Restaurant Brands International Inc. (QSR) Q3 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Restaurant Brands International Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 third quarter ended September 30th, 2018. 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, Matt Dunnigan. 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 quickly review the agenda for today's call. First, Daniel will start by discussing highlights for the third quarter and will then review our performance at Tim Hortons, Burger King and Popeyes Louisiana Kitchen. Matt will then review consolidated financial results for the quarter following which we will open up the call for Q&A. I'd now like to turn the call over to Daniel.

Thanks, Markus. Good morning, everyone. Thanks for joining us today. I'm pleased to provide an update on our third quarter results. On a consolidated basis, this quarter, we grew our adjusted EBITDA to $571 million or $576 million under prior revenue recognition standards, which represents an organic year-on-year increase of roughly 6%. As a reminder, for comparability purposes, we're presenting the 2018 organic growth figures both on a constant currency basis, as well as under previous accounting standards in both periods. Our adjusted diluted EPS was $0.63 per share for the quarter, up from $0.58 per share in the prior year period. This increase was driven by adjusted EBITDA growth, combined with the accretive redemption of our preferred shares in December of 2017, partially offset by a higher tax rate as compared to last year. At Tim Hortons, systemwide sales grew by 3%, driven by net restaurant growth of 3% and slightly positive comparable sales. This quarter's results reflect a continuation of sequential improvement in Canada comparable sales to nearly 1%, partially offset by softer sales in the U.S. At Burger King, we achieved systemwide sales growth of nearly 8%, reflecting net restaurant growth of 6% and comparable sales of 1%. Our global comparable sales this quarter reflect softer results in the U.S. of negative 0.7%. At Popeyes, we grew our systemwide sales by roughly 8%, driven by net restaurant growth of nearly 8% and slightly positive comparable sales. Our comparable sales reflect softer results in the U.S. and a continuation of strong sales momentum in our international markets. We remain confident in our long-term strategies to drive sustainable comparable sales and profitability growth for all three of our iconic brands for many years to come. Our focus remains in the 2018 priorities outlined earlier this year, most of which we have already made good progress against, but some of which we hope to improve in the fourth quarter. Let's start now by reviewing our results for Tim Hortons. In the third quarter, adjusted EBITDA was $299 million or $294 million under prior accounting standards, which represents a year-on-year organic increase of 4%. Our comparable sales at Tim Hortons this quarter continue to improve sequentially, but they do not yet reflects several important initiatives in Canada that we plan to launch through our Winning Together plan in the coming months and quarters. This quarter global comparable sales were 0.6%, reflecting Canada comparable sales of nearly 1%, partially offset by softer results in the U.S. Our improving comparable sales in Canada reflect growth in breakfast foods, driven by our Breakfast Anytime launch, while softer results in the U.S. were driven by weaker sales of brewed coffee and baked goods, partially offset by strength in breakfast foods and cold beverages. Our improved results in Canada reflect continued progress that we've made against our Winning Together plan, which centers around guest satisfaction and franchisee profitability, through a focus on three main pillars, product excellence, restaurant experience and brand communications. Under product excellence, we have several initiatives underway to elevate our product quality with a commitment to offer our guests the absolute best product in the industry for every single item on our menu. Some of our efforts in this regard are more near term in nature, whereas others will take a little bit more time to perfect, but we are committed to getting it right. One of the more immediate initiatives within our product excellence pillar was Breakfast Anytime, which we launched nationally across Canada. We have seen healthy levels of incrementality from this program both for restaurant level sales and profitability. While we are pleased with the results of the program, Breakfast Anytime is only the first of many steps we are taking to improve comparable sales in Canada. Another more immediate initiative we are exploring under our product excellence pillar is a kids menu. Our Tim Hortons restaurants are already heavily visited by families, and despite that our current menu has virtually no dedicated kids offering. As a business that is highly engrained in local communities across Canada, we believe that we have an opportunity and a responsibility to do better than that. Our goal is to offer a kids menu with products that are both exciting for kids but that also have the right nutrition for parents to feel good about serving them to their children. We plan to launch our kids menu in the coming months. We're also making good progress on our restaurant experience pillar. Only a few short months after announcing our new Welcome Image, we have now completed roughly 100 renovations under the new image and we anticipate completing hundreds of additional renovations in the fourth quarter. We're also currently testing a loyalty program in Canada across several different markets with each test market offering a different loyalty structure. We have seen very high loyalty card adoption rates in these test markets, giving us confidence in the potential of the program. Our current focus is on establishing the most effective offer. Once we've established the best mechanism, our goal is to launch the program more broadly, initially using analog loyalty cards and then over time integrating loyalty into the digital channel, including through our mobile app. Under the brand communication pillar, we've also made good progress with our proactive initiatives translating into a much improved narrative in the Canadian media. Our team has proactively spent more time with the media, particularly in Canada to share stories of the exciting things that we have been working on with our restaurant owners and their team members to drive an enhanced experience for our guests. One key example from this quarter was our annual Smile Cookie week, which received millions of positive media impressions. Our Smile Cookie campaign involves the sale of $1 chocolate chip cookies decorated with smiley faces, which are handmade by our Tim Horton's team members in each of our restaurants and 100% of the sale proceeds are donated to local charities and organizations across Canada. Thanks to the generosity of our guest’s, franchisees and their team members it was our most successful Smile Cookie fundraising week ever, with roughly CAD8 million of total donation proceeds raised. We also continue to improve the overall quality of our marketing in Canada, including with the recent launch of our hockey cards program. We supported this launch with several promotional initiatives, including a viral uplifting video documenting a Tim Horton’s sponsored trip to Canada for Kenya's only ice hockey team with surprise visits from hockey All Stars, Sidney Crosby and Nate MacKinnon. The video has secured over 270 million media impressions in Canada and the US and already has over 1.5 million views on Facebook and nearly a million views on YouTube. Another component of our brand communication pillar involves enhancing our brand imagery and packaging. In addition to launching a new Timbits Box last quarter and a hockey themed Doughnut Box this quarter, we plan to launch new significantly improved coffee lids and other packaging updates in the coming months. As it relates to restaurant development, we continue to maintain a more selective approach to new site development in Canada this quarter, offset by accelerated development in our international markets. Now let's turn to our results at Burger King. Systemwide sales growth of nearly 8% during the third quarter was driven by continued momentum in both net restaurant growth of over 6% and comparable sales of 1%. Growth in the top line resulted in BK adjusted EBITDA of $231 million for the third quarter or $238 million under prior accounting standards, which represents a year-on-year organic increase of 5%. Our global comparable sales this quarter were up by 1%, reflecting continued growth in the international markets, offset by softer comparable sales in the U.S. of negative 0.7%. Internationally, our comparable sales reflect strength in markets like Brazil and Russia, partially offset by a continuation of softer comparable sales in Germany and Australia. Our softer results in the US this quarter reflect less compelling value offers and the lapping of our strong 2 for $6 launch last year. Heading into the fourth quarter, we intend to return to a more balanced approach and in October you've already likely seen us move in this direction with recent promotional activity. We continue to believe that we have several opportunities to drive further sustainable growth and a comparable sales over the long run, including through a good pipeline of product innovation to address current menu gaps. In addition to focusing on menu related opportunities such as these, our strategy at Burger King continues to center around focusing on the following priorities, restaurant image, technology, operations and marketing, each of which we believe will help drive sustainable comparable sales over the long run. As it relates to restaurant image, this quarter we unveiled our new modern Burger King of Tomorrow restaurant image and our plans to roll out the image across the U.S. While we have made significant progress remodeling and modernizing our restaurants in the U.S. relative to our restaurant image back in 2010, we have continued to refine and to test new design standards to place the greatest emphasis on elements that most positively impact guest experience. Our Burger King of Tomorrow image contemplates upgrading our restaurants to our most recent Garden Grove design, which has demonstrated strong benefits and guest satisfaction and dine in comparable sales. With the majority of our restaurant level sales generated in the drive through, our new image also includes exterior guests facing enhancements, like the construction of double drive thru lanes and outdoor digital menu boards. Double drive does allow for significantly improved throughput and speed of service. Outdoor digital menu boards drive increased check, allow for integration with other technologies like mobile apps and provide franchisees cost savings and printed media and menu signage. This image is also focused on building a digitally integrated experience for our guests, including the implementation of outdoor digital menu boards and in-restaurants sell for [ph] kiosks. We have also made good progress on other technology related initiatives at Burger King this quarter. We continue to expand the size of our delivery program with delivery now available in nearly 2000 restaurants in North America and over 5000 restaurants around the world. We also launched our Burger King mobile order and pay app in the U.S. this quarter. The app is already fully integrated with roughly two thirds of our restaurants in the U.S. and within a few short weeks of launching the approximately, we have already experienced roughly 2 million downloads. We will continue to enhance app over time based on guest feedback and we'll also pursue integrations with other technologies in an effort to our guests a seamless digital experience. As it relates to operations, since the majority of our sales in the U.S. occurs through the drive through, we continue to place emphasis on further improving our drive for speed of service. While we still have lots of room to improve, we are proud to have been recently recognized by QSR Magazine as having the fastest drive through times among our QSR peers in the U.S., up from fourth place last year. And as it relates to marketing, we continue to be focused on unique, creative and edgy marketing initiatives. In the third quarter, some examples include the highly successful and emoji and blank ballot campaigns in Brazil and the viral artificial intelligence ad campaign in the US. Our accomplishments in this regard continue to be recognized by third party advertising agencies, as being among the best in the world. In terms of development, we grew our Burger King restaurant count by just over 6% year-on-year, while this represents a modest sequential deceleration, we remain confident in our full year outlook and we have a robust pipeline of new openings planned for the fourth quarter. As a reminder, we manage our development pipeline on an annual basis rather than quarterly, which is consistent with the manner in which the targets are structured in our franchisees development agreements. This quarter we also celebrated a development milestone in Latin America having crossed 2000 restaurants in the region this quarter. This accomplishment means that we have almost doubled our footprint in Latin America since we first acquired the Burger King brand back in 2010 and is a testament to the strength of our brand and of our partners in the market. In particular it highlights the strength of our partner in Brazil who has opened a net of over 600 restaurants in the country since 2010. Now let's review our results for Popeyes. Third quarter systemwide sales growth was roughly 8%, driven by net restaurant growth of 7.6% and comparable sales of 0.5%. This topline growth resulted in Popeyes adjusted EBITDA of $42 million or $44 million into the prior accounting standards, up 21% organically versus the prior year period. Comparable sales for the quarter reflect relatively flat comparable sales in the U.S., offset by very strong comparable sales in other markets, including in Canada. Our softer results in the U.S. this quarter reflect a shift in media spend toward limited time offers and away from value, which negatively impacted our results as compared to the first half of the year. To address this going forward, we plan on rebalancing our media spend between value and limited time offers and we plan to launch more impactful products. Over the last few months, we have also been highly focused on improving guest experience at our Popeyes restaurants through a variety of operations focused initiatives. These initiatives have already translated into material improvements in several guest feedback metrics, including a 10% increase in operational satisfaction within the last five months. As it relates to restaurant development, we grew our Popeyes restaurant count by nearly 8% this quarter, primarily reflecting accelerated growth in the U.S. We also celebrated the opening of our 3000 Popeye's restaurant. But what excites us even more than the size of our existing footprint is the several thousands of additional restaurants that we have yet to build. In that pursuit of growth, we have signed even more development agreements for Popeyes in the U.S. this quarter, which will support further acceleration in net restaurant growth in the coming quarters. We also announced a master franchise development agreement in the Philippines, marking our first major development agreement for the Popeyes brand in Asia. With a population of over 100 million people and a strong and growing QSR and chicken market, we believe that the Philippines represents an exciting opportunity for development for our Popeyes brand. We also recently opened our first Popeyes restaurant in Brazil and thus still very early, we are encouraged by the positive reception that the restaurant has received from guests. We continue to work closely with our partner in Brazil to support additional openings in the coming months. We have strong conviction that the development agreements that we have already signed, combined with additional agreements that we are actively pursuing in other geographies will set Popeyes up to be one of the fastest growing global QSR brands in the world. I'd now like to turn the call over to Matt.

Thanks, Daniel. This quarter adjusted EBITDA was %571 million or $576 million under prior accounting standards, up approximately 6% organically year-over-year. Our third quarter adjusted net income was approximately $298 eight million or $302 million under prior accounting standards. This compares to prior year results of $276 million and the year-over-year increase is attributable to adjusted EBITDA growth and the accretive redemption of our preferred shares in December of 2017, partially offset by a higher tax rate in 2018. This led to adjusted deleted EPS for the quarter of $0.63, up from $0.58 in the prior year period. As it relates to the impact of the new revenue recognition accounting standard, we wanted to point out some factors influencing our results this quarter. As a reminder, under the new revenue recognition standard, upfront franchise related fees are recognized as deferred revenues, which then amortize into revenue over the life of the underlying contract. As mentioned in prior quarters, the new revenue recognition standards pertaining to franchise fees have a larger impact on periods in which more openings occur. Accordingly, we saw a larger impact from the new standard on franchise fees at Burger King in the third quarter than we have in prior periods and we anticipate that the impact will be even larger in the fourth quarter across each of our brands. It is also important to keep in mind that the franchise fee component of this new accounting standard is non-cash in nature. Regarding the impact of advertising funds, our result at Tim Hortons into the third quarter reflect a net benefit from revenue recognition, primarily due to the timing of ad fund [ph] related revenues and expenses. In the third quarter ad fund revenues exceeded expenses at Tim Hortons. Prospectively, we anticipate the quarterly mismatch in the timing of revenues and expenses may continue. However, in the long run these ad funds are managed such that the total cumulative revenues equal total cumulative expenses. This quarter are adjusted effective income tax rate was higher year-over-year and on a sequential basis. This year-over-year increase was primarily due to the impact of certain aspects of U.S. corporate tax reform and a significantly lower benefit from stock option exercises in the third quarter of 2018 versus the comparable period in 2017. The sequential increase in our tax rate this quarter, primarily reflects the accrual of a year-to-date impact from the realignment of certain intercompany financing arrangements and the non-recurrence of certain benefits in the Q2 2018 tax rate, including audit related reserve releases. Now let's discuss our cash generation and capital allocation for the quarter. In the third quarter, we generated free cash flow of approximately $357 million calculated as the sum of cash flows from operating activities and investing activities. We also paid a total of approximately $210 million in common dividends and partnership exchangeable unit distributions this quarter. As of September 30th 2018, our ending cash balance was $1.1 billion. Our total debt balance was $12.2 billion and our net debt was $11.1 billion. This morning we announced that we received an exchange notice for approximately $11 million [ph] outstanding partnership exchangeable units. In connection with this exchange, we intend to satisfy $10 million [ph] of these exchange requests using cash on hand, which will reduce our fully diluted share count. With the remaining exchange requests satisfied through the delivery of common shares on a one for one basis. For [ph] the terms of our limited partnership agreement, the exchange notice can be revoked by the unit holder in part or in full until October 30th, 2018 and after such time the exchange notice becomes irrevocable. We also announced this morning that the RBI Board of Directors has declared a dividend of $0.45 per common share and partnership exchangeable unit of RBI LP payable on January 4th, 2019, which is consistent with our previously announced target of $1.80 in total dividends to be declared in 2018. Our increased dividends in 2018 are announced intention to exchange a significant number of partnership exchangeable units for cash. Our previously announced investments in our Tim Hortons remodel program and supply chain distribution network and our continued delivering illustrate our balanced approach to capital allocation as we look to create further value for all of our stakeholders for many years to come. Thank you everyone for joining us on the call this morning and for your ongoing support. I'd now like to open up the call for questions. Operator?

[Operator Instructions] First question comes from Patricia Baker with Scotiabank. Please go ahead.

Thank you very much. And good morning, everyone. Just had a quick question on Tim Hortons and Daniel in your opening remarks you talked about the Breakfast Anytime program and indicated that you saw healthy levels of incrementality with that initiative. So I just would like you to clarify and just talk about that a little bit more when you're talking about healthy levels of incrementally, I am assuming that what you're saying there is that this did not cannibalize your breakfast sales, but rather that you had incremental sales of breakfast products beyond what you would normally do in the breakfast day part.

Yes. Hi, Patricia, thanks. It’s Daniel. That's right. You know, as you saw overall our Canada comparable sales continue to improve during the quarter and they're moving in the right direction. And when you look at the impact from Breakfast Anytime, we - it enabled us to drive incremental breakfast sales and profitability for our restaurant, so it resulted in incremental sales to our restaurants and incremental profitability for our franchise owners. I think it's you know, when you kind of take a step back, you look at what we're doing and you know, the Tim Hortons, we're pleased to see the sequential improvement in the sales results. And really this is just the first of many initiatives that we are planning on launching, as part of our Winning Together plan with our franchise restaurant owners. We're excited about the upcoming launch of the kids program this quarter and a whole host of other initiatives, including the innovation around beverages and potentially loyalty that we would expect in the coming months. So we're excited about the outlook for the Tim’s business, working very collaboratively with our franchise restaurant owners and excited to make our Winning Together plan a reality and translate to increased same-store sales.

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

Thanks very much. On the Burger King business in the U.S., you discussed the remodel program. So how many stores are in this new image right now. And what kind of - if you want to discuss or can discuss the sales benefits you're getting from it and what's a reasonable timeframe, given remodel the system and are there - is there a corporate contribution or is this a franchisee funded effort? Thanks.

Yeah. Thanks, John. So we were excited to officially unveil the new modern Burger King of Tomorrow restaurant image today and our plans to roll out the image to the system. We are just getting started now. We have a pilot of this in our Miami company restaurants. We, as you know we upgraded together with the restaurant owners a significant portion of the system over the last eight years and what we could say about this is, really this is the next evolution of our image and we have a pretty significant focus on technology, we’re going to have double drive thru’s, outdoor digital menu boards, kiosks, internally and more open kitchen giving you know the kind of the full kitchen theater experience and some other exciting features. And each year as franchise agreements expire or come to midterms, we have renovation requirements and we would expect that the Burger King of Tomorrow image is going - you know, that our restaurant owners would renovate to that image, as their franchise agreements come due, and in the midterms. In addition, as we've been doing over the past many years to the extent that restaurant owners want to kind of pull forward the renovation and renovate the restaurant before it's kind of officially due, we do provide royalty incentives, as we've historically been doing. As far as capital contribution, unlike the Tim Hortons system, as you know, and the Burger King system, we really only control the real estate about 10% of the system and on that 10% to the extent that those are renovated, in those cases we do make a capital contribution, as we have been doing historically.

The next question comes from Joshua Long with Piper Jaffray. Please go ahead. Again, the line of Joshua Long with Piper Jaffray is open.

Great. Thank you so much for taking my question. I wanted to see if we might circle back to kind of the overall consumer environment, the competitive dynamics of the space right now and how you're thinking about that. A couple of times in the prepared commentary the importance for shifting back to value messaging came up and so just curious you know, what you're seeing out there currently and maybe what the appetite for specific value messaging, affordability, messages, et cetera are across the brands and how you're thinking about that from a marketing per - marketing and strategic perspective as we go through the back half of the year and into 2019?

Yeah. Thanks for the question I think, I mean, I think that the comments kind of particularly relate to the BK US results. And I think if you kind of zoom in on those, what I’d say, our results this quarter probably reflected a little bit less compelling value offers and really the lapping of the strong 2 for $6 launch that we had last year. It is a more competitive environment than we've seen historically. And I think when you look at how we - how we operate during the quarter, I don't think we had the right balance between premium and value. We've already shifted to that kind of more balanced approach that we've had historically, particularly with the $10 piece nuggets promotion that has driven good results for us already. And you know, so we're confident in the outlook for the Burger King brand, as we kind of - as we kind of have that right balance between value and premium. But you know, stepping back kind of more broadly, I mean, in spite of this - you know, maybe not having the right balance and being a little bit more competitive, when you look at our, the size of our business globally, we're still making really good progress growing our systemwide sales, nearly 7% , topline this quarter, driven by restaurant openings all around the world and we still see a very strong outlook for restaurant growth and good plans in place across the three brands to drive comparable sales into the coming quarters.

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

Great, thanks. Just wanted to touch on Tim's and specifically with improving momentum at that business, following the launch of the Winning Together plan. Anything else you can say as it relates to customer satisfaction scores, brand perceptions very recently that have improved, that maybe give you confidence in accelerating momentum this quarter and into ‘19 beyond you know some of the better results we saw this quarter, as you launched Breakfast really just two months or Breakfast Anytime just two months of the quarter, the improved communication plan et cetera. Are you seeing other things that are kind of leading indicators for what seemingly was improving momentum through the quarter and as we go into the next couple of quarters? Thanks.

Yeah. Thanks for the question. I think more broadly just stepping back the way we're working with our restaurant owners and their relationships with the franchisees, it's much stronger today than it was, even at the beginning of this year. I think that the brand leadership team, Alex Macedo, Duncan Fulton and their team were doing a really good job working with our restaurant owners and travelling around the country, getting direct feedback, working collaboratively. We've built the plan, the Winning Together plan with them, we're executing on the plan together now with them. I think when we look at the results of this quarter just with kind of the start of the Breakfast Anytime, we're already seeing kind of positive momentum. And when we look out prospectively, things like the Kid's Meals launch, you know, we have more families coming to our restaurants than any other chain in the country. And despite that we didn't have a dedicated kid’s meal, so that's something we're really excited about. We're testing a few different mechanisms for loyalty, already seeing quite high incidence on that on different test markets that we're running. So once we get the right mechanics there it would be a great way to reward our guests for their frequency, to Tim Hortons and something that could positively contribute to our growth. We have a whole host of innovation planned around our beverage platform. I think you've seen a little bit about - a little bit of that over this past summer and a whole bunch more to come this winter and into next year. And plans to make some changes to our kind of overall lunch architecture as well. So a whole host of initiatives that we have that are kind of yet to be reflected and yet to kind of become reality, but initiatives that we're working very closely with our restaurant owners. And I think also that the quality of the communications is getting much better. You've seen this already. I think you're going to see more to come in the fourth quarter and the overall narrative on Tim Hortons and our company has been has been much better. And it's a function of the collaborative work that we've done with our franchisees. And the good plan that we have in place. So that all the above is what gets us really excited about this business.

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

Good morning. I just wanted to come back to BK US and sort of that balancing of premium and value. And I guess I'd be interested to hear more about your thinking behind the shift in Q3, if that was just simply timing or whether it was more strategic? And then perhaps related the impact of commodity costs and just generally higher operating costs in your business and for the franchisee and how that impacts your thinking around menu construction and promotion?

Sure. I think - you know, I don't think it was strategic, it was bit of timing and bit of how our kind of our plan unfolded during the quarter. We've always said that some quarters will be stronger than others. As I mentioned, you know, I think that we - you know, I think that we didn't have quite the right balance between premium and value. And that coupled with the lapping of the strong 2 for $6 [ph] launch last year resulted in the performance that it does. We are still confident in the kind of the full year outlook. We are still confident in our ability to grow you know, same-store sales for the long run with this - with the Burger King brand in the U.S. Our franchise partners are invested heavily in the brand, both in terms of renovations and new development. And you know we've already kind of shifted that balance back toward the better balance better mix between value and premium and have already seen results from that. As it relates to kind of the commodity environment and operating costs, what I can say is you know, this is something that we are - we follow closely across all three of our brands, all of our markets around the world. In the in the home markets and you know, BK US and Popeyes US and Tim Scana [ph] what I can say is you know, all three year-to-date have grown franchise profitability. Our franchise restaurant owners are earning more money in each of these three markets year-to-date than they did last year. And that's something that's always, always top of mind for us and always a top priority, both driving that profitability at the restaurant level and driving guest satisfaction.

The next question comes from Andrew Charles with Cowen and Company. Go ahead.

Thank you. Thank you. Over the last two quarters BK Global net restaurant accounts have trailed [ph] in 2Q ‘17 and 3Q ‘17 net openings and I know you mentioned that unit growth [indiscernible] in 2018. But just looking at this and taking a step back, given how you have master franchise agreements in place across pretty much all major international geographies, what can be done to help [indiscernible] out the openings as we look to 2019 and beyond? And then Dan, if I can sneak in a quick follow up, for Tim's what are the decision to prioritize kid’s meals, related to the introduction of cold brew. This has been an offering that major U.S. coffee shops have seen tremendous success with. I just wanted to see where Tim Hortons is with plans to introduce the offering?

Yes. So the first question you know, what we've said historically, the development can be kind of lumpy from quarter-to-quarter. We manage the pipeline on an annual basis rather than quarterly. And that's actually - that's consistent with the manner in which the targets are structured in our franchisees development agreements. You know, we've been growing. We've been accelerating the pace of Burger King growth in each of the past couple of years. We have some great partners developing know all around the world, you know, obviously at different kind of stages and different life cycles. But when we look out for the full year in the fourth quarter, we're confident in the outlook for the year and we have quite a robust pipeline of openings and plenty of work for us to be doing. And our partners for it to be doing all around the world this fourth quarter and we're still confident in the outlook. And as it relates to Tim Hortons, you know, as I mentioned, you know, we look at size of opportunity, operational feasibility and a whole host of other - a whole host of other factors in terms of prioritizing different launches and I think as I mentioned with kids meals, we are excited about that, we have more families coming to our restaurants than any other chain and we don't have a dedicated kids offering and we saw big - you know, we and our franchisees saw a big opportunity to kind of fill that gap in our menu. We do have a whole host of beverage innovation slated for next year. So stay tuned for more news on that.

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

Thanks. Daniel, I think you touched on the global system sales growth and the big percentage of that coming from unit growth. Last quarter you said the outlook for unit growth was one of acceleration from here. I think a lot of longer term oriented investors are - they want to get more of a feel for the international profitability. The pipeline, just otherwise a sense of confidence that you're going to be able to sustain or accelerate that unit growth in these markets they don't know as well. What can you tell us metrics or pipeline feel, anything that would make us feel confident that you'll be able to sustain or even accelerate unit growth going forward? Thanks.

Yeah. The return on capital for our partners all around the world is something that we follow very closely with. As you know, with these master franchises that we've set up, we're not only in many cases - you know, we are not only franchiser, but we're also shareholders and board members of these companies and we work very closely with the teams and the owners of our master franchise partners all around the world, both in terms of marketing initiatives and development initiatives and operational initiatives. And in all - how close we are to these businesses that gives us confidence in what I say here that you know, we are confident in the outlook for the year. We are confident in sustained growth. And in many cases we have development agreements that you know, that go many, many more years from where we are - from where we are today. And when you look at the pace that we are you know that we're growing and its across the three brands, you know, Burger King is historically, or at least on an LTM basis, growing north of thousand restaurants, and you know, the other two are obviously much smaller at this stage. And we're working closely with our existing partners at Burger King and existing partners at Popeye's and Tim’s internationally and talking with new prospective partners about new development agreements for Popeye’s and Tim’s. And that's an opportunity that we see in the longer term that we would - we aspire to grow those two brands much faster. I think we've already done a good job with Popeye's in the U.S. having signed a number of development agreements that will lead to increased growth for the brand in the U.S. We've already signed a development agreement Popeye's in Brazil, where we've successfully opened the first restaurant and have a pipeline of several more to open toward end of the year. We signed an agreement with Popeye's in the Philippines where we plan on opening restaurants next year. And we have teams you know working all around the globe to set up more of these - more of more of these agreements with new and existing partners to accelerate the pace of the Popeye's growth in the years to come. And the same goes for Tim Hortons, I think you know, last quarter we mentioned the structure that we've recently set up in China. I spent some time in China you know, this quarter visiting our Burger King operations and our Tim's start up, you know, where we have plenty of work to do. We're excited about the outlook for the brand in that part of the world. And I think you know, when you look at our growth rate, this is a quarter where you know, despite maybe the softer comps and not yet reflecting the benefits of the potential accelerated growth for Popeye's and for Tim Hortons, we grew our system wide sales by nearly 7%. And so you know, that's something you know, as we wrap up the pace of growth in our - in Popeye's and in Tim's and we resumed to better same-store sales that would be a number that we aspire to grow much faster in the long run. And I think we have the right team and the right partnerships and the right set up around the world to achieve that.

The next question comes from Brian Bittner with Oppenheimer. Please go ahead.

Thanks. I just want to follow up on that, on how you closed that answer out with Popeye's. I mean, there is a big gap between Popeye’s, the number two global chicken player and the number one global chicken player. And I guess the question is like now that you've own Popeye’s for about a year and a half, it's closing that gap something that is realistic, or are there reasons why there should be that gap between KFC and Popeye's? And then just a follow up real quick Daniel, in general in the U.S., just the Burger King business, who's really taking the share now because McDonald's was taking a lot, so they're taking a lot of [indiscernible] and they're taking lesser [ph] now than they were when you were accounting at a much better trajectory at the Burger King business, so just also some color on really what's going on there from a share perspective? Thanks.

Yeah. Look on Popeye's, we were pleased to have crossed 3000 restaurants this quarter. We do view this - we do view this as a huge opportunity to have a much larger restaurant count in the future. You know, as I said the first place that we've started to accelerate our growth at Popeye's really has been the U.S. and Canada, as there was a lot of demand both from existing and new partners in the Burger King system and in the Popeye system to grow that brand. And we've started kind of planting the seeds internationally, the first in Philippines, then, sorry the first in Brazil, now the Philippines and we're working hard to you know, strike the right partnerships and the right structures to grow the Popeye’s brand all around the world. Look, I think if you if you kind of look back, over time at Burger King when we bought the brand you know, we're growing around 170 or so 180 restaurants per year and, in fact in 2010, and you know, with a lot of hard work and some - a lot of hard work both from our teams and our franchise partners. We're able to massively accelerate the pace of that growth. And you know, we have a similar playbook now with our other two brands and we're working really hard. So in a few years when - on one of these calls we'll be able to talk about growing much faster in Popeye's. It takes time, you have to set up teams, infrastructure, supply chain. So what we have time as long-term owners of the business and we're committed to doing it. And then you know, as it relates to the overall industry, I think you'd mentioned that the industry has been has been quite competitive. It's been a little bit softer, but I think when you look at kind of where we stand, we've made a lot of good progress with the Burger King brand in the U.S. when we got involved you know, we were - our sales per restaurant and profitability for restaurant was much lower than it is today. We made a lot of progress. I think when you look at the results from this quarter, as I mentioned, I think that you know, when we look at kind of our performance, I think we didn't quite have the right balance for the environment that we're in. We've already made that shift and we would expect - we were expecting in the coming quarters to perform better.

The next question comes from David Tarantino with Baird. Please go ahead.

Hi. Good morning. I was wondering if you could help to frame up the opportunity on the remodeling project for Tim Hortons. You mentioned, like you've already completed 100 or so of those renovations. So could you just talk about maybe what you're seeing in those first hundred that you've done from a sales or return perspective and get feedback? And then I think you mentioned that you wanted to have the majority of the system completed by 2021. Just wondering if there's an update on your outlook for the pace at which you complete this?

Yeah. Thank you. We're making good progress on the Welcome Image program. Just after a few short months after announcing you know, we've already completed nearly 100 renovations under the new image and we would anticipate completing hundreds more in the fourth quarter. So far the feedback from our guests and our restaurant owners has been quite positive. I think it’s a little bit early to talk about sales uplift. I think when you look at that image program, along with the other initiatives that you know that we have, there are really toward - they're really geared toward driving long-term sales growth. I wouldn't say we're expecting an immediate sales jump for renovations, its more of a longer term investment in the restaurant image and you know, improving guest experience. And as I mentioned, we've been already receiving very positive responses from our guests, our team members and our franchisees alike. And again, this is one component of the three prong plan or one component of one of the three pillars of our Winning Together plan. You know, this is this is one of the main initiatives that we're working on as it relates to restaurant experience, but we're also improving our communications and our product excellence.

Okay. The next question comes from Karen Holthouse with Goldman Sachs. Please go ahead.

Hi. Thanks for taking the question. There was a comment about year-over-year increase in franchise profitability at Burger King stores, which would be pretty unique for a low single digit comp and the current labor environment. Are there still sort of outright cost cuts or cost programs happening at the store level that are helping drive that. Or have commodities really been offset to labor pressures?

Yeah, I think Karen, without kind of driving into the specific lines of the P&L, I mean, what we can say is on the low comp we have still grown our restaurant profitability year-on-year. It's something that we look at very closely with our franchise partners each month. Something that you know, that kind of contributes to our decisions around calendar and we're always looking to find ways to get with our restaurant owners to be more efficient to drive their profitability, while also driving guest satisfaction.

Okay. The next question comes from Matt McGinley with Evercore ISI. Please go ahead.

Thank you. As a follow up on the Tim Hortons remodels, I'm sure there's a lot of excitement around getting those underway. But is there any disruption that you would – you experienced in the third quarter as renovations went underway, is there any close time as that construction is occurring? And would you expect as you accelerate the number of projects, would that have any impact on either comp or revenue into the next few quarters?

Yeah. At any time - you know, any time you do a large number of renovations there is - there's always some downtime and there is an impact on sales. We haven't really quantified that though. But what we can say is that as we ramp up the various initiatives on our Winning Together plan, even if we're renovating restaurants, we would still expect to drive positive comparable sales growth in the system.

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

Daniel, I noticed that your net store openings for Tim Hortons on a global basis I believe was 11 units, which is a lot lower than you typically do in any quarter. So I'm just wondering whether a lot of store closures or is there a deferral of openings just timing and we're going to see a lot more openings in Q4. Can you elaborate please?

Yeah. Thanks, Peter. As I mentioned across all the brands, it's a bit lumpy from quarter-to-quarter, we would expect obviously there to be more in the in the fourth quarter, given the backend loaded nature of many of the restaurant openings. And as we look at in the future with Tim Horan's, we do see an opportunity to have kind of a more robust growth profile as it relates to development. We will continue to be more selective in Canada. But we still – we see opportunities to accelerate the pace of international growth, both in the markets that we're in now and some of the new markets that we would expect to come onboard like China next year.

The next question comes from Eric Gonzalez with KeyBanc Capital Markets. Please go ahead.

Thanks. Good morning. Can you give us an update on what you are seeing in emerging markets, have you seen any of the macro issues impact your branch results or franchisee willingness to develop? And as it relates to China, Dan, I know you mentioned you were still over there. The market seems to be embracing delivery in digital technologies in a significant way, as you continue to expand your footprint in that market, do you believe your position to benefit from those trends? Thanks.

Thanks, Eric. We haven't seen any deceleration in emerging markets. In fact, our partners in places like Brazil and in Russia continue to develop restaurants at quite healthy pace. You know, we've already benefited from - you know our business is already benefited from delivery in China. It's quite a high percentage of sales for our Burger King restaurants in China. It has been and has been for some time now and we would expect - we would expect delivery in China to be quite relevant both for Tim’s and hopefully eventually for Popeye.

The next question comes from Jeremy Scott with Mizuho. Please go ahead.

Thanks. Yeah, just on the technology initiatives, I think Joshua has been in the CTO or CTO role for more than 10 months now. So it's arguably still early innings IN developing the pipeline, but I'm guessing we can read into the new image launch on BK US, is indicative of maybe some higher urgency to lean in on some of those technology and issues here. And just you know just a follow up on John’s point on capital contributions, given that this will be your second round of upgrades in a decade. And as you mentioned there's a big competitor putting money to work towards accelerating upgrades in their stores. Is there a precedent being set on what's expected by your franchisees in terms of partnering on these upgrades above and beyond the royalty relief and the contributions to your 10% of stores on the real estate. Is there are a precedent being set on what's expected?

Yeah. And I think maybe the two parts to your question. So I think on the technology, the digital front, you know, I think we made a lot of progress this year. I think Joshua made a lot of progress in his new role, as a head of digital and other technology. And it really starts by building a really strong team under him. So I think that the folks that we've been able to recruit to work on Josh’s team have had helped us increase the pace at which we're moving. And you've probably seen you know, you see that tangible results, we've launched the Burger King mobile app that enables our guests to have great offers and order and prepay in two thirds of the restaurants. We're able to launch a new image that has outdoor digital menu boards, indoor kiosks. We've rolled out delivery at a much more - you know, much more aggressive pace. We're on a path together with our Popeye's franchisees to really converge the system down from over 40 different POS systems to two. Next year we've ramped up the pace of delivery there. We've also launched an app there. We're working on Tim’s on loyalty and piloting kiosks and delivery. So I think in just ten months you know, under Josh’s leadership, we've shown - you know, we've shown kind of a sense of urgency that we brought to really catching up on technology and hopefully having the right team will enable us to do a whole lot more, a whole lot more in the years to come, because we're really just playing kind of catch up at this point. And as it relates to the renovations, I think you know, across the different brands and businesses where we do own the real estate. We always have historically contributed, and we have done and we have historically provided you know, generous incentives to our franchisees in terms of royalty and other franchise incentives to enable us to renovate the system at quite a healthy pace. And we've already seen a lot of interest in the new Burger King of tomorrow and its upgrade.

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

Hey, guys. I got two questions. The first, just on dayparts for Burger King, US, we've been hearing some softness generally in breakfast daypart for the industry. Are you guys seeing that in your business or anything on that front will be helpful? And the other question I had was on the menu simplicity of Tim’s, how do you measure it and maybe where does it stand today versus where you wanted to be or are you kind of where you wanted to be, are you higher, are you low, where you're trying to take that over time? Thank you.

Yeah, on the Burger King comment, I don't think there is anything specific for us to call out on the daypart. As it relates to menu simplicity with Tim, this is something we work closely with our franchise restaurant owners and we're always looking at opportunities of doing things more efficiently and making sure that we have the kind of the highest return on the efforts that we're putting into our restaurants. Now having said that, we have very high volume restaurants and we see opportunities to increase the sales out of those restaurants and in some cases it will be launching new platforms like kid's meals, where it will - we will add additional SKUs, but only if we think it's going to generate additional sales and profitability. And some instances where we're innovating on existing platforms, so some of the beverage innovation that we've already had over the summer and what we expect to come next year and initiatives like Breakfast Anytime, where we're really just you know, we're really just selling more of what we already have. So I think you always have to find that right balance between kind of sales generation and incremental profitability and complexity and that's something that you know, will always – we work closely with our franchise restaurant owners to make sure we have that right equation.

The next question comes from Jon Tower with Wells Fargo. Please go ahead.

Great. Thanks for taking the questions. First on the BK US, are you willing to provide an expected range of capital required for the remodels, similar to what you did with Tim Hortons earlier this year? And then just thinking about the franchise base, what's the appetite amongst the franchisees to remodel versus say build new stores in the US? And then lastly and separately, do you have any plans in the future to offer investors some high level, long0term financial targets for the overall company? Thanks.

Yeah. So on the capital - on the capital requirements, it would be a little bit more than the current renovation that we are doing now given the increased scope. We see demand both for renovations and for - you know, and for new development. And as you know Burger King is one of the fastest growing and one of the brands that opens the most new restaurants in the United States. So we're seeing demand across both of those. We historically haven't provided long-term guidance, as long-term owners of the business, we run the business for the long run and we didn't really see the benefit of doing that. It's not something we've historically done. We focus on driving good results for the long run. And that's been kind of successful formula for us historically.

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

Yes. Thanks, guys. I had a question on Tim's and it's obviously nice to see the improvement there, especially on a two year basis. Can you talk a little bit more about what you're getting as it relates to that improvement from a daypart basis, how broad base that is and where there might remain an opportunity? Also from a geographic basis I know, there we've talked about the West being a little softer in the past and rest of Canada, so curious on those two points? Thanks.

Yeah, nothing really to comment on a geographic basis. You know, obviously we did see benefit - we did see a benefit during the quarter of selling more breakfast food, both during the breakfast daypart and you know, and across other dayparts to the Breakfast Anytime launch. We see kind of a couple opportunities in Tim's. We talked about loyalty earlier. You know we would expect kids to be more focused on the launch daypart. And we see some opportunities to increase lunch day out as we as we look into next year by changing some of the architecture, over menu architecture on the on the lunch - on the on the lunch menu. So we see opportunities across kind of multiple dayparts there coupled with beverage innovation, which will drive beverage sales across the entire day.

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

Thank you everyone for joining us and we look forward to speaking with you again next quarter when we report on our full year results. Have a great day. Thanks.

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