Restaurant Brands International Inc.
Q3 2017 Earnings Call Transcript

Published: 26 Oct 2017

[Operator:]

Good morning and welcome to the Restaurant Brands International Third Quarter 2017 Earnings Release Conference Call. All participants will be in listen-only mode [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] All callers will be limited to one question. Please note, this event is being recorded. I would now like to turn the conference over to Markus Sturm, Head of Investor Relations. Please go ahead.

[Markus Sturm:]

Thank you, operator. Good morning, everyone and welcome to Restaurant Brands International's earnings call for the third quarter ended September 30, 2017. A live broadcast of this call may be accessed through the Investor Relations webpage at investor.rbi.com and a recording will be available for replay. Joining me on the call today are Restaurant Brands International CEO, Daniel Schwartz; and CFO, Josh Kobza. The team will be available to answer questions during the Q&A portion of today's call. 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. Let's begin with the agenda for today's call. Daniel will start by discussing highlights for the quarter at Restaurant Brands International and will then review performance of Tim Hortons, Burger King and Popeyes Louisiana Kitchen. Josh will then review consolidated financial results for the quarter. Following which, Daniel will share some concluding remarks before opening the call up for Q&A. I'll now turn the call over to Daniel.

[Daniel Schwartz:]

Thanks, Markus, and good morning everyone. Thanks for joining us on today’s call. I am excited to give you an update today on our results for the third quarter. Our continued focus on driving restaurant level profitability and a great experience for our guests led to further system-wide sales growth for each of our three brands

[Josh Kobza:]

Thanks, Daniel. Further system-wide sales growth across each of our brands as well as the inclusion of Popeyes in our results drove adjusted EBITDA of $565 million for the quarter, which represents approximately 8% organic growth versus the prior year combined results of RBI. Our third quarter adjusted net income increased to approximately $276 million versus prior year results of $201 million primarily as a result of adjusted EBITDA growth. Our adjusted diluted EPS for the quarter was $0.58, up approximately 35% from $0.43 in the prior year period. As a reminder neither adjusted net income nor adjusted diluted EPS include Popeyes for the prior year results as the business was acquired in March of this year. It is worth noting that our interest expense for the third quarter includes the full quarter of the $1.75 billion of debt that we raised in May as well as the partial quarter impact of the $1.3 billion of 5% second lien notes raised in August, partially offset by the redemption of $1.25 billion in principal of 6% notes in September. Now let's discuss our cash generation and capital allocation during the quarter. We've had a number of capital structure events over the past few months that we'd like to give an update on. In August, we issued $1.3 billion of second lien senior secured notes with an interest rate of 5%. The net proceeds of which we used in September to redeem $1.25 billion in principal of our existing 6% second lien notes. Subsequently, in September, we issued a $1.5 billion add-on to the 5% notes, which was funded in October and as such is not included in our third quarter results. A majority of the proceeds from the add-on offering where we used to redeem the remaining $1 billion and principle of 6% second lien notes in October. In October, we also amended our existing $500 million revolving credit facility to extend the maturity to 2022. In the third quarter, we generated approximately $339 million of free cash flow calculated as the sum of cash flows from operating activities and cash flows from investing activities. We also paid a total of approximately $155 million in preferred income and dividends and partnership exchangeable unit distributions. As of September 30, 2017, our ending cash balance was approximately $3.6 billion, our total debt balance was $11.8 billion and our net debt was $8.2 billion. This morning we announced that on October 25, 2017, the RBI board of directors formally authorized the full redemption of our preferred shares, which we intend to complete on December 12, 2017, the first possible redemption date. We also announced that we received an exchange notice for a portion of our outstanding partnership exchangeable units. In connection with the exchange, we plan to satisfy a portion of these exchange requests with cash on hand. I'm also pleased to share that on October 25, 2017, the RBI Board of Directors declared a dividend of $0.21 per common share and partnership exchangeable unit of RBI LP, payable on January 3, 2018. The refinancing of a significant portion of our capital structure in 2017, the acquisition of Popeyes, the growth in our dividend and the use of cash on hand to redeem our preferred shares and repurchase partnership exchangeable units illustrates our balanced approach to capital allocation as we look to create further value for all of our stakeholders for many years to come. I'd like to now hand the call back to Daniel for concluding remarks.

[Daniel Schwartz:]

Thanks, Josh. During the third quarter, we grew system-wide sales for each of our brands

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Joshua Long of Piper Jaffray. Please go ahead.

[Joshua Long:]

Great, thank you. I appreciate the time this morning. I wanted to see if we might be able to talk about the general competitive environment and how you're seeing that shape up just generally across your brands here in the U.S. and then any sort of global comments you might have in terms of just the competitive environments and how the consumer is searching for value? Thank you.

[Daniel Schwartz:]

Hi, Josh. It’s Daniel. Thanks for the question. I think what we've said in the past and really what I'll say now I mean quick service restaurant industry always it's always competitive. And our strategy has been consistent across our brands regardless of the environment. If you look at some of the progress that we've made at Burger King in the U.S. for instance in terms of working with our restaurant owners to renovate the restaurants, improve operations, improve marketing, always deliver that balance of value and core and premium has enabled us to grow sales over time. Globally, we're seeing strength in our sales and the pace of our restaurant openings across the world. So while the environment continues to be competitive where we're pleased with our continued strength across our brands.

[Operator:]

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

[John Glass:]

Thanks very much and I apologize I joined late, so if some of these have been answered previously, excuse me. Can you talk about Tim's a little bit. Two questions I guess one in Canada what role pricing played in the comp if you didn't talked about that and maybe what the competitive dynamic up there looks like and how you feel you’re competing against that? And the system I think at Tim’s is a little lower than Canada. So what's the dynamic I guess in particular in the U.S.? Do you feel like you're operating at a level that's competitive in the U.S.? Do you feel like there's further adjustments you need to make in that market to stimulate sales because you’re much younger in the market, you expect perhaps comps to be outpacing in the more mature markets.

[Daniel Schwartz:]

Yeah, hey, John. Thanks for the question. So the same store sales for the quarter was a little bit better than last quarter and that was driven by Canada, which was up around 0.6%. We saw some growth in coffee and in breakfast in Canada we’re starting to see really the benefits from some of the initiatives that we had launched including the espresso-based beverage platform as well as our additional app. We're innovating around espresso beverages. Over the summer, we launched iced lattes. More recently, we launched our pumpkin spice lattes. And we think this is going to be an important platform to continue to drive long-term growth at Tim’s. And more recently we’re excited about some of the new products that we have launched at lunch including the artisan grilled cheese sandwich and we look forward to innovating around – in new and improved products at launch. We don't specifically breakout pricing impact. What I can say though we’re always very thoughtful and measured in the way that we do take price. As it relates to Tim’s in the U.S., it was a bit softer the environment as you know is quite competitive. We did recently launched lattes there as well and we're encouraged by the progress that we've seen in the U.S. so far since we launched that product. And I think look what we've said about the U.S. in the past, we're really committed to growing the brand for the long-run. It's quite early I think if you look back in time in Tim’s first, [indiscernible] the western part of Canada, it was also a bit slower, it took some time and now its one of our more profitable regions and faster growing regions. So it's going to take time, but we're committed and we have good partners with whom we’ll work collaboratively to make this work in the long run.

[Operator:]

The next question comes from Mark Petrie of CIBC. Please go ahead.

[Mark Petrie:]

Hi, good morning. Just wondering if you could update us on your view on a potential deal or agreement with aggregators and delivery partners and the potential implications for your business and your franchisees.

[Daniel Schwartz:]

Yeah, delivery – the delivery is something that we're doing actually in several markets around the world. In some markets, there’s a greater percentage of our sales and in certain markets we work internally, in other markets we've partnered with aggregators. I was in China recently where our restaurants, our Burger King China Restaurants have partnered with several of the aggregators there and delivery has become a meaningful piece of the business. And I think we look at it on a country by country basis. And we see it as one of many avenues of growth for our brands around the world for the future.

[Operator:]

The next question comes from Brian Bittner of Oppenheimer and Company. Please go ahead.

[Brian Bittner:]

Thanks guys. Question on Popeyes. Just now that you've had the brand for a couple quarters under your belt. Just wondering if you can better frame the opportunity to really accelerate unit openings there. I mean you have a much larger franchisee roster globally. And you did this very well at Burger King shortly after your 2010 purchase there. So we just love your Popeyes thoughts. And I have a follow up.

[Josh Kobza:]

Hey, Brian. Good morning. It’s Josh. And thank you for the question. Yeah, we – it has been – actually, it's just – it’s been just a few months now that that Popeyes has been part RBI. And I would say that that we're increasingly excited about the development opportunity both in the U.S. and around the world. We've already made some progress in the U.S. finding new development partners to help us to accelerate the pace of growth and we're talking to a number of potential partners to set up new projects in a number of countries and exciting markets in international markets around the world. So we're very excited about the long run potential for Popeyes and increasingly serve with the few months that we've owned it. If you follow-up just a clarification on the unit exchange so you guys, you're repurchasing five million units and then are you separately issuing eight million units? If you could just clarify that I'd appreciate it.

[Daniel Schwartz:]

Yes, of course. So we received an exchange notice for nine million units. And to satisfy that notice we are going to repurchase five million units. And we will issue four million new common shares of RBI corporate.

[Operator:]

The next question comes from Andrew Charles of Cowen and Company. Please go ahead.

[Andrew Charles:]

Great, thank you. Two separate questions from me. Can you talk about the change in culture across realization you've made taking over as President of Tim Hortons Canada. In particular your willingness to provide some cost relief around some of the franchise claims. And separately the question on Tim as you talk about the self softness in the U.S. international markets. So could you talk about efforts in place to help accelerate development outside the U.S. and Canada? Similar you did at BK France, could this involve franchise acquisitions of other coffee concepts to convert to Tim’s so that would be funded by your franchisees or perspective franchisees? Thanks.

[Daniel Schwartz:]

Yes this is the two questions. Look as you mentioned I have gotten closer to our Tim Horton's business in recent months. Working with the team here we continue to work with our owner-elected advisory board and we travel to country meeting with our restaurant owners, sharing with them all the positive plans and the positive agenda that we have to drive the brand forward. And we're making good progress, we've had some good innovations around espresso-based beverages, we worked collaboratively with our restaurant owners to launch our mobile order and prepay app. And we're confident that the initiatives that we have, the innovation that we have, the positive agenda is going to drive long-term to get satisfaction and owner profitability. As it relates to international openings, we've had a number of new country entries from the Philippines to the United Kingdom where we're operating great restaurants and delivering that great Tim Hortons guest experience to new guests all around the world. And we're looking forward to taking the brand to places like Mexico pretty soon and shortly thereafter Spain.

[Operator:]

The next question comes from Gregory Francfort of Bank of America. Please go ahead.

[Gregory Francfort:]

He guys, I had two questions. The first is may be can you talk about what the some of the learnings you've taken from the Popeyes acquisition and apply to your other businesses.

[Daniel Schwartz:]

Yes I think with respect the Popeyes acquisition it’s still quite early as Josh mentioned, it's only been a handful of months. We're excited to bring Popeyes under the RBI family of brands. And we're spending quite a bit of time learning the business, traveling, meeting with our franchise restaurant owners and building our agenda for how to continue to drive great guest satisfaction and owner profitability for many years.

[Gregory Francfort:]

And the other one was just in terms of the gap between the system sales growth in Tim Hortons and then the sales on your line that seemed to have slowed just that gap in this quarter versus last quarter, is that just a matter of the espresso beverage selling being over? Or is there something else maybe that was driving that?

[Josh Kobza:]

Yes great this is Josh. That is one of the factors but also we made a couple of price adjustments from Q2 to Q3 in our supply chain, as we're always looking to deliver the highest quality goods to our franchisees at a really compelling cost in a high level surface.

[Operator:]

The next question comes from Dennis Geiger of UBS. Please go ahead.

[Dennis Geiger:]

Great, thank you. Wonder if you could talk a bit more about any performance differences that Tim's Canada regional differences within the same store sales results? And then if I could get a second one in just with that launch of the espresso-based platform has that opened any doors for you internationally when you think about some of the cultures in various countries? Has that helped having that platform now within the brand? Thank you.

[Daniel Schwartz:]

Yes without getting into too much detail as you know the economy in the western part of the country had been a bit softer. And that did affect our sales. But we are committed to driving continued sales growth and profitability growth across the chain. And espresso-based beverage is our – an important product and platform not just in Canada and the U.S. but in as you mentioned as markets all around the world given our guest’s eating habits and coffee drinking habits in places from the Philippines, to the United Kingdom, Mexico, to Spain. So I think we do see this playing an important role in the international expansion of the Tim Hortons brand.

[Operator:]

The next question comes from David Palmer of RBC Capital Markets. Please go ahead.

[David Palmer:]

Thanks. Just a couple of questions on Tim Hortons Canada. And forgive me if these were asked already. Bored jumping around. The first is are there any data points you can share that can speak to franchisee profitability in generally the direction – the approval of franchisees in the direction of the business and given all the headlines some data points here could be helpful as we address that. And that's your concern. And I have a quick follow-up if I may. Thank you.

[Daniel Schwartz:]

Yes we're obviously David we're always striving to grow franchise profitability and deliver great at the same time and deliver great value for our guests in 2015 and in 2016 franchise profitability group each year. Franchise profitability in the most recent quarter was flat year-on-year and we've seen profitability increase quarter-on-quarter and actually reached now the highest levels we've seen this year. And we're committed to continue growing our restaurant owners bottom line.

[David Palmer:]

And second with regard to Tim's Canada, your big competitor McDonald's has done a lot with their assets up there. They obviously have McCafé too. When you think about Tim's in light of the competitive set what are the big opportunities that you're going after right now or that you think are areas of opportunity, is it with regard to menu, the assets? And putting this in a positive light there could be some things that you think that have a slow burn in terms of being more competitive in that marketplace? Thank you.

[Daniel Schwartz:]

Yes as you noted the environment in Canada is competitive. I think some of the opportunities that we already talked about around espresso-based beverages and building our latte business, building our digital business, those we view as opportunities. We also see while we have a significant share of traffic and sales at launch we see an opportunity to build an even bigger lunch business. And more recently, we've launched a new and improved grilled cheese sandwich at lunch which is doing well. And you’re going to see us continuing to build on our lunch business and innovate around new great products at launch which we do view as an opportunity for growth in our business.

[Operator:]

The next question comes from Will Slabaugh of Stephens Inc. Please go ahead.

[Unidentified Analyst:]

Hi guys this is Heron [ph] of Will. My first question would just be around, I guess the Burger King value and how you see the positioning of that value proposition going forward in light of some of your large QSR peers getting more aggressive?

[Daniel Schwartz:]

Yes we made quite a bit of progress on the Burger King brand. Our franchise restaurant owners in the U.S. have done a great job. We're pleased with the pace of growth that we achieved this most recent quarter. And I think that it's really around maintaining that kind of that balanced approach of premium products, of value offerings, limited time offerings and we innovated around our crispy chicken sandwich, we innovated around the BAKING KING platform, we’re promoting the [indiscernible]. So there’s no one piece that accounts for everything. It's really this continued balanced approach in innovative around these platforms that I mention.

[Operator:]

The next question comes from Peter Sklar of BMO Capital Markets. Please go ahead.

[Peter Sklar:]

Thanks. Question on Tim Horton's. What’s the minimum wage going up in Ontario as you know quite substantially on January 1? Can you talk a little bit about what your strategy is going to be to maintain franchisee economics? And whether or not you'll be passing that through on your menu board?

[Daniel Schwartz:]

Yes our two primary goals are to continue driving franchise profitability and deliver great value for our guests. And we do look at pricing from time to time and adjust if needed but we always have to balance this with delivering great value for our guests. And ultimately the best way to offset rising costs way is our cost of sales or utilities is to drive sales growth and that at the forefront of our agenda, with our restaurant owners. And that's the number one topic we work with our owner elected advisory board, putting the other programs that are going to drive sales for the long run.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Daniel Schwartz, Chief Executive Officer, for any closing remarks.

[Daniel Schwartz:]

Well thank you all so much for taking the time to join us today. And we look forward to updating you all on our results for the fourth quarter early next year. Thank you so much.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.