Good morning, and welcome to the Restaurant Brands International First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kendall Peck, 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 first quarter ended March 31, 2024. As a reminder, a live broadcast of this call may be accessed on 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 Executive Chairman, Patrick Doyle; CEO, Josh Kobza; and CFO, Sami Siddiqui. Today's earnings call contains forward-looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings. In addition, this earnings call includes non-GAAP financial measures. Reconciliations of non-GAAP financial measures are included in the press release available on our website. And now I'll turn the call over to Josh.

Thanks, Kendall. Good morning, everyone, and thank you for joining us today to discuss our first quarter of 2024. We talked a lot about our business and strategy during our investor event in February, so I'll keep my remarks brief today and focus on the quarter. We had a good start to the year with first quarter consolidated comparable sales of 4.6% and net restaurant growth of 3.9%. This translated into system-wide sales growth of 8.1% and organic adjusted operating income growth of 7.7%. Leap day contributed about 1% to same-store sales globally, so that's important to keep in mind as we talk through results. We're proud of the hard work our teams and franchisees are doing to deliver outstanding product quality and service to guests every day at a great value. That's what brings guests back and will be the driver of sales and traffic growth today and into the future. We're also making progress towards improving convenience. In addition to remodeling our restaurants, we opened 43 net new restaurants this quarter. We continue to expect mid-4% net restaurant growth for 2024 with development ramping in the second half of the year. And finally, after an incredible performance in 2023, our franchisees and teams delivered another quarter of improved home market franchisee profitability, driven by top line sales growth and enhanced operations. Before I shift to our segment results, I'd like to address the consumer environment. As we've all seen, sales across the restaurant industry have been slowing for a few quarters. In our own data, we've seen consumers become a bit more sensitive to price, resulting in moderating check growth. This is why driving traffic is so important, and why I'm so pleased to see our brands deliver better traffic than most of the industry this past quarter.…

Thank you, Josh, and good morning, everyone. It's really great to be here today. At RBI, we have 5 amazing businesses, and I'm excited to work with each of them to deliver on our long-term outlook of 3%-plus comparable sales growth, 5%-plus net restaurant growth, 8%-plus system-wide sales growth and at least 8% adjusted operating income growth on average over the next 5 years. For the first quarter, global system-wide sales grew 8.1% year-over-year, and our organic adjusted operating income grew 7.7%. Organic adjusted EPS declined slightly 0.9%. System-wide sales and adjusted operating income growth were largely in line with one another this quarter. That said, there were a few items that impacted results, which I'll walk you through now. First, we estimate that the February leap date benefited consolidated comparable sales by 120 basis points, which was almost entirely offset by a 60 basis point consolidated headwind from the ongoing conflict in the Middle East and a 50 basis point headwind from tough weather, largely impacting Burger King and Popeyes in the U.S. Second, we recorded just over $7.5 million of net bad debt expenses compared to $5.5 million in Q1 of '23, $3 million of which impacted Burger King in that quarter. Our Q1 '24 expenses were primarily split between royalties at our International segment and cost of sales in our Tim Hortons supply chain business relating to coffee sales to certain international partners. Third and finally, segment G&A increased $16 million year-over-year, primarily reflecting higher compensation-related expenses associated with increased head count to support our development, franchising and operations [ efforts ]. These items were offset by strong underlying growth in system-wide sales and profitability improvements at Popeyes company restaurants as well as the impact of restaurant acquisitions at Burger King including 89 restaurants acquired in Q4…

Thanks, Sami, and good morning, everyone. When I take a step back and I look at the quarter, I'd say it was a pretty good quarter that I'd put solidly in the win column. As Tims in Canada, Burger King in the U.S., Popeyes in the U.S. and several international markets, one market share. We're beginning to see the benefit of having the right teams with the right plans and the time to execute them in the right way. And importantly, we're seeing the benefit of strongly aligning with our franchisees. The performance from Tims in Canada has just been stunning. Axel and team have a clear path to keep driving the business forward, giving Canadians even more reasons to love Tims with our growing food and beverage offerings and amazing service. Our International segment has shown great top line resilience over the past few quarters, especially considering the broader environment affecting the whole industry. With that said, I'd really like to see us unlock the potential we know exists in China. While it's a very small portion of our results today, less than 2% of total RBI adjusted operating income, we know the long-term opportunity there is significant. We'll have more to say about this in the coming quarters. At Burger King U.S., we've now committed more than $2 billion to put the brand on the right track when you consider today's $300 million co-investment in addition to our $250 million Royal Reset investments towards restaurant equipment and reimaging efforts. Another $150 million towards marketing and digital and the $1 billion acquisition and $500 million remodel commitment we're making with Carrols. I also think it's important to not forget that I'm talking about our investment. And in addition, we will be seeing billions of dollars of accelerated investments from…

[Operator Instructions] And our first question today is from the line of Dennis Geiger -- apologies -- your first question is from the line of Dennis Geiger of UBS.

I wanted to ask on Tims. And as it relates to the strength of the momentum that you continue to see with the brand. Wondering if you could just talk a little more about the sustainability of the underlying gains. It seems like progress against the factor basic plans continue to resonate, that's the main driver of performance. But anything notable to call out as well, maybe on the macro, your customer in Canada? And how many of that may impact the outlook relative to strategy?

Dennis, it's Josh. Thanks for the question. As we mentioned, we're really pleased with the performance at Tims. And I think as you mentioned, it's sustained for quite some time now. I think Axel hope, Matt, the whole team up there are working really well with our franchisees and working on just improving all the basics. And I think that's why you've seen so much momentum in the business. I think the quarter was really good, both same-store sales and the traffic, which has continued to be solidly in the positive category. So we're really happy there. I think we have a lot more to do still at Tims that we've been talking about building into the PM food part of the business and growing our cold beverages mix. And I think as you saw in the quarter, we're doing those things, and you've seen even more recently, us coming out and building on some of the food offerings with our Flatbread Pizzas and deployment of Merrychef ovens and we're pleased with the results of that so far. But I think it just it opens up even more things that we can do. It creates more options in the innovation pipeline for us over time. They are going to allow us to continue to build on top of an amazing breakfast business, a great lunch and later in the day business. So I'm pretty pleased with what they're doing. Really great work from the teams and we're confident in where we're going for the rest of the year.

Our next question today is from the line of Brian Bittner with Oppenheimer.

You laid out a path this morning to getting Burger King 85% to 90% remodeled. And obviously, you'll remodel those 600 stores you've talked about from the Carrols acquisition and it will be exciting to see that in the new reporting segment. And then this morning, you announced that you'll remodel another 1,100 franchise stores through the $300 million co-investment. And the question is, will these remodels on the $300 million be as impactful as the remodels you're spearheading with the Carrols acquisition? And as you work through this path to get to 85% to 90% remodeled, should we expect another batch of closings or relocations to get the portfolio at Burger King U.S. exactly where you want it to be?

Brian, I'll take those maybe in reverse order, if that's okay. I don't expect another sizable batch of closures in the business. I think we've gotten past that. And you see that reflected a bit in our outlook, which we've talked about to see the stabilization in the Burger King U.S. store base numbers. So that's the first part. And in terms of the remodels and how impactful they will be, I do expect that all of these remodels should be fairly impactful. We're doing larger scope remodels in general compared to what we did over the prior 10 years. So those tend to have a big impact on the consumer and on sales. And the other thing that I'm really excited about that you haven't really seen in the numbers yet, but I think you will over the next 3 years is the impact of this Sizzle image in all of the elements of that and how they come together. The remodels we've been doing, we've been talking about are more in our prior Garden Grill image. And so you're just starting to see some of those Sizzles, we mentioned it in our prepared remarks. They look awesome during the day, and they look, I think even better at night perhaps. They're really beautiful. But importantly, they incorporate a lot of new digital elements and a new guest flow. So they've all -- they're all built intentionally to have a nice interior flow with all kiosks and to have beautiful drive-thrus and really great layouts in the kitchen. So I think there's a lot of different elements to the Sizzle that I think are going to be good for the uplift that we get over the duration of the program that you haven't really seen come together in the backward-looking results so far.

Brian, I'd add one thing on that, which is when you get to the point where the vast majority of your restaurants are reimaged, you get a bit of a catalytic effect from that. So having your Burger King reimaged and looking great, has effect on that restaurant. But when all of the restaurants around it are reimaged, you get a dual effect, right? And so going to a great-looking Burger King, but driving past another one that doesn't look great. is not ideal. And so we thought it was important for -- to get this last leg out there to show our commitment to the franchisees to give you visibility on our path to getting this system all looking great, but there's a real advantage. I mean we're still a bit under 50% today getting to the point where virtually every restaurant you're ever going to see looks great, has a real positive effect on the brand overall.

Our next question today is from the line of David Palmer of Evercore ISI.

A question on Tim Hortons Canada. Obviously, a very strong quarter. Could you provide any color about how Tims and the Canadian fast food industry progressed through the quarter? And perhaps how things are starting this quarter, given what seems to be some negative macro headlines that we hear about the consumer in that market. And is there an adjustment that's needed. You probably are not aware, but there was another call today in the U.S. fast food market. Slowing down was certainly highlighted in the need to access value challenge or a lower income cohort is certainly a theme for the U.S. I'm wondering if you're seeing that in Canada as well?

Dave, thanks for the question. We're not going to get into kind of the intra-quarter like monthly dynamics too much. What I can share is that we're really pleased with the performance of the Tims Canada business. We think we're taking share in that market, which is great. That's what we're focused on every day is competing effectively in the marketplace. And I think we're doing that because we're executing across all fronts. We're very convenient. We're improving operations. And we already have the best value for money rankings in the market. I think that's something really special about Tims. That positions us very well, especially if you're going into a tougher consumer environment. We already provide that best value in the market. And that's probably an important part of why the business has been performing so well on an absolute and on a relative basis.

Our next question today is from the line of Danilo Gargiulo of AB Bernstein.

Congrats on a great quarter. I mean it looks like your brands are accelerating in a decelerating environment, and maybe you have even greater line of sight on franchises profitability increases. We are noticing some incremental pressures among the Canadian franchisees in light of the increase in labor costs due to the minimum wage increases. So maybe can you elaborate on the extent of these pressures and what are you contemplating to alleviate the operating costs in the stores without compromising on food quality? It sounds like you're really working on some equipment upgrades, but maybe there is more coming?

Yes, Danilo, thanks for the question. In terms of what we're seeing in terms of business performance in Canada and then how that translates to our franchisees' P&Ls and the outlook for that. As you've seen, our same-store sales performance has been good both last year and into the first quarter. And we announced that franchise profitability was up very significantly last year. Given the sales outlook and the sales that we've already seen, plus what we see in terms of some favorable commodity movements, we actually have a very positive outlook for further growth in Tim Hortons Canadian franchise profitability throughout the course of 2024. So we feel pretty good about both the progress in Q1 on that front and the outlook for the full year for franchise profitability.

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

Josh, in your prepared remarks, you mentioned not wanting to recreate the -- recreate the wheel on value. So I just wanted to revisit what that meant. I mean do you think Burger King particularly in the U.S. but also around the world has an opportunity to kind of rotate back to a pre-COVID type of pricing stance in general for the industry that did involve some type of a value menu and at least you are communicating to customers in some way, perhaps giving them some sense what core menus, things like Whopper combo meals themselves would cost them. So as the industry, as David Palmer was alluding to, I mean, as the industry is going to be talking a lot more about value very explicitly and might be trying to get some of your lower income or perhaps middle-income consumer way? Are you preparing to perhaps be more explicit to communicate price points as we move forward versus what you've done in the past 4 years?

John, when I look back at Q1, the way I read it, I think what we're doing is working really well. For sure at our Tim Hortons business in Canada, but also in our BK and Popeyes U.S. businesses, our sales and traffic performance relative to competition is pretty good. So I'd say we're pretty happy with the strategy that we have. The perspective that we've had over the last few years is we try to be balanced in how we manage any cost headwinds. We don't want to take price up quickly, but we also want to avoid some of the deeper discounting that happened at Burger King probably 3 to 5 years ago. So we're trying to strive to make sure we have every day good value and some reasonable value offerings. So I think within the Burger King system, specifically kind of U.S. and around the world, in the U.S., we already have some pretty effective value mechanisms that seem to be working. We have our $5 Duos that we've had in the market. We've had $5 Your Way meals. We've had the [ $2.99 ] wraps. So those are the things that we've been doing. We think they've been pretty effective while having a balanced margin profile for the franchisees. And I'd say there's no real intention to change the strategy there. If you get into international, it is a bit more nuanced. It's a lot of markets and a lot of different strategies. And I think you can see there a little bit more of a division where some of the markets where I think we've had a better strategy on value. I think places like France, we've gotten credit for that with consumers, and we've been able to take market share. And we have some other markets that we need to do a little bit more work on. So I think there's probably a little bit more of a division in some of those markets, and we're working with all the places where results haven't been as good to make sure we've got the right value offerings. But I think when you zoom out across the majority of our big markets, we're happy with the value for money we're providing, and we think the results reflect that it's resonating with consumers.

John, we've just got a lot of levers to pull. So when you look at all of the different things we're doing with getting Burger Kings reimaged, with launching PM foods at Tims with increased ad spend at Burger King with Easy to Love, Easy to Run at Popeyes giving better service and more consistent products. We feel good about our value platforms. It's got to be a balance and we have it, offering good value to consumers through a range of products. But we have a lot of other levers that we're pulling to try to get balanced growth out of the business. And first quarter was a pretty good reflection of that.

Our next question is from the line of Lauren Silberman of Deutsche Bank.

On unit growth, I know it tends to be back half weighted. Can you just talk about the visibility in the development pipeline for '24 and how the timing is going versus your expectations? And then any color on how the 2025 pipeline is beginning to shape up?

So our outlook is still for mid-4% unit growth for the year. As you point out, Q1 is always pretty quiet and we are working on building those pipelines. I think we'll have more visibility as we get further into the year. And of course, we'll share that as we get through Q2 and get to our call there. I think we'll build more and more visibility on exactly where we'll land. And I think it's probably a bit early for 2025. I think it -- we probably want to wait and just check in on that when we get further into the year as well, and we'll have a better sense of planning together with our franchisees. Usually, we do a lot of that more in the back half of the year, kind of Q3, Q4 where we plan all the kind of the growth targets for the final year. So probably need a few more months before we can come back with more visibility on that front.

Our next question today is from the line of Andrew Charles of TD Cowen.

Josh, you spoke to a challenging restaurant macro that we're hearing about from other U.S. quick-service restaurants is anticipated to continue to soften. So notwithstanding 1Q's strong performance across the portfolio, is long-term guidance for 3% plus same-store sales still on track for 2024 across the portfolio? In the business that would make you think otherwise, particularly in the U.S. market, just given what we're hearing from peers.

Andrew. So I think if you look at the kind of industry overall, you have seen some softening in sales and traffic levels. Some of that, I think, is to be expected. We knew that as we came into 2024, you were going to see inflation coming down and pricing coming down from some of the elevated levels we saw in the past couple of years. But you have seen and heard some commentary on some consumer softening -- some lower end consumer softening. I think despite that, we've been able to put up pretty good numbers in Q1, right? We were about 4.5% in terms of our same-store sales. So a healthy margin north of that 3%. We feel pretty good about the outlook for the year, but we'll keep updating you on that as we progress through the next couple of quarters.

Our next question is from the line of John Zamparo of CIBC.

I wanted to ask about the Tims supply chain and CPG businesses. I appreciate the additional disclosure on that business. I wonder if you could parse the performance of those 2 in the quarter. I believe the commentary last quarter was that you get back to a, call it, low to mid-18% margin range. Can you comment on when you expect margins to stabilize at that level?

John, it's Sami. Thanks for the question. I think a couple of things going on in the Tims supply chain business for the first quarter. So first off, as kind of I mentioned and alluded to in my prepared remarks, Q1 is typically seasonally the smallest quarter of the year. So in a business like the supply chain business where you have higher fixed costs, you'll see the margin be a little bit lower in Q1. If you look at Q1 of this year, we were around 17.5% sales less cost of sales margin. There were -- there was a bad debt expense that I alluded to in my prepared remarks around certain international partners. I think on a more normalized basis, that margin will be closer to 18% for the first quarter. And on a full year basis, as we've said in the past, we expect full year supply chain margin to be around our 2022 full year levels which were at 19%. So hopefully, that gives you some color.

Our next question is from the line of Brian Mullan of Piper Sandler.

I had a question on Tims Canada. I just want to ask specifically about speed of service. Last quarter, you called that out as a positive contributor. I'm wondering if that continues to be a benefit in Q1? And then kind of just related to that, if you could give us some historical context? When was Tims at its best? And where are you in the process now of improving that metric? And can this be a traffic driver from here?

Brian, thanks for the question. So we do continue to make progress on speed of service. I think I mentioned for this quarter, we did improve about 8% year-on-year. So we're making more progress. Matt Moore and the team are really doing a wonderful job on that front. I think we'll probably see a little bit of a headwind in the near term from the Flatbread Pizza launch. That will slow us down a little bit, we think probably for like -- for some number of weeks. And that's something that we saw in the market test is when we launched Flatbread, we slowed down for a little bit as we kind of -- we learn the muscle memory, but then we picked back up to where we were before. So I think probably a little bit of a near-term headwind, but something that we'll work through as teams get used to the Flatbreads and then we'll -- we should be back on track.

Our next question today is from the line of Sara Senatore of Bank of America.

A clarification on the question. The question is, you mentioned you're on the path to getting franchisees to 300,000. Does that require significant volume increases? Or are there self-help opportunities that can get you there? I'm just trying to think about unit economics and a period of perhaps of slower growth. And then maybe it's not a clarification, but just specifics on the G&A outlook. I think you mentioned head count reduction. But you've always been much leaner than others. So I'm just wondering if you could give a little bit of color on that?

Sara, just a clarification on the 300,000 franchise profit. Are you talking about -- which concept are you referring to?

I thought it was for Burger King U.S. I thought that's what Patrick was referring to?

Perfect. Okay. Great. Yes. So I think there's a few things that will drive that. One of them is absolutely increased sales. That can come from a combination of improved operations even more effective marketing, increasing our advertising spending, which we've been doing, but also importantly, remodels. And that's one of the really important pieces that we think it's helpful to have more visibility on now that we've announced the funding that's needed to get -- to move us to a fully modern state. So there's a few different pieces of sales growth that are definitely part of the mix there. There is also a piece of which is improving margins. And you've seen us be more thoughtful about discounting. So we've already made a lot of progress there in terms of managing our gross profit margins better. And then I think those -- the increase in sales can also allow us to become more efficient with labor. We're at sales levels where you get a lot of incremental margin out of those marginal sales and a lot more labor productivity. So that's an important part of the piece as well. And I think some of the stuff that we're doing on technology can also be a really important margin driver. If we're able, over the course of a few years to move, for example, to a fully digital ordering model, whether it's through kiosks or digital ordering and the drive-thru, that really changes the operating model of the restaurant and can allow us to be much more efficient in how we run the restaurants over time. So those are a few of the pieces we're working at all of them. Some of them will work better than others, but there's a lot of different things we're working on that can be pieces of the puzzle to get towards that 300,000.

Yes. And Sara, I will -- maybe I'll give a clarification to your clarification. So in Q1, segment G&A grew 11% year-over-year. And so actually, that was related to higher compensation-related expenses. The majority of which were in the second half of 2023, so they're now flowing into Q1 of '24. As we think about guidance for the full year, we took it down by about $15 million for the full year. That guidance and the majority of that reduction is really related to stock-based comp expense, which, as you know, goes into our segment G&A. So that's the majority of the $15 million. There are some one-off items as well, some smaller G&A items in that $15 million. I'm digging in, I'm new into the role, and I've been working pretty closely with the brand presidents to see how we maximize the leverage we can get on the investments we've made. And if we have anything else to report there, we'll come back to you.

Our next question today is from the line of Brian Harbour of Morgan Stanley.

Yes. Maybe just following up on your unit growth comments, mainly outside of North America. Are there any markets that you think could remain slower for whatever reason, whether it's Middle East or if it's just sort of like macro issues? And then China, it sounds like you'll update us later, but is that going to be more of a '25 story, at best?

Brian, thanks for the question. I think you hit on the 2 main things that are top of mind and that have a lot of focus from us. First, we may see a small impact in some of the Middle East markets where pipelines might be a little bit slower there. So that's certainly something that we're paying attention to. And I think the other one is China, which we've called out before and we talked about in February. I think that's a huge long-term opportunity for us. I think it will take some time to get all of those markets on the right track. As you mentioned, we don't have anything new to touch on today there, but of course, we'll update you in the coming quarters there.

Our next question is from the line of Eric Gonzalez of KeyBanc.

My question is about the remodel investment. Patrick, you said to us over a year ago that if we saw RBI make an investment that is because the company found something he was confident to generate a significant return to shareholders. So it's exciting to hear what this next round of capital, and I appreciate the comment that you're seeing in the high-teens uplift, which appears quite strong. Can you speak to the cost of the remodel today? And maybe what percentage RBIs contribute on average to each project so we can maybe assess the return on the investment of that initiative?

Sure. So I think you're seeing the remodels, it depends on the scope of the remodel. Clearly, if it's a scrape and rebuild, it's going to be close to the cost of building a new unit, depending on equipment that you're going to reuse. But I think you're going to see an average on full remodels and lighter remodels that's going to wind up in the $0.5 million to $1 million range, full, obviously, closer to the high end of that. If you just play through the numbers that we rolled out today, you're looking at about 250 of that coming from us. And if we get a list in the double digits as we have seen to date, our return on that is healthy and the franchisees' return on that is healthy. So overall, and this kind of plays back to Sara's question a bit on how do you get to that 300,000 over time. If we've still got half of our system to get remodeled and we can see double-digit lifts, mid-teens lifts on those remodels, and you average that out over half of our system, that's a pretty nice lift to the overall average unit and does really good things for the profitability of those units. So we feel very good about the return for the franchisees and for us. And ultimately, this is us kind of laying out the full plan and the full commitment for the progress that we are making and are going to continue to make to get Burger King to a great place. We are fully committed to having the brand fixed. We're seeing great progress on that. We're pulling lots of different levers. And we feel very much on track.

Our last question today will be from the line of Gregory Francfort of Guggenheim.

My question is mostly, I guess, on the U.S. market. And I guess we're seeing in the protein markets is that they seem to be reinflating at a time where the industry seems to be focusing more on value. And I'm curious, one, is that something you're seeing in your business? And two, how do you expect that to play out as we get through 2024? Do you expect maybe that focus on value from the industry to start to abate later in the year? Just any thoughts on that would be great.

Greg, it's Sami. I can take the first part of your question. Look, as we look at, first off, the Q1 results, but even the outlook for the year, I think from a protein perspective, most of you have read about beef headwinds and potential headwinds in that market. But then on the flip side, as you think about Popeyes and the chicken industry, you've actually seen some abatement in food costs from a macro perspective. So nothing to call out here on a forward-looking basis when it comes to the food cost side of things. We're going to continue to monitor the situation. But as Josh mentioned earlier, we feel good about the position where our franchise profitability ended last year. And our outlook for this year, and I think nothing in the food cost arena changes that outlook.

Thank you. And this will conclude the Q&A for today. And I'd like to hand back to Josh Kobza for any closing remarks.

Well, thank you all for taking the time to join us today on the earnings call. I'd just like to say thank you one more time to our corporate teams, our franchisees and our restaurant teams for an amazing job and for all your hard work you do every day. Have a great day, everyone, and we'll talk again soon.

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