment pattern and payback experienced to date?

John, yes, the $1 million Whopper campaign is still planned for November. We're on track for that. In terms of the realized returns so far, they’re slightly better than expected. Our average for remodels had a low-teens return on capital expectation, and we are pleasantly surprised that the results exceed those baseline expectations. Some recent remodels also show fantastic initial sales responses in Miami with good momentum, indicating that the investments are paying off.

Our final question today comes from the line of Christine Cho from Goldman Sachs.

I wanted to inquire if you could share any trends or spending shifts you've seen across various income cohorts. In the last call, you mentioned that $5 deals are successfully driving trial and participation, particularly among the lower income cohort. How does that segment look in terms of repeat business and frequency?

Yes, Christine, I’d say there’s nothing too new this quarter on income cohort performance. Most trends have remained consistent over the past few months. I don’t have anything particularly notable to report there. Great. Thank you all for your time today and for the great questions. We look forward to updating you again on our Q4 results in early 2025. Thanks, and have a great day.

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