Good morning, and welcome to the Restaurant Brands International first quarter 2017 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. You will hear a tone to confirm that you are in the queue. To exit the question queue, you may press star then two. 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.
Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the first quarter ended March 31st, 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, Joshua 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 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&A. I'll now turn the call over to Daniel.
Thanks, Markus, and good morning, everyone. Thanks for joining us on 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 CAD 27 billion 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 CAD 0.36 per share and grow Adjusted EBITDA by 6.8% on an organic basis. Our growth in the bottom line was largely attributable to further system-wide sales growth at both Tims and Burger King, primarily resulting from net restaurant growth over the past trailing 12 months. Same-store sales growth for each of our three brands was relatively flat this quarter and includes an approximate one 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 U.S. and international markets helped fuel a 4.6% year-over-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 5.1% increase in our restaurant count year-over-year. Popeyes achieved Q1 comparable sales growth of - 0.2% and approximately 6% growth in year-over-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 continued to see year-over-year EBITDA growth in the first quarter. Overall, Tims' Adjusted EBITDA reached CAD 256 million, up approximately 9% on an organic basis versus last year.
This growth was primarily driven by the brand's 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 continued 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're excited about our initiatives to drive improved sales growth and remain confident in our long-term strategy for Tims in our home country and around the world. Two such initiatives include the launch of espresso-based beverages and the debut of our Tims 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 served what we labeled as perfectly uncomplicated lattes. We wanted to highlight that our latte is easy to order and is handcrafted with two quality, simple ingredients: freshly ground espresso beans and freshly steamed Canadian milk. The shop served several hundred 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're 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're receiving thus far. This quarter, we accelerated the pace at which we grew our Tim Hortons restaurant footprint worldwide, having achieved 4.6% 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're working with our local partners to continue our momentum in growing the brand countrywide. We're 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 - 0.1%, driven by same-store sales of - 2.2% in the U.S. and partially offset by growth in the international markets. Our results reflect lapping of Q1 2016, which was 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 second quarter, 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 fourth quarter of last year. Additionally, heading into the second quarter, we launched a Froot Loops 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 U.K. 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 the 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 and system-wide sales growth this quarter helped to drive our first quarter Adjusted EBITDA for Burger King to CAD 187 million, representing an organic increase year-over-year of 4.1%. We're thrilled to have officially closed the Popeyes acquisition on March 27th, 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 first quarter of 2017, Popeyes increased restaurant count by approximately 6% on a trailing 12-month basis and had relatively flat comparable sales growth of - 0.2%, driven by U.S. same-store sales of - 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 first quarter. 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 CAD 443 million, representing an increase of 6.8% on an organic basis versus the prior year. Adjusted net income increased 20% year-over-year to approximately CAD 171 million, primarily as a result of Adjusted EBITDA growth.
On an Adjusted Diluted EPS basis, we achieved CAD 0.36 per share in the first quarter, up 20% year-over-year. Starting in Q1 2017, 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. Let's discuss our cash generation and capital allocation. This quarter, we financed the Popeyes acquisition through an incremental CAD 1.3 billion borrowing under our term loan facility and approximately CAD 600 million 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 CAD 146 million in principal, extended the maturity date to 2024, and repriced the loan from LIBOR plus 275 basis points to LIBOR plus 225 basis points. This quarter, we generated free cash flow of CAD 287 million and paid a total of CAD 146 million in preferred and common dividends and partnership exchangeable unit distributions. As at March 31, 2017, our ending cash balance was approximately CAD 924 million. Our total debt balance was approximately CAD 10.1 billion, and our net debt was CAD 9.2 billion, all of which reflect our refinancing and Popeyes acquisition funding. On April 26th, 2017, the RBI Board of Directors declared a dividend of CAD 0.19 per common share and partnership exchangeable unit of RBI LP, payable on July 6th, 2017.
The continued growth in the dividend reflects our commitment to a balanced capital allocation strategy. I'll now hand the call back to Daniel for concluding remarks.
Thanks, Josh. We had an exciting first quarter 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 three brands for 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. With that, we'd like to open up the call for Q&A. Operator?
We will now begin the question- and- answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Callers will be limited to one question. At this time, we will pause momentarily to assemble our roster. 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 Tims, is there a pattern in which they open the new world zones, either in the 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? 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? Because this 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. 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. 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 in our vision for the growth of the brand all around the world, particularly on their home markets.
When we look back at places like Brazil, Russia, China, where we started with a very small presence and today have many hundreds of restaurants, are operating the brand quite well with strong local partners, we get pretty excited about the opportunity to grow Popeyes. We think that the brand and the product offering will resonate really well with guests all around the world. In some cases, we'll look to partner with existing master franchise joint venture partners. In other cases, we'll look to partner with new partners. 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 Tims franchise in Canada. Second straight quarter of slightly negative, but negative same-store sales. Obviously, you've been busy with the espresso rollout, the app testing, just wondering if you could talk about that business overall and how you feel about the saturation within the Canadian market for Tims.
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. We're confident that we have the right strategy in place to grow same-store sales and sales per restaurant and profit per restaurant in Canada for the long run. 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 first quarter 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 was already unveiled, and we're excited to launch this new great product throughout Canada today. We also focused on our Dark Roast coffee in the first quarter as well, which enabled us to continue with our strong position in coffee. 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 two brands simultaneously? My question has to do with Tims 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.
Yeah. Thanks, John. It's Daniel. There's a lot of overlap with Burger King and Popeyes franchisees in the United States. 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. For 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 Tims. 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.
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 to follow up on some of the things you were talking about. Tim Hortons Canada and Burger King U.S. have 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., is it just getting sharper on value, and then some of the renovation that you're doing? Are those the two big things that you're focusing on to not just benefit from comparisons, but to really accelerate on a two-year basis?
Yeah, Dave, you're right. We were lapping one of our strongest quarters of the year in the first quarter of this year on the Burger King U.S. side, and we also had the drag from the leap year and all that. 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. We're excited about that and some of the other initiatives that we have, like the Steakhouse King and the Froot Loops Shake, that we see positively contributing to the growth in sales per restaurant that really didn't benefit us much till the end of the quarter.
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. We're excited to continue growing the same-store sales for Burger King U.S. for the long run.
The next question is from Patricia Baker of Scotiabank. Please go ahead.
Yeah, good morning. Could we just talk about Tim Hortons Canada and just point to the drivers of the increased SG&A this quarter this year versus last year?
Yeah. Good morning, Patricia. It's Josh. On the G&A, how I would frame it for you is I look at the G&A on average, kind of the run rate from 2016, which was right around CAD 20 million. I think 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 either difficult or not feasible right now?
Greg, it's Josh again. Thanks for the question. The way that the preferred works, the first redemption date in the documents is in December of this year. That's the first date that we would be allowed to potentially redeem those shares.
The next question is from Brian Bittner of Oppenheimer & Co. 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 already a gigantic, well-known brand across the globe. I'm wondering or asking what drives the confidence that you can really get this humming internationally. Is it that KFC has paved the way and shown that chicken brand works real well globally, or are there other insights that you have that you can share?
Brian, it's Josh. Thanks for the question. I think probably two main things. One, I think you make a good point that 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. Two, 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. 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. 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 from me. Daniel, just Burger King U.S. focused pretty intensely on chicken in the first quarter with Crispy Chicken Sandwich and also with Jalapeño 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. 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's since 2015. Just curious about 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 demands, and will it drive growth in our franchisees' profits? If we can answer yes to both of those questions, we move forward and we make it a priority. 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. I think you're going to see more and more innovation around this for the balance of the year. I guess, Josh, you want to take the Tim's question?
Yeah, of course. Andrew, I think if you look at the margins both year-over-year, the F&P margins both year-over-year and quarter-over-quarter, they're relatively stable. If you're looking at just the absolute dollars year-over-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 Lallement for Karen today. 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. Just wondering if that'll still be in the Q, and if not, what is the rationale for no longer giving it?
Yeah. Good morning, Greg. It's Josh. As we noted in the press release, in connection with the acquisition of Popeyes, we took a look at our reporting, we're going to continue to have our three reporting segments be the three brands, now including Popeyes. You'll get the comps and the restaurant counts for each of those three segments. To add some additional visibility, we'll give you the top markets, for each of the brands, the largest market for the comps. 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.
Yeah, 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? Then on the back of that, what does this quarter's result mean for your plans to grow same-store sales and guest counts as we look to the rest of the year?
Yeah, it's Daniel. Thanks for the quarter. I think we've mentioned before, in the first quarter, we were lapping one of the stronger quarters from last year. 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.
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 at 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. 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.
Yeah, no, 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 test that we have in Canada. 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 that same thing with Burger King U.S. We're excited to launch both of those this year. I think it's a little bit early to comment on Popeyes, ultimately, we'll look to 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. It sounded like you were very busy preparing for the espresso program, can you talk about some of the more prominent promotions you had during the quarter and how they resonated with your guests?
Yeah. 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, 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. We had our annual Roll Up the Rim. Those are some of the things that we had going on in the quarter, while, as you said, we were preparing for the big espresso launch, which is happening today. 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.
Well, 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, 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