Good morning, and welcome to the Restaurant Brands International Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. . After today’s presentation, there will be an opportunity to ask questions. . Please note this event is being recorded. I’d now like to turn the conference over to Stephen Lichtner, RBI's Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the second quarter ended June 30, 2022. As a reminder, a live broadcast of this call may be accessed through the Investor Relations web page at rbi.com/investors, and a recording will be available for replay. Joining me on the call today are Restaurant Brands International's CEO, José Cil; COO, Josh Kobza; and CFO, Matt Dunnigan. Today's earnings call contains forward-looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings. In addition, this earnings call includes non-GAAP financial measures. Reconciliations of non-GAAP financial measures are included in the press release available on our website. Please note that consolidated growth metrics discussed during the prepared remarks including consolidated system-wide sales growth, net restaurant growth and organic adjusted EBITDA growth exclude results from Firehouse Subs, which we acquired on December 15, 2021 to reflect comparable year-over-year growth figures. And now, I'll turn the call over to José. José Cil: Thanks, Stephen. And good morning, everyone. Thank you for joining us on today's call to discuss our results for the second quarter of 2022. Before jumping into our results, I'd like to give some perspective and what we are seeing from a macroeconomic standpoint. We recognize the uncertain and at times difficult environment that we are facing as a result of ongoing commodity and wage inflation, rising interest rates and broader macro uncertainties impacting our industry and many others. While many of these pressures are out of our control, we have been focused on working closely with our franchisees to take thoughtful action to alleviate those within our and our franchisees' control. Together, we're strategically placing price across each of our brands, always being mindful of traffic…

Thanks, José, and good morning, everyone. I'd like to share a few highlights from the quarter that show consistent progress against our goal of enhancing guest experience through technology. Results this quarter show us guests are using digital channels more than ever. Home market digital sales were collectively up in the low double digits year-over-year with the international business well above that. This growth spans across channels, notably delivery, loyalty, and mobile order and pay. We're seeing benefits from collaboration between our marketing and digital teams. With exclusive online offers such as the Frequent Fry'ers campaign at Burger King, performance enhancements we've made to our e-commerce platforms that reduce the time it takes to place an order and important reliability upgrades to restaurant technology that help create an overall seamless experience for guests and our team members. With the common tech stack powering our mobile apps and other e-commerce platforms, we're able to take features and performance upgrades and deploy them across our brands with ease. For example, this quarter, we moved the Popeyes app to a more modern code base, improving loading times by up to 52% thus far. A statistic importantly is highly correlated to app usage and orders. We're planning to roll out the similar speed upgrades to Burger King and Tim Hortons in the coming months. Restaurant technology is increasingly important as restaurants have evolved from essentially only having point-of-sales hardware to working with multiple delivery aggregators having indoor and outdoor digital menu boards, mobile app integration and likely more technology touch points in the future. We want all of this to work seamlessly for our guests and for team members in the restaurant so they can focus on excellent service. One of our larger ongoing efforts in this area relates to standardizing key elements of…

Thanks, Josh, and good morning, everyone. For the second quarter, excluding Firehouse, our global system-wide sales grew 14% to $9.8 billion and our adjusted EBITDA increased about 9% organically to $618 million. And as José mentioned, Russia had an approximately $11 million negative impact on our year-over-year adjusted EBITDA, which was about a negative 2% headwind. Beyond this, our increased segment G&A of $89 million, excluding Firehouse, reduced our adjusted EBITDA growth rate an additional 2%, as we continue to invest in our teams and add talent in key areas such as operations and digital. We believe this is an important piece of the approach we're taking to support our brands and deliver better and better multichannel experiences to our guests, which we view as a key growth unlock for the future. As mentioned over the past few quarters, we'll continue to be proactive on this front and expect to see a modest ramp in core segment G&A in the back half of the year. Before turning to EPS, I'd like to touch on the current inflationary environment. As José mentioned, similar to others, during the quarter, we saw continued commodity volatility and elevated levels of inflation. We've been working closely with each of our systems to drive sales including by taking a measured approach to pricing to offset some of these pressures as well as identifying other restaurant profitability initiatives through our focus and investment in our field teams. Inflation has also had a flow-through impact on our P&L, increasing both our sales and cost of sales line items as market increases in commodity costs are generally passed through. This grossing up of commodity costs in both sales and cost of sales has had the effect of diluting our percentage margins. However, the underlying health of this business is…

Our first question is from John Glass of Morgan Stanley.

I'm curious about development, particularly at the Burger King brand and what you think the unlock is, understanding you had a COVID period that was impact, but sales now are strong and above COVID levels. Is this an issue of equipment location and availability? Is it willingness of franchisees or maybe there are certain markets where it's lagging? Just what do you think the unlock is to get Burger King international in particular development back to historical levels and over what time frame do you think that may occur? José Cil : John, thanks so much for the question. On the development front, we're still well positioned to accelerate overall unit growth in 2022. So we're excited about the progress we've made and the opportunity that we have in front of us this year and beyond. We have strong pipelines. We've said this before, we tend to see from time to time, some volatility by quarter, but we feel very good overall that there's plenty of gas in the tank, if you will, to accelerate growth. I'd note that the overall mix of growth is shifting. We're accelerating growth, both domestically and internationally at Popeyes, as I mentioned in the prepared remarks. We've seen record levels of growth at North America for Popeyes and we're seeing acceleration of growth internationally in places like Spain, Brazil, Philippines and Mexico. And we think it's just the beginning of the journey for Popeyes internationally, and we're accelerating growth at Tims as well internationally in the Middle East and Mexico and the UK as well as a really significant opportunity for growth in China for Tims. BK International, the business is strong, as you pointed out. And as I mentioned in the prepared remarks, same-store sales growth has been really, really strong and compelling…

Our next question is from David Palmer of Evercore ISI.

The Burger King Rest of World same-store sales growth, it looks like you're outperforming other global chains internationally. I guess some of this might be your regional weighting versus peers. But have to understand where you are seeing the most growth and where you think you're gaining market share and why that is? And then just a separate like more of a model question. On the supply chain business, your margins on that business are below -- maybe 300 basis points below where they were a few years ago. I wonder if we should be thinking about that as something of an upside area? Or we should be thinking about that as maybe you make $0.5 billion in an absolute EBITDA from that business, whether the nominal sales are higher or lower from it. In other words, margin isn't the thing, but rather EBITDA should be remaining steady from here. José Cil : Dave, thanks for the question or the two questions. I'll take the first one on Burger King Rest of World, and then I'll pass it over to Matt on supply chain. On Burger King International, as you pointed out, we've seen some really strong performance there dating back to the end of last year. If you look at the performance through the pandemic, and we shared this before, we saw some really strong improvement in overall performance of our off-premise business, drive-thrus, delivery and other modes of service that were off-premise given the necessity of the pandemic -- the situation of the pandemic. So that business was proved to be very sticky, especially delivery and our drive-thru business or expanding drive-thru business. And when things opened up in Europe and in other markets internationally, we've seen folks come back to dine in restaurant. And the combination of…

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

Our next question is from Dennis Geiger of UBS.

I appreciate all the comments on the progress against the Back to Basics plan and the resulting momentum that you're seeing. Wondering if you could speak to the pricing actions that you've taken across your brands and if you've seen any resistance to that pricing? And I guess, specifically on Tim Hortons, curious not just about the menu pricing, but the overall ticket and given all the enhancements that you've made across the menu and the brand broadly, how important is this to this ticket component, perhaps to the growth as you think about looking ahead from premiumization, attach, et cetera? José Cil : Dennis, thanks for the question. Yes, on pricing generally across the brands, I've touched on that in the past. And what we try to do here is we take into account obviously, pressures that we're seeing from a commodity standpoint and other areas of the P&L and wage inflation as well as utilities. We look at the competition and then we take into account the consumer and where they are in the journey. And so we're very thoughtful about this. We use third parties to help us assess the situation by market, by brand, by local as well. And then we work with the franchisees to ensure that they do the best they can to price in the best way possible to ensure that we don't get too far ahead of the consumer that we're mindful of traffic and flow through of these price increases but that we're also mindful of the impact on the P&L. So that's the broad general approach to it, which we've shared in the past. We tend to stay in line with CPI. There's -- in North America, there's a gap in CPI between U.S. and Canada of about 200 basis…

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

Our next question is from Brian Mullan of Deutsche Bank.

Just sticking with Tims in Canada, a question on the PM daypart opportunity. At the Investor Day, you said it was an $8.5 billion market. It's growing at a 5% CAGR. You only have 4% market share today. So -- from the outside looking in, it seems like there's a tremendous amount of potential for growth there with your brand, your asset base. My question is, can you just talk about the road map here? What is realistic from a market share perspective? How are you thinking about this internally? Is there a goal to get to x percent share over years, for example, just anything that can inform investors about your ambitions for this daypart as you continue to execute on your plans? José Cil : Yes. Brian, thanks for the question. As we shared at Investor Day, we're -- it's obviously a big opportunity for us given the ubiquity and presence that Tim has throughout Canada. We have already decent share for the lunch daypart, but it was mostly -- and it continues to be mostly beverage driven. And so we're seeing growth in PM food and growth in lunch daypart on the food side. As Matt touched on, with some data points there. We have aspirations internally in terms of where we want to get to. We haven't shared those publicly. But we do believe this is a massive opportunity. The shift in how we think about the menu, the fact that we've brought in culinary expertise over the last 18 months or so, folks that specialize in developing craveable products that people love and want to come down for more and more. The fact that we have tremendous strength in terms of value for money perception in Canada even if we're addressing some near-term pressures from a commodity standpoint and the fact that we're Canada's most loved brand. I think all of these favor well in our ability to be able to capture share. The focus will and the kind of the key will be our ability to prioritize our ability to execute well and we're looking forward to sharing more over time, but we have big aspirations for our lunch and dinner business, and we're just getting started.

Yes. Maybe just 1 other quick one to add to that, I think, just on dinner in the quarter. Looking back to '19, I think we saw that dinner daypart as the largest sequential improvement in terms of sales performance. So another good indicator for us. in terms of the progress that we're making on the food side and expanding further into the PM dayparts. Thanks for the question.

Next question is from Chris Carril of RBC Capital Markets.

Thanks. So I wanted to ask about BK US. Can you perhaps expand a bit more on what you're seeing in the underlying demand trends today that's giving you confidence that the time is right to move forward on the strategy you're planning to share with franchisees in September. The comp trends are pointing to improving stability in the business, and that's encouraging. But was hoping you could provide any additional color on what you're seeing more recently as you and franchisees prepare to take the next steps here with the brand? José Cil : Yes, Chris, thanks for the question. Look, I think overall, we're seeing, obviously, the consumer in the U.S. feeling a ton of pressure, whether it's commodity, fuel inflation interest rates, hiking. So there's definitely pressure out there. We've been very thoughtful with the Burger King business as well as the other brands, but we've been very thoughtful on making sure that any price increases that we take, we're taking in -- with the consumer in mind and ensuring that we don't get too far ahead of them. As I mentioned earlier and ensuring that there's flow-through for the franchisees. We've also taken some steps around operation improvement, simplification. We've taken some steps on mix, moving whopper out of core discount, all of which has helped address margin pressures even if we've seen tremendous volatility over the last six months or so. Our confidence in the long-term improvements in the business and kind of the road map that we have in front of us that we're working through with the franchisees, it gives us the certainty that investments in the business around marketing, advertising as well as restaurant image and ensuring better throughput and capacity in our drive-thrus. That's the work we're doing now, and that's the work we plan to share in detail with our franchisees at the beginning of September and that we'll share with the rest of the kind of broader audience in the coming month or so. And we think the underlying performance of the business even in difficult circumstances is the kind of the barometer of why we believe long term and the ability to drive that BK business from a sales and profitability standpoint. So more to come on that, excited with the progress we've made but there's much more to come with the BK business and excited about the team that we're building and the progress that we're making with the franchisees.

Our next question is from Jeffrey Bernstein of Barclays.

Great. One follow-up to an earlier question and then a separate question. The follow-up, José, is just on the unit growth for the system, which you addressed earlier. I'm just wondering your expected growth for this year and your ability to accelerate for next year. It does seem like, I think you mentioned Burger King is going to get back to historical and then Tim's and Popeyes are going to it relative to the historical 5% long-term target? And then my main question was for Matt, in terms of G&A. I know there's no formal '22 guidance, but any directional thoughts you can share on spend? I know you mentioned a couple of point headwind to EBITDA in the second quarter and what your thoughts are on the back half spend or whether you look at it as growth versus revenue targets or what not? How you think about G&A in the back half? José Cil : Yes, Jeff, thanks for the two questions. On unit growth, just kind of -- I don't want to reiterate exactly what I said earlier, but we feel good about the pipeline and the development plan for '22. And we believe there's a path to accelerate this year and next year and beyond. We've got really strong franchise partners internationally for all brands. We've seen acceleration to high single digits in terms of unit growth for Popeyes. We've seen Tims get to kind of mid- to high single digits as well. And BK historically has had tremendous strength internationally from a development standpoint. As I mentioned, there's one market that we're focused on to get back to historical levels. And we're also working on new partnership deals and new development deals across international markets for Popeyes, for Tim Hortons. We've seen new development deals and master franchises pop up in places like the UK for Popeyes, Mexico for Popeyes. We've talked about others as well, Middle East and a few others. And those are -- those take a little bit of time to ramp up. Those take a little bit of time to build pipelines, but the confidence long term for us in terms of the pipeline and our development goals is quite strong, and we'll continue to share details on that each quarter. And look forward to those updates.

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

Our next question is from Brian Bittner of Oppenheimer.

I want to revert back to the Tims business. Clearly, the results were very impressive this quarter. It's great to see you puncture through those 2019 sales levels as you execute this Back to Basics plan. And what I'm trying to understand is how much potential traffic upside is left in the tank as we move past this quarter. So the question is, do you believe just overall consumer mobility in Canada is already back to pre-pandemic levels or is there room to go on improving mobility in Canada and therefore, room to go as you plug your share gains? And what I also wanted to ask is just, can you talk about your outlook on the Canadian consumer? We don't really get a good beat on the current state of the Canadian consumer and maybe how that shapes your view on whether this 2% trend versus '19 is sustainable in the Tims Canada business as we move through the rest of the year. José Cil : Thanks, Brian. Appreciate the question. Yes. Look, on the mobility question, we -- if you recall, we were in pretty strong restrictions and lockdowns just three months ago or 3.5 months ago at the end of Q1. And those were lifted and we mentioned last quarter and in my prepared remarks that mobility throughout the quarter improved, and we're seeing that have an impact on the business. What's exciting about the growth from the second quarter, the 14% comp that we posted is that it was not just mobility. Mobility is kind of upside here. The plan is strong. The business is performing well across all segments. We're seeing strength in PM food and cold beverages as well as our kind of traditional core breakfast offering. So mobility, we think there's more to…

Our next question is from David Tarantino of Baird.

A couple of questions on the investments you're making. First, on G&A, historically, you've operated with a very lean G&A structure, if you look at it maybe as a percentage of system sales relative to peers. And it seems like you're now moving a little higher in terms of kind of the support infrastructure. And I guess my question is, as you think about longer term, is this a a trend that you think will lead to just a higher G&A infrastructure to support the business and the growth initiatives you need to support the brands? Or do you think this is kind of a temporary increase where you'll get leverage on it over time? And then relatedly, I guess, separately, I wanted to ask, you mentioned making an investment in China to recapitalize the business there, if I heard that correctly. I was just wondering if you could elaborate on what you did and why that was needed. José Cil : Yes, David, thanks for the question. I'll let Matt touch on the G&A question briefly. On the investment in China, we kind of noted this last quarter and then this quarter was when the investment was made. We had some -- we resolved some issues in China with Popeyes and with Burger King. And following that resolution, we -- there was a contribution to the business in China, capital contribution to fund the business and accelerate growth there in the coming years. And so that's what I was referring to in my comments around China and the confidence that we have long term to be able to get back to growth there as restrictions ease and the Zero COVID policy hopefully shifts into a different approach going forward. We think we're well positioned there with the team that we have, with the relationship that we have with the franchisee and the cash available to develop to get back to historic levels of net restaurant growth in China. Matt, you want to touch on G&A?

Yes, sure. Just touching on the G&A question. I think we feel really good about the level of G&A spend that we've been adding to the business over the past year too. We think it's in the right areas, important areas of the business to really bulk up our teams and our talent to go deliver on these plans that we set out for Tims in Canada and then also for BK U.S. and elsewhere as we look forward. And again, those are key investments in tech, digital marketing, analytics, and we think those will be important long-term investments that we're going to benefit from as we built those teams out. I think it's a bit difficult to compare our level of spending to peers for a couple of reasons. Almost 100% of our restaurants are franchised. And we also -- given how big our international business is, I think I would also take into account the fact that we're structured with the master franchisee framework internationally. So we feel good about the investments that we've been making and where we're bringing the business to. And as I mentioned, I think we'll expect to see a modest increase on a run rate basis quarterly through the second half of the year. And then from there, I think we'll continue to be thoughtful in our approach to G&A investments. And we'll make investments where we see an opportunity to grow the business and drive sales and profitability for the company here. Thanks for the question.

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

I just wanted to ask quickly about the Tims, a couple of things. One is the Tims mix. I know you said hot coffee was maybe the only exception. I was curious. Are you seeing a trade substitution in your existing customer base versus bringing in new customers? That may be fine because the profitability, I suspect, is better. But just some update on loyalty and whether that's evolved further. José Cil : Sara, thanks for the question. I'll touch on the mix question briefly, and then I'll pass it over to Josh on loyalty. On mix, so we did mention in prepared remarks that the hot coffee segment is the one area that we haven't seen growth versus '19 yet. We do -- we have -- we are seeing that the shift that's taking place to specialty and cold beverage, in some cases through our loyalty data. In some cases, that's a shift happening with existing customers that either or adding an additional beverage that is either specialty or cold or in some cases, they're transitioning altogether to new products. And then we're also bringing in new customers as well through these platforms. So that's why it's so exciting. And it's similar to kind of the evolution that we've seen in the coffee business in the U.S. and in some of the international markets as well, where there's kind of -- there's been a base traditional definition of what coffee is and it kind of expands and it's modernized as consumer behaviors change and as brands kind of provide innovation to the consumers to try different products for different occasions. And so our confidence in the long term making this transition shoring up the core and also providing innovation and offers and opportunities for different occasions with cold beverages and specialty gives us confidence that we'll be able to bring in new customers as well as drive more frequency with our existing base. Thanks for the question. Josh, do you want to touch on loyalty?

Yes. Thanks, Sara. I hope you're doing well. I'd say just as a reminder, we're now at just over 1/3 of our system-wide sales in Canada are digital, including loyalty, and we've seen a lot of great progress and we're continuing to innovate and evolve. Both the mobile app and some of our in-store touch points and how some of those digital and loyalty guests interact with the restaurant. We're seeing continued progress in both in-store loyalty and Mobile Order & Pay. Our in-store loyalty sales grew double digits year-on-year, and our mobile order and pay was actually up about 2x year-on-year. So we're seeing a lot of progress there, really happy with it. And the team is thinking of even more innovative things that we can do with how we evolve the app over the rest of this year and into next year to drive even more engagement from the loyalty base. Thanks.

Our final question is from Gregory Francfort of Guggenheim.

And I appreciate the details and the plan that's coming next month on the Burger King U.S. side. Can you maybe talk just a little bit about franchisee profitability? And maybe as you've looked at trimming the portfolio on the U.S. side, kind of how big that could be as a portion of the store base, just any way we can ring sense that would be helpful. José Cil : Greg, thanks for the question. as I mentioned in prepared remarks and we touched on quite a bit, we're working closely side by side with the franchisees to develop a really strong and thoughtful plan to accelerate sales growth at BK in the U.S. and also ensuring that we're focusing on the guest experience and their franchise profitability. And as part of this, we've been doing a deep dive on our restaurant portfolio. And what investment opportunities exist. And we're going side by side. I think different from what we've done in the past. We're going side by side to determine the best path for each restaurant. We're considering remodels versus scrape and rebuilds versus relocations or offsets. And this is centered on kind of the guest experience on digital and also enhancing our throughput or the capacity for us to serve more guests in our restaurants. Ongoing closures is a natural part of this process, a natural part of the business as we look at portfolio optimization. From where we stand today and based on a lot of work that the team has done and a lot of discussions and collaboration with franchisees, we do not expect significant shifts from historical closure levels, which over the last five years, have averaged just under 200 per year. I'd note that many of the closures include trade market repositioning or relocations,…

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