Earnings Call Transcript - QSR Q3 2021

Operator, Operator

Good morning, everyone and welcome to the Restaurant Brands International, Third Quarter 2021 earnings conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that all callers will be limited to one question. Please also note that this event is being recorded. I'd like to turn the conference call over to Steven Lichtner, RBI's Head of Investor Relations. Please go ahead.

Steven Lichtner, Head of Investor Relations

Thank you, Operator. Good morning, everyone. And welcome to Restaurant Brands International's Earnings Call for the Third Quarter ended September 30, 2021. As a reminder, a live broadcast of this call may be accessed through the Investor Relations web page at investor.rbi.com, and the recording will be available for replay. Joining me on the call today are Restaurant Brands International's CEO, Jose Cil, COO, Josh Kobza, and CFO, Matt Donigan. 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. Throughout 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. And now, I will turn the call over to Jose.

Jose Cil, CEO

Good morning, everyone. Thank you for joining us on today's call to discuss our third quarter of 2021. I hope everyone is doing well. Before I dive into our results for the quarter, I'd like to highlight an important milestone for our company. In 2020, we launched our Restaurant Brands for Good sustainability framework to address our food, the planet, and the people and communities we serve. During the quarter, we announced our goal to achieve a 50% reduction in greenhouse gases by 2030, which was approved by the science-based targets initiative, and reach net-zero emissions by 2050 or sooner. These targets are a good example of the action-oriented approach we're taking to do our part to tackle climate change. The moment for action is now, and I'm personally extremely proud of the team's efforts so far, getting it started on this important journey. Beyond doing right by the planet, we believe we're doing right by our guests, employees, and shareholders who increasingly value brands that take sustainability seriously. This progress is really important because our value proposition starts with our brands: Tim Hortons, Burger King, and Popeyes, all of which generate resilient, growing, high-margin revenue streams through comparable sales growth and restaurant development, allowing us to reinvest in our business while also returning capital to shareholders. During the third quarter, we once again grew global comparable sales year-over-year, driven by worldwide growth at Tim Hortons and strong results from Burger King and Popeyes' international business, which offset softer performance from Burger King and Popeyes' home markets. As compared to 2019, our system-wide sales growth accelerated to 5% versus 4% in Q2, driven by positive overall comparable sales growth and continued progress in our development pipeline. With 264 net new restaurants delivered during the quarter, we are on track to return to 2018-2019 levels of growth this year. Looking ahead to 2022, based on our current pipeline, we believe we are well-positioned to accelerate our net unit growth across all three brands and continue on our path to 40,000 restaurants. Our efficient operating model helps convert the system-wide sales growth to the bottom line, contributing to robust free cash flow generation that provides significant optionality, allowing us to reinvest in the business and return capital to shareholders through both dividends and open market share repurchases. We're making investments in key areas of the business, such as building in-house technology and digital teams that we believe position us to add value directly to our guests and improve restaurant operations, investing behind our marketing plan at Tim Hortons in Canada, accelerating the rollout of outdoor digital menu boards, and investing in our people, especially in areas like technology, operations, and marketing. We also returned roughly $240 million to our shareholders on October 5th in the form of a $0.53 per share quarterly dividend, once again maintaining the highest payout ratio in our industry. In addition, since announcing our expanded $1 billion buyback program at the end of July, we've repurchased and retired approximately 2.8 million shares in open market transactions, totaling just over $180 million. These robust capital returns reflect the confidence we have in our brands, our view of our underlying intrinsic value, and our outlook for the business. Before I turn to our brand-level performance, I'd like to hand it over to Josh to provide you with a more detailed update on our development framework—a key driver of our long-term growth prospects—then also share an update on technology.

Josh Kobza, COO

Thanks, Jose. Good morning, everyone. As Jose mentioned, we have big aspirations to grow our restaurant base towards our long-term goal of 40,000 locations, and we are confident we are well-positioned to execute. We are fortunate to operate three iconic brands in some of the most attractive QSR categories. Within this landscape, we view ourselves as uniquely positioned to drive outside growth. When we look at the unit count of our leading peers by category in key international regions, we see notable opportunities—most compelling in Asia-Pacific, where our leading competitors collectively have nearly 10 times the number of restaurants as we do. In EMEA, leading peers have over three times the number of stores compared to us. In Latin America and the Caribbean, they have more than double our footprint. While this international runway is especially compelling, we also see growth opportunities closer to home in the U.S. and Canada. Developing new restaurant business around the world is a key foundational strength of our team, and we are joined in our efforts by an exceptional network of master franchise partners who have the experience, local expertise, track record, and capital to invest. While we do not take a one-size-fits-all approach with our partners, working with local entrepreneurs, established restaurant operators, as well as strategic and financial partners, we do look for a few common threads across all of them. We seek out partners who share our vision for building out our brands to their full potential in their markets, have the capital resources to do so, and have talented local management teams to execute on that vision. The success of our global development playbook is readily apparent when looking at Burger King's international growth, which includes a doubling of the brand's international store count since 2012 to nearly 12,000 locations and roughly 60% of the brand's worldwide system-wide sales. In multiple markets—China, France, Russia—the team effectively started from scratch, identified a strong local partner, entered into a long-term master franchising development agreement, and created a robust business with a lasting presence and continued runway for growth. In fact, in these three markets alone, since 2012, we have built nearly 2,400 restaurants and created nearly $3 billion of annual system-wide sales. For example, in Russia, through our partnership with both a financial partner and a local entrepreneur, we've grown Burger King's store count from just a handful of restaurants in 2011 to nearly 800 today, almost matching the market leader. Despite this robust international development, Burger King still has only half the number of restaurants globally versus a leading competitor, including only a third of the number of restaurants in Asia-Pacific, where we are building a strong foothold. As a result, we continue to see Burger King as a significant growth engine, and based on our current pipeline, we expect it to be the largest contributor to our net restaurant growth for the foreseeable future. We also expect the overall pace of our restaurant growth to benefit as we ramp up contributions from exciting franchise relationships we recently established for both Tim Hortons and Popeyes. At Tim Hortons, we are the undisputed leader in Canada; however, the brand remains significantly underpenetrated throughout the rest of the world. For example, we have just over 325 restaurants in Asia-Pacific, a fraction of leading competitors’ approximately 10,500 stores. We've only just started scratching the surface with master franchise agreements in China, the UK, the Middle East, Mexico, and others contributing to our year-to-date unit growth of 188 restaurants, which includes the fastest pace of international growth the brand has ever achieved. We are actively working towards development projects in new markets to add to our existing pipeline and accelerate growth for years to come. We feel confident that Tim Hortons can translate to markets all around the world, as demonstrated by our fast-paced growth in China where, as many of you know, we only started in January 2019 and already expect to have over 350 locations by the end of this year. This growth is only expected to accelerate with our partners driving a strong vision for the brand, aiming to propel Tim China to over 2,700 restaurants by 2026. Finally, we see opportunities at Popeyes to grow all around the world, and this year alone have signed commitments to develop some of the most important QSR markets, such as the United Kingdom, India, Mexico, and Saudi Arabia, as well as expand our footprint in the U.S. and Canada, further enhancing our visibility into achieving our long-term unit growth aspirations. The opportunity in the U.S. is especially compelling for Popeyes. Our guest insights work shows that the number one barrier to trial for the brand is convenience. With 50% of guests driving more than 10 miles to reach one of our restaurants, we see adding new locations closer to our guests as a significant long-term opportunity. We're excited about the roadmap for Popeyes, with the brand on track to achieve record unit growth this year, driven by contributions from key markets including the U.S., Canada, Spain, and the Philippines, and expected to further accelerate in 2022. Before handing it back to Jose, I also wanted to share some thoughts about our digital progress and insights from key international markets. We've discussed how building out and investing behind our technology platforms is a key priority. When we look at our most advanced digital markets internationally, which also happen to be some of our largest and fastest-growing markets, we see the importance of this in driving digital sales. Our businesses in China and South Korea generate the vast majority of sales from digital channels: nearly 90%, with China in particular driving over 50% of sales from known diners. In France, Spain, and Russia, over half of sales already come from digital channels. There are a few notable common threads across these markets: 1. Each has a strong loyalty program in place with easy in-store authentication capabilities. 2. Each recognizes the merits of an omni-channel approach utilizing kiosks, mobile order and pay, delivery, and third-party partners to make it easy for guests to interact with the brand in their own way. 3. All quickly integrate new and emerging channels, including third-party delivery and social commerce, like WeChat and Kakao, to grow their customer base by ensuring the brand is present and has open communication channels wherever our guests are. Each market has developed a simple and effective back-end infrastructure to scale quickly without creating complexity. These are just some of the learnings we're able to apply to our home markets, which we expect will follow the path of our more digital international markets over time. That's why we've been focused on ramping up enrollment in our loyalty programs, creating better digital experiences across service modes, including digitizing our drive-throughs, integrating with a growing number of platforms, and continuing to improve our back-end infrastructure. We've already seen some early success with the Tim Hortons app, which now accounts for over 10% of Canadians as monthly active users and has the highest usage among restaurant or food delivery apps in the market. While these initiatives take time and investment, especially in our large home market, they're critical to the future of the business and will continue to be a key priority. With that, I'll hand it back to Jose.

Jose Cil, CEO

Thanks, Josh. Turning now to our brand performance. At Tim Hortons, we're encouraged by the progress we've seen in Canada, including generating five points of sequential quarter-over-quarter improvement in 2-year comparable sales as government restrictions ease throughout July and August, and we continued to execute against our back-to-basics plan. This improvement has come from all provinces with Quebec, Western, and Atlantic Canada showing low-to-mid single-digit declines versus 2019 compared to mid and high single-digits in the second quarter, while Ontario improved to high single-digit declines versus low teens last quarter. When we look at both the restaurant format and our vanity, it's clear where the decline is concentrated. From a vanity perspective, all were vanities outside of super urban, which represents roughly 10% of our footprint, improved to single-digit declines versus 2019 with rolled down low single-digits and suburban and urban down mid-single-digits. While super urban restaurants declined nearly 30%, they did see a 7-point improvement versus the last quarter. From a format perspective, drive-through restaurants are nearly flat versus 2019, while non-drive-throughs are still declining in a 20% zip code. However, non-drive-through locations did see about a 10-point improvement this quarter versus the second quarter. Despite this positive momentum across regions, formats, and vanities, with reopening plans paused across the vast majority of the country and workplace mobility still significantly behind pre-pandemic levels, we know we're not out of the woods yet, and neither our teams nor our restaurant owners are standing still. We're highly focused on continuing to execute our multiyear back-to-basics plan, which is centered around elevating core quality, innovating for growth, and modernizing the brand. The progress we've seen so far from our work has been encouraging. With the exception of hot beverages, all of our product categories are back to pre-pandemic levels or better. It's also worth mentioning that despite the continued workplace mobility impact on hot beverage occasions and sales, year-to-date our brewed coffee market share is slightly above pre-pandemic levels. We believe this reflects benefits from the fundamental core quality work we focused on around fresh brewers, water filtration, and our improved dark roast blend. The benefits of this focus on core quality also extend to breakfast, with breakfast foods outperforming pre-pandemic levels despite lapping 2019's very successful 2 for 5 hot breakfast sandwich promotion. This outperformance has been driven by a boost from the latest addition to our fresh cracked eggs platform, as well as improved breakfast wraps. The team's dedication to innovating for growth is also paying off. As you know, last quarter we introduced new lines of cold beverages, including our cold brew and real fruit quenchers, and we saw them once again contribute positively to 2-year comparable sales. We are also pleased to see these items, along with our fresh cracked eggs platform and improved baked goods, help drive the morning daypart close to 2019 levels. Historically, the morning daypart has been a significant percentage of our overall business, so it's encouraging to see progress here even despite workplace mobility constraints. As I mentioned earlier, we're not standing still waiting for mobility to return. We're pushing forward with a strong innovation pipeline to improve our presence in food-driven dayparts like lunch and dinner. We have experienced promising results to date in our efforts with craveables and our new and improved artisan sandwiches helping drive lunch ahead of pre-pandemic levels this quarter. As we move forward in Q4 and into 2022, you will see us continue to build up the credibility we've been establishing and drive further long-term growth opportunities in food-led dayparts. We're also focused on our commitment to modernization, including building up our strong base of digital known diners and driving guest engagement through our Tim’s Rewards loyalty program. This quarter, we kicked off our second Roll Up To Win campaign, which helped drive overall monthly known diners to an all-time high. We're particularly excited about this growth, as it positions the team to learn more about our guests' wants and provide them with even more compelling offers and experiences to drive increases in check, traffic, and brand closeness. We're actively working together to further integrate Tim's Rewards into our drive-throughs as well, which cover approximately 70% of our systems, in addition to equipping our drive-throughs with outdoor digital menu boards. We remain on track to complete substantially all of Tim Hortons' North American outdoor digital menu board rollout by the end of this year. Finally, we remain committed to supporting our communities through important efforts like Camp Day and our Smile Cookie campaign. This quarter, we celebrated the 30th anniversary of Camp Day, one of the most exciting days of the year for our team and restaurant owners, who raised a record-breaking 12 million CAD for the Tim Hortons Foundation Camp. In September, franchisees broke another record, this time for the 25th anniversary of our Smile Cookie campaign, raising another 12 million CAD for over 600 charities. I am incredibly grateful to each and every one of our restaurant owners for their contributions year-end and year-out. I would like to give a particular shout-out to our Denville, Ontario restaurant, which sold the most of our cookies for the fourth year in a row, selling roughly eight cookies for every resident in Denville. We believe our investments in the back-to-basics plan and our community engagement are having a positive impact not only on our business but also on our brand health. In fact, we once again saw a year-over-year improvement in brand health metrics across most categories, including food and coffee quality and taste, as well as overall brand connection. We’re confident that the work we’re doing together with our restaurant owners across our core platforms—product and daypart innovation, brand modernization, and community outreach will position Tim well to not only recapture routines as mobility constraints subside but also drive new guests, new occasions, and new opportunities for the brand in any environment. Turning now to Burger King, starting with the U.S. It’s clear we’re navigating a transition in the U.S. and this quarter's results reflect that. During the quarter, we saw a 1.6% decline in comparable sales at Burger King U.S., driven primarily by the underperformance of value offerings and our intentional shift away from paper coupons. In terms of value offerings, this quarter's core offers—a BOGO plus $1 and 2 for $6—yielded considerable year-over-year GAAP against last year's 2 for $5, while also facing headwinds from competitor core discount offerings. On paper coupons, we made a conscious decision to reduce our investment in this declining promotional channel that we've historically over-indexed relative to our peers. We know this decision will impact our results in the near term, but we believe it’s the right one as we focus on building more sustainable long-term sales through our digital platforms, and maximizing media firepower behind growing channels with increasingly tailored offerings for our guests. These items contributed to our third quarter comparable sales decline, and with two of our big campaigns during the quarter, and real meals unable to offset these headwinds, we continued to see gaps relative to our peers. We know we have an iconic brand with well-tenured, focused franchise operators, but we also see clear opportunities across operations, digital menu, and image that can work together to reclaim market share and drive long-term sustainable growth. Executing on these opportunities starts with having the right people and right team in place. As you know, we appointed Tom Curtis as President of Burger King U.S. and Canada in August. A proven QSR operator with 35 years of experience as both a franchisee and senior executive, Tom has spent most of the last two months visiting with franchisees across the U.S. and focusing on our biggest operations opportunities, in addition to gathering feedback on our menu, digital, and image programs. His initial observations are clear: we have a great brand and the assets to build from, but we need to double down on putting the guest experience at the center of all of our efforts. Tom and the team have been hard at work in partnership with our franchisees to build a focused plan to reclaim our market share and put us on track for long-term sustainable growth. While I’m not going to get into all the detail today, I will share a few directional highlights on where we’re headed. We know that the foundation of any restaurant business is exceptional repeatable precision in operations. There are upstream impacts on great operations like having a focused menu and creating platforms that can be executed consistently by our teams in well-designed kitchens with modern, efficient equipment. There are also important downstream indicators of great operations, including competitive drive-through times, order accuracy, and product and guest satisfaction scores. Our biggest areas of addressable opportunity are clear and we’re already at work on our plans to streamline our operations and drive superior guest service levels. Equally important is creating an easy and seamless experience for both our team members and guests through digital platforms. We hit an important milestone this quarter with a nationwide in-store rollout of our Royal Perks loyalty program in September, and we’re pleased with the early results with nearly 80% of registered digital guests now having converted to Royal Perks. We are also actively working to integrate loyalty offers into our outdoor digital menu boards, which we continue to install across North America. We now have over 50% of Burger King drive-through restaurants equipped with outdoor digital menu boards and expect to exit 2021 with about 75% complete, nearing that 100% milestone by mid-2022. With nearly 80% of Burger King sales coming from drive-through, we believe this initiative will drive significant long-term benefits for the overall business. Regarding our menu, we know we have the most loved hamburger in America. All our data shows our flame-grilled Whopper outperforms the hero product of our competitors; yet many of our Burger promotions for the last few years have focused on some brands or extensions to our core rather than doubling down on our flagship hero product. The Whopper is a key component of our burger category strategy, and there's no doubt that the Whopper is very important to our long-term plans. On chicken, despite the modest initial performance, we continue to believe in the platform. It’s a great chicken sandwich and an important part of our core menu, but there's work to be done to leverage the platform to its full potential, including improving our communications, market positioning, and pricing. Breakfast is also one of the most incremental menus and daypart opportunities for the brand. We have a sizable existing breakfast business driven by Croissan'wich, but we see runway to expand by developing the menu offering at various price points, serving a good cup of coffee, leveraging our technology to nail speed of service and accuracy, and deliver a more consistent and reliable experience, as well as executing a more thoughtful and consistent marketing and media investment plan. On value, we've been spreading ourselves too thin across too many messages, resulting in mixed results. Historically, we've consistently had the most value constructs in the market—three times as many as our lead competitors—which diluted our marketing firepower and added operational complexity, confusing guests. Our ongoing investments in data and analytics have given us a much clearer view of the media weight required to have both promotional and everyday value offers, and we are already working to address this by focusing our efforts behind fewer, more impactful offers and value platforms. We are also thoughtfully developing a roadmap for image transformation of our restaurant portfolio. Our digital initiatives go hand-in-hand with this priority. We’re examining ways to optimize the sales potential of our portfolio while maximizing the ROI for each franchisee. For example, in certain markets, the highest return on investment for a franchisee may be investing in our double drive-throughs rather than in extensive in-store dining room redesign. Each market, each store, and each partner is unique, and to that end, we're working with our franchisees to align on a more ambitious image transformation plan for the future. This brings us to the most important piece of driving long-term success: franchisee profitability, trust, and engagement. We can have a great strategy in place, but at the end of the day, the key to success will be how well we work together with our franchisees to execute the plan in the restaurants. Fortunately, Tom's candor and humility, his intense focus on simplification, guest experience, and profitability; and his track record of success as a former franchisee, along with the time he and the Burger King team have spent with franchisees, have resulted in early support from our franchisees. As we look ahead, Q4 is all about finalizing our engagement with the franchise system on the multiyear plan, with 2022 being year one of that plan's implementation. We recognize that important long-term value-creating change does not happen overnight. We're confident in our Burger King leadership, our brand, our team, and our incredible franchisees and their teams. We look forward to sharing more with you in the coming quarters. Turning for a moment to international—a bright spot for the Burger King brand and a key driver of our long-term growth. As Josh highlighted, Burger King has a strong and growing presence internationally, generating about 60% of the brand's system-wide sales, up from roughly 45% in 2012. The brand has incredible global awareness and is improving its market positioning, including in Spain, which generates over a billion dollars in system-wide sales and recently hit an exciting milestone by becoming the most preferred QSR brand in the country. During the third quarter, Burger King's international business grew system-wide sales over 10% versus 2019, an acceleration from last quarter's 3% growth. This performance included sequential two-year comparable sales improvements in some of our largest markets: France, Spain, Germany, and Brazil, with France notably returning to pre-pandemic levels during the quarter, and Germany generating nearly double-digit comparable sales growth versus 2019. We saw double-digit comparable sales growth versus 2019 in key markets including Australia, the UK, Russia, South Korea, and Japan. Given the diversity of our international business, it’s difficult to pinpoint one or two key drivers of the overall comparable sales growth in the quarter. However, we’ve noted a few highlights that we believe are contributing to growth in certain markets. For example, our plant-based products have proved to be an important sales driver in the UK, Germany, and the Netherlands, and continue to grow as we launch new products. Our digital sales have also notably improved, with the international business now generating roughly 50% of sales from digital channels. We are pleased with the progress we continue to make internationally at Burger King, and as restrictions continue to ease, we are optimistic we will continue to see a rebound in sales that will, coupled with our robust development pipeline, drive long-term sustainable growth for the brand for years to come. Let's now turn to Popeyes. As Josh highlighted, we see a significant long-term growth opportunity for the Popeyes brand. This quarter, we grew three comparable sales nearly 15% even despite lapping the August 2019 launch of our game-changing chicken sandwich. That said, on a year-over-year basis, U.S. comparable sales declined 4.5%, primarily driven by traffic declines and, to a lesser extent, less effective impacts from the offers we had in the market. Regarding traffic, ongoing labor challenges led to reduced service modes and operating hours, particularly in late-night, as well as a temporary distribution center interruption in the Northeast. We're focused on working with our franchisees to alleviate the impact of these challenges in the future. While in-restaurant staffing may take time to improve, we're well into the process of diversifying our distribution network in the region to mitigate the impact of any future distribution center disruptions on our supply chain. Despite these headwinds, which drove the majority of the year-over-year decline, the brand continues to generate over $1.8 million in annualized sales per restaurant in the U.S. Popeyes U.S. once again grew system-wide sales, a success from the team's focus on strong development offsetting the decline in comparable sales. The team also remains committed to making progress across menu innovation, focusing on two areas this third quarter: nuggets and premium beverages. We launched nuggets in July as a new long-term category to our menu—and a convenient way to enjoy delicious hand-breaded Louisiana chicken. While the launch of nuggets has shown to be incremental to our business by attracting new guests and driving check, it could not offset the traffic headwinds we experienced during the quarter. We know there is more we can do to enhance the performance of this important new category for us. For example, we know every great nugget deserves a great sauce pairing. We're focused on innovating in this key area, introducing creative and delicious new sauces like our recently launched Hottie Sauce, in collaboration with Megan Thee Stallion. We are particularly excited about this collaboration as it not only introduces a new dipping sauce for our nuggets but also innovates on our iconic chicken sandwich platform for the first time. Our recently launched lemonade platform has driven beverage incidents to their highest levels since 2017. Beverages are a great driver of traffic and franchise profitability, and we believe there's even more we can do here and are excited to continue building on the momentum we’ve seen. We remain confident in the long-term outlook for the Popeyes brand, continuing to innovate across our menu and dayparts, enhancing the guest experience, and bringing Popeyes to more guests around the U.S. and the world with a robust development pipeline. With that, I would like to hand it over to Matt to take you through our financial and cash flow results for the quarter.

Matt Dunnigan, CFO

Thanks, Jose. Good morning, everyone. This quarter, we made solid progress against many of our key priorities, and our results once again demonstrate the benefit of having a diversified and resilient business model. For the third quarter, our global system-wide sales grew 11% to $9.4 billion, and our adjusted EBITDA was up about 5% organically year-over-year to $607 million. While historically our growth in adjusted EBITDA year-over-year has been closer to our system-wide sales growth, there were a couple of factors that contributed to the difference in our consolidated growth rates this quarter. First, as mentioned on past calls, our continued proactive investments in people, digital, and technology led to a sizable year-over-year increase in segment G&A. We expect that our core segment G&A will sequentially increase roughly $5 to $10 million in the fourth quarter, with fourth-quarter levels establishing a reasonable baseline as we head into 2022. Additionally, our year-over-year growth this quarter reflects the fact that advertising expenses exceeded revenues by approximately $12 million more than they did in the third quarter of last year, resulting in a negative impact of two points on our EBITDA growth. This mostly reflects spending from our CAD 80 million commitment behind the Tim Hortons Canada ad fund supporting our back-to-basics initiatives. By the end of Q3, we have deployed nearly 75% of these funds and expect to spend the remainder during Q4. Before turning to EPS, I would like to quickly discuss two items that we know are top of mind: first, our supply chain business at Tim, in light of the current macroeconomic environment, and second, how to think about the impact of our robust international growth on our business. On supply chain, as you've heard from our peers and others outside our industry, we’re seeing increased levels of inflation in commodities and labor. We thought it would be helpful to include a brief update on our supply chain business at Tim. With sales beginning to recover this year in Canada, we have seen margins bounce back relative to 2020 and hold a consistent level on a year-to-date basis. We have been very encouraged by this improvement. However, given the most recent market trends, we do expect margins to moderate slightly over the next couple of quarters as we navigate through this elevated volatility, monitor and adjust our pricing as appropriate, and ensure strong operations and service levels, all while keeping both our guests and our franchisees in mind. On our international growth, you heard Jose and Josh mention the strong progress we've made restarting our global growth engine this year, and the expanding opportunities we have to accelerate toward our 40,000 restaurant target. We see significant runway to continue scaling our international businesses, which are already strong contributors to our results, generating over 40% of our consolidated global system-wide sales. Our international franchise partners typically localize supply chains and control their own real estate portfolios. Therefore, as we continue to rapidly expand in international markets, our primary source of incremental income will come from high-quality franchising revenues with royalties tied to system-wide sales growth. Now, turning to EPS, our third-quarter adjusted earnings per share was $0.76 compared to $0.68 last year, representing a nominal increase of approximately 12%. Included in this increase is an FX tailwind of about 3%. The higher growth compared to our consolidated adjusted EBITDA growth of 5% year-over-year was mainly driven by lower net interest expense and a reduced share count from our repurchase activity, partially offset by a higher adjusted effective tax rate and increased equity-based compensation. It's worth highlighting that equity-based compensation increased quarter-over-quarter to $25 million in Q3. Given the continued investments we've been making in our people throughout the year, we do expect this to ramp up a bit more in Q4. Turning to our capital structure, we manage a highly efficient and scalable business model with recurring and diversified income streams and strong conversion to cash flow. During the quarter, we generated nearly $490 million of free cash flow, enabling us to reinvest in our business while also following through on our commitment to return capital to shareholders through both dividends and share repurchases. As Jose mentioned, we've been actively buying back shares utilizing our enhanced capital allocation flexibility from our $1 billion open market share repurchase authorization. During Q3, we repurchased and retired approximately 2.8 million shares of our common stock for over $180 million, leaving us with over $800 million still available under our current program. On October 5th, we also returned approximately $245 million to our shareholders for a $0.53 per share quarterly dividend, and we recently declared an additional dividend of $0.53 per common share payable on January 5th, 2022, consistent with our previously announced target of $2.12 per share for 2021. Even with combined capital returns of over $425 million in the quarter, we also saw our net leverage further decline to 5.2 times. From a liquidity perspective, we continue to maintain very strong flexibility. Between nearly $1.8 billion in cash and a $1 billion revolver, we have about $2.8 billion available to us. Looking ahead, our capital allocation priorities remain very consistent: prudently maintain an efficient capital structure, invest back in the business through high-impact organic opportunities, continue returning significant capital to shareholders through dividends and our expanded open-market authorization, and evaluate accretive strategic opportunities. With that, I'd like to thank everyone again for your support and for joining us this morning. We will now open the line for questions.

Operator, Operator

Good evening, gentlemen. At this time we'll begin the question-and-answer session. As a reminder, we do ask that you please limit yourselves to a single question. Our first question today comes from Chris Carol from RBC. Please go ahead with your question.

Chris Carol, Analyst

Hi, good morning, and thanks for the question. So on Tims Canada, I appreciate all the commentary around regional and urban trends. Can you talk a little bit more about some of the other factors driving performance in Canada? Perhaps any insights on what the competitive environment has been like as mobility has improved? And curious about drive-through trends—I think you noted that drive-throughs were flat in the quarter. If I heard that correctly, what do you see pushing drive-through trends into positive territory? Thanks.

Jose Cil, CEO

Hey, Chris, thanks so much for the question. If I may, I’m going to go into a little bit here because you asked a number of different components of Tims Canada's performance. As you probably recall, last time we were together was in late July and as of the end of July, reopening was well underway in Canada, with a lot of momentum in the market from large employers in Toronto expected to return to offices in Q4. This was when we started to see some impact from the Delta variant just making some noise. Fast forward to the end of the summer, cases rose significantly throughout August, reopening was paused, and we saw vaccine mandates and mask mandates reintroduced, which put further pressure on mobility and reopening, lagging in Canada versus the U.S. Urban centers continued to take cautionary approaches, with downtown Toronto still not back to work. That being said, we saw a nice improvement in July maintained in August and September, exiting September similar to July. There has been no real material shift in trends to call out in October versus where we were in Q3. The clear drag remains our urban and super urban locations, most impacted by lagging workplace mobility. Despite these pressures, we are improving quarter-to-quarter, getting back to where we were in 2019. For example, even with the drag, we’ve gotten the morning daypart to close to flat driven by our emphasis on quality enhancements in our breakfast foods. We are seeing sequential improvements in hot beverages. In other words, we are reducing the drag we experienced over the last 18 months. We see strong opportunities to continue to grow even if mobility doesn’t come back fully. As I mentioned in my prepared remarks, we are protecting and enhancing our core offerings while pursuing opportunities in food-led dayparts like lunch and dinner. It is critical as those make up 60% of overall industry sales in Canada, while we are around 35%. We under-index there and believe we can increase share as we develop offerings and have seen promising results with craveables and freshly grilled wraps. Dinner appears to have the biggest opportunity, which is still down compared to pre-pandemic levels. As we look at the offerings we’re developing, with Artisan sandwiches and wraps, we believe we have a path to not only return to pre-pandemic levels but to grow beyond that, which is an exciting long-term opportunity. For drive-through, you mentioned we’ve seen growth during COVID. Drive-throughs are important; we have over 2,600 locations in Canada, more than 1,000 more than our closest competitor. We’ve seen morning daypart, roughly flat to 2019 levels, with drive-through-enabled locations outperforming pre-pandemic on average. Investments in digitalization, drive-through modernization with outdoor digital menu boards and loyalty integrations are also taking place, capturing more sales and guests. Finally, on the ad fund contribution, we had mentioned CAD 80 million; we are approaching three-quarters through that in 2021, and franchisees increase their contributions to the ad fund by 50 basis points. We are confident in our plan and encouraged by the progress we've been making. We've seen improvements in daypart sales, as well as brand health metrics. Of course, there’s work still to do, but we’re looking forward to sharing how we evolve.

Chris Carol, Analyst

Thank you.

Operator, Operator

Our next question comes from Dennis Geiger from UBS. Please go ahead with your question.

Dennis Geiger, Analyst

Great. Thanks for the question. Jose, I wanted to ask about some of the key pressures impacting franchisees and really the industry in particular in recent months, across brands, be it staffing issues, labor pressures, commodity pressures, etc. What kind of impact are the franchisees and the system broadly seeing from these pressures? How is the system managing them, and what are the implications moving forward? I know you spoke about aspects with Popeyes DC and Tim Hortons' supply chain but more broadly, what are we seeing? Thanks.

Jose Cil, CEO

All right, thanks, Dennis. I’ll take labor impacts generally and then I’ll pass it over to Matt to touch on broader inflation impacts, wrapping up on development and its implications. Labor challenges are affecting the entire industry—not only restaurants but retail sectors and others. We have called out the impact at Popeyes acutely, particularly related to operating hours and service modes due to staffing issues. We saw about an average one-hour reduction in operating hours at Popeyes relative to pre-pandemic levels, mainly affecting late-night business. Outside late-night, we saw daily sales improving or flat throughout the quarter. The real drag remains the late-night daypart with the trends. On service modes, nearly 40% of the system operates with reduced service modes, with many dining rooms closed due to labor challenges, which poses near-term challenges for the system. For the DC side, we saw disruptions impacting roughly 10% of stores from Northeast distribution issues. Our teams, alongside our purchasing cooperative for Popeyes, are working to diversify the distribution network and expect to complete that transition later this quarter. All brands in North America are currently facing this challenge. We have some excellent operators already creating job fairs and sourcing pipelines. We're sharing those practices and leveraging technology, streamlining operations to make the transition friendlier. I’ll pass it over to Matt for additional impacts.

Matt Dunnigan, CFO

Thanks, Jose. Hey, Dennis, good morning. I think as it relates to inflation—with strong profitability, we have faced headwinds regarding staffing, wages, and general inflation. Our approach is to collaborate with franchisees, addressing the cost environment while continuing to drive traffic to our businesses. Pricing has taken alignment with inflation levels in the U.S., and we will reassess where needed moving forward. Additionally, on the commodity front, improved procurement at scale benefits our brands via strategic sourcing across products and brands globally. On the labor front, we’re looking at simplifying processes and the menu. Our goal here is also to drive traffic and meet guest needs, enabling better sales under current conditions. On Tim Hortons supply, we’re encouraged by progress and sales recovery in Canada, but we anticipate moderate pressure moving forward. We expect margins to shift approximately 50 basis points versus Q3. The environment is volatile, requiring close monitoring. Now, back to Jose on development.

Jose Cil, CEO

Thanks, Matt. On development, some constraints persist in certain markets due to labor and supply chain, but we’re collaborating successfully with equipment suppliers. As mentioned previously, we remain optimistic about our pipeline and overall trajectory. We expect to reach or even surpass the growth levels of 2018 and 2019 in 2021, and we anticipate accelerating in the coming years given the quality of our partners and the abundant opportunities present, both internationally and within the U.S. and Canada. Thank you for the insightful questions.

Dennis Geiger, Analyst

Thank you very much.

Operator, Operator

Our next question comes from John Glass from Morgan Stanley. Please go ahead.

John Glass, Analyst

Thank you. Jose, on Burger King U.S., two questions. One specifically, what's the impact of removing the paper coupon? If there's a way to sort of isolate that, so we understand that impact. And then more broadly, you outlined several pieces that you want to work on and had to do with menu and the brand; what are a couple of things that we should watch for the next couple of quarters? What are the immediate action steps that might be able to bend the trend or should we think about this as a longer-term project?

Jose Cil, CEO

Thanks, John. On paper coupons, as I mentioned, historically, Burger King in the U.S. has over-indexed in paper coupons relative to peers, around three times the amount. Traditionally, an important channel, but effectiveness has eroded, especially with younger consumers. It makes sense to transition focus to other consumer-facing channels. We believe we'll shift quickly with the growing Royal Perks platform, which also helps us engage with guests more effectively. Regarding broader plans for Burger King, we have important work on operations, digital, and menu work in place. Our focus has been consistency and operational excellence. We aim to enhance the menu, streamline processes, and improve restaurant operations. We need to build the organization focused on the customer experience while maintaining clear communication with our franchisees. We’re working with them to build a plan for reclaiming market share, establish a multi-year execution, and integrate digital elements in our operations to drive effective communication throughout. We’re working to optimize our menu offerings focusing on core products and leveraging tech in efficiency, which we believe is critical for achieving our long-term goals.

John Glass, Analyst

Thank you!

Operator, Operator

Our next question comes from John Tower from Wells Fargo. Please go ahead.

John Tower, Analyst

Great. Again, you answered much of it in the last question, but just in terms of following up on the BK U.S., would you consider a similar lever as with Tim Hortons in Canada, investing some of the Restaurant Brands’ capital into the marketing programs at BK U.S., assuming franchisees align with the message?

Jose Cil, CEO

John, thanks for the question. The first level of investment we’re making is building out a strong leadership team, similar to Tim Hortons. We’ve appointed Tom to lead the BK U.S. business, bolstered the team with an industry veteran in data science and analytics, along with culinary leadership driving innovation. Our investments in remodels and improvements in customer experience are key. We’re working on accelerating marketing efforts but our priority remains building a solid plan that receives franchisee support. We will pursue capital allocation prudently to ensure substantial impact and long-term shareholder returns.

Operator, Operator

Our next question comes from Brian Mollen from Deutsche Bank. Please go ahead.

Brian Mollen, Analyst

Thank you! A question on Tim. You shared a statistic that 10% of Canadians are now fully active users in the loyalty program. That's encouraging. Big picture, do you think you’re now at a place with the program where it's ready to be a meaningful transaction sale driver once the Canadian economy fully reopens? Could the benefits prove to be multiyear in nature? Any thoughts on your degree of optimism here as the country emerges from COVID would be helpful.

Josh Kobza, COO

Yeah, Brian, it’s Josh, and thanks for the question. We are really pleased with the work that Tim’s team has done on the mobile app and the Tim’s Rewards program. Launched a couple of years ago, it has evolved in a positive way that has led many Canadians to engage with it. The monthly active users engagement is special, resulting in regular use weekly rather than monthly. Our focus on creating a seamless experience at restaurants, contests like Roll Up to Win, executed well, have added to this experience. We believe it is an exciting avenue toward driving greater engagement and sales over the medium to long term. We see this as a significant asset for the business, confirming our long-term prospects.

Operator, Operator

Our next question comes from Lauren Silverman from Credit Suisse. Please go ahead.

Lauren Silverman, Analyst

Thank you for the session. I appreciate all the commentary on development. Tim Hortons International had another nice quarter of unit growth. You’ve talked about the significant opportunity in China. What have you learned about expanding internationally with Tim Hortons China that you can leverage to expand in other international markets? And on Canadian development opportunities, how are you thinking about those?

Jose Cil, CEO

Lauren, thanks for the question. We’ve discussed Tim's China extensively, and we’re thrilled with progress. The team there has successfully built a product offering that engages with consumers. Our beverage offerings truly resonate across many markets. The expanded beverage offerings and local food adaptations deliver well. We’re excited to build on this momentum; I’m heading to Mexico today to visit our growth there; business is performing well there too. The U.K. has a different offering from China yet still achieving strong results. Coffee is a fast-growing segment internationally, especially in Asia and Europe. Digital capabilities are growing significantly, further enhancing engagement with consumers. For Tim Hortons in Canada, we think there are great opportunities for growth, especially around drive-throughs in select areas, ensuring accessibility for our guests. Thank you for your question.

Matt Dunnigan, CFO

I think one of the great things our international team is doing with Tim Hortons is adapting the business uniquely to each market. Formats vary across locations, from drive-throughs in the U.K. to smaller formats in Mexico or China. Remarkably, success, achievable payback periods across geographies lead us to build a compelling investment attraction for franchise partners internationally. Our expansion efforts have made us more enthusiastic about Tim's potential on a global scale.

Lauren Silverman, Analyst

Great! Thank you, guys.

Operator, Operator

Our final question for this morning comes from David Palmer from Evercore ISI. Please go ahead.

David Palmer, Analyst

Thanks for squeezing me in. Two quick ones: could you touch on the percentage of dining rooms closed or hours of operation reduction you're seeing for Burger King U.S. and Tim Canada? Any numbers you provide would be helpful. Obviously, those should get reopened and those hours restored. And then it was good to see the two-year acceleration for Burger King International—where was the greatest improvement as you look around the world?

Jose Cil, CEO

Thanks, David. On dining rooms closed and operational hours, dining rooms fluctuate a lot, especially with Popeyes. We’ve seen some significant impacts in late-night service primarily affecting dinner dayparts due to labor shortages. The numbers show dining room impacts are notable, with vaccination and other regulations affecting operations. Overall, for Burger King International, we are excited to see widespread progress relative to 2019 and noted that these approaches and collaborations are working well globally, providing an optimistic outlook for our international growth going forward. Thank you again for your questions, everyone. We’ve made substantial progress executing on key priorities, particularly in accelerating our development pipeline. There’s still work to do, however, we’re grateful to our team for their contribution to enhancing guest experiences, driving restaurant development, and supporting sustainable growth for the long-term benefit of our remaining shareholders. Thank you for joining us, and have a great day.

Operator, Operator

Ladies and gentlemen, with that, we'll conclude today's conference call. Thank you for attending. You may now disconnect your lines.