Okay, great. We're gonna get started. So really thrilled to continue with the restaurant portion of the TD Cowen’s Future of the Consumer Conference. We're joined today by Restaurant Brands International, which is the nearly 100% franchise parent company of Tim Hortons, Burger King, Popeyes, and Firehouse Subs, which spans over 31,000 restaurants across over 100 countries. Representing the company is new CFO, Sami Siddiqui, who has a well-rounded background of the company, spending time across four of the five brand segments. We're gonna do this in a very efficient way. We're trying to get through 100+ countries in the course of roughly 180 seconds or so.
We may need more than 30 minutes for that.
Yeah, exactly. Yeah.
Yeah.
We're gonna be jumping around quite a bit here. So, maybe just first, you know, would just love an intro for you. I mean, I've known you for a while, Sami. You know, you came from IR, it's a great example of RBI's culture and the way that you've been homegrown. You know, you just became CFO in March, though. Curious if you can help us think about your approach to this role, just particularly given your background in RBI and brand leadership and in finance.
Yeah, it's crazy to think it's been almost three months in the seat. We've been pretty busy at RBI. We closed on the Carrols deal about a month ago now, a little less than a month ago. We've been doing a lot of IR conferences, and I had my first earnings as well, so it's been a full schedule. But I, you know, I'm no stranger to the company. As you know, I joined over a decade ago, actually into the IR role. So I led IR as my first role at the company. So I worked with Andrew, and transitioned more to the operating side of the business.
I've had the privilege of leading of our five business units, I've led three of them, worked on four of them for a long time, and actually been based out of three of our four global offices. So, I know the teams and really the business quite well. I think, you know, coming into this seat and really coming, kinda coming full circle back to finance, I couldn't be more excited. First off, I think, you know, for me, I can really help the business unit presidents. I can help Tom and Axel think about how, you know, just business opportunities because I do know the franchisees and the teams.
I think I can also help them think about ROIs and getting the leverage out of the investments we've made over the last few years. As you know, we've made a lot of investments in the business and really focused on maximizing returns there. Plus, I can just connect the dots across all our brands. As you know, we've kind of gone to this brand really decentralized model, but that still means we should be sharing best practices, and that's something I can do and am uniquely positioned to do, kind of in the CFO role.
Awesome. So you have a great international business, which I wanna dive into in a minute, but maybe just given the scale that you guys have in the U.S. and Canada, your two biggest markets, you know, how would you compare the state of the consumer in these two markets?
Yeah, it's a really good question. I think certainly the macro is more complicated than it was a year ago. And I think, you know, you're hearing all of our peers talk about that. We do have a good lens into Canada and the U.S., and I think as you kinda compare and contrast the macro situations in those markets, I'd say probably two trends. I'd say employment's a little bit stronger in the U.S. than it is in Canada, and I think employment being strong is really important for QSR as we look at it. When people have jobs, they're more willing to go out and buy fast food. And, you know, I'd say we've seen a little bit in the employment numbers in the U.S. versus Canada.
I'd say the other macro factor we see is really around inflation. I think inflation has moderated a little bit quicker in Canada than it has in the U.S., and, you know, that matters because, you know, we were just talking about it. When you look at the gap between grocery pricing and restaurant pricing, you'll see that, you know, that gap has expanded in the U.S., particularly after really the inflation and the price taking of the last couple of years, and it's made grocery a more compelling option for consumers in the U.S. And so I'd say those are the two big macro dynamics.
As you kinda double-click into our brands, and the two bigger ones in the home markets, I'd say Tims is an incredible business and is really well positioned for an environment like this. We are consistently ranked as number one in kind of value for money in the market, and being number one, I think when you do see guests potentially trade down, that means they're trading into the convenience and quality and value leader, which is Tims. In the U.S., I wouldn't say Burger King is that different really. Over the last 18 months, you've seen Burger King in the U.S. really position itself well from a balanced value perspective, whether it's $2.99 wraps or $5 Whopper Jr. Duos. You're seeing a lot of...
You're seeing really the strategy working and, you know, ultimately, and we mentioned this on the earnings call. We can't control the macro. We can't control what happens here with the consumer, but what we can focus on is in good and bad and choppy environments, we wanna take share. We wanna outpace the industry, and that's kind of what our goal is with all the brands, really.
Awesome. So let's talk about Tims first, given it's about 40% of the EBIT of the company. So during the last Investor Day in 2022, you know, at the time, the team gave guides for 2%-3% long-term Tims same-store sales for 2023 and beyond. Obviously, 2023, fantastic year, 1Q will, you know, continuing that strength as well.
Yeah.
I'm just curious, given the brand's momentum, can you rank your enthusiasm around the remaining opportunities here? Do you still believe long-term low single digits is still the right term, long-term growth rate for the business, or could we see something stronger than that, given the playbook and, given the playbook and the success that you've had with it?
... Yes, it's a great question. I think Tim's is an incredible business, as I mentioned, and I think it is, of the sort of major home market brands, it's probably furthest along in execution of its plan. We've been, Axel and the team have been consistently executing, working really, really closely with the franchisees to deliver fantastic results, as you've seen in the numbers quarter after quarter. I think the first couple years of the plan, they were really focused on reinforcing the foundation. So you saw quality upgrades to everything, our coffee, our hot breakfast sandwich, our donuts, kind of that base layer that we have leadership positions in across the business. And now, as you kind of look forward, there are a ton of exciting opportunities to take this business to the next level.
You know, one of which, which we were just talking about, is around PM food. So, it's sort of crazy to think that 50% of Tim Hortons sales come before 11 A.M. So that means post-11 A.M., there's just a lot of low-hanging fruit to really kind of better utilize that box. And as you think about PM food, it's a massive opportunity. It's untapped. We launched the Loaded platform. We recently launched Flatbread Pizzas, but the goal is to get guests to come more frequently to come for PM food. We're already the convenience leader, so we have that strength in our back pocket already. I think beyond kind of food, as you look at beverage, there is still a beverage opportunity in Canada.
So, we have about 70% market share of hot-brewed coffee in the country, but we only have about 25% share of cold beverage. So as you think about that sort of delta between 70% and 25%, cold beverage is a massive opportunity. As you think about cold brews, you think about Quenchers and other things like that, we see tons of opportunity there. And then I think beyond that, I view digital as a massive opportunity for this business. I don't know if it's the biggest, but you look at what digital has done in a pretty short period of time. Over 30% of our sales come through our digital platforms, through our app, and it's actually helping the business get operationally better.
Scan & Pay is a feature of our app that helps our drive-throughs move even faster in the morning. And, if we have any Canadians in the room, if you've ever sat at a Tim's drive-through in the morning, it's pretty, it's pretty packed, and if you can move guests through a couple seconds faster, that's all upside for the business. So we are thrilled about the next leg of Tim's journey in Canada.
Yeah. Funny, follow-up question for you.
Yeah.
Just on the cold beverage side for Tim's, it's about 40% of the sales, if I recall correctly. You know, in the US, we've seen coffee brands go as high as 70%-80%. As you look around the world at Tim's, you know, is there an opportunity to move that higher in terms of the mix of sales that you've seen? I mean, from a CFO's perspective, you gotta love the fact that it's higher margin, the fact that SKU is younger. But are there other opportunities to raise that higher, as the climate, the temperature, if you will, in Canada, could be prohibitive on that?
I think there's opportunity. I think as you look at, I'm sure I didn't get a sit in on the presentation before me, but I'm sure they mentioned it, and you look at some of our peers. They are a lot more heavily weighted towards cold beverage than we are today, and I mean that in Canada, but I also mean around the world. So as you do see us launch in new countries with Tim's, you do see cold beverage. Depending on sort of the market preference, you do see it take more of the mix. Actually, you see espresso-based beverages take more of the mix. So Tim's, I think it really depends on kind of what the tastes in the market are.
I'd say Tim's in Canada, we're unique in that our market share is so great that actually we sort of help dictate and guide the consumer to where they need to be. And, you're seeing that as we've launched things like cold brew, you've seen the entire category expand. So I think we can help build categories, and I think cold beverage is a really, really good place to start.
That's great. Okay, another question on Tim's. You know, it's a vertically- it's the only vertically integrated business that you have within your portfolio. And over the last 12-18 months, you know, supply chain business has been caught up in macro supply chain disruption, as well as inflation. The business seems to be cleaner, you know, with guidance for 19% margins in 2024. But I'm curious that looking ahead, I mean, do you expect operating leverage in the business as same-store sales continue to grow, or are there headwinds to consider from reinvestment, the CPG business, or just other dynamics?
Yeah, I think this, the supply chain business is a little different than kind of our core restaurant, franchisor business. And it's a fantastic business because ultimately, strategically, what does it do for us? It allows us to ensure the highest quality products are making it through the back door for our franchisees. And, as you think about sort of the economics, and really, you know, Kendall, Val, and I get a ton of questions around how to model that business. And, you know, fundamentally, growth in that business comes from increased volume in the restaurants, right? Selling more products in the restaurants, opening new restaurants, and, you know, we still are opening some restaurants in Canada, and ultimately, some kind of mix shifts in the business. But those are the fundamental drivers, and so, the offset is commodity inflation, right?
So as commodity costs go up, you'll see costs go up, but keep in mind, we pass that through, through pricing to, to the franchisees. So the right way to actually look at this business is probably not on a margin percentage basis. You actually want to look at kind of the gross profit dollars to see how they're growing for the business. That said, I do know everyone likes to model based on percentages, so do we. We get it... and so in Q1, I think, you saw that that business kind of had a sales less cost of sales, a margin percentage of around 17.5%. And we've guided for the full year to be around 19% for the business. So naturally, you'll see that margin come up as the quarters, sort of progress throughout the year.
The reason for that is that Q1 is seasonally our lowest quarter of the year. So as the business picks up, you'll see that margin sort of pick up. But we feel really good about the 19% full year margin for the business. It's a healthy place to be, and it's a healthy place, I think, that we feel like the business can sort of sustain.
Excellent. Okay. I want to turn to Burger King U.S. You know, last quarter, you talked about not reinventing the wheel on value. I thought you guys really took the high road, you know, in terms of this, where the industry is going. You've introduced the $5 Your Way Meal, or I shouldn't say you've introduced it, but it's been announced, you know, at BKUS. So can you talk more about how we should interpret the shift? Can you expand more on the low-hanging fruit you have in place to protect traffic as well?
Yeah. Yeah, well, I actually give credit to the media on that one 'cause I think we didn't announce it, but I think they picked something up on our behalf. And, you know, value is sort of the topic that everyone is, you know, talking about in the media right now. As we think about it, yes, it is a more value-conscious consumer right now, but, you know, we have been on value actually pretty consistently for the last 18 months as you look at the Burger King business. You know, whether it was the $2.99 wraps that have a very healthy GP or the $5, two for $5 Whopper Jr. Duos, we've been running those for multiple quarters now.
So as you think about the $5 Your Way Meal, it's really just a continuation of the strategy. We're not reinventing the wheel on anything. There's no shift from us in that sense. And I think the really important thing that this feels like a lot of people have missed is we've run the $5 Your Way Meal before. So we ran it for three months in Q1 of 2023, and actually, in early April of this year, we brought it back to the franchisees to vote on it, and our franchisees overwhelmingly voted and asked to bring back the $5 Your Way Meal before kind of all this media frenzy. So it was already in the calendar for this year.
We did move it up, but we're always tweaking things in the calendar, depending on kind of what's happening in the macro. And so it's not anything new. We've executed it well in the past, and our franchisees are incredibly excited to launch this. So we're excited as well.
Awesome. Sami, one thing that I think a lot of people miss as well is that in the proxy, you know, 10% of the executive team incentive compensation hinges on franchisee profitability, you know, clearly showing RBI's commitment to this and, you know, Patrick's approach that he obviously prioritized it when he joined a year and a half ago. You know, so I guess what I'm curious about is that how does the team balance, you know, this, while offering attractive value options for guests, like the recently announced $5 value box?
Yeah, I think, Andrew, it's a really interesting dynamic. I think when Patrick Doyle came in as Executive Chairman, about 18 months ago now, and Josh became CEO, probably the biggest shift in the business internally was really elevating the importance of our franchisees and their restaurant profitability for all of us. And one of the best ways to do that is to quite literally put your money where your mouth is. So all of us, everyone on our corporate team, in the building, in our field, has franchisee profitability as a part of their bonus formula. So if our franchisees aren't making money in line with what we expect, then all of us kind of take the hit on our bonus, and I think that's incredibly powerful.
It changes the conversations we have in the building in a big way. But also equally important is we're now reporting this number to all of you, right? So the street gets our franchisee, our restaurant profitability numbers at the end of every year. You can see how our franchisees are doing. We made incredible progress in the first year of reporting on it. I think that holds us accountable and allows us to talk to- talk to you a lot more about the health of our franchise system, which I think is ultimately the backbone of kind of what we do. With the $5 Your Way Meal, specifically, the gross profit margin, it's actually pretty good.
As I mentioned, we've run it before, so franchisees would not have overwhelmingly supported this if the profit profile weren't good. I would say when you're looking at something like this, we try to look at two lenses. Number one is what sort of incremental traffic and buzz can something like this drive? And the reality is the media is talking about this a lot, so we're pretty pleased with kind of even the pre-buzz right now. And I think number two is, I think you have to look at the menu holistically, right? You know, if you're running a $5 Your Way Meal, the vast, vast majority of people are buying something else. They're not buying the $5 Your Way Meal. So you have to look at the margin profile of everything we're running.
You know, we're running a lot of premium right now. If you look at premium Melts, right? That has, you know, potentially a higher profile margin, and as you look at the business as a portfolio, then that's how you kind of come to what is an acceptable gross profit level for the business.
Excellent. Okay, that's super helpful. Sticking with BK, you know, you have a roadmap in place to reach 85%-90% modernized image by 2028.
Yeah.
That's funded in part by corporate investments. How are you balancing the need to be sensitive to franchisee profitability in the near term as franchisee cash flows are rebuilding, you know, reporting a strong $205,000 in 2023, but your work's not done, you wanna get to $300,000, you know, over time. And so how do you balance the fact that you've got, franchisee profitability, still rebuilding, interest rates that are still elevated, you know, with the fact there's a sense of urgency of improving the aesthetics of the fleet? You know, maybe said differently. Can you help us qualitatively understand the cadence remodels of the next five years, you know, in a directional way?
You know, I, I know incentives provide great rewards for near-term re-imaging, but do you expect this will lead to a linear cadence remodels, or, or could we see this perhaps weighted towards outer years as the turnaround progresses?
Yeah, I think, you know, when it comes to profitability, like I said, to go from $145,000 in average restaurant four-wall profitability in 2022 to $205,000 in a single year, that's a big jump. And we're pleased with that. But ultimately, what does that do? That gives our franchisees more money to reinvest into their business. And, you know, as you think about remodels and modernizing the Burger King system, I think everyone agrees that it has to be done. We have to get the fleet to a more modern place over the long term. And when our franchisees are in the financial position to do that, that's an incredible driver of adoption of a program, and we took a big first step.
As you think about the cadence, it's not gonna be entirely linear. The reality is, you know, running a business like this can be lumpy sometimes, right? And so, we are seeing an incredible amount of interest from franchisees and sign-ups. We've publicly reported that about 46% of our system is on the modern image as of the end of 2023. And we've also said that we want 85%-90% of our system to be on the modern image by the end of 2028. So as you kind of do the math, you can look at those numbers, and you can extrapolate what you will. We also think we'll do about 400 remodels this year, in 2024.
Like I said, timing can be a little bit, volatile, but what we look at is, are these numbers over the long term, and 85%-90% on the modern image by 2028 would be a big win for the system. It'd be a massive win for the brand as we think about this turnaround, that we're still really in the early innings of at Burger King.
Great. Maybe last one from me, just on BKUS, that last month, you closed the acquisition of your largest franchisee, Carrols. Can you talk about your philosophy on Carrols' G&A? You know, I'm curious, given BK's infrastructure, how much of Carrols', 2023 G&A of $106 million is really needed to run the business, just given the infrastructure you have with Burger King is already in place, you know, for these stores?
Yeah, it's interesting. I'd say I wouldn't view the Carrols acquisition as sort of the traditional M&A that you all are used to at RBI, right? Typically, we're acquiring other brands, which are typically fully franchised concepts. In this case, we're actually acquiring 1,000 restaurants of our largest franchisee. And what's the strategic intent? Really, it's to modernize these restaurants, remodel them quicker than had we not acquired them, and to then break the portfolio up into smaller pieces and sell them and re-franchise them to smaller local owner-operators in their markets. And as a result, I don't think this is about really cost synergy or G&A cuts. You know, naturally, there's gonna be things like public company costs or some redundancies in some corporate overhead that get taken out, but that's just kind of natural.
But this deal, by and large, is not about that. It's really about the strategic goals here. And I'd also say that as you think about Carrols, they're a really well-run company. If you visited the restaurants, I actually have visited a bunch of the restaurants. I went out to Memphis to visit the Popeyes restaurants, and I was really impressed with their back-of-house software, their labor scheduling, their team member communications. They're able to get in touch with all their tens of thousands of team members just through, you know, through phone and through monitors.
Interestingly, if you look at anything, there might be opportunity for our existing corporate fleet on the Burger King side to learn from Carrols to adopt some of their technology and really accelerate our, you know, 150 or so corporate restaurants that we have at Burger King.
Awesome. And then I know we're a ways away from the re-franchising of these stores, but as you design this out, is the intent that you want to sign development agreements as well with Carrols for BKUS development?
Yeah, I mean, it'll really depend. I think, as you've seen over the last couple of years with Burger King, you've seen a bit of a cleanup of the portfolio. We've closed some underperforming restaurants. And, you know, you always see that to some extent in a large, mature system, and we'll continue to do that. As you think about development, I think we want to start first with getting, breaking this portfolio into smaller chunks. We have tons of folks who are restaurant managers or area leaders, so let's say you're managing four or five restaurants, who want to become franchisees. And so we want to give those people opportunities, these kind of small local entrepreneurs, to jump on board for that.
There may be development that comes with that, but I think most importantly, it's to ensure that we get the right level of operations in the restaurants and for them to be modern restaurants. So on the margin, when you think about kind of a fixed pool of capital, we want most people's capital going to R&M, maintenance, and image investments for the system, digital investments for the system, versus, you know, all-out growth, which is, you know, might be different than, for example, Popeyes, where we have a massive growth opportunity to accelerate the brand.
Got it. Okay, great. Let's jump to kind of a global piece here. You know, so we like RBI's target to ramp net restaurant growth from 4% in 2023, 4.5% in 2024, you know, 5% in 2025 and beyond. You know, China certainly presents a big unlock. The macro in that market has not been kind in recent months to the restaurant industry.
Yeah.
I'm curious about the avenues that RBI has to reach development goals in 2024 and 2025 if ramping China growth proves too challenging given the macro?
... Yeah, I think I've been spending a lot of time on China, and as you look at it, and you saw it in the Q1 results of basically all of the competitors in the market. I think most of our peers were slightly negative to very negative on same-store sales in the market. And there is no debating it is a tough macro environment in China right now. And we are working really closely with our partners to get that business on track. And I would say one of the big moves we made last week, which I think you probably saw in the press releases, we appointed a new senior advisor for Asia, Patrick Siewert. Patrick has 30+ years in the region.
Most recently, for the last 15-plus years, was leading Carlyle's Asia Group, and has an incredible track record, knows all the players in China and generally other markets as well. And so we're excited to have Patrick on board helping us there, a new Patrick, a second Patrick. But beyond that, I think, you know, China, we have to get right over the long term, but I'd also say it's less than 2% of our operating income today, as you think about RBI consolidated. So we have to get it right over the long term. I think as you look at kind of the short-term growth algorithm, which you're alluding to, we're a little bit insulated.
The beauty of RBI, as you think about it, really is we have over 150 country brand sort of combinations that we operate in all around the world. So to hit our targets and hit where we need to be, we can have certain markets show weakness a little bit in the short term to see... You know, to have all these other markets that are diversified, sort of come online. And we're seeing incredible growth in markets like India, in Japan, in France, in Mexico. Mexico is, I think, our first country anywhere in the world where we have all four brands, Popeyes, Burger King, Tims, and Firehouse Subs. And so there's just massive white space, and, we can accept some temporary weakness, in certain markets as these other markets do incredibly well, as you think about kind of the algorithm.
Great. I want to touch on Popeyes as well, a brand I know that's very near and dear to you, of course, given that you were last running that brand before becoming CFO. I want to talk about the new Easy to Love kitchen format. Can you help us better understand how impactful this is to speed of service and margins, just given the ease now of preparing chicken versus the prior model?
Yeah, this one is near and dear to my heart. I kind of helped to lead this brand for the last four years. And I think, you know, when you look at the consumer research on Popeyes, it's overwhelmingly clear is that pretty categorically, people love Popeyes food. They love the chicken, they love the taste profile, the spice profile. But what guests typically say is that when you go to a Popeyes, the experience can be inconsistent, right? You know, sometimes you may wait a little bit longer than you need to. Sometimes you may not, you know, get everything you ordered. It may not be the most accurate order. And as we did a bunch of research, what we really realized was our kitchen formats had not been updated in really about a decade.
And in that decade, a lot has changed in the business, right? You've seen the emergence of boneless. You've seen digital become a pretty meaningful service channel for the business. And kind of those shifts require a rethink of the kitchens. And so what we've done, as part of the Easy to Love plan, the whole premise is we want to make the kitchens easy to run for our team members, and that comes down to things like new technology, new processes, new equipment, and new layouts that will ultimately allow us to not just get more efficient on labor, but also have equally good or better quality, but be able to drive more throughput through the kitchens. And I think we can do that. There's a ton of interesting ideas that we've been testing and working on.
I won't bore you with everything, but we have 30 distinct changes to the kitchen that we're making. One of which, for example, is today in our restaurants, we make all the batter for our chicken by hand. So, it's a very labor-intensive process, and it requires a lot of strength, actually. We now have equipment that will automatically make batter for you. The batter is more consistent. It sort of gets to that right sort of thickness and consistency. And it's also done so that the labor that was making that batter can go do something else in the kitchen while the automatic batter maker makes the batter. So little innovation like that in the Popeyes system is going to go a long way.
We already know we have the best food, and we're just gonna make it that much easier for our guests and our team members.
Great. Okay, I think we have time for one or two others. So, maybe just, tying it together, another model question that in February, the company introduced a new long-term same-store sales growth framework of 3%. Now, on the Q earnings call, you talked about how 2024 will be an on-algorithm growth year.
Yeah.
The international piece naturally has more moving pieces than the other parts of the portfolio that makes visibility from, you know, more difficult from our seats. Is there any reason to believe that achieving the growth algorithm in 2024 across the portfolio will be more difficult than originally anticipated?
No, I think we still think that this will be an on-algorithm year for us. As we think about from a system-wide sales growth perspective, we still kind of think 8%+ is the right range to be in for this year. We've talked about this year on the unit side, on the unit growth side, we'll be closer to 4.5%, so a little bit down from that 5% that we guided to in February. But still, kind of as you think about the holistic algorithm, we feel good about it. I think the other thing to mention is that, you know, as we've talked about operating income, we expect operating income to be at least in line with system-wide sales growth, and, you know, so 8%, but we've also said 8%+.
You know, as I mentioned earlier today, we've made a lot of investments in the business over the last few years, and those have been the right investments to make. But as CFO, my focus is very much on how do we get the right ROI on those investments, and how do we drive leverage in the P&L? So when we say 8%+ adjusted operating income growth, that plus is a big deal for me because we want to make sure that we're maximizing ROIs and leverage.
Awesome. Well, we spent 30 minutes running around the world. I think we did it in a time-efficient way, and so I want to say thanks, Sami. You know, first time in Insights today, and with the II poll coming up, we really appreciate your support in the audience. So thank you-