Restaurant Brands International Inc. (NYSE:QSR) Q4 2023 Earnings Call Transcript

Restaurant Brands International Inc. (NYSE:QSR) Q4 2023 Earnings Call Transcript February 13, 2024

Restaurant Brands International Inc. beats earnings expectations. Reported EPS is $0.75, expectations were $0.73. Restaurant Brands International Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Restaurant Brands International Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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.

Kendall Peck: Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International’s earnings call for the fourth quarter and year ended December 31, 2023. As a reminder, a live broadcast of this call may be accessed on the Investor Relations webpage at rbi.com/investor 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, Matt Dunnigan. Today’s earnings call contains forward-looking statements, which are subject to various risks set forward in the press release issued this morning and in our SEC filings. In addition, this earnings call includes non-GAAP financial measures. Reconciliations of non-GAAP financial measures are included in the press release available on our website.

During portions of the call today, we will be referencing franchisee profitability measures that are based on unaudited self-reported franchisee results. In addition, the consolidated gross metrics discussed during the prepared remarks, including consolidated system-wide sales growth, comparable sales, net restaurant growth and organic adjusted operating income growth exclude results from our franchised restaurants in Russia, as we did not generate any new profits from restaurants in Russia in 2022 or 2023. As a reminder, our Tim Hortons, Burger King, Popeyes, and Firehouse Subs segments include results from each brand’s restaurants in the U.S. and Canada, while our International segment represents consolidated results from all four brands outside of the U.S. and Canada.

Finally, this morning we published updated trending schedules and provided restaurant counts by brands and market. Both documents can be found on our Investor Relations webpage under financial information. And now I’ll turn the call over to Josh.

Joshua Kobza: Good morning, everyone, and thank you for joining us today. With our Investor Event coming up in New York on Thursday, I plan to use today’s call to focus on Q4 and 2023 performance, and then we’ll use Thursday’s event to give a longer term outlook on the business, including sharing for the first time long-term guidance. Today’s call marks our first quarter reporting under five segments: Tim Hortons, Burger King, Popeyes, Firehouse, and International, and reporting adjusted operating income. This shift fully aligns with how we are now managing the business and provides each of our five business unit leaders with even greater autonomy over their strategic decisions and greater accountability to deliver strong returns.

We are also lapping the one-year anniversary of our commitment to provide public accountability for reporting on franchisee profitability. I’ll let Patrick share the results in a bit because this was really his push. But I want to acknowledge our incredible franchisees and their restaurant teams who are doing a great job driving sales, generating cost efficiencies, and delivering operational improvements. We are proud of the progress they have made, including delivering average home market franchisee profitability growth of over 30% in 2023, and we are working to drive continued strength in 2024. Turning now to results. For 2023, comparable sales grew 8.1% and net restaurants grew 3.9%, resulting in 12.2% system-wide sales growth and 7.5% organic adjusted operating income growth.

For the fourth quarter, we delivered 5.8% comparable sales and 3.9% net restaurant growth, which drove year-over-year system-wide sales growth of 9.6%. This quarter organic adjusted operating income was relatively flat year-over-year, largely due to incremental spending behind our Fuel the Flame initiatives at Burger King in the U.S. We also delivered solid overall traffic this quarter with Tim Hortons Canada, seeing nicely positive traffic and Burger King U.S., reaching positive traffic for the first time since the second quarter of 2021. Firehouse U.S. traffic was also positive, while Popeyes U.S. and International declined slightly year-over-year with International impacted by the conflict in the Middle East. We grew full-year global digital sales 20% to over $14 billion, representing over a third of consolidated system-wide sales.

We opened 695 net new units during the quarter and 1,168 net new openings for the year, resulting in net restaurant growth of 3.9%. Net restaurant growth was impacted by our incremental closures at Burger King U.S. and a higher mix of express units at Tims China, which as a reminder, our smaller format units with lower average revenue that are not included in our restaurant count. I’d now like to turn to our segment results, starting with Tim Hortons in Canada. This year, we are celebrating the 60th anniversary of Tim Hortons in Canada. Axel and team kicked off the festivities with the return of our four retro donuts, and as a fun fact, the Walnut Crunch has been the best seller of the retro showcase. In 2023, Tim Hortons Canada successfully grew share in sales and traffic year-over-year, an impressive accomplishment driven by the hard work of the team and restaurant owners to deliver a great experience to Canadians.

For the fourth quarter, we saw a very healthy balance of check-in traffic, aided by operational improvements and strong calendar initiatives, all of which drove Tims Canada comparable sales growth of 8.7% and system-wide sales growth of 9.3%. Our hot, cold and specialty beverage selection continues to gain traction with our guests. Sparkling Quenchers helped fourth quarter cold beverage sales grow 19% year-over-year. We also broadened our beverage and baked good strengths with our Baileys collaboration, including Baileys Cold Brew with infused foam, Baileys Latte, and our delicious Baileys Boston Cream Donut. This partnership proved to be one of our most successful and contributed nicely to traffic growth during the quarter. Our PM-led snacking initiatives like our savory twists and dream cookies, as well as our loaded bowls and wraps contributed to PM food sales growth of 7% year-over-year, lapping 18% growth in the prior year, so strong year-on-year results.

These initiatives also helped us to make progress, growing PM food market share to nearly 9%, up from approximately 8% in 2022. We are also maintaining excellent operations by working closely with restaurant owners to deliver an amazing and consistent guest experience. The team has been delivering targeted restaurant trainings that address new product builds, equipment optimization and the adoption of a single QR code for guests to scan their loyalty and pay for their orders at the same time. This helped to drive 9% year-over-year improvements and drive-thru speed of service, an important contributor to traffic growth this quarter. Our digital community of over 5 million monthly active users continues to drive over 30% of sales in Canada. In 2023, 45% of our Tims rewards loyalty guests visit us in the morning and returned in the afternoon on the same day.

And we see an opportunity to grow this number even further through the continuation of targeted personalized offers. In addition to our strong and loyal digital community, we also have an amazing restaurant owner community that is dedicated to giving back. Since 1996, Tim Hortons has held an annual Smile Cookie campaign that raised nearly $20 million in the summer. And in November, we launched our first-ever Holiday Smile Cookie campaign that raised another CAD10 million for 600 local charities. This included our very owned Tim Hortons foundation camps. This is a really impressive community achievement for our restaurant owners and from their guests. Shifting now to our International segment, which ended the year with over 14,700 restaurants, over $17 billion in system-wide sales and grew system-wide sales 17.6% for the full-year.

You’ve heard us say that the international business is an important growth engine for our brands, and that is one of the reasons why we are so excited to now have international as its own segment. Each brand is well positioned for growth in some of the most attractive global quick service restaurant categories, all aided by the resources and development expertise we’ve developed over the years through our scaled global Burger King business. For the fourth quarter, our International segment grew comparable sales by 4.6% and net restaurants 8.9%, driving system-wide sales growth of 12.8%. Although comparable sales were still quite solid, they were impacted by softening performance in China and select markets in Western Europe, continued price moderation and the effect of the conflict in the Middle East on upwards of a dozen countries.

We estimate the conflict resulted in a 1.5 point headwind to comparable sales and a 3-point impact to traffic this quarter. We are not going to speculate on how long this headwind may last. In the impacted countries, our entire focus is on the safety of our team members and our partners. Despite these pressures, a combination of thoughtful calendar initiatives and high-quality core offerings across over 120 markets we operate in around the world, has allowed us to still deliver solid performance in the segment. Including growing share in Burger King France, where guests consider us the preferred option when it comes to value for money and great tasting food credentials. In 2023, we grew in over 75 markets outside of the U.S. and Canada and signed 15 development and master franchise agreements for 15 new markets, including Tim Hortons Singapore and South Korea, Firehouse in Mexico and the UAE and Popeyes and Burger King in Bosnia, which all serve as long-term opportunities for our brands.

Our largest contributors to net restaurant growth this year included Burger King China, which delivered 176 net restaurants followed by Burger King India, France and Spain, which collectively contributed 135 units during the year. During the fourth quarter, Tim Hortons had new openings in South Korea and Singapore. Meanwhile, Popeyes surpassed the 100 unit mark in Spain, just 5 years after opening its first restaurant in November of 2019. We also continued Popeyes expansion in Eastern Europe by opening in the Czech Republic and recently announced we are bringing our [awesome] Louisiana Chicken to Italy. At Firehouse, we just opened our first location in Mexico and are excited to start bringing our newest brand to more markets around the world.

At Tim Hortons and Popeyes, our partners are building brand awareness in new markets and ramping up the pace of development. These two brands contributed to over 45% of net restaurant growth in 2023, an impressive step up from the 10% mix in 2019. Their development strength helped drive strong double-digit system-wide sales growth in the quarter, including over 20% at Tim Hortons International and 55% at Popeyes International. I’ll now turn to our modern image and digital strength, both of which significantly enhance the experience we offer our guests. Given that nearly 90% of Tim Hortons and over 50% of Popeyes stores were opened in the past five years, we have a very high proportion of modern image restaurants overseas at over 75%, including Burger King.

International digital sales grew 20% year-over-year to represent over 50% of international system-wide sales in 2023. The ongoing addition of kiosks in many markets around the world is helping to contribute to this growth in digital sales and importantly, improve the overall guest and team member experience while also being more profitable for our franchisees. Before I shift to Burger King U.S., I’d like to discuss our 2024 net restaurant growth expectations. Last year, we shared our expectations for 5% plus net restaurant growth in 2024. A key factor to delivering this level of growth was our expectation that our development in China would accelerate in 2024 off of 2023 levels. We now believe that outlook is less certain and have updated our outlook to reflect a lower level of net unit additions in China this year.

As a result, we now expect consolidated global net restaurant growth in the mid-4% range for 2024, with growth expected to ramp up over the course of the year and improve into 2025. We have a strong belief in China as an attractive growth market for our brands. Given the incredible geographic scope and population of the market, success that requires a serious long-term capital commitment from our partners, a long-term time horizon and a commitment to grow the brand in the face of tough competition. In the U.S., we have demonstrated our willingness to do what it takes to succeed, particularly as it relates to our Burger King business in the past 18 months. And in the U.S., we entirely control menu innovation and advertising spending and have demonstrated our willingness to invest significantly behind each of our businesses.

In China, we rely on our master franchisees for that level of commitment. Burger King China is a good business with nearly 1,600 units, and it’s a profitable business. But ultimately, we are going to need to grow further to compete effectively with the largest players in this market. On the Tims business, we believe our partner is going to need to commit more capital to grow that business in an exciting way, and we believe it’s critical that they do so. We are working with them both to lay the foundations needed to meet the growth aspirations that we know we are capable of. Shifting now to Burger King in the U.S. 2023 was an incredible year for the brand. Burger King U.S. grew franchisee profitability nearly 50% year-over-year, significantly surpassed our year-end 2024 Fuel the Flame target well ahead of schedule, and achieved low single-digit positive traffic growth in the fourth quarter and saw significant improvements in operations across the system.

Burger King U.S. grew fourth quarter comparable sales by 6.4% and system-wide sales by 4.6%. Our total net restaurants declined 3.7% year-over-year driven by elevated gross closures this year as part of our planned efforts to strengthen the system for the long-term and address the underlying issues of franchisees whoever extended themselves in the last few years. We believe most of these closures are behind us and expect a more normalized level of closure activity in 2024. Results in the quarter were driven by guest experience enhancements and strong calendar initiatives like our Royal Crispy Wraps and [Halsey’s] combo that highlighted our [indiscernible] way brand positioning that differentiates us in the category. Guest satisfaction will always be a top priority for the system.

The dedication of our franchisees to operations is why we were able to increase the product satisfaction of our core products, attract more new and lapsed guests and deliver low single-digit positive traffic during the quarter. We have also seen success in our purposeful marketing of the Whopper, including the Whopper Jingle and Ways to Whopper campaign. We’ve taken this one step further with our $1 million Whopper campaign that launched last week. It’s designed to let guests help decide the next Whopper through a unique experience that leverages advanced AI technology, brings guests to our Royal Perks app and lets them win some cool prices along the way. We’ve already seen guests create about 1.5 million new Whoppers. If you haven’t seen it yet, please download the VK app and check it out.

It’s a lot of fun. This campaign is one of the many ways we’ll accelerate digital adoption to drive higher guest frequency. Digital sales grew 40% year-over-year, resulting in a digital sales mix of 15%, including 27% mix in our company-operated restaurants. The positive results from our kiosk pilot across our company restaurant portfolio led us to expand our trial, and now we are testing this new kiosk pilot across over 100 stores in our franchisee system. During Q4, we spent $40 million of our $150 million Fuel the Flame advertising and digital investments. This included $37 million deployed towards our marketing efforts, in line with the guidance we shared in Q3, leaving us with $58 million to spend on marketing in 2024. Based on our franchisee profitability results to date, we expect that as we enter 2025 and our marketing contribution rolls off, franchisee contributions to the ad fund will step up from 4% to 4.5%, ensuring we maintain our strong share of voice throughout least 2026.

As a reminder, should average franchisee profitability reached $230,000 by year-end 2026, this elevated ad fund contribution would remain in place through 2028. I’d also like to give a quick update on our $250 million Royal Reset Program. Given the strong early results from our short-term refresh program as well as the impact of our pending acquisition of Carrols, we now expect to shift approximately $50 million of the $200 million investment previously earmarked for remodels to an expanded short-term refresh initiative. As a result, we expect to spend approximately $100 million in total on our Refresh program and roughly $150 million on our Remodel program. We have seen an overwhelmingly positive response to our refresh program from franchisees who are seeing the results show up in their sales and operating metrics.

The incremental refresh dollars will be dedicated to participating A and B operators and support assets that improve the drive-thru and digital experience. As a result of the incremental refresh investment, we now expect to positively influence more than 6,000 restaurants. Early results of the remodel program also continued to exceed program benchmarks with average sales uplift of approximately 20% net of control for the roughly 50 remodels that have been open for at least six months. While we are really encouraged by these results, I’d note we’d expect the uplift to migrate lower as the number of remodels grows and overall scope shifts. That said, they are clearly outperforming what we and our franchisees underwrote our investments for, and we are excited to continue the program in the year ahead.

In 2023, we completed 264 remodels, one-third of which were normal course and outside of the Royal Reset program, and we exited the year with 46% modern image. This year, we expect to ramp up our remodel program and plan to complete nearly 400 remodels with over 80% committed to full remodels or scrapes and rebuilds. And of course, we are aiming to have our sizzle format and as many of these restaurants as possible. A couple of weeks ago, I was in Philadelphia and North Carolina visiting two of our first 10 modern image sizzle restaurants with Tom and Demon. I can tell you I am very excited about this new restaurant format. Sizzle is not only beautiful, it also really puts both the team member and guest experiences at the heart of the restaurant’s design.

It is awesome to see the diligent execution of our team and franchisees over the past year translate into positive results. We have more conviction than ever in our plan to Reclaim the Flame, which is why we are so confident in our pending acquisition of Carrols Restaurant Group. This acquisition offers a compelling strategic opportunity to accelerate our modern image efforts with a clear path to 75% modern image by 2028 to be funded entirely by Carrols operating cash flows even after our interest payments. That 75% expectation is up from 65% that we would have achieved just based on our existing Reclaim the Flame remodel funding program. Importantly, the acquisition also enables us to refranchise restaurants into the hands of local strong owner operators, many of whom we plan to develop within the existing Carrols operator network.

We see firsthand the benefits of being a smaller operator. The numbers speak for themselves. Operators with less than 50 restaurants have 51% modern image and delivered average franchisee profitability of $15,000 per store above that of franchisees in the 50-plus restaurant group in 2023. Not surprisingly, they are also generally better capitalized. I cannot stress enough that while accelerating our modern image efforts is a key benefit of bringing Carrols together with Burger King. I think what makes me, Patrick and Tom, just as excited as our ability to further accelerate change in the franchisee community and give even more great operators the opportunity to become great franchisees. I’ll save the rest of my comments on Burger King U.S. until later this week at our New York Investor event.

Turning now to Popeyes. Sami and team are one-year into their easy to love plan. Popeyes U.S. grew comparable sales by 5.8% and net restaurants by 4.5%, resulting in another quarter of double-digit system-wide sales growth of 11.2% and a record digital sales mix of 25% up from under 20% in 2022. Our November expansion of wings into a five flavor platform has quickly established us as the number three wings flavor in quick service restaurants in the country and help drive traffic across digital channels like delivery and Mobile Order & Pay. We are pleased to see this positive impact, but know there is more incrementality to unlock in 2024 and beyond, starting with driving mass awareness. Two days ago, Popeyes ran its first-ever Super Bowl commercial, featuring well-known comedian Ken Jeong in a funny and impactful ad that made sure everyone watching the game would know Popeyes now has the best wings in America.

We have also seen extensive media coverage about the ad. So great execution by the team to bring mass awareness to this important growth platform. We are also in the early stages of implementing our easy-to-run kitchens at Popeyes that will transform the guest and team member experience. These retrofits provide new equipment, updated kitchen layouts, technology upgrades and process simplification, all geared to help solve fundamental operational hurdles that impacts speed and overall guest satisfaction while upholding our excellent product quality. We are now transitioning from initial pilots to more scaled test clusters. I’ll be visiting one of these test clusters in L.A. later this month and I’m looking forward to seeing the progress the team is making firsthand.

At Popeyes, we are also focused on building a system of best-in-class operators to deliver a more consistent experience while driving convenience. We made solid progress towards this goal by achieving another impressive year of unit growth, with growth across a broader set of partners and most of our openings coming from top scoring operators. We saw a clear progress in 2023 against our strategic plan easy-to-love, and this gives us confidence that the priorities in place are the right ones to ultimately drive franchise profitability to $300,000 by 2025. Lastly, Firehouse Subs which grew comparable sales in the U.S. 3.8% and increased system-wide sales by 7.4%. There is a lot of excitement among current and new franchisees to grow this incredible brand, and we’re seeing good progress in both the U.S. and Canada.

In Canada, we expanded from Ontario this quarter, opening restaurants in three different provinces in Western Canada with incredible local operators. Earlier this year, Mike and team leaned into the brand’s public safety routes and launched an exciting addition to our development incentive program to attract veterans and first responders who want to continue to serve their community in a new way as part of the Firehouse family. We’re looking forward to seeing Firehouse’s development ramp up this year as we bring the brand’s flavorful subs to more locations across North America. We’re also focused on being a leader in digital and saw strength in our mobile order-and-pay channel which helped to drive digital sales to a record 40% of system-wide sales, an exciting accomplishment driven by the continued enhancements and investments the team is making to fuel the brand’s overall tech strategy.

As a result of this great work, we’ve seen close to one-fifth of all transactions coming from our first-party mobile order-and-pay or web ordering platforms during some of our recent promotions. With that, I’ll now turn it over to Matt to discuss our financial results for the quarter. Matt?

Matthew Dunnigan: Thanks, Josh, and good morning, everyone. For the fourth quarter, our global system-wide sales grew 9.6% year-over-year, while our adjusted operating income was relatively flat, up 0.5% year-over-year and our adjusted EPS was up 4.4% organically. The primary drivers of the difference between system-wide sales growth and organic adjusted operating income growth where our $40 million of support behind our Fuel the Flame program at Burger King U.S. and an $11 million true-up to trade expenses in our Tim Hortons consumer packaged goods business. Combined, these had an impact of negative 7% on our year-over-year growth in adjusted operating income for the quarter. For background, in the Tims CPG business, we have typically held a steady run rate of promotional spend as a percentage of revenues that has been tight versus industry.

But in 2023 saw consumer price sensitivity and competition in Canada intensify considerably as the year progressed, which resulted in a greater-than-expected investment required to maintain our leading market share. We successfully held our share but realized an $11 million true-up to close our year-to-date promotions from prior quarters. Given the continued pressures across Canadian retail, we expect our trade investments to remain elevated in 2024. Aside from this impact to our Canadian CPG business, our underlying Tims supply chain business has continued performing well with stable margins over the past few quarters. For the fourth quarter and full-year 2023, this business grew positive mid-single digits year-over-year, in line with the healthy traffic and volume growth that we’ve been driving across Canada.

Our adjusted operating income was also impacted by higher segment G&A and increased bad debt expense of $13 million, primarily impacting our Burger King segment as an expected result of finalizing a few portfolio restructurings in the quarter. Segment G&A, which included equity-based compensation of $53 million, came in at $176 million, up $21 million year-over-year. The increase in segment G&A largely reflects higher compensation-related expenses associated with hiring, mainly across operations and franchising. Shifting to EPS. Our fourth quarter adjusted earnings per share was $0.75 compared to $0.72 last year, representing an organic increase of 4.4% year-over-year. Our adjusted EPS also included a $0.05 per share net benefit related to discrete non-cash tax items, which was offset by a negative $0.08 per share headwind from the combined impact of our Burger King U.S. Fuel the Flame investment and true-up related to our CPG trade spending attempts.

Our adjusted EPS was also impacted by higher interest expense due to higher U.S. benchmark rates which flow through to approximately 20% of our debt. Turning now to capital structure and cash flow. During the quarter, we generated $356 million in free cash flow, reaching $1.2 billion for the year. Our free cash flow generation allowed us to continue executing on key aspects of our capital allocation policy, including $56 million of investments behind Reclaim the Flame at Burger King U.S. and returning roughly $634 million of capital to shareholders through our dividend and share repurchases. During the quarter, we repurchased and retired 5.9 million shares of our common stock for $385 million. And today, we declared our Q1 dividend at $0.58 per common share in unit, targeting a $2.32 per share dividend for 2024 up 5.5% year-over-year.

As part of Reclaim the Flame, this quarter, we deployed $40 million towards our Fuel the Flame advertising and digital investments and $16 million of capital toward our Royal Reset program including $8 million for our Royal Refresh program. We have $77 million of Fuel the Flame investment left to deploy in 2024 and $189 million of Royal Reset remaining. Our free cash flow was also impacted by higher cash interest impacting the 20% of our debt that is not fixed. However, free cash flow metric does not reflect the benefit of our FX and interest rate hedges which added approximately $49 million of positive cash flow in Q4. We ended the year with a liquidity position of approximately $2.4 billion, including $1.1 billion of cash and saw our adjusted EBITDA net leverage ratio remained consistent at 4.8x given our share repurchase activity in the quarter.

Looking ahead, we remain confident in reaching our mid-4x target net leverage ratio by the end of this year even after accounting for the pending acquisition of Carrols. Now I’d like to wrap up with some guidance for 2024 on G&A, capital expenditures and interest expense. Excluding the pending acquisition of Carrols, we currently expect segment G&A between $680 million and $700 million, including equity-based compensation between $190 million and $200 million. Following the ramp-up of our G&A investments over the past few years, we exited 2023 in a solid place and expect our level of segment G&A on an absolute dollar basis to be more consistent from quarter-to-quarter in 2024 as compared to 2023. We currently expect total aggregate 2024 capital expenditures, tenant inducements and remodel incentives which, as a reminder, flow through working capital to be roughly $300 million, primarily driven by continued Burger King U.S. image investments, like our expanded Royal Refresh program and remodel investments, increased remodels at Tims in Canada, technology investments across segments and other brand-led growth initiatives like our Firehouse development incentive program.

Finally, based on the current interest rate environment, we expect 2024 net interest expense, excluding the acquisition of Carrols in the $555 million to $565 million range based on an average SOFR rate of 4.6%, flowing through to approximately 20% of our debt. With that, I’ll now hand it over to Patrick for some additional thoughts on the business.

Patrick Doyle: Thank you, Matt, and good morning, everyone. Before I talk about the really exceptional improvement in franchisee profitability year-over-year, I’d like to give you my perspective on the expectations Josh shared for 2024 net restaurant growth. Last year, we shared our plans to reach 5% plus net restaurant growth in 2024. There are a number of opportunities to generate that growth. Burger King U.S. returning to normalized closures, Firehouse Subs ramping up development, continued acceleration in growth of all brands in our international markets and acceleration in China, specifically with Burger King recapturing pre-pandemic levels of growth. Our Burger King U.S., Firehouse and broader international assumptions are still very solid.

Tom and team made great progress last year, taking the necessary steps to close underperforming restaurants to improve the long-term health of the system. As a result, we should see a roughly 50 basis point year-over-year improvement from lower gross closures at BK U.S. in 2024. At Firehouse, Mike and team have already turned on the development engine in Canada and are setting up the U.S. for growth through new incentive programs that really lean into Firehouse’s strong community ties. Meanwhile, David and team signed development agreements in four markets, and are actively working to continue building the brand’s overseas pipeline. But we’re being practical about the pace of growth we’re forecasting in China, as Josh noted. Given each of these dynamics, we believe it’s important to be upfront about near-term implications.

So I think, Josh’s perspective of potentially slower development in China for the balance of this year is accurate. Depending on pace of capital improvements in the system, there may be upside to our mid-4% net restaurant growth range for 2024. I’ll wrap up today on franchisee profitability where our teams and franchisees have really delivered terrific results. Last year, we told you that our long-term growth as a company is entirely dependent on the growth and profitability of our franchisees. We reminded you that while our franchisees are responsible for being great operators and stewards of our brands, as their franchisor we are responsible for giving our franchisees the opportunity to generate compelling financial returns. If we can deliver great returns for our franchisees, the entire flywheel of future reinvestments moves much more smoothly.

Franchisees are excited to invest in their restaurants, great operators. Not yet franchisees are excited to work hard for the potential opportunity to become a franchisee one day and deliver over and above guest experiences. And guests receive the consistent great experiences they deserve every time they visit or order from one of our restaurants. We committed to publicly sharing 4-Wall EBITDA for our home markets annually so that you, our investors and our franchisees can hold us accountable to continue pushing forward and making progress. In 2023, we made a lot of progress. Average home market franchisee profitability is up by 30%, while our profitability as the franchisor is up 9%, and I think that’s awesome. We need to deliver compelling profitability growth for our shareholders, and we’re doing that.

Our franchisees need to realize compelling profitability growth to continue to invest in their business and they are seeing that. This is exactly how this is supposed to work. At Tim Hortons in Canada, average 4-Wall restaurant EBITDA in 2023 was over C$280,000, up nearly 30% from $220,000 a year ago. Burger King U.S. saw average restaurant profitability of over $205,000, representing nearly 50% growth from $140,000 a year ago and putting us well ahead of the 2024 Fuel the Flame threshold of $175,000 to unlock a higher ad fund rate from franchisees for the coming years. At Popeyes U.S., average 4-Wall restaurant EBITDA grew approximately 17% year-over-year to roughly $245,000 compared to $210,000 last year. And on Firehouse Subs, we saw a 38% increase in restaurant profitability, reaching $110,000 compared to $80,000, a year before.

While these results are really impressive, especially in just one year, we need to continue demonstrating a growth path this year and in future years. There’s a lot of opportunity for our franchisees still ahead of us. To achieve this, we need to further improve operations. We’ve said it before, but better operators have better profitability. On average, A operators for each home market generated restaurant profitability that was 30% higher than the system average. In fact, Tims, Popeyes and Firehouse A operators have already achieved our long-term profitability targets, which I plan to share with you on Thursday. And as a result, these franchisees are generating strong unlevered paybacks. I strongly believe that we must deliver our part of this equation.

But ultimately, execution is in the hands of our franchisees and those that do it better, make way more money. That should be inspiring for everyone. I’d like to echo Josh’s comments around franchisee profitability. I’m very proud of the progress our teams and franchisees made this year. Delivering results like this does not happen overnight. It requires hard work, patience and collaboration and dedication. I’m confident we will continue to move the ball down the field in the year ahead. With that, let’s take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from Brian Bittner of Oppenheimer. Please go ahead. Your line is open.

Brian Bittner: Thank you. Good morning. The updated franchisee profitability for your home markets was obviously very impressive, particularly with Burger King U.S., up 46% versus last year, and it’s already way ahead of your 2024 targets by $30,000 per unit. So it seems the ad contribution step-up is obviously inevitable. But maybe, Patrick, you could unpack how else these better metrics can help fuel the Burger King momentum moving forward? Is it just momentum drives momentum? Or are these metrics going to help you unlock more remodels or anything else to point out? And secondly, it does seem like between 4Q and 1Q of this year, you’ve acquired 127 Burger King U.S. restaurants, which is surprising. It’s happening at a time that franchisee profitability is exploding. So can you just help us understand the reasoning or perhaps the strategy behind these acquisitions going into the Carrols acquisition? Thanks.

Patrick Doyle: Yes, Brian. So Brian, there are really a couple of things on that. First of all, clearly, the momentum drives momentum, the flywheel is working. The other thing that I would add to your question is the 20% return on remodels that we referenced. And some of you, I’ve seen some speculation out there that perhaps those numbers weren’t as good as we had been expecting that we talked about 12% because we hadn’t shared those yet. In fact, we wanted it to go longer because, frankly, the numbers were coming in so strong that we really needed to see it go a bit longer before we were ready to believe it. We believe that will work its way back down a bit over time as we get more numbers in. But there is a lot of momentum in that business right now.

And look, ultimately, as franchisees get more confident about this business, as they get more confident about the return that they’re going to get for remodeling restaurants, from building new restaurants. All of that generates system sales growth, which generates more advertising dollars, even off of a comparable percentage of sales. So I mean, the momentum does build on itself. Our job is to keep that going. And I guess what I would say is 205-plus is great progress, but we’re not there yet, right? I mean it’s got to be higher than that. And we’re looking at plans for how do we continue to increase that. Obviously, we’re excited about the momentum of the business, but we’re not satisfied with the level that we’re at yet. And I guess the last thing or the last question that you asked was about corporate restaurants and the addition of restaurants at the end of the quarter.

That’s simply from some of the workouts that you read about last year. We provided a home for some of those restaurants as we work through those three bankruptcies last year. Most of them already from those were sold to smaller, great franchisees. We were excited to have join our system. Some of the restaurants that you saw on our books at the end of the year will still be sold off soon, and we expect that number is going to work back down over time. But we’re fine holding those until we find a great long-term operator for those franchisees. We’re going to work through those expeditiously. We don’t expect to hold those particularly for the long-term. There are a few in South Florida that we may. But ultimately, that’s kind of a transitory thing.

Joshua Kobza: Brian, if I could just add on the first part on your question of how does this flow back into the system. I think there are some really kind of practical day-to-day things that are happening that are fueling our growth. And I think as we’re seeing sales and profitability improve, that also allows our operators to increase the staffing levels in the restaurant. So we’ve got better staffing. It means our speed is getting faster. We’re also being able to expand operating hours. Again, that helps a lot. And the improvements in the franchise profitability are also allowing our operators to reinvest in some of these initiatives like the short-term Royal Refresh where we’re getting new technology into the restaurants, new equipment.

I’ll tell you, I see it when I’m out in the restaurants with Tom. There’s a lot of improved technology in the restaurants, and we have a lot of updated new pieces of equipment. And I think our guests are seeing that, and they’re feeling that in improved product quality that we’re getting out of the new equipment. So there’s a lot of things that sort of drive the flywheel forward, and I think we’re benefiting from a number of them right now.

Brian Bittner: Thanks.

Operator: Our next question today comes from Danilo Gargiulo of Bernstein. Your line is open.

Danilo Gargiulo: Good morning. Can you please elaborate maybe a little bit more on the strategic rationale for shifting the budget from remodeled to refresh? Maybe if you can also help us understand the uplift post refresh that you’re seeing today?

Joshua Kobza: Yes. Thanks, Danilo. So as I mentioned, we just saw a ton of excitement within the system. Our franchisees really like that short-term Royal Reset. And we started to make those investments, and we started to see a big impact on those restaurants. So all of the restaurants that we were able to touch with upgrades, with new equipment, we started to see those outperform the rest of the system. And I think that generated a lot of discussion between Tom and team and the franchisees on how we could do even more of that. So we decided to shift a little bit more money to that just based on the returns that we were seeing. And on top of that, if you think about – once we do the Carrols acquisition, Carrols would have been a meaningful part of that kind of the first couple of years of remodels.

And now that’s taken out of the program. So it frees up some capital for us to do other things. And so we’re deploying it in some of the things that we can do to impact as many restaurants as possible as quickly as possible and keep the positive performance going.

Operator: The next question comes from John Ivankoe of JPMorgan. Please go ahead.

John Ivankoe: Hi. Thank you. I think in your prepared remarks, correct me, but I heard some softness or perhaps slowing in Burger King in Western Europe. So I wanted to elaborate kind of on those comments and if you think they’re specifically related to the Middle East conflict. And if you can juxtapose those comments with what you said about fiscal 2023 development were some of the highest rates of development were in France and Spain, I think, specifically, and whether we could potentially see slower overall unit development as same-store sales have slowed in 2024 and perhaps 2025?

Joshua Kobza: Yes, John, thanks for the question. A few thoughts on this one. So we did see a bit of a sequential slowdown in terms of same-store sales in Western Europe. I think some of that was expected just as you’re seeing inflation decelerated a bit. So I think that’s the biggest driver of what we’re seeing there. Though I would say we still did pretty well in markets like France, which has been a fantastic market for us. It was a little bit slower, but we were still positive, and we’re still taking share there. So I think we’re happy with the business performance. We don’t see any particular correlation with the conflict in Middle East in terms of the performance that we’re seeing in Western Europe. And I think on your last point, John, in terms of development, it is true that France and Spain are some of the bigger contributors to development, and we expect that to continue into 2024.

We’re not seeing any big impact on development expectations in Western Europe. So we expect continued positive progress there this year.

Operator: Our next question comes from David Palmer of Evercore ISI. Please go ahead. Your line is open.

David Palmer: Thanks. Good morning. Great job with the North America brands. But I wanted to ask you about Tim Hortons supply chain and the CPG coffee profit. Over the last couple of years, I think the profit for that has been something like 3%. There’s been some quarterly volatility like you’ve talked about. I’m wondering what is the profit outlook for these businesses or that combined line item, sales net of cost of sales for 2024? And what’s the future outlook for this business in your view? Thanks.

Matthew Dunnigan: Hey, Dave. It’s Matt here. Thanks for the question. Yes, so I think the way – just to point out for everyone, the CPG business and supply chain both roll up into our sales cost of sales lines. And so those are together. I think for 2023 for the full-year, what you saw in terms of our margin there was around 18%. And if you adjust for the true-up that happened in Q4, the Q4 margin levels were kind of at a similar place. Looking forward, I think given normal seasonality that we’ve seen in the beginning of the year, we would expect Q1 to come in at kind of a similar level of margin. But then I think for the full-year in 2024, we see an opportunity to recover to more normalized levels that we saw in 2022. So I think overall, though, we feel good about the direction of the business and the core margin profile that we’re seeing in the supply chain business.

And it’s tracking very nicely in terms of organic growth along with the Tim Hortons business across Canada and the traffic and volumes that we’re driving there. The CPG business, as we called out, had very challenging conditions through – especially into the second half of the year. And so that’s what drove the true-up of the promotional expense there. We’re going to continue spending a bit more in that business, but we still have leading market share. We held our market share over the past couple of quarters. And we’ve also brought in a new team and experienced leadership. And I think we have a good outlook on being able to deploy those promotional investments more effectively going forward and more of an even cadence in 2024. Thanks for the question.

Operator: Next in queue, we have Dennis Geiger of UBS. Your line is open.

Dennis Geiger: Great. Thanks and good morning, guys. Encouraging progress for the BK and Tims brands in their home markets. Wondering off the back of some of the comments on the CPG business with Tims in Canada and the consumer there. If you could talk a little more about what you’re seeing from your customers across the U.S. and Canada as it relates to those two brands beyond CPG, anything with the low-income consumer or other behavior changes to call out? And I guess more importantly, if you could highlight kind of how those two key brands in their home markets are positioned – if we’re in a more challenged spending environment, what that means for the brands, for market share? Perhaps anything on that front? Thank you.

Joshua Kobza: Hey, Dennis. Good morning. So in terms of what we’re seeing with the consumer – overall, we’re not seeing big behavioral changes. I would point out a couple of things from Q4 that are most relevant in our mind. One, within the Tim Hortons business in Canada, we pointed out that we had really solid same-store sales, but it was combined with a really good mix of traffic. We’ve seen that throughout the year, but we’re kind of half-and-half mix, which means we had solid traffic. And I think that’s the consumer in Canada reacting to some great new products and really great operations. So we haven’t seen a big deviation from the Canadian consumer. And then similarly in – with Burger King in the U.S., our biggest business there, we noted that traffic was positive in Q4 for the first time in a while.

So we’ve seen pretty good health within the consumer and the U.S. QSR space, and we’re pretty happy with it. So no big behavioral shifts that I would point to. In terms of how our brands are positioned. I always go back to the fact that our brands are in a great place for any part of the cycle. We offer great value, high-quality products and convenience. I think that’s true across our entire portfolio. So I think we’re already really well positioned. And as long as we keep doing what we’re doing, which is focusing on the basics of the industry, trying to do everything right around quality, service and convenience. That’s what’s driving our results right now, and I think that’s going to serve us well and allow us to keep driving good results into 2024 regardless of what happens with the overall consumer environment.

Matthew Dunnigan: Yes. Maybe just one quick thing to add there to Josh’s comments on the U.S. and BK. On the positive traffic, we did see positive traffic across all income groups as well.