Good morning, and welcome to the Restaurant Brands International First Quarter 2017 Earnings Conference Call. All participants will be in listen only mode.
Call.
Please note, this event is being recorded. I would now like to turn the conference over to Marcus Sturm, Head of Investor Relations. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the Q1 ended March 31, 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's CEO, Daniel Schwartz and CFO, Josh Kobza.
The team will be available to answer questions during the Q and 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 the 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 and A. I'll now turn the call over to Daniel.
Thanks, Marcus, and good morning, everyone. Thanks for joining us in today's call. I'm pleased to report on our exciting first quarter during which we completed the acquisition of Popeyes Louisiana Kitchen, an iconic brand whose offering is highly complementary to Burger King and Tim Hortons. Popeyes has a rich Louisiana heritage, a loyal customer base and great franchisees and we look forward to accelerating the growth of this brand in the United States and all around the world for many years to come. As a combined company, RBI now has a footprint of over 23,000 restaurants worldwide and over $27,000,000,000 in annual system wide sales.
We're excited about our long term growth prospects and our ability to continue increasing guest satisfaction and franchisee profitability at all three of our iconic brands. Despite a challenging quarter, we were able to grow our adjusted diluted earnings per share by 20% to $0.36 per share and grow adjusted EBITDA by 6.8 percent on an organic basis. Our growth in the bottom line was largely attributable to further system wide sales growth at both Tim's and Burger King, primarily resulting from net restaurant growth over the past trailing 12 months. Same store sales growth for each of our 3 brands was relatively flat this quarter and includes an approximate 1 percentage point drag on comps due to the impact of the leap day in the prior year period. Our teams remain focused on important initiatives to drive improved same store sales growth metrics over the long run.
At Tim Hortons, we continue to make good progress expanding the brand in both existing markets and prospective new markets. Our continued expansion of the brand into United States and international markets helped fuel a 4.6% year on year increase in our restaurant footprint, which contributed to system wide sales growth of 3.3% for the quarter. We also achieved continued growth at Burger King this quarter. Overall system wide sales growth grew by 6.2% in Q1, driven largely by a 5 point 1% increase in our restaurant count year on year. Popeyes achieved Q1 comparable sales growth of negative 0.2 Q1 comparable sales growth of negative 0.2% and approximately 6% growth in year on year restaurant count, both of which span a period prior to RBI's ownership of the business and are being provided for informational purposes only.
Let's review the results for the Tim Hortons brand where we continue to see year on year EBITDA growth in the Q1. Overall, Tim's adjusted EBITDA reached $256,000,000 up approximately 9% on an organic basis versus last year. This growth was primarily driven by the brand system wide sales growth. Same store sales were relatively flat compared to the prior year with same store sales in Canada, our largest market for the brand, of negative 0.2%. We continue to see a slowdown in the western part of the country due to macroeconomic conditions as well as an impact from harsher weather on restaurant level traffic in the winter months.
However, we are excited about our initiatives to drive improved sales growth and remain confident in our long term strategy for Tim's in our home country and around the world. 2 such initiatives include the launch of espresso based beverages and the debut of our Tim's mobile app. New espresso machines have now been installed in most of the Tim Hortons restaurants across Canada and we are pleased to have formally launched our national espresso campaign today. In anticipation of our launch, we set up an intentionally unbranded pop up cafe in a trendy downtown Toronto neighborhood where we serve what we labeled as perfectly uncomplicated lattes. We wanted to highlight that our latte is easy to order and is handcrafted with 2 quality simple ingredients, freshly ground espresso beans and freshly steamed Canadian milk.
The shop served several 100 guests, but only last week did we finally reveal that the store and the latte product it was serving were from Tim Hortons. This generated a lot of media buzz and guests were thrilled to learn that their local Tim Hortons restaurants will be serving such a high quality product at an everyday value price. We are also looking forward to our national rollout of our new digital app later this year. With the help of our franchisees, we recently implemented the technology in even more test restaurants and are pleased with the feedback we are receiving thus far. This quarter, we accelerated the pace at which we grew our Tim Hortons restaurant footprint worldwide, having achieved 4.6 percent net restaurant growth over the trailing 12 months.
Further acceleration of restaurant growth over the long term will be driven by our U. S. Development partners and our international master franchise joint ventures. In March, we opened our first restaurant in the Philippines and are excited about the reception Tim's has received in this country. We are working with our local partners to continue our momentum in growing the brand countrywide.
We are also encouraged by the progress our partners in Great Britain and Mexico have made to date and look forward to opening our first restaurants in those countries later this year. Additionally, we continue to make good progress towards signing further development agreements in prospective U. S. And international markets. Now let's discuss the results for Burger King.
We grew our overall system wide sales by 6.2% this quarter, driven primarily by net restaurant growth. Comparable sales were relatively flat this quarter at negative 0.1%, driven by same store sales of negative 2.2% in the U. S. And partially offset by growth in the international markets. Our results reflect lapping of Q1 2016, which one of our strongest quarters for the Burger King brand in terms of restaurant level sales and as mentioned earlier include an approximate one point drag due to the impact of a leap day in the prior year period.
In the U. S, we remain focused on improving the quality of our products and innovating around our existing platforms, bringing impactful but operationally simple products to our guests. One such example of this is our improved Crispy Chicken Sandwich, which we launched in late Q1 and which is performing well. Heading into the Q2, we're excited to have launched our Steakhouse King Burger, which is another example of innovation around our highly successful Bacon King product launched in the Q4 of last year. Additionally, heading into the Q2, we launched a Fruit Loop shake, a fun and delicious product, which we believe gives our customers yet another exciting reason to revisit our restaurants.
Internationally, we continue to perform well in markets like China, Russia and Brazil, while some markets such as the UK and Korea were a little softer, but we're confident in our overall outlook for the rest of the year. We're excited for our Burger King brand to have recently been named 2017 Creative Marketer of the Year by Cannes Lions. This prestigious award reflects a significant amount of work built up over several years by our marketing teams and our franchisees all around the world. It is also a positive reflection of just how far the business has come and highlights our potential to continue driving further growth of the brand in the long term. On the development front, we grew our restaurant count by 5.1% on a trailing 12 month basis through working with our partners to open great looking restaurants in the right locations all around the world.
This quarter, we closed a multi country development agreement in Sub Saharan Africa with Servair, who is an existing franchise partner with recently opened restaurants in Ivory Coast and Kenya. We look forward to our expansion in Africa, which we believe is a market with significant growth potential for the Burger King brand. We remain encouraged by our pipeline for new restaurant openings and are excited to translate several development agreements and master franchise joint ventures signed in recent years into successful new restaurant openings. The momentum in system wide sales growth this quarter helped to drive our 1st quarter adjusted EBITDA for Burger King to $187,000,000 representing an organic year on year of 4.1%. We are thrilled to have officially closed the Popeyes acquisition on March 27, 2017, only a few short weeks after announcing the transaction.
We remain confident in our plans to accelerate the growth of this iconic brand all around the world and our conviction continues to grow as we learn even more about the business from its strong employee and franchisee base. During the Q1 of 2017, Popeyes increased restaurant count by approximately 6% on a trailing 12 month basis and had relatively flat comparable sales growth of negative 0.2 percent driven by U. S. Same store sales of negative 0.4%. I'd like to now turn the call over to Josh.
Thanks, Daniel. Before reviewing our financial results for the quarter, we wanted to clarify that Popeyes revenue and segment income for the period from the acquisition date of March 27, 2017 through to March 31, 2017 were immaterial to our consolidated financial statements and were therefore excluded from our results for the Q1. Popeyes revenues and segment income for this stub period will be included in our Q2 consolidated results. This quarter system wide sales growth and net restaurant growth achieved at both Tim Hortons and Burger King allowed us to continue our growth in organic adjusted EBITDA and adjusted diluted EPS. Adjusted EBITDA for the quarter was approximately $443,000,000 representing an increase of 6.8% on an organic basis versus the prior year.
Adjusted net income increased 20% year over year to approximately $171,000,000 primarily as a result of adjusted EBITDA growth. On an adjusted diluted EPS basis, we achieved $0.36 per share in the Q1, up 20% year over year. Starting in Q1 20 17, our tax rate and weighted average shares outstanding reflected new accounting standards related to the tax impact from equity based compensation. This accounting standard resulted in a positive impact on our effective tax rate for the quarter, but increased our weighted average shares outstanding. Further details pertaining to this accounting standard can be found in our Form 10 Q.
Now let's discuss our cash generation and capital allocation. This quarter, we financed the Popeyes acquisition through an incremental $1,300,000,000 borrowing under our term loan facility and approximately $600,000,000 in cash on hand. In addition to the Popeyes transaction, in February, we amended and extended our term loan B facility, whereby we paid down approximately $146,000,000 in principal, extended the maturity date to 2024 and repriced the loan from LIBOR plus 2 75 basis points to LIBOR plus 2 25 basis points. This quarter, we generated free cash flow of $287,000,000 and paid a total of $146,000,000 in preferred and common dividends and partnership exchangeable unit distributions. As at March 31, 2017, our ending cash balance was approximately $924,000,000 Our total debt balance was approximately $10,100,000,000 and our net debt was $9,200,000,000 all of which reflect our refinancing and Popeyes acquisition funding.
On April 26, 20 17, the RBI Board of Directors declared a dividend of $0.19 per common share in partnership exchangeable unit of RBI LP, payable on July 6, 2017. The continued growth in the dividend reflects our commitment to a balanced capital allocation strategy. Will now hand the call back to Daniel for concluding remarks.
Thanks, Josh. We had an exciting Q1 this year in which we completed our acquisition of Popeyes, an iconic brand with a rich Louisiana heritage. We also continued to grow our Tim Hortons and Burger King brands, increasing system wide sales despite relatively flat comparable sales growth. We remain confident in our strategies to accelerate comparable sales growth and to grow franchisee profitability for each of our 3 brands for many, many years to come. We look forward to updating you on our progress next quarter.
Thanks to everyone for joining us on today's call. And with that, we'd like to open up the call for Q and A. Operator?
We will now begin the question and answer session. The first question is from Nicole Miller of Piper Jaffray. Please go ahead.
Thank you. Good morning. I'm wondering, is there a pattern that's required for master franchise partners looking back at Burger King and Tim's? Is there a pattern in which they open the New World Zones, either in a way that you go out to partner with those franchisees or once they're signed up the pattern of how many stores they open per year and how they fill in the territory they take on? And I'm asking because the Part B is how would you then characterize the opportunity for Popeyes outside of the U.
S? Meaning will you go to the same partners, new ones, would it follow the same pattern? And because it seems like a healthy brand that doesn't need much fixing, would this be a brand that could potentially grow faster than any others have in the portfolio? Thanks.
Hi, Nicole. Thanks for the question. It's Daniel. Look, we're obviously very excited about the Popeyes acquisition. It's a great iconic brand.
And to your point, one of the reasons we get really excited is the ability to accelerate the pace of growth, both in the U. S. And Canada and all around the world. Every situation is different. And when we look back at what worked well with the Burger King brand and what's now working well with our Tim Hortons brand, we like to partner with strong local operators who share our vision for sharing our vision for the growth of the brand all around the world and particularly on their home markets.
And we look back at places like Brazil, Russia, China where we started with a very small presence and today have met many hundreds of restaurants and are operating the brand quite well with strong local partners, We get pretty excited about the opportunity to grow Popeyes and we think that the brand and the product offering will resonate really well with guests all around the world. And in some cases, we'll look to partner with existing master franchise joint venture partners. And in other cases, we'll look to partner with new partners. But it all comes down to making sure that we have a great local operating partner who really shares in our vision for what this iconic brand can become in his or her home market.
The next question is from Mark Petrie of CIBC. Please go ahead.
Good morning. I just wanted to ask about the Tim's franchise in Canada, 2nd straight quarter of mean slightly negative, but negative same store sales. Obviously, you've been busy with the espresso rollout, the app testing. But just wondering if you could talk about that business overall and how you feel about the saturation within the Canadian market for Tim's?
Yes. As we mentioned in the past, we try not to get too caught up in the quarter to quarter results. Like our franchise owners, we're invested in our business for the long run and we're confident that we have the right strategy in place to grow same store sales and sales for restaurants and profit per restaurant in Canada for the long run. And we're excited about the initiatives that we have in place that we think can enable us and will enable us to grow those sales and profits. I'd say we were really focused this Q1 on rolling out all of the equipment and preparing for the national espresso based beverage launch, which is actually happening today.
In the prepared remarks, we had mentioned that we had launched this through an unbranded pop up shop, which is was already unveiled. And we're excited to launch this new great product for Ed Canada today. We also focused on our dark roast coffee in the Q1 as well, which enabled us to continue with our strong position in coffee. So overall, we're excited about the outlook for the year between the launch of our espresso based beverages and the digital rollout. We think we have a lot of good initiatives, which will enable us to sustainably grow our sales and profits per restaurant for the long run-in Canada.
The next question comes from John Glass of Morgan Stanley. Please go ahead.
Thanks. First just a quick follow-up on the Popeyes expansion. Will you allow the Burger King franchisees, for example, in the U. S. To co develop or develop those 2 brands simultaneously?
And my question has to do with Tim's in Canada. There's been some concern raised by franchisees about food quality and various issues, which I'm sure you're aware of. Have those been addressed in your mind? Do you think they have legitimacy? Or how do you approach that situation?
I think it's the first time we've heard about franchise commentary about your brands.
Yes. Thanks, John. It's Daniel. There's a lot of overlap with Burger King and Popeyes franchisees in the United States and they're already there are many cases where they're already developing both brands and we would expect that to continue to be the case. We obviously don't agree with some of the comments around food quality and whatnot.
But just some background for you, we work with an elected advisory board in Canada, elected by our franchisees for many years and it's how it's kind of always operated with Tim's. And they're the foundation of the system. We always seek their guidance. We always seek their counsel. And we work in close collaboration with them to deliver great guest experience and continue profitability growth.
And in each year since we acquired Tim Hortons and created Restaurant Brands International, we've grown the profits for our franchise owners to record levels in 2016 and we look forward to working collaboratively with them for many years to come to grow the brand.
The next question is from David Palmer of RBC Capital Markets. Please go ahead.
Thanks. Largely just a follow-up on some of the things we were talking about. Tim Hortons Canada and Berking U. S. A pretty similar setup to the year where you have these difficult comparisons earlier and perhaps things get easier from here and you have a clear initiative in espresso with Tim Hortons.
With Burger King U. S, I'm trying to think about what is it just getting sharper on value that and then some of the renovation that you're doing? Are those the 2 big things that you're focusing on to not just benefit from comparisons, but to really accelerate on a 2 year basis?
Yes. Dave, you're right. We were lapping one of our strongest quarters of the year in the Q1 of this year on the Burger King U. S. Side.
And we also had the drag from the leap year and all that. But I'd say some of the stronger initiatives like the new Crispy Chicken Sandwich, which are doing quite well, Those were launched later in the quarter. And we're excited about that and some of the other initiatives that we have like the Steakhouse King and the Fruit Loop shake that we see positively contributing to the growth in sales for restaurant that really didn't benefit us much till the end of the quarter. And we see the contribution from those and some of the other initiatives that we have, combined with as you mentioned, the continued renovations of our restaurants and building of new good restaurants, all of which kind of together give us confidence in our outlook for the year that we'll be able to grow the sales per restaurant and the same store sales. And we're excited to continue growing the same store sales from Burger King U.
S. For the long run.
The next question is from Patricia Baker of Scotiabank. Please go ahead. Yes, good morning. Could we just talk about Tim Hortons Canada and just point to the drivers of the increased SG and A this quarter this year versus last year?
Yes. Good morning, Patricia. It's Josh. So on the G and A, what I how I would frame it for you is, I look at the G and A on average kind of the run rate from 2016, which was right around $20,000,000 So I if you look at the quarter, we were up a little bit and most of that was just a slight increase in salaries and benefits compared to the run rate from the prior year.
The next question is from Gregory Francfort of Bank of America. Please go ahead.
Hey, guys. Maybe just one housekeeping one. Are there any limitations on the preferreds or taking out the preferreds later this year? Are there any covenant restrictions that may make that difficult or not feasible right now?
Yes, Greg, it's Josh again. Thanks for the question. So the way that the preferred works, the first redemption date in the documents is in December of this year. So that's the first date that we would be allowed to take to potentially redeem those shares.
The next question is from Brian Bittner of Oppenheimer and Company. Please go ahead.
Thanks guys. Good morning. Just going back to the Popeyes acquisition because obviously the big strategy here is to take the brand international in a much bigger way than it is today. When you bought Burger King and you successfully accelerated that business, it was kind of already a gigantic well known brand across the globe. So I'm wondering or asking what drives the confidence that you can really get this humming internationally?
Is it kind of that KFC has kind of paved the way and shown that Chicken Brand works real well globally? Or is there other insights that you have that you can share?
Yes, Brian, it's Josh. Thanks for the question. I think probably 2 main things. 1, I think you make a good point though. We view chicken as a huge global category that's very well developed around the world and one where we think the Popeyes brand can clearly be a much bigger player.
And 2, we've seen that Popeyes already has a very large global business. We're in about 25 countries already all around the globe and we have a successful business in many of those countries around the world. So we've built out partnerships around the world, supply chain and operations and we've seen that the brand and the product resonates really well with customers all around the world. I think those two things give us a lot of confidence around where we can take the brand and we're excited to work on it with our existing and potentially new partners in the coming years.
The next question is from Andrew Charles of Cowen and Company. Please go ahead.
Great. Thank you. Two questions for me. Daniel, just Burger King U. S.
Focused pretty intensely on chicken in the Q1 with crispy chicken sandwich and also with jalapeno chicken fries. I'm curious if this was just driven more by consumer insights that you guys needed better chicken options or if this is really more of a gross margin play as well just given that chicken naturally has higher margins than beef. And then for Josh, just curious as well, on the year over year increase in the franchise and property expenses, this is the first time we saw that for Tim since 2015. And just curious what this relates to if there's more investment back in the business. I know the remodel cycle had pretty much completed, but curious if there's any store level enhancements you guys are investing behind with that?
I can take the first one on the Burger King U. S. When we look at the calendar and the initiatives, obviously everything we do we look at it through the lens of is this going to drive guest satisfaction and meet our guest demand And will it drive growth in our franchisees profits? And if we can answer yes to both of those questions, then we move forward and we make it priority. And I can answer yes to both of those questions as it relates to the new crispy chicken sandwich that we launched.
We saw an opportunity to improve the quality of our Crispy Chicken Sandwich and we're excited about this new product platform. And I think you're going to see more and more innovation around this for the balance of the year. And I guess Josh you want to take the Tim's question?
Yes, of course. So Andrew, I think if you look at the margins both year on year, the F and P margins both year on year and quarter on quarter, they're relatively stable. If you're looking at just the absolute dollars year on year, you'll see both an impact from the growth in the business and there's also some FX impact in the U. S. Dollar amounts given that most of that comes from the Canadian business and there was a meaningful difference in the Canadian dollar rate from Q1 of last year to Q1 this year.
The next question is from Karen Holthouse of Goldman Sachs. Please go ahead.
Hi, good morning. This is actually Greg Longmont for Karen today. So we noticed that some of the reporting in the press release changed, particularly less detail on unit counts and comps by region than we used to get. So just wondering if that will still be in the queue? And if not, what is the rationale for no longer giving it?
Yes. Good morning, Greg. It's Josh. So as we noted in the press release, in connection with the acquisition of Popeyes, we took a look at our reporting and we're going to continue to have our 3 reporting segments be the 3 brands now including Popeyes. And so you'll get the comps and the restaurant counts for each of those three segments.
And to add some additional visibility, we'll give you the top markets. So for each of the brands, the largest market for the comps. And as we also noted in the press release, we'll also each year give the unit counts for some of the biggest countries around the world for each of those brands.
The next question is from Will Slabaugh from Stephens. Please go ahead.
Yes. Thanks guys. I had a
question on Burger King U. S. Curious, how much of the softer comp this quarter do you credit to competition improving their offerings during the period versus maybe some of your promotions being less impactful than what you've seen in the past? And then on the back of that, what is this quarter's result mean for your plans to grow same store sales and guest count as we look to the rest of the year?
Yes. It's Daniel. Thanks for the quarter. I think we've mentioned before in the Q1, we were lapping 1 of the stronger quarters from last year. It's a competitive QSR especially in the United States, it's a competitive industry.
It always has been, always will be. It doesn't change our focus and our drive to drive great guest satisfaction, drive profitability for our franchisees. What I can point to in the quarter is I'd say some of the bigger initiatives that we had like the Crispy Chicken Sandwich, they happened a little bit later in the quarter. So as we look out to kind of the balance of the year between the crispy chicken sandwich, some of the new milkshakes that we've launched, the premium beef sandwich and steakhouse king, all that and kind of the trends we see that gives us confidence in our ability to grow same store sales for the balance of the year.
The next question is from Dennis Geiger from UBS. Please go ahead.
Great. Thanks for the question. Can you talk some about digital at both brands? I guess anything more you can share with respect to what you've seen in the tests at Tim's with the mobile order pay? Anything on loyalty, if you could share that?
And then just any thoughts on what that might mean for the timing at Burger King for when it might enhance its digital platform? And if it's not too early yet to talk about how you're thinking about Popeyes with its digital? Thanks.
Yes. We're excited about the beta tests that we're rolling out across both of the brands, Tim's in Canada and the U. S. And Burger King in the U. S.
We've continued to expand the size of the beta tests that we have in Canada. So we're adding additional provinces and additional owners to help us test and gathering a whole lot of feedback and we're going to be doing the same thing with Burger King U. S. And we're excited to launch both of those this year. I think it's a little bit early to comment on Popeyes, but ultimately bring a digital channel to that brand as well.
The next question is from Peter Sklar of BMO Capital Markets. Please go ahead.
I have a question on Tim Hortons Canada. So it sounds like you're very busy preparing for the espresso program, but can you talk about some of the more prominent promotions you had during the quarter and how they resonated with your guests?
Yes. It's Daniel. Happy to talk about that. During the quarter, I think probably the most prominent promotion was the relaunch of the even bolder and even darker dark roast coffee that we were pleased with during the quarter and we're happy with the results of that. In addition, we had a perfect pairings offer where we gave our guests the opportunity to mix and match sandwiches with some of our delicious sides including wedges.
And we had our annual roll up the rim. So those are some of the things that we had going on in the quarter, while as you said, we're preparing for the big espresso launch which is happening today. And we're excited about our outlook for the year and the calendar of events that we have for the balance of the year for our Tim Hortons brand and our Big Home market.
This concludes our question and answer session. I would like to turn the conference back over to Daniel Schwartz for closing remarks.
Thanks a lot to everyone for joining us today. As we mentioned earlier, we're really excited to have brought the Popeyes Louisiana Kitchen brand into the RBI family of brands this quarter. And we look forward to having a great year and reporting back to you all next quarter. Thanks a lot.
The conference has now concluded. Thank you for attending today's presentation.