Restaurant Brands International Inc. (QSR) Q2 2019 Earnings Report, Transcript and Summary

Good morning. And welcome to the Restaurant Brands International Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded.I would now like to turn the conference over to Chris Brigleb, RBI's Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. And welcome to Restaurant Brands International's earnings call for the second quarter ended June 30, 2019. As a reminder, a live broadcast of this call maybe 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, José Cil, and CFO, Matt Dunnigan. José and Matt will also be joined by our COO, Josh Kobza, for 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. José will start with some opening remarks and highlights for the second quarter and then discuss our performance at Tim Hortons, Burger King and Popeyes. Matt will then review financial results before opening the call up for Q&A.I'd now like to turn the call over to José. José Cil: Thanks, Chris. And good morning, everyone. I'd like to start with a quick summary of the second quarter results and then spend some time sharing my views on the key drivers of our performance and the confidence we have in our plans for each of our brands to continue driving strong systemwide sales growth around the world.Overall, we had a strong quarter with nearly 8% consolidated systemwide sales growth and surpassed 26,000 restaurants worldwide, including over 18,000 at Burger King.Our systemwide sales growth was led by Burger King at nearly 10%, Tim Hortons at just over 1.5% and Popeyes at nearly 9%. Our results in the quarter were highlighted by strong global same-store sales results at Burger King and Popeyes, improved same-store sales momentum at Tim Hortons and continued restaurant expansion around the world.Before I jump into my detailed remarks on brand performance this quarter, I'd like to once again thank everyone who was able to join us at our Investor Day in May. I enjoyed meeting many of you and appreciated the opportunity to share the excitement and confidence we have for our three iconic brands and details of our plans to continue growing all around the world for years to come.Hopefully, our discussion of sales drivers, development opportunities, technology and digital progress and introduction to some of our leaders and master franchise partners provided helpful context to assess our strategy and performance.We have an exciting business model and an ambitious plan and look forward to sharing our progress with you each quarter.Back to our Q2 results, and let's start with Tim Hortons. In Q2, global Tim's comparable sales were positive 0.5% and positive 0.7% in Canada. The Tim Hortons team continues to execute on the Winning Together plan that we shared with you in May and we're pleased with the positive momentum we generated in the business over the past year.As we've discussed in the past, were focused on investing in key areas of the business that will allow us to drive long-term growth, including the continued rollout of our welcome image, on-trend product innovations, advancements in the quality and consistency of our coffee experience, and our exciting new loyalty program.In the second quarter, we saw the positive trends in our breakfast platform continue. The Omelette Bites we introduced in the quarter performed well and we're working on new great tasting flavors to be showcased in our restaurants in Canada in the second half of this year.We also launched the Beyond Meat breakfast sandwich toward the end of the quarter that is performing well and driving healthy levels of incrementality.Some of the strength from menu innovation was offset by softness in our lunch daypart, particularly during the second half of the quarter where we saw gap in sales of our sandwiches and wraps versus last year.We expect that the introduction of our value chicken sandwich midway through the quarter to help drive growth year-over-year, but performance fell short of the volumes we expected. We're taking steps to address this part of the menu with a variety of new innovation and continue to believe this represents a good opportunity for growth for the brand.You may have seen a few weeks ago, we opened a new Tim Hortons innovation cafe in the same building as our headquarters in downtown Toronto. Initial feedback from our guests and early sales and product mix results have been very encouraging.This innovation cafe will serve as a guest-centric testing ground for new and exciting products, technology and service modes that we believe will help us drive lunch and other dayparts for Tim Hortons in the future.In addition, our cold beverages lagged in May and June as compared to Q2 of 2018, which is one of our strongest quarters for cold beverages in recent memory.Our Oreo Ice Cap limited time offer underperformed our expectations and did not do as well as our offerings last year. That said, we're encouraged by some of our recent cold beverage innovations like Creamy Chills and slushys which have been performing well.We've also seen positive guest response as we've started to introduce new flavor varieties, such as our Jolly Rancher slushy – my personal favorite – and we're excited to continue building on these beverage platforms with new and exciting options for our guests.At our Investor Day, we talked about another important area of our plan, which is enhancing our coffee leadership in Canada. And over the past few months, we have continued to make progress on our plans to roll out new fresh brewers.Our test markets continue to perform well and we have plans in place to roll out all over the country over the next year. Our guests are noticing the improved consistency in our coffee and, at the same time, team members can be much more efficient and spend even more time serving our guests.We're also using the new lids which are functionally much better than our previous lids and are made with 100% recyclable material in even more restaurants around Canada. We've tested them with millions of guests and they're getting overwhelmingly positive reviews.We're also very excited about the success of our loyalty program, Tim's Rewards. After a rapid ramp-up phase over the course of about a month, approximately half of all transaction swipe or click Tim's Rewards. This reflects very strong adoption and buy-in with more than 7 million people using the program every month after just a few short months.We're really pleased with the level of engagement from our guests and believe we're establishing an exciting platform that we can use to drive improved guest experience and sales growth in the future.As we talked about before, the overall impact of Tim's Rewards on our comparable sales so far has been neutral. However, it is helped us drive an encouraging level of incremental traffic bringing more guests into our restaurants more often.Our next step is to use the powerful insights we're gathering from the program to offer our guests rewards and promotions tailored to their purchasing interests. We believe this will provide a solid basis and valuable program for driving incremental sales across our large customer base over time.To wrap up on Tim's, we continue to make progress growing the brand around the world. In the second quarter, we were excited to announce our latest partnership which will bring Tim Hortons to Thailand and represent our third market entry in Asia.Thailand is a thriving coffee market and our partner has a deep understanding of the market as well as local guest wants and needs and is building a top-notch team, all of which we believe will position us well for success in this country. We've already begun work to develop a compelling menu based on our global beverage platform and unique food offering.We've also continued making good progress with our partners in China where we've now opened our 14th beautiful Tim Hortons restaurant since launching the brand in Shanghai in March. Overall, I'm confident in the team and plans we have in place to drive the Tim Hortons brand in the second half of the year and beyond, both at home in Canada and around the world.Turning to Burger King, in the second quarter, we generated systemwide sales growth of nearly 10% globally, including comparable sales growth of 3.6% and restaurant growth of nearly 6%.Our results were primarily driven by strong international systemwide sales growth of approximately 18% where BK has now grown to over 10,000 restaurants around the world and continues to deliver exciting growth for our business with 6.5% comparable sales growth and nearly 10% unit expansion in this quarter. This performance was broad-based across international regions, but we saw particular strength in markets like China, India, Brazil and Spain.We believe our compelling growth in these markets is a combination of factors – a strong team, a balanced menu offering of great tasting products that resonates well with our guests and a fast-growing digital and delivery business.A large portion of our sales are digital in many of these international markets and we're beginning to share best practices all around the world and right here in our home market as well.We also benefit from a growing presence in these international markets as we expand our footprint, increasing brand awareness and convenience and consequently sales.At home in the US, comparable sales were positive 0.5%, slightly ahead of our performance in Q1. Our chicken parm sandwich in the 4-5-6 Whopper Junior, Whopper and Double Whopper promotion performed well, but we had a sales gap in value.We know that the best way to grow our business is a balanced core, premium and value offering that caters to all guests and it seems that we did not have strong enough value offers and messaging throughout most of the quarter. We addressed this gap in the beginning of July with the launch of our dollar tacos and the early results are encouraging.Yesterday, we announced the national launch of the Impossible Whopper starting next week. As leaders in the plant-based space, we're excited that Burger King is the first national brand to make a unique craveable product like this available throughout the US.In our test markets, we've been pleased with the reaction from guests to this great tasting product that features our one and only flame grilling heritage, the iconic Whopper build, freshly made to order and all at an incredible value for money.It' attracting new guests to the BK brand and proving to be incremental to Whopper sales. If you want to try it for yourself, we're running a cool promotion where you can get an original Whopper and the Impossible Whopper together for just $7. So, you can try to figure out which one is which. But this promotion is only available on the BK app and DoorDash.We're really excited about the Impossible Whopper and think it's a great way to continue evolving the BK brand, expanding our reach and bringing in new guests.Our global net unit growth for Burger King was 5.8%, down slightly versus last year, driven in part by the timing of openings as well as the closure program in the US that we discussed at our investor day in May.The good news is that we're working together with our franchise partners in the US, closing lower volume restaurants that are being replaced with new, great-looking, Burger King of tomorrow restaurants that generate significantly higher average sales.In 2019, we expect Burger King to remain at the top of the list of growing brands in US.Internationally, as I mentioned, we saw strong unit growth of nearly 10% on our base of about 10,000 restaurants as we work closely with our great network of partners around the world to drive continued expansion, including in markets like China, Russia, Spain, Korea and India.Overall, we feel good about our full-year openings pipeline for Burger King in the US and around the world, driven by the quality of our partners, significant market opportunity and the strong returns on capital highlighted at Investor Day.Finally, on Burger King, I'd like to take a minute to recognize our talented marketing teams who brought home an incredible 40 [indiscernible] awards in June for their groundbreaking creative work around the world over the last year.Burger King was also named the number one creative brand for 2019, beating out a number of respected, global powerhouse brands for this honor. This edgy, impactful marketing has been instrumental in rebuilding the BK brand here in the US and growing it all around the world and I'm proud that our teams and our franchise partners are getting the recognition they deserve for their outstanding work.Now, let's take a look at the results for Popeyes. We've been talking for a few quarters now about putting in place the foundational building blocks to drive long-term comparable sales growth in US and we're starting to see the benefits flow through.In Q2, we grew comparable sales positive 3% globally and positive 2.9% in the US. We've been building a layered offering for guests which has gained traction.Our bone in chicken business is a consistent solid platform for guests coming alone or in small groups. Late in 2018, we identified a gap in the important family segment and we were able to stabilize and then begin to grow that layer in Q2.On top of that, in the boneless chicken category, we have some strong limited time offers in the quarter, including our Hot Honey Crunch Tenders. We also benefited from the rollout of our delicious new chicken sandwich across several new markets.As a result of encouraging initial results, we have significantly expanded availability in recent weeks and we continue to see a favorable response from our guests with positive incremental sales.This should put us in a position to rollout the sandwich to the remaining Popeyes stores in the US in the coming months with national media support.We also saw incremental contribution from delivery in Q2, which we continue to rollout to more locations as we expand the integration of our new POS systems across the US. There's a lot of hard work left to upgrade the entire Popeyes system, but just about two-thirds are done and we're on track to complete this important initiative in the coming months.Even at this stage, with just under one-third of the system remaining, we're already seeing the benefits of higher-quality, more granular sales and product mix information from our restaurants. We've been using this increased visibility to strengthen our sales and marketing plans, including our approach to the menu layers, limited time offers and digital sales I mentioned that contributed to the improved comparable sales performance this quarter.And we're excited to continue expanding and improving our market and restaurant level insights to help drive topline growth over time.On the development side, we continued expanding the Popeyes brand in the second quarter with global net unit growth of 6.1%. This reflects a slight reduction in pace versus last year. however, as with Burger King, we build our development plans on a 12 to 18-month basis and continue to feel very good about our openings pipeline for the balance of the year, especially in the US where, like Burger King, we generate very strong returns on capital and are one of the fastest growing QSR brands in the country.Outside the US, we were also super excited to announce two new very important partnerships with the Popeyes brand in China and Spain.China is one of the largest chicken QSR our markets in the world and a huge opportunity for Popeyes. We'll be working with the same partner, TFI and the Kurdoğlu brothers, that have built our Burger King China business into one of our largest and fastest growing markets internationally, with over 1,000 restaurants.They also have a great track record with Popeyes, having already built the largest international market for Popeyes in Turkey and we're excited to extend this partnership to China with a goal of over 1,500 restaurants in the next 10 years.In addition, we were also very excited to announce that our long-time partner in Spain, Gregorio Jimenez, will be adding Popeyes as well. Spain has been a very strong growth market for us over the past years and we're eager to expand this market opportunity to our Popeyes brand.These new partnerships, in addition to the significant whitespace in our home market, give us conviction that Popeyes can be one of the fastest growing QSR brands in the world over time.So, to wrap things up, we believe the fundamentals across the business remain very solid. Strong comparable sales growth in many regions around the world, combined with a continued strength of our global expansion model, allowed us to deliver another quarter of strong topline growth with our consolidated global systemwide sales increasing by nearly 8%.We continue to make good progress delivering against the key pillars of the growth plans we shared at our investor day across all three of our iconic brands and are looking forward to a productive second half of the year.I'd now like to hand it over to Matt to take you through our profitability and cash flow results for the quarter.

Thanks, José. And good morning, everyone. In the second quarter, systemwide sales growth across each of our brands led to consolidated adjusted EBITDA of $580 million, up more than 6% organically year-over-year.This quarter, ad fund revenues exceeded expenses by $2 million more than they did in the second quarter of last year and impacted our consolidated organic adjusted EBITDA growth rate by approximately positive 0.3%.As we have mentioned in the past, while in some quarters there may be a mismatch in the timing of revenues and expenses, in the long run, these ad funds are managed such that the total cumulative revenues equal expenses.At the segment level, Tim Hortons second quarter adjusted EBITDA was $287 million, which represents a 3.5% organic increase year-over-year. This increase was driven by systemwide sales growth of 1.6% and the expansion of our retail business, which has grown meaningfully over the last few years.Also, substantially, all of the positive $2 million year-over-year intact to consolidated adjusted EBITDA related to the timing of ad fund revenues and expenses was attributable to Tim Hortons.At Burger King, second quarter adjusted EBITDA was $252 million, representing a year-over-year organic increase of 10%. This increase was driven primarily by systemwide sales growth of just under 10%, driven by continued momentum in global net restaurant growth of nearly 6%, including nearly 10% internationally, and global comparable sales growth of 3.6%.Finally, at Popeyes, this quarter's adjusted EBITDA was $41 million, which is up 4.6% organically year-over-year. This increase was driven by systemwide sales growth of about 9%, including net restaurant growth of over 6% and comparable sales of 3%, partially offset by slightly higher segment G&A, primarily related to the year-over-year timing of certain expenses as well as some costs related to organizational changes.Our second quarter adjusted net income was $331 million. This compares to second quarter 2018 adjusted net income of $313 million. The year-over-year increase was attributable to adjusted EBITDA growth and a favorable tax rate due to stock option exercises in the quarter, partially offset by unfavorable exchange rate movements, higher interest expense related to the annual step up in our interest rate swaps we noted in the first quarter and higher stock-based compensation expense.Our adjusted diluted EPS for the second quarter was $0.71 compared to $0.66 in the prior-year. Included in this increase is a headwind from unfavorable foreign exchange rate movements that accounted for approximately $0.03 per share.Our first and second quarter 2019 adjusted effective income tax rate was lower than the range we had provided earlier this year. however, it is important to remember that the timing and amount of stock option exercises can vary materially quarter to quarter and can thus have a much more material impact on a specific quarter's tax rate.On a full year basis, our view on the adjusted tax rate has not changed from the low 20% range we shared earlier this year.Now, let's discuss our cash generation and capital allocation for the quarter. We generated free cash flow of approximately $312 million. Calculated as the sum of cash flows from operating activities, less payments for property and equipment.Including the results of the second quarter, our free cash flow generation over the last 12 months totaled approximately $1.3 billion. During the second quarter and prior 12-month period, we also paid a total of $230 million and $858 million respectively in common dividends and partnership exchangeable unit distributions.We also continue to make progress on key investment projects, including our previously announced remodel programs at Tim Hortons and Burger King as well as the expansion of our Tim Hortons supply chain network in Canada.Based on the timing of our remodel pipelines and construction projects, we anticipate our spend to be more substantial in the second half of the year as we complete more Tim Hortons and Burger King renovations and advance the buildout of our distribution centers, which we expect to complete in 2020.As of June 30, 2019, our total debt outstanding was $12.2 billion. Our net debt calculated as total debt less cash and cash equivalents of $1 billion was $11.2 billion. And our net debt to adjusted EBITDA leverage ratio was 5 times.This morning, we also announced that the RBI Board of Directors declared a dividend of $0.50 per common share and partnership exchangeable unit of RBI LP, payable on October 3, 2019, which is consistent with our previously announced target of $2 per share in total dividends to be declared in 2019, and reflects our strategic priority of maintaining a balanced approach to capital allocation.Thank you, everyone, for joining us on the call this morning and for your continued support.I'd now like to open the call for questions. Operator?

[Operator Instructions]. The first question comes from Dennis Geiger of UBS. Please go ahead.

Good morning. Thanks for the question. José, just wondering if you could talk a bit more about plant-based and what you're seeing. I think you noted healthy levels of incrementality in new customers at the brands, but just wondering anything more on incrementality on repeat orders, other relevant feedback and data points?And, I guess, related, you've got a bunch of initiatives that you've put in place especially at Tim's to drive sales and franchisee profitability. Just wondering if you could help frame kind of what you view as having the greatest potential for incrementality. Thank you. José Cil: Hi, Dennis. Thanks for the question. On plant-based, as we've kind of mentioned over the last few quarters since the launch of – or the test of Impossible in St. Louis back in April, we're excited. We've done a lot of research on this and spoken to a lot of guests. And it was an insight that our teams have found in the research that there was an opportunity to kind of address a real, strong and growing demand in our business at Burger King and we saw the same thing with Tim's in Canada because guests are demanding and looking for more options and alternatives. So, it's kind of core to our marketing teams in the way we look at the business that we've tried to understand in as much detail as possible what it is that guests are looking for and we give that to them with a great tasting quality and options that we have in our business at Burger King, at Tim's and Popeyes as well for different products.So, we feel really good about it. We've tested both Impossible at Burger King in the US, we've tested other plant-based products in other markets in Europe and we're seeing really, really good response from our guests. And we see that there's two types of behaviors taking place. We're seeing existing guests come more often and actually changing their orders and try different – kind of the same product but with different proteins, and so that's exciting. And then, we're seeing new guests as well, younger guests. We're seeing a shift as well in demographic. So, we feel really good about the potential that this platform has for Burger King. And we're seeing the same thing with Tim Hortons in Canada with breakfast options that include Beyond Meat.So, we're really excited about it, which is why we announced yesterday that we're launching, nationally next week, Impossible in the US and look forward to seeing how our guests react to that over the next few weeks and months.Now, as it relates to Tim Hortons, we continue be very excited about the long-term at Tim's. As you mentioned, we're working on some very key initiatives to drive the business forward. We have amazing restaurant owners. We have very loyal guests and we have an awesome business. And we had some really good momentum in Q2. We saw Breakfast Anytime continue to work. We saw the breakfast innovation, including Beyond Meat, work.Loyalty and Tim's Rewards continues to really amaze us in terms of the potential that it has for the business long-term. So, we're really excited about those initiatives, coupled with the other initiatives that we talked in our Winning Together plan, focusing on continued on-trend innovation, coffee leadership, serving roughly 8 out of 10 cups of coffee in Canada every day. We know we're already way in front, but we need to continue to drive that with great consistency. We've changed packaging. We're going to be leaders in sustainable packaging long-term. And then, we continue to focus on loyalty in digital and welcome image.We think those initiatives, which are really long-term initiatives to continue our strengthen and dominance in the market, are going to help us continue to grow for the long haul here in Canada.Thanks the question.

Our next question comes from Mark Petrie of CIBC. Please go ahead.

Hey. Good morning. You called out the positive impact of your efforts on digital and delivery in some of your international markets for Burger King. Can you just recap where you're at in the US, the impact it's had on your business so far in 2019 and how you can accelerate that for the rest of the year and then into 2020?

Yeah. Mark, it's Josh. Thanks for the question. So, we're really pleased about how we've done with on both those fronts, particularly at Burger King. Also about the potential for the second part of the year.I would say, on delivery, we've made progress on rolling out delivery through a large part of our system and we're in about 3,500 restaurants today with Burger King. And we've seen pretty significant growth in terms of the sales per restaurant per day as we've continued to grow coverage.And as we go through the rest of the year, I'd expect to see that to continue to grow. We started to work with Uber Eats and we're working on expanding our rollout with Uber Eats quite rapidly over the next few months, such that we'll have really significant coverage with multiple aggregators within just the next few months here.So, we think we've made a lot of progress with delivery and we expect to make a lot more progress over the next quarter and the remainder of the second half.I think even more broadly, I think you've seen us focus a lot on growing the importance of our mobile app and engagement through the mobile app. We did that at the end of last year with Whopper Detour and we've continued to focus a lot on engagement through the app in the beginning of this year. We've continued to grow app downloads and our monthly active user base. We've had some pretty compelling offers in the app. And I would say that engagement in the app and the presence of that in our business has grown very systematically throughout the year. So, we're excited about making digital an even more important part of our everyday business and think we've made some pretty good progress throughout this year so far.

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

Hey. Thanks for the question. Good morning. It seems like you had a lot of success on the Tim's mobile app and the loyalty program, drawing customers in right out of the gate. I'm just wondering if you could talk about the user growth and how that's trended since the last update.And then, you mentioned personalized marketing is on deck with that program. Can you talk about maybe when that will launch?And then, related to that, you mentioned that same-store sales was neutral, but it was driving traffic. I was wondering if you could bridge that gap for us. Thanks.

Yeah. Eric, it's Josh again. Thanks for the question. To your point, as we've ramped up the loyalty program, we've seen a significant growth not just in the users of the loyalty program, but also with that engagement on the mobile app. So, we've seen really dramatic growth in terms of our monthly and weekly active user base on the mobile app, which is great.And in terms of the program in using personalized marketing, I think the way that that we think about it is that our goals for the beginning of the program were really to reward our most loyal guests and to drive a very large level of engagement with the program. And I think we've been really successful on both of those fronts. We've moved very quickly to having about half of our daily transactions on the program, which is great. And also all of the consumer research that we've done has shown that our guests are really appreciating the program and it's driving a really big improvement in terms of all of our brand metrics that we've seen. So, really big success on that front.In terms of traffic, as you pointed out, we have seen a big improvement in traffic, which is great. That's another one of the goals that we set for the program. And as José pointed out, it's been roughly neutral on sales the time being.I think what's really exciting about this program – and I think this is consistent with what you've seen of many of our peers' programs, is what we can do with it over time. And this gets a little bit to your point of personalization. It's something that we're already working on. I think this is just the start of our loyalty program and we're working on ways to evolve the program over the next coming quarters and years to figure out how we make it work even better for our guests and for our brand and for our system. We're very excited about the potential for that.

The next question comes from David Palmer of Evercore ISI. Please go ahead.

Thanks. On Tim's Canada, how much do you believe weather held you back on your cold beverage and overall sales for Tim's in the second quarter? And are you already seeing significantly better results thus far in the third quarter, not just driven by weather becoming more normal and driving that cold beverage, but also perhaps the help of Beyond Breakfast sandwich and the new burger? Thanks. José Cil: Hey. Thanks for the question, David. As I mentioned last quarter, I hate to talk about weather as it relates to business performance, but certainly with a high-frequency business and a strong beverage business, hot and cold, it does have an impact. We saw a little bit of that throughout the quarter, but nothing to comment on in terms of what impact, if any, it had. We continue to focus on things that are going to drive guests into our restaurants, whether it's cold or rainy or hot and beautiful out like it is today in Toronto.So, our plan, as I mentioned earlier, is strong. We're focused on capitalizing on the strength of the amazing strength of the Tim's brand here in Canada. Amazing restaurant owners, loyal guests and a really, really strong and awesome business that has super high frequency. And our focus is on things that are going to keep our guests excited, wow them on a regular basis and we think a lot of the innovation that we're doing on the products side, a lot of the work we're doing on the quality side and consistency side, on product as well as coffee, and then some of the work we're doing on image including our innovation cafe here in Toronto, I think those things are going to be the drivers of long-term growth for the business and we're excited about that.We've occasionally shared information around performance within the quarter, but we're excited about the plan long term and look forward to sharing more with you in the coming quarters.

The next question comes from Sara Senatore of Bernstein. Please go ahead.

Thank you. I wanted to ask about Burger King US. I understand the global compass quite strong. But I think you've lagged in the US some of the big competitors. Virtually everybody has said it's really about value as you did. I know you've launched the Taco Burger King, but it's not really a core menu item.And I guess I was trying to understand if the issue is that your franchisees won't let you get more aggressive on value or if you really think that this sort of incremental product offering is going to be the appropriate driver because I feel like we had a little bit of a head-fake at the beginning of this quarter where it looked like things might be getting better and then they kind of settled into the slower pace. So, just trying to understand what leverage you can pull because it doesn't feel like value is going away and most of your competitors are being aggressive across the board on their menu. Thanks. José Cil: Thanks for the question, Sara. We've said it before. I've mentioned it quite a bit in the last few quarters. We do best at Burger King in the US, and really with Burger King across the globe, when we have a good balanced offering that focuses on our core and also highlights some of our strength in how we cook and prepare the food flame-grilled as well as on premium and then having a good value offering every day that drives consistent traffic into the business.I think we do have a strong balanced offer at Burger King in the US. We work closely with our franchise partners in the US and counsels, each quarter going through plans and looking short term and long term at how we drive the business, not just from an advertising and product innovation standpoint, but also in other key initiatives that drive the business forward, technology, image, et cetera.And so, we have a good plan. As I mentioned in my comments, we occasionally have a bit of imbalance on media allocation and maybe some of the promotional activations weren't as strong they could have been. But we feel good about the plans we have long term. We feel good about what we're doing in the US. We are excited about the innovation that we're doing on core, including Impossible Whopper, which starts next week. And we think, over time, we're going to be able to continue to drive traffic and sales and grow the business as we have the last many years. Thanks for the question.

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

Yes. Thanks very much. On the Burger King International conference and you cited certain markets and kind of general causalities in terms of management, et cetera, but can you talk about specifically if digital and delivery is a meaningful component of that acceleration and comp, kind of what some benchmarks are in terms of penetration of either digital or delivery in aggregate or specific market examples if you want compared to the US, if we can get a sense of that.And just as a follow-up, the Tim's Canada business and lunch, you didn't mention the Beyond Meat Burger, but is that – do you view that as a significant lunch driver similar to what you're experiencing or think you experience at Burger King with Impossible Whopper? José Cil: John, thanks for the question. On international Burger King comps, as I mentioned in the prepared remarks, we saw some really good performance and we've seen it consistently over the last many quarters in China, India, Brazil, Spain. We have really good teams in those markets. We shared some of the insights and some of their perspectives at Investor Day. So, you had a chance to see some of the leaders and partners that we have in some of these markets and they're doing a good job in each of these markets focusing on a balanced menu offering.They're doing really good work in terms of image and we're also seeing, in many markets, really strong growth from a digital standpoint. Delivery is a strong driver of growth in many of these markets. We have over 8,700 restaurants today with delivery globally.In China, for example, more than 90% of our restaurants have delivery and it represents a big part of our business in that market, north of 30%. Korea, we have 80 plus percent of our restaurants with delivery. In Spain, we have a really big business as well in delivery, so it becomes a really strong part of our business. It's a great way to address dayparts where we have growth opportunity and there's a lot of incrementality from a sales standpoint. So, we're excited about where we are from a digital standpoint.Kiosks are a big part of our European business and growing. Apps and other engagement digitally in Asia as well as Europe are big parts of our business. So, we feel we're just in the early days of growing top line and engaging with guests in Europe, Asia and Latin America as well as obviously in the US and Canada. And we're excited about the business from a delivery standpoint as well as digital in those markets.As it relates to Tim's and lunch, we felt we had a lot of work to do there to continue to grow. We have a strong lunch business, but we think it has ample room for growth both in terms of the product side as well as in terms of the beverage side. So, we're excited about that. We're doing work now to rethink how this can drive sales long term for us.We looked at the Beyond Meat burger as well as a kind of limited time offer to see how it would react and we're encouraged by some of the behavior there. But in the end, we're really a coffee and baked goods business with very strong sandwich offering with soups and other products that are natural to our restaurants. And we're going to continue to work on that and we'll have more to share with you in the coming quarters.

The next question comes from Brian Bittner of Oppenheimer & Co. Please go ahead.

Thank you. Good morning. Just from a capital perspective, you have $1 billion of cash on balance sheet. Your net leverage is trending to below the 5 turn level which is pretty low on a relative basis. So, how do you want us thinking about this opportunity for a capital event moving forward? How do you think about the trade-off between doing a more aggressive share repurchase plan versus M&A?And separate to that, can you just confirm on the US Burger King side, whether the Impossible rollout is an LTO or whether this is a new permanent menu item or a menu platform? Thanks.

Thanks, Brian. It's Matt here. Thanks for the question. Just on capital allocation, I think we're really fortunate to have a business model that's very efficient in terms of delivering strong growth and cash flow and consistent de-levering as we execute on the core business plans and grow our systemwide sales.And to us, the most important thing about our approach to returns, which I think we've been pretty disciplined about over time, is making sure we deploy our capital in a thoughtful and balanced way, which really means providing shareholders, I think, with a good foundation of returns through a strong dividend that we've been able to grow over time as we grow the business, along with some thoughtful investments back into the brands as we've been doing with our remodeling initiatives at both Tim's and Burger King, as well as infrastructure investments we've been making at Tim's in our supply chain business.But also, at the same time, I think it's important for us to preserve flexibility, to execute on attractive investment opportunities over time, which has allowed us to add great brands at some points in the past to our company, but also to invest back in ourselves through meaningful share repurchases.So, I think we believe this is the sort of balanced approach that will allow us to drive the best returns for shareholders over time and we'll continue to maintain this flexibility and balance. José Cil: Thanks. Brian, regarding the question on Impossible, all of our product launches, particularly here in the US, are inherently limited time offers. And being brand led and being guest centric, we let our guests decide which items should earn a permanent place on our menus. And so, we're very excited about the launch. We're very excited about the prospects of building a platform with plant-based burgers and other menu options, but we're starting as we always do and let's see what happens.

The next question comes from Andrew Charles of Cowen and Company. Please go ahead.

Great. Thanks. Two questions, if I may. José, can you talk about the health of Tim's Canada franchise system? Comps are encouragingly starting to move in the right direction and relations are better following Duncan's hiring a year ago. But there seems to be several pulls in franchise cash flows around remodels, the new coffee brewers and the loyalty program, which you allude that boosts traffic, but presumably weighs on check, while sales have lagged the two segments.And then, Matt, when we look at Tim's gross margins seasonally from 1Q to 2Q, 2019 showed the lowest seasonal step up since you guys acquired the business. Can you talk about any headwinds we should be aware of that restrained supply chain margin expansion in 2Q beyond the same-store sales? José Cil: Thanks for the question. Duncan is in the room. He is really excited about the call out, so I'll have to deal with that later. We're really pleased and excited about the progress we're making with our partners and restaurant owners here in Canada. We have a really healthy, strong business in Canada. It's one of the most profitable franchise businesses anywhere in North America and probably around the world.We've been working closely with our advisory boards at the Tim's side on many initiatives that are critical to the business long term, franchise and restaurant owner probability being front and center as well as guest experience and satisfaction. And what we're seeing is really strong engagement with our restaurant owners, lots of really good dialogue and a lot of progress working together shoulder to shoulder to drive the business forward.And so, we're excited about it. We continue to work at it. This is not once in a while thing in franchising. It's an all the time thing. We just had our advisory board in town here in Toronto this week. I had a chance to speak to some of the restaurant owners and they continue to be excited and encouraged by a lot of the Winning Together initiatives that we've been putting in place and implementing over the last several quarters, including loyalty, including welcome image, including a lot of the innovation. So, we're really excited about that and positive about the long-term health of business here, and I think our restaurant owners are as well.

Yeah. Andrew, just regarding your question on the margins, I think we've seen margins remain relatively flat year-over-year. And as we look at the margins sequentially here from quarter to quarter, I think they were up a bit, which is typical for us given sales seasonality between the first and second quarter. And nothing really specific to call out. I think the margins have remained relatively consistent over the last few quarters within a reasonable range. And again, I think it was up a bit in the second quarter versus the first.

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

Hey, guys. I have two questions. The first is just going back to plant-based meat with the Impossible launch. Can you just maybe frame up and test sort of how big the lift was to the business? I guess, the incrementality there. I know it got asked earlier in the call.But the other question I had was on China. I think you have 14 stores open now. What are the early learnings with Tim's there and I guess anything you're calling out in terms of performance? That would be helpful. Thanks.

Thanks, Greg. We don't share specific numbers on how tests perform. Obviously, if it didn't perform well, we would have put it in the waste basket and moved on. So, we feel good about the incrementality. We feel good about the guest reaction to it, both existing Burger King guests coming back for another visit to try a new product that's innovative and craveable, and also, as I mentioned earlier, there is new guests coming in, guests that haven't been at Burger King in a while, trying this product and we're seeing some really good attachment as well with ancillaries and beverages and desserts as well.So, we feel good about it. We feel this is a long-term opportunity for the business. We launched it on a limited time basis and we want to see how guests react to it, but we feel really, really encouraged and strong about what we think this can be for the business long term.And as it relates to Tim's in China, we opened – actually, I got an email earlier today that we opened our 15th store in Shanghai. So, we continue to open really good restaurants there. The images is awesome. The team there is doing an amazing job with kind of translating the Canadian heritage of the brand and making it relevant to the Chinese consumer.Beverages are doing really well, as I've mentioned in the past. They continue to do well. We've innovated on teas and other beverages that are more relevant in China. And then, the food offering, baked goods, sandwiches and others have done well. We've kind of made some adjustments to that part of the menu and continue to be encouraged.And as I've mentioned on the BK side for international, in China with Tim's, we're seeing tremendous engagement from our consumers on the digital front as well. And so, we're really excited about the business here. The team is awesome. The team at Tim's China, I know many of them from the past and they've done a good job of getting the brand going in the right direction and we look forward to sharing more with you in coming quarters.

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

Hi. Good morning. Just a couple questions on Tim Hortons. First, one clarification. On the second quarter same-store sales number, did traffic outpace the comp? And just wondering sort of the dynamics around this loyalty program. And if you could talk about whether the sort of offset to the traffic growth you are seeing related to the program is a function of the accruals of the discounting or the actual discounting itself during the quarter?And then, I guess, more broadly, José, a bit interested to hear your perspective on what you think the biggest impediments to growing comps at Tim Hortons have been over the last year. I appreciate the initiatives you have going forward. But it seems like you've thrown a lot at the business over the last year or so and comps have remained relatively shallow. So, just wondering, to put it in the context, what you think the biggest impediments have been over the last several quarters? Thanks. José Cil: Thanks, David, for the question. On Tim's and the performance, we don't break out traffic and check. So, we don't have any insight to share with you on that today. As we mentioned in our remarks – or as I mentioned in the remarks and I think Josh touched on it earlier as well, we're encouraged by the adoption rates of the loyalty program. We're seeing a lot of repeat business coming in and acceleration of guests that already come in on a regular basis because of loyalty. And it's doing exactly what we thought it would do. And it's giving us confidence that we can do much more over the long haul.And so, we always felt when we launched – when we tested the loyalty program and then launched it in March that this would be evolutionary. But, initially it's been a revolutionary for us in terms of the amount of information we have, the engagement that we're able to create with our guest and we think we can do a lot more with this over the long haul. So, we are really encouraged by it and look forward to sharing more with you in the coming quarters in terms of the progress we're making on loyalty.And with respect to the overall Tim's business, as I mentioned earlier, I'm really excited and encouraged by the progress we're making in some of the initiatives that we put in place since last year, working together with our franchise and restaurant owners.We have a really, really good business. We have amazing restaurant owners. We have very, very loyal guests that come very frequently. We sell 8 out of 10 cups of coffee in Canada in our restaurants. And what we're trying to do is build on that over the long haul to create an even stronger business. And I think the initiatives that we're working on are not things that are flashes in the pan. We need to continue to work closely with our restaurant owners. These are initiatives that include transforming the image of our restaurants. They include transforming the way people engage with our restaurants through technology. They include innovation on the food side for breakfast as well as lunch and other dayparts and, obviously, enhancing and continue to innovate on our beverage side. So, I'm very encouraged and look forward to seeing the business in Canada continue to grow in the coming quarters and years. Thank you.

The next question comes from Jeffrey Bernstein of Barclays. Please go ahead.

Thank you very much. Question on Burger King US. The comps were modestly positive, but it does seem like labor inflation is large and commodity inflation presumably on the comps. I'm just wondering if you could talk a little bit about franchisee sentiment conversations you're having with them on profitability, whether you can share anything around what the inflation levels are currently for commodities and/or labor and how they think about menu pricing in response to that.And just as an aside, I know you mentioned kind of thinking that you were lagging a little bit this past quarter on value. I'm just wondering how you could think about Burger King other than value versus premium. Maybe think about it by dayparts? Just wondering where you're seeing the greatest strength or maybe opportunities where you might be lagging some of your peers? Thank you. José Cil: Thanks, Jeffrey. On the BK US probability front, we don't break out our profitability at the restaurant level quarter-over-quarter, but do it more on an annualized basis. And we continue to see the business at healthy levels in terms of sales, as well as restaurant level profitability. Certainly, there has been a lot of reports on inflation whether it's on the wage side or on the commodity side. Our focus – and working closely with our franchise partners in the US, our focus has always been on driving at the top line, driving the top line through a balanced approach with core premium and value offerings and we continue to be focused on that. We have a very good working relationship with our franchise partners in the US, similar to what we do in Tim Hortons in Canada. We have regular routines with our franchise counsels in the US working through marketing initiatives, operations initiatives, equipment initiatives that are helping us be more efficient in the restaurants as well as image and other projects and key platforms that are going to be driving the business long term. So, we continue to enjoy positive working relationships there and continue to work closely with them to drive the top line and bottom line of the business in the US.And as it relates to dayparts, I've mentioned in the past, we talked about it at Investor Day, breakfast in the US is an important daypart. I think we have a solid business there that can be much bigger. And we've launched and started to make progress on beverages in breakfast as well as other innovation on the breakfast side. And we think that's, long term, an opportunity for us to continue to grow top line. And given the profitability levels of breakfast daypart, we think it'll be a big driver of franchise probability as well.And then, as Josh touched on earlier on delivery, we see delivery being a big driver of incremental growth in dayparts such as dinner and late nights and we continue to work closely with our partners on that and are excited to be adding a new delivery partner in Uber Eats to help us drive that business as well. Thanks for the question.

Thank you. And now, I'd like to turn the conference back over to José Cil for any closing remarks. José Cil: Thanks again to everyone who joined us this morning. As I mentioned before, the fundamentals of our business is strong. We have strong comp sales and continued restaurant expansion this quarter, which enabled us to drive strong top line growth of about 8% in Q2. But, more importantly, we're really excited about the long-term prospects for our business, driven by our great teams, our great brands and great partners around the world and we look forward to updating you on our progress again in a few months. Have a great day.

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