Earnings Call Transcript - QSR Q4 2021

Stephen Lichtner, Head of Investor Relations

Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the fourth quarter and year ended December 31, 2021. As a reminder, a live broadcast of this call may be accessed through the Investor Relations web page at investor.rbi.com, and a recording will be available for replay. 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. During portions of the call today, we will be referencing 2-year comparisons for system-wide sales growth and comparable sales to provide a cleaner indication of how the business is trending versus a more normalized period. These 2-year comparisons are calculated on a geometric stacked basis by using the 2020 and 2021 disclosed growth metrics. In addition, consolidated system-wide sales, digital sales, net restaurant growth and organic adjusted EBITDA growth do not include the results of Firehouse Subs, which we acquired on December 15, 2021. And now I'll turn the call over to Jose.

Jose Cil, CEO

Good morning, everyone. I hope you're all doing well. Joining me on the call this morning, as usual, are Josh Kobza, our COO; and Matt Dunnigan, our CFO. I'm also excited to have Tom Curtis, the President of Burger King in the U.S. and Canada, as a special guest this quarter to share what he and his team have been up to since he took the helm in August. We made significant progress over the course of 2021 on key near-term initiatives, including opening over 1,200 net new restaurants, seeing early progress at Burger King U.S. and good momentum exiting the year at Tim Hortons in Canada. As we look to 2022, we have a number of clear objectives for the year ahead and remain focused on: first, continuing to build sales momentum in our home markets and around the world, while driving franchisee profitability and unit economics. Second, accelerating global unit growth through our best-in-class franchise network. Third, leveraging recent investments in our field teams, training and equipment to improve restaurant operations. Fourth, utilizing technology initiatives, including our growing loyalty and e-commerce platform to enhance the guest experience. And finally, making meaningful strides in our restaurant brands for good plan, including executing against our climate strategy and furthering what sustainability means for our brands. I'm confident we're well positioned to execute on these priorities as we work towards our big dream of building the most loved restaurant brands in the world. I want to thank our restaurant team members, franchisees and employees for their continued dedication. Our people are the lifeblood of our business, and for that reason, I was incredibly proud to see us earn the Great Place to Work Certification with our strongest scores ever, reflecting our commitment to our team and culture. Turning to a few highlights from the quarter and the year. During the fourth quarter, year-over-year comparable sales accelerated sequentially from the third quarter, driven by all of our brands and across the world. This includes Tim Hortons Canada, which saw year-over-year comparable sales improve to 11.3% positive from 9.5% positive in Q3 and Burger King's international business, which grew comparable sales positive 19.4%, a 320 basis point sequential acceleration. In addition, Burger King U.S. started to narrow the gap to industry performance and saw comparable sales improve to plus 1.8% from a decline of 1.6% in Q3. On the development front, we opened nearly 600 net restaurants in the fourth quarter, returning to over 1,200 net new restaurants for the full year. And what excites us even more is the excellent work our teams delivered in 2021, entering into new high-quality master franchise development agreements for Burger King, Tim Hortons and Popeyes in building pipelines that position us well to accelerate unit growth in 2022 and beyond across all brands. The combination of comparable sales and unit growth helped drive year-over-year system-wide sales growth of 14%, with organic adjusted EBITDA growth of 15%. This contributed to strong free cash flow generation that enabled us to capitalize on an exciting strategic opportunity with the acquisition of Firehouse Subs. As the year came to a close and as we look forward to 2022 and beyond, I could not be more excited to welcome Firehouse Subs' brand and its seasoned team to our family of iconic and loved restaurant brands. We also returned over $610 million to shareholders during the quarter and over $1.5 billion for the year through a combination of dividends and open market share repurchases. Our capital allocation this year was consistent with our overall philosophy that allows us to dynamically allocate capital between reinvesting in our business, returning capital to shareholders, executing on strategic M&A, or all three. In addition, our continued commitment to our restaurant brands for good framework helped drive a notable improvement in our ratings this year from leading ESG rating agencies. For example, we improved our S&P score by 37 points year-over-year and achieved a strong inaugural score of B- on our first public CDP disclosure, which was anchored by our strong governance and ambitious climate targets. Before we dive into brand results, I want to address a few industry headlines relating to staffing and inflation that I'm sure are top of mind for everyone listening in. Our brands have not been immune to these challenges, and we're hyper-focused on alleviating near-term pressures by driving sales and traffic in conjunction with recommending staffing initiatives and pricing strategies. On labor, we're taking a proactive approach to improve the situation, including providing toolkits for hiring and retention, expanding the support from our field and training teams and working on simplifying back-of-house processes to make it easier and more rewarding for our franchisees' restaurant staff to work in their restaurants. On pricing, we took price in 2021 at each of our brands and given the level of commodity cost and labor inflation we're seeing, we expect additional price increases in 2022 and are working closely with franchisees to make the best decision for guests and our franchisees' P&Ls. Turning now to our brand performance. Let's start with Tim Hortons Canada. We are two years into our back-to-basics plan and continue to see encouraging proof points that our focus on elevating core quality, innovating for growth and modernizing the brand is positioning Tims well for long-term growth in Canada. For the fourth quarter, as I mentioned, we saw an 11.3% year-over-year increase in comparable sales, a 180 basis point acceleration relative to the third quarter. As compared to 2019 levels, we saw a 2% decrease in comparable sales, which is a 360 basis point improvement versus Q3. These results were driven by broad-based momentum, including in the underlying core business, the impact of our digital initiatives and well-executed promotions. During the quarter, we continued our journey of core quality enhancements in both breakfast and coffee. In breakfast, we built on our fresh cracked eggs platform with the introduction of the steak and egg breakfast sandwich, which helped drive overall morning daypart sales ahead of 2019 levels for the first time since the start of the pandemic. We also made progress enhancing our hot beverage offerings, extending our prior work on brewed coffee into a successful platform relaunch of handcrafted espresso beverages, including lattes in November. We saw the benefits of our richer and bolder recipes, dairy alternatives and equipment to nuts with these great tasting espresso-based beverages contributing to positive sales growth and helping drive a sequential improvement in hot beverage sales. In October, we took the next step in innovating for growth around our food-led occasions with freshly grilled wraps. This successful launch built off our established credibility in craveables and helped drive mid-single-digit growth in our lunch and afternoon snack dayparts versus 2019 levels. It's encouraging to see our focus on enhancing food quality and taste translating to strong sales growth with breakfast foods and main foods up a combined 14% versus 2019. Building new ownable platforms across food-led dayparts remains an ongoing focus for the team, and you can expect to hear more from us on our initiatives throughout the year. We're also making important strides modernizing the brand through restaurant technology enhancements and continued growth in our Tims Rewards loyalty program. For example, a roll-up to win 2.0 helped propel digital sales to over one-third of system-wide sales. In addition, Tims Rewards maintained its position as the number one food and beverage app in Canada with 4.5 million monthly active users during the quarter, over 50% growth year-over-year. On top of these underlying improvements, we also drove special visits and sales during the quarter through impactful promotions, such as our NHL trading cards and our collaboration with Justin Bieber. Timbits, which included exclusive merchandise in three delicious Timbits created together with Justin Bieber, was one of the more successful traffic-driving initiatives in recent memory and outperformed our internal expectations. We've seen early signs of brand love benefits from this partnership through unprecedented social engagement and increased appeal with younger guests. I'm a believer, and you can expect to see more from this exciting partnership in the year ahead. We were pleased to see the positive impact of our initiatives translate to growth in our brand health metrics as well across nearly all metrics and ahead of competitors with notable call-outs in both food and coffee quality and taste and all brand connection attributes. I should point out that our efforts in the quarter, alongside the tremendous work of our owners, drove sequential improvements in comparable sales each month, culminating in the month of December with positive low single-digit comparable sales versus 2019. We also saw sequential improvements on a two-year basis across all product categories, all dayparts, all formats, all our vanities and all regions during the quarter. While temporary restrictions and lockdowns in January naturally had some impact on mobility and hence performance, we were pleased to see that the impact of this latest surge and resulting restrictions has proven to be less severe than prior impacts, a reflection of the strength of our underlying business and brand connection and the fact that Canadians, like people everywhere, are keen to safely return to their normal mobile lives. In Tims, we have a beloved brand, dedicated restaurant owners and a strong multiyear plan in place to build on the momentum we're establishing in the attractive categories of food, specialty beverage and cold beverage. And we're confident that thoughtful and steady category innovation combined with improved core execution and unmatched digital reach will unlock a better experience for our guests and more opportunities to grow sales and owner profitability across Canada. What's more, there's also a very attractive path to expand the Tims brand around the world. We already have an established presence in 13 countries and are actively adding to this footprint through our robust development pipeline. The team achieved the highest level of unit growth since we acquired the brand, delivering 342 net new restaurants in 2021 with notable strength in China where we exited the year with 390 stores and opened our 400th restaurant in January, less than three years after opening our first. In the U.S., we achieved our best year of restaurant growth since 2016 and signed development agreements to expand to new markets, including Houston, which will open its first store this summer. Our new U.S. openings leverage a smaller footprint, faster build times and an optimized menu offering focused on beverages, baked goods and hot breakfast sandwiches, all leading to more compelling unit economics. We're seeing encouraging results from these formats and are excited to see the overall business get back to growth. We look forward to sharing additional progress of the Tims U.S. business later in the year. Now before I walk you through the rest of our results, I'd like to pass it over to Tom to give you an update on the encouraging progress we're seeing at Burger King U.S.

Tom Curtis, President of Burger King U.S.

Thank you, Jose, and thank you all for having me here today. Over the past six months, I've had the pleasure of traveling throughout the U.S., meeting with and learning from our dedicated franchisees and doing important foundational work with our BK team and franchisees to build a multiyear plan to reclaim the flame at Burger King. While we intend to share additional details of this plan later this year, I'd like to take this opportunity to walk you through some of the near-term initiatives we recently shared with our franchisees. I've been an operator for most of my career, including two decades as a franchisee. So I'm going to start with our initiative to improve operations, which is an important unlock for driving comparable sales. The opportunity is evident when we look at performance across our top operators compared to our bottom operators as measured across a number of metrics, including hours of operations, staffing, speed of service and average complaint ratios. In 2021, for example, comparable sales from this top quartile operators outperformed bottom quartile operators by over 400 basis points, and this is why we are focused on working with our franchisees to implement initiatives that will improve operations. At the end of December, we rolled out our first of two waves of menu simplification, removing low-volume items so the team members can focus on serving our most loved products and providing guests a fantastic Burger King experience consistently. The first wave had no material impact on comparable sales, and we are confident that the improved execution we're starting to see will drive guest retention and frequency for our restaurants. In addition, we're streamlining some product builds across the menu and simplifying our menu boards to make production and ordering easier for team members and for guests. These measures and the renewed focus on operations are welcomed by our franchisees and starting to drive progress in several key operational metrics, including order accuracy and overall satisfaction. Next, on digital. I spent many years at another company that has been an industry leader in the digital guest experience. There's no doubt for everything that I've seen at Burger King that we have a lot of opportunities to make it easier for guests to order from us online with way fewer clicks to complete an order and a consistent, easy-to-enjoy pickup experience. Becoming a leader in this digital space also involved completing the rollout and effective utilization of our outdoor digital menu boards, where over 70% of our guests order with us today. We are well on our way to equipping 100% of our drive-throughs in the U.S. and Canada with these boards by mid-2022. And as we continue to expand our Royal Perks loyalty program, we expect to see synergies from integrating loyalty into these dynamic digital boards. Shifting to our menu. We are leaning into our iconic brand equities and assets starting with a more purposeful highlight on what has made us special over the decades, flame grilling and having it your way. We were the first in the industry to do both at scale, and they're very much core to our future growth. And also core to our growth is leaning into our strongest brand equity, The WHOPPER. The WHOPPER is a multibillion-dollar brand, and we need to treat it as such. You should expect to see new extensions and innovations around The WHOPPER, some of which are already proven winners in our international markets. We expect they will test and perform well here in the U.S. as well. And while we always strive to provide excellent value for money on a full menu basis, going forward, we will be purposeful and targeted when we choose to promote this iconic asset. On chicken, you can expect us to optimize our platform so that we ensure unique offerings that we can execute on consistently. This includes a thoughtful menu architecture that features our premium chicken sandwich and extensions, celebrates our original chicken sandwich and offers a fun new approach to our unique fan-favorite chicken fries. Value also remains important to our guests and core to our business. One of our key priorities is to establish a strong value menu that will drive incremental traffic, specifically by creating a powerful Have It Your Way value menu and addressing its rightful place in our overall menu architecture. Now to execute on our initiatives, we've been building strong capabilities with our new analytics and insights team, bringing additional rigor to all areas of the business, utilizing guest insights, operations analytics, performance analytics and digital analytics. We are implementing better testing protocols to ensure our advertising and our initiatives are well-chosen and more impactful. And given the increased rigor of our new processes, it's fair to expect more of an impact from our initiatives in the back half of 2022. On branding and advertising, the team is working on our brand positioning and how we build relevance with all audiences. I won't go into the detail on that today, but I would note that we recently announced our decision to put our creative and accounts into review. Another crucial part of our brand positioning and relevance is reflected in our systems image, where currently we have nearly 30% of our system equipped with the latest BK of tomorrow image and technology element. The path toward a fully modernized fleet of restaurants is a key part of our longer-term plan, and we're committed to doing what we need to, including making investments in both the brand and its physical assets to get there. We are working side-by-side with our franchisees to develop a bold and thoughtful investment plan, which we'll share with you later this year. We are also investing in the support of our franchisees and restaurants so that operators execute well on our proven business model, especially in this challenging operating environment. First, we increased our corporate field and training positions across the U.S. and Canada by over 50% since the start of 2021. Second, we're developing our Burger King employee value proposition, and also we'll start providing franchisees with market insights on competitive wages and benefits to help them attract and retain great talent. And third, we plan to pilot new training methods for restaurant team members, like in-the-moment QR codes that can help them learn and grow as well as complete their everyday tasks more efficiently. And finally, it will come as little surprise that inflationary pressures coupled with near-term sales headwinds have had an impact on franchisee profitability. We've developed and tested a list of opportunities, many of which came directly from our top operators, which we expect will make a meaningful difference going forward. We already started to selectively implement some of these profitability initiatives in 2021 and plan to execute on more over the course of this year with a clear path to improved profitability in the coming quarters. And now to touch on our results for the fourth quarter. We saw a 1.8% year-over-year increase in comparable sales, a 340 basis point acceleration from Q3. This was driven primarily by the impact of simple, more powerful messaging around our key core platform initiatives for the quarter as well as increases in both delivery and digital sales. These improvements offset a modest impact from reduced operating hours, continued headwinds from our measured transition away from paper coupons and lapping last year's two-for-$5-per-core discount promotion. I was especially pleased to see our Italian Original Chicken Sandwich and Ghost Pepper Nugget promos benefit from our improved media testing and our purposeful decision to reduce the number of messages in the quarter. These were direct outcomes of opportunities our team identified early on to enhance our media firepower. I'm also excited to see that our efforts help to close the gap to our peers by a few hundred basis points last quarter. While we have a long way to go to further shrink this gap and to start creating one, both our corporate team and our franchisees are energized and excited to get after it. Finally, I want to thank them for their dedication and support as we work toward our common goal to reclaim the flame and provide exceptional experiences for each and every guest. And with that, I'll hand it back to Jose.

Jose Cil, CEO

Thank you, Tom. It's clear the team's hard work is paying off, and I'm personally equally as energized as you and our franchisees about Burger King's opportunity in the U.S. Let's turn now to our Burger King international business, which comprises nearly 60% of the brand's global system-wide sales in the quarter. During the quarter, we once again achieved a sequential acceleration in system-wide sales growth versus 2019, growing over 12%, up from last quarter's 10%. This result included sequential two-year comparable sales improvements in some of our largest international markets with Spain and Brazil notably returning to pre-pandemic levels during the quarter. Canada, up high single digits versus 2019, and Australia, Korea and the U.K. generating double-digit growth. We also ended the year with our three largest international markets, France, Spain and Germany, each generating over $1 billion in system-wide sales. Outside of the benefits from easing restrictions, one of the largest contributors to business performance in our international business remains digital growth. As Josh shared last quarter, we've seen a correlation between our most advanced digital markets and our largest and fastest-growing markets. In addition, our plant-based products continue to be an important sales driver in Europe, where we are a leader in plant-based offerings. We continue to introduce new products, including the veggie version of our iconic Long Chicken, which made its debut in Spain and Germany during the quarter. We've been pleased with the results, including a doubling of plant-based product incidents in Europe in the quarter and are looking for new market opportunities in Europe and around the world to expand the platform. We, of course, expect the international business to see continued improvements as restrictions ease. And as we look forward into 2022, we also expect to accelerate our unit growth in Burger King's international markets off our 2021 levels. We're optimistic about the long-term appetite and opportunity to expand the Burger King brand in new and existing markets around the world. Turning to Popeyes. As you know, development remains a key priority and an unlock for the brand for long-term growth. 2021 was a milestone year for Popeyes development, crossing the 3,000 restaurant mark in the U.S. and Canada and experiencing record unit growth with the highest number of openings since we acquired the brand, and we have no plans to slow down. In 2021, we signed more development agreements around the world than ever before, including plans to bring Popeyes iconic Louisiana-style chicken to India, the U.K., Saudi Arabia, Romania and France as well as further expansion in Mexico and of course, the U.S. and Canada. We continued this momentum into 2022. In January, Popeyes announced an agreement to launch in South Korea, one of the largest chicken QSR markets in the world. I'm very proud of the team's dedication to introducing Popeyes to more guests, and I'm confident we'll once again see strong unit growth in 2022 in both the U.S. and around the world. We saw the benefit of our powerful development engine on full display in our home market during the fourth quarter as strong net new restaurant growth of 5.6% offset softer comparable sales and drove a 4% year-over-year increase in system-wide sales. While Popeyes unit volumes remain incredibly strong, we did see a 1.8% year-over-year decline in home market comparable sales as a result of staffing challenges and competitive pressures. Ongoing labor challenges led to reduced operating hours and service modes, impacting comparable sales by roughly 1%. In addition, chicken sandwich volumes remain pressured by competitors, which, as you may recall, started making their sandwich debuts in early 2021. Despite these pressures, comparable sales did improve by nearly 300 basis points relative to Q3, partially driven by traction from many innovations. For example, we saw encouraging results from recent initiatives with nuggets and the sauce collaboration contributing positively to comparable sales. These initiatives also played an important role in attracting new demographics, specifically Gen Z and millennials, and expanding our PM snacking daypart. We're just scratching the surface on opportunities for Popeyes, and I firmly believe that the brand is poised to become one of the fastest growing in the industry. And finally, I'd like to briefly touch on our newest addition, Firehouse Subs. I'm pleased to share the strong results that the Firehouse Subs team drove in 2021, including reaching all-time high average unit volumes of over $900,000, growing year-over-year comparable sales 21%, driving system-wide sales to approximately $1.1 billion and generating over 27% of system-wide sales through digital channels. These impressive results are a testament to the strength of the brand, its unique menu offerings, its purpose-led public safety commitment and its seasoned management team. It's all of these elements that make us so confident in Firehouse Subs long-term growth and expansion opportunity. We're excited to plug Firehouse Subs into our robust global development network, shifting the brand's unit growth into high gear in the coming years. And while Firehouse Subs already has a growing digital presence, we see further opportunities to add more guest options and benefits and transport the brand's digital experience across borders. I'm very excited for the future of Firehouse Subs at RBI and look forward to providing you with more updates in the year ahead. With that, I'd like to hand it over to Josh to take you through a quick update on our technology and digital initiatives.

Joshua Kobza, COO

Thanks, Jose, and good morning, everyone. Technology remains a key pillar of our long-term strategy and one we view as a powerful business driver across all our brands and markets. We're focused on creating an even more convenient and seamless experience for guests with the ultimate goal of driving sales. That means being available across all channels, making it easier and faster to order and creating a joyful experience each and every time anyone interacts with our brands. To help us achieve this goal, we've added roughly 300 team members in the last three years across our consumer-facing, restaurant technology and data analytics teams, putting ourselves in a position to move quickly and build critical capabilities ourselves. In addition, we have accelerated adoption of key skills across our broader organization through hiring, education and training programs. One way we're integrating digital into our brands is through new service modes built into our restaurant image. For example, at Tim Hortons, our design team has added new order and pickup channels into various restaurant types. These include developing a walk-up order window, a dedicated curbside pickup area and a drive-through conveyor system. We look forward to sharing more on each of these exciting design innovations that enable the digital experience as we roll them out to more restaurants in 2022. And a quick update on our digital sales progress. We ended 2021 with over $10 billion in global digital sales, representing just over 30% of our total system-wide sales. Tremendous progress from just over four years ago when we had virtually no digital sales in most of our major markets. During the fourth quarter, Tims Canada derived over one-third of its sales from digital channels, an all-time high for the brand. And Popeyes and Burger King home markets generated 16% and 9%, respectively, while our international markets drove over 50% of sales through digital channels. We attribute this improvement to a combination of factors, including growth in delivery, an increase in mobile order and pay and continued traction from loyalty. 2021 marked the first year we had loyalty across all our brands in home markets. While Burger King and Popeyes are earlier on in their journeys, during the year, Tim Hortons transitioned its loyalty program from one focused on building a strong user base to consistently driving comparable sales and as a result, saw the highest sales contribution from loyalty to date. I'm confident that the investments we are making across our digital and technology capabilities will play a critical role in enhancing the guest experience and advancing our growth in the future. With that, I'll hand it over to Matt to take you through our financials for the quarter.

Matthew Dunnigan, CFO

Thanks, Josh, and good morning, everyone. In the fourth quarter, our global system-wide sales increased by 14% to $9.3 billion, and our adjusted EBITDA was $584 million, which represents a rise of approximately 15% organically. In addition to the growth in system-wide sales, several factors contributed to slightly higher EBITDA growth compared to system-wide sales growth this quarter. These factors include a favorable sales mix at Tim Hortons Canada, which benefited from same-store sales growth of over 11% year-over-year. We also saw cash distributions from joint ventures and other ownership interests as many of our markets globally continued to improve. Additionally, we released bad debt provisions while moving past cautionary provisions established in 2020. Lastly, our retail business at Tim Hortons continued to grow, supported by new product launches and further expansion into U.S. markets. These positive developments were somewhat countered by expected increases in our general and administrative expenses and the timing of our advertising fund year-over-year. As mentioned throughout 2021, we have intensified our G&A investments in essential business areas such as enhancing our field operations, which included a 50% increase in field headcount at Burger King U.S. and Canada, as highlighted by Tom, and significantly improving our technology capabilities. In the fourth quarter, we observed this investment impact as expected, with our segment G&A climbing to roughly $104 million, excluding Firehouse, reflecting these investments and a few million in discrete compensation expenses due to business performance exceeding year-end expectations. Regarding ad fund timing, our year-over-year growth this quarter indicates that advertising expenses were about $11 million higher than revenues, which created an organic EBITDA growth challenge of approximately 2%. This adjustment largely relates to the deployment of our CAD 80 million commitment to the Tim Hortons Canada marketing efforts aimed at enhancing our back-to-basics initiatives. Additionally, starting in January, our restaurant owners' ad fund contributions rose by 50 basis points compared to the beginning of last year, which we believe will provide valuable investment capacity for future advances in our food innovation roadmap and further development of our digital momentum to modernize guest experiences across Canada. Before discussing EPS, I want to highlight our cost of sales margin within the Tim Hortons segment. Consistent with observations from others in the industry, we experienced significant commodity volatility throughout the quarter, resulting in high inflation impacting both our revenue and expense lines. Consequently, this led to a slightly lower margin percentage for the quarter than we anticipated. However, during the fourth quarter, we saw healthy year-over-year dollar growth related to sales less cost of sales, reflecting the upward trends at Tims as sales and volumes improved throughout the quarter. We aim to navigate the ongoing volatility and remain focused on achieving volume growth with high-quality service, which is crucial for our system. Our fourth quarter adjusted earnings per share was $0.74 compared to $0.53 last year, marking a roughly 39% increase, including a foreign exchange tailwind of about 1%. This rise was driven primarily by reduced net interest expense, a lower adjusted effective tax rate, and a decreased share count due to our repurchase activities, partially offset by increased equity-based compensation. In terms of cash flow and capital structure, we generated $435 million in free cash flow during Q4 and over $1.6 billion for the year. This robust cash flow allowed us to keep investing in our business and take advantage of strategic opportunities while fulfilling our commitment to returning capital to shareholders through our leading dividend and share repurchase activities. In December, we expanded our term loan A facility by more than $500 million and extended the maturity of our term loan A and revolver to 2026. The funds, along with our cash reserves, facilitated our $1 billion acquisition of Firehouse Subs, which had a minimal effect on our balance sheet, only increasing net leverage by about 0.3x since Q3, ending the year with a strong liquidity position of $2 billion, including $1 billion in cash. Our strong cash flow and adaptable balance sheet have empowered us to execute on all fronts of our capital allocation priorities, starting with investments in the business. This year, we made significant investments, including the G&A expenditures I mentioned and our CAD 80 million support for the Tim Hortons Canada ad fund. Additionally, we invested $125 million in our business through capital expenditures and tenant inducements, showcasing our dedication to modernizing our brands and enhancing our digital capabilities. Moving forward, we will prioritize investments in our brands and are working on a thoughtful plan for the BK U.S. business that we will share in more detail later this year. We have also been actively repurchasing shares, and in the fourth quarter, we bought back and retired approximately 6.4 million shares of our common stock for nearly $370 million. Furthermore, we paid shareholders a $0.53 per share quarterly dividend, which will increase in Q1, marking the 38th consecutive quarter of year-over-year dividend growth with a target of $2.16 per share for 2022. The year 2021 was a combination of improving business results with double-digit growth in both system-wide sales and adjusted EBITDA, along with $1.5 billion returned to shareholders through nearly $1 billion in dividends and over $500 million in share repurchases. Looking ahead to 2022, we see significant opportunities to build on this momentum at Tims, increase initiatives in BK U.S., and pursue major global development opportunities. With our substantial liquidity, strong cash flow, and nearly half of our $1 billion open market authorization remaining, we have considerable flexibility to dynamically allocate our capital between reinvesting in the business and shareholder returns in 2022, barring any compelling strategic investment opportunities. Thank you all once again for your support and for being here this morning. We will now open the line for questions.

Operator, Operator

We'll be taking our first question today from Brian Mullan of Deutsche Bank.

Brian Mullan, Analyst

Tom, thanks for the prepared remarks. You talked about a lot of things, but I believe you mentioned potentially being willing to further invest in the brand to be in physical real estate, which will presumably require more CapEx. But I would imagine perhaps, that could also mean ongoing G&A or OpEx to support the system. So if you could just elaborate on that comment and what you had in mind. Is one thing even more than the other? Are both equally important? Just any thoughts would be great.

Jose Cil, CEO

Brian, thank you for your question. This is Jose. I'll start by addressing it and then pass it to Tom, who is right here with me. As we've mentioned before, we have a strong business that generates significant free cash flow, allowing us to reinvest in the business, return capital to shareholders, pursue strategic mergers and acquisitions, or a combination of all three, as demonstrated in the fourth quarter of 2021. Regarding the Burger King business, we've discussed this quite a bit already. Tom has recently taken on a new role and is collaborating with the team on the future strategy. I'll let him elaborate on general and administrative expenses as well as our efforts in real estate and capital investments.

Tom Curtis, President of Burger King U.S.

Yes. And thanks for the question, Brian. It's important to remember that we're already investing a good bit of G&A behind the BK U.S. business as we expanded the field team last year, increasing over 50% the size of the field team from January to January of this year. And those team members are critical partners with our franchisees. They're helping drive the operational improvements that we're seeing and that we need to continue to see, and they're also helping the franchisees implement some of the new initiatives that we have going forward. Also, we've invested in our analytics and insights team, led by a fantastic colleague of mine, Julia Oswald, and we're putting money behind technology and digital. But image is perhaps the area where we can accelerate the most with capital. We exited 2021 with about 30% of our home market system remodeled to the BK of tomorrow. We've been going at a run rate of about 500 remodels per year, but we're looking at ways to make step changes while maintaining quality. And this year, we'll be going site by site and working with our franchisees to execute on what that looks like so that they can drive good return on investment and also create a more seamless end-to-end experience for guests and improve operations for the restaurants. So we certainly are anxious and eager to share more with you, and that will probably come later this year in the coming quarters.

Chris Carril, Analyst

I wanted to circle back to development. You noted recently and again today that you see development accelerating, but I was hoping you can expand on that a bit more. I mean, Tim's clearly showed meaningful acceleration in the 4Q, and you've signed a number of new agreements for Popeyes. I know you've layered in Firehouse. So curious on how all the pieces fit together for the overall development outlook for this year? And to what extent you see more balanced growth going forward longer term?

Jose Cil, CEO

Chris, thanks for the question. Yes, we were excited with the progress we made in 2021. We saw the power of diversified growth this year with Popeyes in the U.S. as well as internationally beginning to really be a big contributor as well as Tim Hortons gaining traction in international markets, especially in China, but also in other international markets like the Middle East and the U.K. and Mexico. And we saw the first time in a long time, positive growth out of Tims in the U.S. So we're excited about Popeyes and Tims contributing. Obviously, BK is the engine of growth and has been for some time for our company internationally, in particular. And we're confident in the ability of that business to get back to levels of growth of what we saw back in '17, '18 and '19. And we're encouraged by the broad-based growth that we saw internationally in many markets. We saw some markets where we have large franchisees getting back to growth in 2021 and seeing some good momentum there, but not quite to pre-pandemic levels. And examples of that include China, Brazil and Russia growing, but not quite at the pace that we saw in 2018, 2019. In some cases, there are macro environmental issues like we saw with Brazil, although we did see signs of improvement in the fourth quarter. In the case of China, as an example, we've been working through some open issues and disputes that we've had with our master franchisee there. We're working through them, working closely with the master franchisee. I'm not going to be able to get into too much of that in this call here, but I've known these guys a long time and believe that we have a good path forward to help accelerate growth in China, which is one of our biggest priorities. And overall, we're pleased with the huge bounce back we saw in 2021 from basically flat in 2020 to meaningful growth in 2021. And we have a lot of confidence in our long-term outlook. We continue to see a lot of the white space in many markets in Asia. Our competition has 3:1 versus us, and we think we have an opportunity to grow in the chicken space, in the coffee space, in the burger space and now in the sandwich space. In EMEA, Europe, Middle East, Africa, it's 2:1, and North America, it's also 2:1. So lots of room for growth. We have four great brands that have strong unit economics and lots of interest from franchisees. And in particular, as it relates to BK, we're confident that we can accelerate in 2022 and beyond and get back to really strong growth across the entire company.

David Palmer, Analyst

For my question, I wanted to focus on the impact of inflation in the supply chain in Canada. You mentioned how Tims' supply chain was a drag to the EBITDA this quarter. And I would imagine costs would be running high in the supply chain in Canada this quarter. But looking to the future, I would imagine that the relationship of pricing to cost in the supply chain business would be improving, and some of these COVID-related friction costs that we see across all sorts of supply chains out there would also be going away. So could you talk about how much COVID and perhaps the temporary dislocations of price to cost might be a drag to Tims' EBITDA right now? And how much of that might be easier comparisons later? And then how much higher are Tims Canada prices at the menu level for the franchisees versus a year ago to pay for this?

Matthew Dunnigan, CFO

Yes. Dave, thanks for the question. It’s Matt here. I was just going to share some comments on your question on supply chain margin, and I think Jose was going to jump in with some thoughts as well. But specifically as it relates to the quarter in the supply chain, we had talked last quarter about some pressure on the sales, cost of sales margin, and we were expecting it to come down a bit given the volatility that was out there. And I think that's generally what we saw in the quarter. We did come in a bit lower than we had expected when we spoke in the third quarter. I called out in the prepared remarks, there was an impact there related to inflation, obviously. And if you think about it, the way our business works in terms of commodities where we're seeing a bunch of volatility and inflation, where we have pass-throughs, those pass-throughs are going through both the revenue and expense lines in the P&L. And so they have a little bit of a disproportionate impact as they flow through, which is kind of what we saw in terms of the impact to our percentage margin in the quarter. But that being said, I think we're very positive on the trajectory of the business, and I think that's the most important thing. We're very excited to see the progress in the business at Tims in the quarter, both in terms of sales and volumes following along with that. And as a result of that, it didn't really have a material impact on our dollar profit, right? So we saw healthy year-over-year growth on a dollar basis in the supply chain. I think where we are now, we're obviously still facing a bunch of volatility out there. We aren't giving specific margin guidance, but we are managing costs and pricing in a really disciplined way, and focused on really driving guest experience and delivering great value to our guests and maintaining best-in-class service levels from our supply chain, which we think is a pretty key advantage for the system in Canada. I'll let Jose jump in with some other thoughts as well.

Jose Cil, CEO

Thank you, Matt. David, regarding the second part of your question on consumer pricing, we collaborate closely with our franchisees and third parties to determine the appropriate pace and level of pricing. Our approach is structured and data-driven, and we regularly review market conditions. We also keep a close eye on trends within the marketplace and our competitors. In Canada, as well as in the U.S., our pricing has generally aligned with the Consumer Price Index, which in Canada was about half or slightly below half of what we experienced in the U.S. As such, Tims pricing in Canada has been slightly below the CPI, and we will continue to monitor this closely. It's crucial for us to manage the demand side effectively and not move too far ahead of the consumer in terms of pricing. Our teams collaborate with the owners in Canada and our supply chain teams to ensure that we maintain appropriate pricing while continuing to foster strong demand for our beverages and food offerings throughout the day. Thank you for your question.

John Glass, Analyst

Tom, you mentioned franchisee profitability at Burger King being under some pressure just given inflation in the sales results. Can you maybe frame what the average profitability looked like in '21 versus '19 or some way to sort of measure how you think franchisee profitability is today? Do you think that system has the wherewithal to continue to reinvest in the business the way you want them to, just given that profitability? And do you think the solution has just helped them operationally improve profitability, and therefore, they can reinvest? Or do you think there's a more significant role in corporate investment to help them achieve those goals of reimaging the system?

Tom Curtis, President of Burger King U.S.

Yes. Thank you, John. Franchisee profitability is going to be a big key to our long-term success. And as we came out of 2020, we had very strong profitability despite a difficult time, and that really speaks to the resilience of the business model. But that said, we worked through a lot of headwinds last year and saw an overall decline in profitability in 2021. We did see some positive signs in Q4 where we were flat to Q3 nominally and as a percentage of sales, despite the inflation headwinds. And just positively, we started to see some progress at the end of the year from our profitability initiatives specifically. So as we go forward, we're doing a lot on this front, and we're positive, and our franchisees are also very optimistic that this will have a positive impact in 2022 and beyond and help create the ability to invest more. So on the cost side, we're helping to diversify sourcing to alleviate cost pressures and supply chain risk. On the labor front, I talked a lot about simplifying life in the restaurants and addition of technology that can help drive efficiency as well. So our near-term plan in the next year is to try to drive about $500 million of annualized price and price-related efficiencies to the system. Part of that comes through utilizing those new approaches in guest insights. We started to roll those out in Q4, by the way, and expect to complete those in 2022, once again, providing us with a road map and a backdrop for future investment. And as we mentioned earlier, we do think we have a role to play. Matt, Jose, myself are working closely together. It's something we talk about almost every day, and then we'll have more later in the year on what that will look like. And also we'll be working closely with our franchisees on that plan.

Dennis Geiger, Analyst

Jose, I appreciate all the color on Tim Hortons and the improvements that the brand saw through the quarter. Wondering if you could talk a little bit more about how you view the brand is positioned this year to make further gains based on everything you highlighted and the work the team has done across menu and marketing and digital and more, particularly as the restrictions in Canada begin to ease and mobility improves. Maybe specifically, if you could kind of touch on sort of the strength maybe that you're seeing on those brand, customer brand closeness scores that you've highlighted previously or whether the brand is taking market share currently in Canada?

Jose Cil, CEO

Thanks, Dennis, for the question. We're excited about the progress we made in Q4. The plan was well-balanced and executed effectively by our owners and team. We experienced growth in our core performance, and the underlying business is heading in a positive direction. Our digital business is also strong, as Josh noted, and we executed promotions well this quarter, including efforts around hockey cards and Timbits. These promotions have been consistently successful for us, and we believe they will continue to engage our customers both digitally and in our restaurants. As we approached the end of the quarter and the beginning of 2022, we noticed a surge related to the Omicron variant and some restrictions were reintroduced in Canada. However, those restrictions are now easing, and recent announcements suggest ongoing improvement. Our business plan focuses on our excellent food and beverages while paying close attention to our digital initiatives. Trends remain positive, and brand metrics are encouraging. We're looking forward to sharing more progress as we move into the second half of the quarter. Matt, could you elaborate on some of these points?

Matthew Dunnigan, CFO

Yes. Thanks, Dennis. Just related to market share, just a couple of ones to kind of throw out there for you. We did see in the important area of food innovation, which we've been focused on, and we've seen a lot of good results so far against the plan. We did see breakfast food market share grow over 300 basis points year-over-year improvement based on high single-digit growth in breakfast foods versus '19. And we also saw a really, really nice strong growth in lunch foods as well, which were up over 20% versus 2019, and also improving in terms of market share.

Jeffrey Bernstein, Analyst

Great. Tom, welcome to the call. It's wonderful to have brand leadership involved. I want to follow up on the pressure franchisees are experiencing with Burger King profits. Do you think this will restrict certain investments or initiatives you plan to pursue in 2022? I know you mentioned collaborating with Jose, Matt, and others. Is there a possibility of making a contribution to the Burger King system similar to what you did for Tim Hortons last year, which appeared to have a positive impact? Additionally, regarding franchise profits, could you share your thoughts on menu pricing for the Burger King brand? Where do you think the system ended in 2021 to protect profits, and do you have any suggestions for balancing traffic, value, and margin in 2022? Any insights would be appreciated.

Tom Curtis, President of Burger King U.S.

Thank you, Jeffrey. We're carefully considering what a multi-year investment plan could entail and believe we can collaborate with our franchisees on this. In the meantime, our primary focus is on operational improvements to enhance profitability, along with marketing interventions to support this goal. Regarding pricing, in late 2021, we increased price limits on selected items and removed the WHOPPER from our core discounts, although we will seek opportunities for some additional discounts in the future, though not daily. We've demonstrated good price elasticity in several areas, and as we implement these strategies over the next couple of years, maintaining an excellent guest experience will be crucial for us and our operators. We've noticed that those operators who excel in traffic after raising prices tend to sustain that traffic effectively. Therefore, our operational initiatives will align with any strategic pricing adjustments to ensure business growth. We observed solid evidence of this in Q4, particularly with our high-performing operators.

Andrew Charles, Analyst

Great. Guys, really impressive traction in the first three years in Tim Hortons China. Could we just get an update, though? I think with the master franchisee plan go public, they did share some store-level details. And just want to learn a little bit more around how it impacts your income statement. Based on their disclosure, it looks like AUV is around $450,000 to $500,000 or so. And also, I'd love to know just the royalty. I think it steps up over time, but it starts at around 1% to 2%. Just want some help just connecting the dots between their store economics and how it impacts your income statement. Obviously, that becomes a larger percentage of growth.

Jose Cil, CEO

Yes, Andrew, thank you for your question. We are very enthusiastic about the progress we are making with Tims in China. As I mentioned earlier, we surpassed the 400-store mark in January, just under three years since opening our first location. We have ambitious long-term growth targets for China, which we see as an excellent opportunity to expand Tims internationally across Asia and other global markets. We're really thrilled, and we're also seeing solid growth in comparable sales for 2021. Our digital business is substantial, with around 90% of sales coming through digital channels, and we are observing considerable improvements at the operational level in our stores, with positive guest engagement and feedback. Similar to our experiences with Popeyes and early days with Burger King, there are different formats we'll utilize as we build our brand internationally. Particularly in Asia, we are focusing on smaller format locations instead of standalone drive-throughs. Additionally, as you noted, we are seeing different economic conditions, especially regarding royalties. Our international business is primarily royalty-based, and while we have seen ramp-ups in certain royalties, our aim is to achieve standardized royalty rates across all our brands globally. Many of these international ventures are starting from the ground up, requiring us to build brand awareness. We expect average unit volumes to increase over time as we enhance consumer connection and understanding of our brand, leading to increased frequency. We have strong loyalty programs in these markets that promote even higher customer frequency. We are excited about sharing more updates on our progress with Tims, as well as Popeyes and Firehouse, alongside our international growth for Burger King. Thank you for your question.

Lauren Silberman, Analyst

I wanted to ask about Popeyes U.S. You talked about competitive pressures at the brand, and given these competitive pressures are unlikely to abate, how are you thinking about the strategy to reaccelerate comps and market share gains? And then to what extent is the sales performance weighing on franchisee economics and the appetite for development in the U.S.?

Jose Cil, CEO

Thank you for the question, Lauren. It's important to highlight the significant transformation that Popeyes underwent in the U.S. starting in 2018 and continuing into 2019 and 2020. The business has experienced remarkable changes in annual unit volumes and four-wall EBITDA for our franchisees. We've noticed strong interest and engagement from franchisees nationwide, both existing and new, drawn in by the appealing unit economics. Like all brands in the U.S. and other mature markets, we face considerable competition, which is a natural part of the industry. However, we believe our unique offerings, particularly the chicken sandwich and the recently launched nuggets, along with our diverse innovation pipeline in handheld chicken products, position us to sustain long-term growth. Our investments in digital initiatives will also play a crucial role in driving the brand's growth in the U.S. in the upcoming quarters and years. We see a significant opportunity ahead. Moving forward, we will keep innovating and refining our menu to align with industry trends. Ultimately, the key for Popeyes will be to consistently deliver delicious products efficiently in our restaurants. The team is focused on investing in drive-throughs, outdoor digital menu boards, and operational improvements to support our guests every day. Thank you again for your question.

Mark Petrie, Analyst

Tom, I'll echo the other comments this morning. But just regarding the approach to marketing, I heard your comments about the opportunities in the menu as well as in digital, but I wanted to ask about the Burger King brand perception. And I understand you're in a review of your creative accounts, but where do you think the Burger King brand has lagged? And where do you see the most opportunity this year?

Tom Curtis, President of Burger King U.S.

Thank you, Mark. I believe our greatest opportunity lies in redefining our identity and establishing a relevant and distinct voice. This is one of the reasons we initiated an agency review. We are eager to enhance our brand positioning and clarify our brand essence moving forward. Our focus will be on our core offerings, such as the WHOPPER, flame-grilling, and the "have it your way" concept, which have contributed to our success and will continue to do so. By concentrating on these elements and delivering them in a simplified manner with stronger messaging, we aim to increase our market share over time.

Jose Cil, CEO

Great. Thanks to everyone for their questions and for joining us this morning. I'm incredibly proud of the progress we've made this quarter and throughout the year against a number of our key priorities, including driving sequential improvements at Tim Hortons in Canada, at Burger King in the U.S., enhancing our global digital capabilities and building a robust development pipeline to accelerate unit growth in 2022 and beyond. I'd like to thank our team and franchisees for their contributions and their continued dedication and effort as we work together towards our big dream of building the most loved restaurant brands in the world. Thank you again for joining us, and have a great day.

Operator, Operator

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