Restaurant Brands International Inc. (QSR) Q2 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Restaurant Brands International Second Quarter 2020 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 Chris Brigleb, Restaurant Brands International'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, 2020. As a reminder, a live broadcast of this call may be accessed through the Investor Relations web page 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; COO, Josh Kobza; and CFO, Matt Dunnigan. 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 on our company’s response to the ongoing recovery from the COVID-19 pandemic. He will then discuss our results for the second quarter, and provide detail around our performance at TIM HORTONS, BURGER KING and POPEYES. Josh will then provide an update on technology at RBI. And to conclude, Matt will review our 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. Thank you for joining us on today's call. I hope everyone is doing well and staying safe. In the second quarter, our global response to the COVID-19 pandemic remain the focal point. We operate in over 100 countries and territories around the world, and this crisis has impacted everyone. Our response has involved a huge coordinated effort across all regions and by leveraging our platform's key points of differentiation, we've been able to drive a significant recovery in our performance. We've come a long way since March, and the rebound we've seen highlights the resilience of our business model, which can perform well both in good times and in more uncertain times. At its core are our three iconic brands, which are among the most recognized and loved restaurant brands in the world: Burger King, Tim Hortons and Popeyes are all leaders in their respective categories and offer a combination of high-quality cravable food and convenience that you can match. They also offer familiarity and comfort, as well as great value; characteristics, we've seen consumers gravitate towards in more trying times like those we face today. During the pandemic, the strength of our off-premise service modes has been another key differentiator with guests that recognize the added safety and convenience of our drive-thru and delivery channels. And by moving quickly to adjust our restaurant operations and marketing, to underscore the strength of off-premise, we've helped drive a significant recovery in sales since the onset of COVID-19. This has been especially apparent in our home markets where substantially all of our restaurants have remained open throughout the crisis and comparable sales across all three of our brands have improved by about 30 percentage points versus the lows we saw in late March. In our international markets, approximately 90% of our restaurants are now open versus half during the peak of the lockdowns, and we've seen sales ramp-up at a healthy pace. Moving into the second half of the year, we remain focused on the key priorities we outlined last quarter to adapt our strategy to evolving conditions and drive a continued recovery in sales. Our diversified network of strong and well-capitalized master franchisees has been a key pillar of our platform for years, and we're working hard alongside our partners to reopen and return to growth. We're also working closely with our partners around the world to prepare for what we believe will be opportunities for growth, exiting the crisis and building strong pipelines for development as we move past the pandemic and look ahead to 2021. There's considerable white space for each of our brands around the world, and we believe the dislocation caused by COVID-19 has reinforced the positioning and consumer value of world-class brands like Burger King, Tim Hortons and Popeyes. Before I continue with my remarks, I'd like to express my sincere gratitude to everyone in the extended RBI family. Our business is naturally well suited to respond to the challenges posed by this pandemic, but the pace and strength of our recovery has depended on the hard work and dedication of hundreds of thousands of people around the world. To everyone that has contributed to this effort, I want to sincerely thank you for everything you've done to help us navigate through this crisis, gain strong footing and move forward with our plans to build the most loved restaurant brands in the world. I'd now like to take you through our progress against the key priorities we established in response to COVID-19 before reviewing our results for the quarter. Since the beginning of the pandemic, we have had 4 main priorities: The first is to protect the health and well-being of our guests and restaurant team members; the second is to continue serving our millions of guests every day through all available channels; the third is to support our restaurant owners; and the fourth is to be there for our communities in need. Our first order of business has been to ensure that we are protecting the health and well-being of our guests and restaurant team members, and we move quickly to implement enhanced safety protocols across our networks, including the rollout of high-frequency sanitation, contactless service procedures and universal PPE usage. More recently, as we've started to reopen our dining rooms in the U.S. and Canada, we've implemented additional measures to protect the health and safety of every guest that comes to dine with us. Dining rooms are currently open in about 1/3 of our restaurants across both countries, and in all cases, we're limiting the number of open tables to ensure social distancing and sanitizing tables between each sitting. Our rapid action in rolling out protocols to protect our guests and team members has allowed us to continue serving millions of guests every day. Even during the most severe period of the pandemic in March, we were able to keep substantially all of our restaurants in our home markets open by refocusing our efforts on our off-premise capabilities and recovering much of the sales volumes we had lost through growth in our drive-thru and delivery business. Given the unique challenges posed by the pandemic, our over 12,000 drive-thrus across the U.S. and Canada have been one of the safest and most convenient places to get a meal over the past 4 months. Within the first few weeks of the crisis, we quickly implemented new procedures like contactless pickup at the drive-through window and shifted our marketing to showcase the safety and accessibility of this channel. By the end of April, comparable drive-thru sales were up over 20% at Burger King and over 100% at Popeyes. By the end of May, comparable drive-thru sales at Tim Hortons were up double digits year-over-year. In the second quarter, we also continue to serve millions of guests via our rapidly expanding delivery channel where comparable sales grew well into triple digits across all 3 brands in our home markets. We've added nearly 3,000 new restaurants onto delivery in the U.S. and Canada since February and now have almost 10,000 restaurants or about two-thirds of our network offering the service and over 34,000 unique points of delivery, considering the fact that most restaurants offer delivery via multiple aggregators, as well as our own mobile apps. The strength of our off-premise business has allowed us to drive a meaningful improvement in overall sales levels across all three brands. And as a result, we believe we are well positioned to navigate the current environment and can be flexible as we reopen our dining rooms in a safe and measured way, even if that means temporarily slowing down or pulling back in certain areas, where local guidelines require. While we're encouraged by the positive trend we've seen in sales, we're prepared to invest additional resources into our advertising and media funds during the second half of this year, if needed. In our international markets, we've also made substantial progress behind our priority to continue serving our guests. As of the end of July, over 90% of our restaurants are now open on a global basis, including substantially all of our restaurants in APAC, approximately 90% of our restaurants in EMEA and approximately 80% of our restaurants in Latin America. Supporting our restaurant owners has been another critical priority for us, and our work on this front has set a strong foundation for an ongoing recovery. In April, we temporarily moved to 100% variable rent at about 3,700 locations in the U.S. and Canada, where we have property control, so that rent expenses could flex down to reflect changes in sales levels. We also deferred April rent collections for up to 45 days and offered significant liquidity advances to our BURGER KING and TIM HORTONS systems on an as-needed basis, in total, making over $130 million available to our restaurant owners. Across our home and international markets, we also took a proactive approach in postponing CapEx commitments, as we prioritize the liquidity and financial strength of our franchise partners. This step, coupled with the dislocation to permitting and construction caused by the pandemic, has naturally slowed our pace of openings for 2020. And recently, we've also worked closely with our partners to identify underperforming, unprofitable restaurants that it makes sense to close. We've shared with you in the past our work around portfolio optimization, both in our home markets and around the world, and believe this process of replacing older parts of our network with new modern restaurants and strong locations, drive substantial benefits and returns for both our partners and for us over the long term. Given the natural delay in openings that will result from our pause to capital commitments, and despite proactively closing several hundred more restaurants than we might in a typical year, we expect to end 2020 with a similar number of restaurants relative to where we ended 2019. Looking out to 2021, we'll be working very closely with all of our franchise partners through the back half of this year to build strong pipelines and restart the development process. And given the overall health of our systems and the opportunities we see emerging, we're confident that we'll have our development cycle back on track by the end of this year to deliver net restaurant growth in 2021, in line with what we delivered in 2018 and 2019. While we made important progress reinforcing the performance and overall health of our business since March, supporting our communities is also a priority. In June, we announced our Restaurant Brands for Good framework that addresses our major initiatives to invest in the quality of our food, our planet and our people and communities. We believe this framework sets out the important long-term investments that are foundational to building the most loved restaurant brands in the world. You'll hear us talk more about our Restaurant Brands for Good framework in future quarters, and I encourage you to go to our website and review our plans in greater detail. And so, though, our results in the second quarter were heavily impacted by the COVID-19 pandemic, we're encouraged by the recovery we've seen across all brands and geographies and the way in which all of our teams and partners came together to make this possible. We cannot predict exactly when the dust will settle, but we're confident that we will be well positioned to capitalize on opportunities for growth as we emerge from the crisis and continue towards the 40,000 restaurant goal we talked about last year. We've been hard at work with our partners to make sure we're ready to move forward and restart our engine for growth around the world. I'd now like to go through highlights for each of our brands, after which, I'll ask Josh to share an update on our digital progress, and then Matt to take you through the financial details of the quarter. At Tim Hortons, in Q2, our system-wide sales decreased 33% to $1.1 billion, driven by a decrease in global comparable sales of 29%, which was partially offset by net restaurant growth of over 1%. In Canada, comparable sales declined 30% for the quarter and were significantly impacted by the widespread stay at home orders following the onset of the COVID-19 pandemic in March. However, we've seen a significant improvement in comparable sales since March. And as of the end of July, comparable sales are now in the negative mid-teens versus the negative mid-40s we saw at the peak of the crisis. Since the onset of the pandemic in late March, we've seen a slightly faster pace of recovery at Tim Hortons in the U.S. than we have in Canada. And as of the end of July, comparable sales at Tims in the U.S. are in the negative low single digits, in line with other coffee-oriented concepts in the U.S. and about 10 points ahead of Tims in Canada. Historically, our performance at Tims in the U.S. has closely tracked our performance at Tims in Canada. And during the onset of the pandemic in late March, our comparable sales were similarly impacted in both countries. The slower pace of recovery and resulting gap in sales we've seen since then is attributable to 3 main factors: First, as we noted during our remarks for the first quarter, the pandemic has had an especially pronounced impact on routine based visits, including on the morning commute and afternoon snack occasions, which each represent a significant part of our business. High-frequency coffee-led tickets are an even greater percentage of our sales in Canada than they are in the U.S. and have seen the most significant impact during the pandemic. Second, markets across Canada have generally followed a measured pace of reopening, which has helped effectively contain the virus, but has led to a slower pickup in activity and reestablishment of routines. By contrast, the U. S. has progressed into later stages of reopening much sooner, which we've seen show up in mobility data as a significant differential in commuting traffic and patterns. And third, as I mentioned earlier, off-premise sales, especially in our drive-thrus, have been especially important in driving the topline recovery we've seen thus far. About 2/3 of our Tims restaurants in Canada have a drive-thru versus approximately 90% of our Tims restaurants in the U.S. Comparable sales have meaningfully outperformed at these locations as comparable drive-thru sales in both countries, increasing the double digits during the quarter. These 3 factors have been particularly apparent in Ontario, where about half of our restaurants are located and performance has been more impacted by the disruption to routine traffic and a lower penetration of drive-thru. However, certain parts of Canada have been a bit quicker to reopen and we're encouraged by the further improvement we've seen in sales. In Québec, for instance, where we have drive-thru penetration closer to our Tims U.S. business and activity has resumed at a slightly faster pace than in other provinces. We've seen comparable sales improve into the negative mid-single digits as of the end of July. In the second quarter, we've also made significant progress in the evolution of our Tims Rewards platform. We continue to incentivize registration by highlighting the additional features available to registered guests, including the ability to choose a preferred reward from our broader menu and gradually adjusting the base reward for non-registered guests. We also ramped up personalized offers over the course of the quarter and are encouraged by the level of guest engagement and redemptions we've seen so far. Considering the natural drag from free rewards, offset by the uplift from personalized offers, the impact of the loyalty program to comparable sales was approximately neutral by the end of June. You may recall that loyalty contributed approximately negative 3% to comparable sales in the fourth quarter of last year, and we're pleased to have closed that gap within the first six months of 2020. We continue to be really excited about the potential of our loyalty program, and Josh will provide a bit more detail on our progress during his remarks. From a product perspective, we move forward with our plan to simplify our menu and heightened focus on the improved quality of the products that made us famous, coffee, baked goods and breakfast sandwiches. $1 ice coffee promotion and two for $5 breakfast sandwich deal performed especially well in our core layer, while we saw improvements in the consistency and quality of our brewed coffee from our fresh brewers and water filtration systems. And two weeks ago, we continue to invest behind the quality of our core lineup by rolling out a meaningfully improved English Muffin and crispier naturally smoked bacon across our breakfast sandwich platform. Despite the obvious challenges posed by COVID-19, we have nonetheless made progress on some of the important strategic initiatives we outlined towards the beginning of the year, which form an important part of our growth strategy for the brand. For instance, we continue to add new restaurants on to delivery and now have over 1,200 restaurants offering the service versus about 200 at the beginning of this year, making us one of the only restaurant companies with full delivery coverage throughout Canada. We also recently completed installation on several hundred additional fresh brewers and water filtration systems and expect to install the final 700 or so by the end of this year. As conditions have stabilized, we're excited to be restarting our project to install outdoor digital menu boards in our drive-thru. Matt will provide a bit more color around our important projects later on. You'll recall that the baseline unit economics of Tims in Canada are among the strongest in QSR anywhere in the world, and the improvement we've seen in performance across Canada and direct support we provided mean that the vast majority of our restaurants are cash flow positive, even before considering the various support programs made available by the government. And finally, we continue to maintain a strong working relationship with our restaurant owners and advisory board. Turning to BURGER KING. In Q2, our system-wide sales decreased 25% to $4.1 billion, driven by a decrease in global comparable sales of 13% and a significant number of temporary closures in our international markets, which were partially offset by net restaurant growth of over 4%. Given the progress we've made on reopening, about 90% of our international restaurants are now open versus half back in April. In the U.S., our comparable sales growth at BURGER KING in the second quarter was negative 9.9%. By the end of April, we had already seen a significant improvement in results versus the end of March, as comparable sales improved from the negative mid-30s to the negative mid-teens. Between May and July, comparable sales continued to improve, and as of the end of July, are now flat on a year-over-year basis. As nearly all of our dining rooms were closed during much of the second quarter, the primary driver of this recovery was an increase in off-premise sale, especially in our drive-thrus Burger King has over 6,500 drive-thrus across the U.S. and has been one of the most accessible options for millions of guests to get a meal during the pandemic and with minimal exposure, given the contactless procedures we rolled out at the beginning of the crisis. By leveraging these advantages, we were able to grow comparable sales in the channel in the positive low 20s for the second quarter and saw drive-thru sales grow to more than 85% of total sales versus about 2/3 in 2019. And we also saw strong growth in delivery in Q2, continuing a trend we noted in the first quarter. We've brought nearly 2,000 new restaurants online since February and now have over 6,100 Burger Kings on delivery in the U.S. From a menu and occasion perspective, breakfast was the daypart most negatively impacted by the pandemic and we underperformed in this category as American consumers put their routines on hold. However, we were able to drive growth in other areas and saw a strong contribution from family and group orders this quarter, which we helped accelerate with the launch of new bundles. We also saw continued strength from the Impossible Whopper, as well as a positive contribution from value-oriented offerings like our 5 for $4 meal and Dollar Nuggets. And in June and July, in line with local guidelines, we began reopening our dining rooms at about 1/3 of our stores and have seen an additional improvement in comparable sales at those locations. Moving into the back half of the year, we'll continue to sharpen our approach to the value for money equation, especially given the uncertainty the consumer is facing. We'll continue to invest in and drive momentum behind our technology assets and especially delivery. And we'll also continue to invest behind the quality of our food, putting the spotlight on our classic products across daypart that resonate with guests seeking comfort in the midst of the pandemic. As we mentioned last quarter, restaurant level cash flows have never been more important in our business and for our teams and franchise partners. At Burger King in the U.S., as with our other brands in our home markets, our work with our restaurant owners to adapt operations to the current environment, as well as the direct financial support provided by RBI and the U.S. government has combined with the significant recovery in sales to help the vast majority of our Burger King restaurants in the U.S. generate positive cash flow in the quarter. In our international markets, system-wide sales decreased 38%, driven by a decrease in comparable sales of 18% and a significant number of temporary closures, partially offset by net restaurant growth of over 7%. The impact of these temporary closures was particularly concentrated in EMEA and Latin America, where approximately half of our restaurants were temporarily closed at the beginning of the quarter. This impact diminished substantially over the course of the quarter, and as of the end of July, a considerable majority of our restaurants have reopened in both regions. Temporary closures also impacted our performance in APAC in Q2, although the impact was not as pronounced. Substantially, all of our restaurants in APAC have now reopened, and despite the pandemic, markets like Australia, Korea and Japan registered positive system-wide sales growth for the quarter. As markets have reopened, we've seen countries with more freestanding restaurants like Australia and the U.K. tend to recover loss sales more quickly than markets with more mall locations. In this regard, our international platforms have benefited from an increasing orientation in our development strategy to build drive-thru locations, especially in key markets like Spain, U.K., France, Germany, Italy, Brazil, Australia, Mexico and Puerto. In recent months, we've also seen markets with strong off-premise and delivery platforms like Korea and Spain regain sales at a higher rate. As markets move into more advanced stages of reopening, we expect global sales at Burger King to continue to improve. And finally at Popeyes, system-wide sales increased 24% to $1.2 billion, driven by nearly 25% growth in global comparable sales and unit growth of nearly 7%, partially offset by temporary closures in our international markets. Comparable sales growth was especially strong in the U.S., where they rose almost 29% for the quarter. As we noted on our call for our first quarter result, U.S. comparable sales performance at POPEYES recovered sharply into the positive 30s in April, then further improved into the positive low 40s in May from a starting point of approximately flat during the peak of the crisis in March. Comparable sales are in the positive high 20s as of the end of July, but nominal monthly sales per restaurant have continued at record highs. The moderation in comparable sales growth we saw in July, primarily reflects the impact of several large-scale market tests of the chicken sandwich and a highly successful Big Box promotion during the same period in 2019. Given the significant top line increase we've seen between 2019 and 2020, on a trailing 12-month basis, POPEYES now generates an average of $1.7 million in sales per restaurant and still growing. A large part of this growth can be clearly attributed to the chicken sandwich, but in Q2, we saw significant growth across every category of our menu. Like our other brands, POPEYES generated a significant majority of its sales via off-premise channels this quarter and saw especially strong traction in new and improved family offers. We see a huge amount of potential for our flavorful offerings in the family occasion. And in July, we launched our Pizza Party Crashers campaign to continue the momentum we saw build during Q2. Positive sales momentum has substantially boosted restaurant owner profitability and made POPEYES unit economics in the U.S., some of the best in the business. Combining these strong unit economics with the excitement around the POPEYES brand, not to mention the real estate opportunities we see opening up across regions, reinforces our excitement about the brand's long runway for development in the U.S. While COVID-19 has resulted in some disruption to construction and development timelines this year, we look forward to executing behind a strong pipeline of restaurants for years to come. Looking outside the U.S., in May, we opened our first POPEYES restaurant in China and have seen an overwhelmingly positive response. We've made a few tweaks for the Chinese market, but so far, our guests have love POPEYES signature Louisiana Style Fried Chicken. China represents just one of the many significant opportunities we see to develop the POPEYES brand around the world, and we're excited to be launching into a new chapter of international growth for the brand. As I've mentioned, our digital assets continue to make a significant and growing contribution to our results across brands this quarter. I'd now like to turn the call over to Josh to provide an update on what we've accomplished in technology during Q2. Josh?

Thanks, José, and good morning, everyone. Last quarter, we shared with you our observation that the COVID-19 crisis had accelerated trends in consumer behavior that we've seen building for some time. In the second quarter, this process continued to play out, as consumers increasingly look outside their homes for meals in a safe and convenient format. As José outlined earlier, this shift drove a substantial increase in sales in our drive-thrus, and it also helps for greater adoption and usage of our digital platforms. In this context, we've continued to enhance our core tech assets and adapt our digital strategy to best fit our guests' evolving needs. We're excited about the progress we made over the past few months and wanted to share a few highlights from three core areas: First, we continue to see significant growth in delivery across all three of our brands. Our addition of nearly 3,000 new restaurants on to delivery in the U.S. and Canada since February, brings our total to nearly 10,000 restaurants offering the service across our home markets. At Burger King and POPEYES, our delivery sales are up about three times and four times, respectively, versus the same time last year, and we've seen considerable growth in sales via our own mobile apps through Q2. At Tims, delivery sales are now up over nine times versus their pre-crisis level at the beginning of this year. Second, we continue to enhance our mobile app guest experience across all three of our mobile apps in our home markets. We've added new features and continuously incorporated guest feedback, which has allowed us to once again rank near the top of our industry in terms of app downloads and monthly active user growth. This has also led to a sustained improvement in our app store ratings, especially for our Tim Hortons mobile app, which saw its ratings rise toward the upper end of our competitive set. We also recently finished integrating our mobile apps for Burger King in Canada and the U.K. onto our core code base, and we'll continue to add additional markets and gain scale in the back half of the year. Finally, we made significant strides this quarter in our rollout of CRM and personalized offers through our Tims Rewards platform. Over the past year, we learned a lot and have been able to build a rich segmentation based on our guest preferences. Our engineering team also designed a framework for tailored offers that we began rolling out at scale in Q2. While in parallel, we continue to reduce the natural drag to comparable sales from redeemed rewards from non-registered guests. The ramp-up in contribution from personalized offers and the decrease in drag from redeemed rewards meant that by quarter end, the net impact of Tims Rewards to comparable sales was approximately neutral, a meaningful improvement versus the negative 3% impact we noted for Q4 of last year. We look forward to continuing to build our capabilities around personalized offers and believe that over time, Tims Rewards will create significant value for our guests and for our system as a whole. Overall, we continue to make significant progress this quarter on our goal to build an industry-leading technology platform and grow sales across digital channels. During Q2, digital sales in our home markets grew more than 120% year-over-year and over 30% quarter-over-quarter. And this growth was broad-based across our three brands, which each saw a substantial increase in digital sales in the quarter. In Q2, digital sales in the U.S. represented 8% of total sales at Burger King and 14% of total sales at POPEYES. And at Tim Hortons in Canada, digital sales represented 23% of total sales during the quarter. I'll now turn things over to Matt to provide additional detail around our business results.

Thanks, Josh. In my comments today, I'll take you through an overview of our results for the second quarter and touch on some of the steps we've taken to support our systems as sales recover and to position our brands for continued long-term growth. In the second quarter, consolidated system-wide sales decreased 21% to about $6.5 billion, reflecting the impact of COVID-19 on our results across regions. However, as José outlined, we saw a significant improvement in performance over the course of the quarter as we increased comparable sales by about 30 points and reopened over 4,500 restaurants around the world. Based on this progress, we now have about 93% of our global restaurants open and exiting the quarter, we were back to approximately 90% of our prior year system-wide sales. We believe this highlights the quality of our business model and value of our global scale and diversification. For the quarter, consolidated adjusted EBITDA decreased 36% organically to $358 million and beyond the decrease in system-wide sales, several factors contributed to the decrease we saw in consolidated adjusted EBITDA. First, the base rent base rent relief we provided to Tim Hortons and Burger King relief we provided to Tim Hortons and Burger King restaurant owners in the U.S. and Canada that José mentioned earlier, impacted our growth rate by about negative 3% this quarter. It is important to note that this relief is tied to sales performance and naturally diminishes as sales improve. So given the recovery in sales we saw over the course of Q2, we have seen the size of this rent relief decline to a relatively marginal level entering Q3. Second, while we have not historically had meaningful bad debt expense, given the level of volatility and uncertainty around the world, we increased our bad debt provision in the second quarter to reflect an increased risk environment around receivables. In addition, our provision also included an $8 million one-time charge in our supply chain business that I'll touch on in a moment, for a combined impact on our growth rate of approximately negative 4% in the quarter. Third, our performance this quarter also reflected ad fund expenses exceeding revenues by nearly $12 million more than they did in the second quarter of last year, resulting in an impact of approximately negative 2% to our consolidated organic adjusted EBITDA growth rate. We've mentioned in the past that in some quarters, there may be a mismatch in the timing of revenues and expenses, but that in the long run, we manage these ad funds so that total revenues equal expenses. In this quarter, the sudden decline in sales that resulted from the spread of COVID-19 led to a continuation of the mismatch we saw in Q1, which we expect should normalize over time. We also felt that given the unique challenges posed by the COVID-19 pandemic and the result in shifts in consumer behavior, it was important to continue investing behind our brands and the messages of convenience, safety and community that have helped us drive our recovery. Fourth, the deleveraging of fixed costs in our supply chain on account of lower volumes also contributed about 1% to the decrease in our consolidated adjusted EBITDA this quarter. However, the impact of this deleveraging diminished substantially over the course of the quarter as volumes recovered and represents a relatively marginal impact on results entering Q3. The remainder of the gap between our consolidated system-wide sales growth rate and our consolidated organic adjusted EBITDA growth rate stemmed from a number of smaller items, including a decline in fees and other income and EBITDA from company stores as well as a sizable shift in sales mix that we saw across brands, reflecting a more pronounced decline in sales at Tims. Where in addition to franchise royalties, we also generate EBITDA from property and supply chain activities. Moving on to segment level performance, at Tim Hortons, our second quarter adjusted EBITDA was $147 million, which represents a decrease of approximately 47% on an organic basis. This decrease was driven primarily by a 33% decrease in system-wide sales, which included a 29% decrease in global comparable sales as well as the temporary closure of some of our restaurants due to COVID-19, which were partially offset by global net restaurant growth of over 1%. The year-over-year decrease in adjusted EBITDA at Tims also reflected a decrease in supply chain sales, which was driven by the decline in restaurant traffic and volumes we experienced during the quarter. Our Tim Hortons results were also affected by the one-time charge I mentioned, which is flowing through our cost of sales and is related to the restructuring of one of our suppliers during Q2. This issue has been fully resolved with minimal operational disruption, but the associated charge reduced our adjusted EBITDA growth rate at Tims by about 3%. Further impacting our results was our strategic decision to maintain full employment in our distribution business, despite lower volumes, which contributed to the fixed cost deleveraging, I mentioned earlier that reduced our organic adjusted EBITDA growth rate at Tims by approximately 3%. And again, we saw the impact of this deleveraging dropped significantly over the course of the quarter. In addition, the rent relief we provided to provided to Tim Hortons restaurant owners in Canada, impacted our growth rate at Tims by about negative 5%. Finally, approximately half of the ad fund related to negative impact to consolidated adjusted EBITDA was attributable to TIM HORTONS and reduce our Tims adjusted EBITDA growth by nearly 3%. At Burger King, second quarter adjusted EBITDA was $160 million, representing a year-over-year organic decrease of approximately 34%, driven primarily by a 25% decrease in system-wide sales. The change in system-wide sales reflected a decrease in global comparable sales of over 13% as well as the temporary closure of approximately half of our international restaurants due to the COVID-19 pandemic, which were partially offset by global net restaurant growth of restaurant growth of about 4%. In addition, organic adjusted EBITDA growth at Burger King was impacted by part of the provision for bad debt I noted earlier, the rent relief we provided to restaurant owners in the U.S. as well as about half of the ad fund related negative impact to consolidated adjusted EBITDA. At POPEYES, in the second quarter, adjusted EBITDA was $51 million, which was up nearly 25% organically year-over-year. This increase was driven by strong system-wide sales growth of 24%, continuing the brand's strong momentum from last year and included global comparable sales growth of nearly 25% and net restaurant growth of nearly 7%. This growth was slightly offset by some temporary closures due to the COVID-19 pandemic. On a consolidated basis, our second quarter adjusted net income was $154 million. This compares to second quarter 2019 adjusted net income of $331 million. The year-over-year decrease was attributable to the decrease in adjusted EBITDA and unfavorable exchange rate movements, as well as higher stock-based compensation, and was partially offset by lower interest expense resulting from our refinancing activities in the second half of last year and a lower adjusted effective tax rate. Our adjusted diluted EPS for the second quarter was $0.33, compared to $0.71 in the prior year, representing a nominal decrease of 53%. Included in this decrease is a headwind from unfavorable exchange rate movements, which reduced our EPS growth rate by approximately 2%. Our second quarter 2020 adjusted effective income tax rate declined to just under 16%, reflecting the larger relative decline in income we've experienced at TIM HORTONS, which carries a higher tax rate. However, it's important to remember that the rate in any given quarter can vary, and we may see additional volatility moving forward as our mix of income continues to evolve. Now turning to our cash generation and capital allocation for the quarter. Since March, we've seen a significant stabilization and conditions across our business. Throughout the crisis, we've been able to leverage the strength of our balance sheet to support our brands and take a proactive stance in confronting the challenges we faced. And the results we've seen so far have given us a strong foundation to push forward with our recovery and work towards restarting our growth heading into 2021. In terms of our cash flow, we're encouraged to report that despite the significant impact of COVID-19 on our business and the investments we made to support our brands through rent relief, liquidity advances and other programs, we still generated positive free cash flow in the second quarter, calculated as the sum of operating cash flows less CapEx, reinforcing our belief and the resiliency of our model. We also paid a total of $484 million in common dividends and partnership exchangeable unit distributions, which represents two quarters' worth of dividends and distributions due to timing of the disbursements. And given the continued strength of our liquidity position, this morning, we announced that the RBI Board of Directors declared a dividend of $0.52 per common share and partnership exchangeable unit of RBI LP payable on October 2, 2020. In terms investments, in recent months, the restrictions to business activity resulting from the COVID-19 pandemic have limited our ability to make progress on certain strategic projects. But despite these challenges, we were still able to move forward with several key initiatives. In the past two months, we opened two of our three new distribution centers in Canada, one in Debert, Nova Scotia and the other in Calgary, Alberta, and have brought them online with no disruptions to service. In fact, we've already seen improvements in both efficiency and service levels to our restaurant owners. In addition, even though we had pushed back the installation of our outdoor digital menu boards in Canada, we were still able to move forward on some important steps, including permitting for thousands of sites. We are now fully restarting the rollout and aim to install around 1,000 outdoor digital menu boards by the end of the year, with the remainder coming in 2021, which we believe will be a very strong enhancement to our business in Canada, given the scale and importance of our drive-thru network. All three of our brands continue heading in a positive direction, and with the recovery we've seen in sales and the solid financial position of our networks, we are excited to move forward with our partners and continue investing behind our brands. As of June 30, 2020, our total debt outstanding was $12.9 billion. Our net debt calculated as total debt less cash and cash equivalents of $1.5 billion, was $11.3 billion, and our net debt to adjusted EBITDA leverage ratio was 5.6 times. You'll recall that in the beginning of the crisis, out of an abundance of caution, we look to maximize our flexibility by drawing down on our $1 billion revolver and issuing $500 million of new notes. However, based on the recovery we’ve seen in our business over the past few months. And the confidence we have in the strength of our business model, we decided to full repay the revolver at the end of the quarter. RBI remains in a strong financial position with meaningful flexibility for a wide range of scenarios. We ended the quarter with a healthy $1.5 billion cash balance, even after taking into effect the full repayment of our revolver and two quarters' worth of dividends due to the timing of the disbursements. We also feel very well positioned from a capital structure perspective with no near-term maturities and plenty of flexibility. We are not concerned by temporary fluctuations in our leverage ratio, and are confident we have the resources to successfully navigate through the crisis and pursue opportunities for growth as we come out the other side. With that, I'd like to thank everyone for joining us on the call this morning and for your continued support. We'll now open the call for now open the call for questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Nicole Miller of Piper Sandler. Please go ahead.

Thank you. Good morning. When you look at a franchise level cash flows and take a look back at 2019 or what maybe was kind of planned or thought would be the levels for 2020. As you look across the brands, what percentage of those prior year projected cash flows do you think your franchise partners can capture in this environment? It seems like with some top line PPP and some other probably labor leverage, I would imagine the vast majority. José Cil: Yeah. Hi. Good morning, Nicole. Thanks for the question. I think, in terms of franchisee cash flows, what we've been most excited by is really the return of the business and sales recovery over the past month or two, which we know is the primary driver. I think the other thing to call out here is, we've done a lot of work over the past couple of months with – across all our brands, with our franchisees in terms of making operational improvements and adjustments to respond and adapt to the current environment. And I think, the result has been a pretty good amount of progress in terms of offsetting some of the impact that we saw in the early days. And now as we're on a, I think, a better path with the business and improving our outlook is good for the second half, and we think that, there is a path to generate very significant profitability for the year, even without taking into account the government programs, which were also quite helpful.

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

Thank you, and good morning. José, I wanted to go back and I wanted – maybe if you could clarify, maybe expand on the comments you made about the development plan. As I understood, it would suggest you how low net unit growth this year. Can you maybe just talk about where by brand you expect the most closures that would offset any development? And maybe within that, the region, whether it's the U.S. or home markets? And then, I think you also said, you expected to get back to normalized growth that you would have seen in 2018 and 2019, which would be like a 5% unit, and I want to make sure that's right. And how you get confidence in that at this early stage? I know, some of your peers have sort of said the opposite, which they don't have real visibility in 2021, just given franchisees have been disrupted. So maybe what insights do you have? And into how franchisees are thinking about development that you think that development can resume at that kind of pace? José Cil: Yeah. Thanks for the question, John. I hope you're doing well. Look, our focus the last four months has been on supporting our franchisees here in our home markets as well as internationally and regaining momentum in reopening markets as well as momentum in sales. And we've seen, as we mentioned in the prepared remarks, we've seen a good strong recovery across all markets, 93% of our restaurants are open, and we've regained just north of 90% of our system-wide sales. We have a strong set of franchisees across the globe, strong brands, and our partners are well capitalized as are we. And I think as we’ve continue to drive recovery in sales, we feel confident in our ability to continue to work with our franchisees to maneuver and manage through the current situation and be prepared for a return to growth in 2021. I think we've seen – just to give you our perspective on this, my perspective, we've seen strong growth over the last decade or so with our brands, with Burger King in particular, across a broad base of markets in Europe and Asia. In Latin America, there is a ton of white space left for us to grow in all these regions, including North America and our home markets for Burger King, for Popeyes and for Tim Hortons. What drives expansion and growth is really strong unit economics, and considering the strength of our unit economics in our home markets and internationally, and seeing the improvements that we're making, including with Popeyes in the U.S. gives us a ton of confidence in the ability to grow long term. We've focused – as I mentioned in my prepared remarks, focus in the last several months on reopening and are now working closely with our partners on ramping up and getting ready. There is a ton of opportunities in real estate in North America as well as internationally, and so that gives us confidence in the ability to get back to growth levels that we saw in 2018, 2019. In terms of closures, I mentioned the opportunities to optimize the portfolio. We'll see that in a number of markets across the globe and including here in North America and our home markets, both in the U.S. and in Canada. And all of this, as we've said in the past, is aimed at improving the profitability of our franchisees and of our system. In many cases, these restaurants that we close are -- we're in good trade areas that have evolved they're no longer the right trade areas, and we're reopening or opening new stores with better unit economics, better image, better experience, better technology or latest and greatest in terms of image and all the different offerings. So we're really excited about that and feel confident that, that's going to create a ton of value for our franchise partners over the long haul. Thanks for the question.

Our next question comes from Dennis Geiger of UBS. Please go ahead.

Great. Thanks for the question. Good morning guys. Thanks for the all the updates and the insights here. I wanted to focus on the go-forward strategy for Tim Hortons. A lot of exciting stuff going on with the brand, it seems like the brand is in a good place where, especially where COVID restrictions are less onerous. So just wondering if you could talk a bit more about the continued recovery from here, thinking about the macro and consumer mobility, is that one of the biggest things that gets you a significant recovery from here, and then maybe a lot going on -- a lot of good stuff, if you could just kind of frame, what you see as the most impactful? Is it loyalty, is it some of the stuff with the digital menu boards that you talk about? Now that's kind of on track again, you're rolling that out. Is it other things? Just kind of framing what you're most excited about and how you see this recovery for the brand from here? Thank you.

Thanks, Dennis. I appreciate the question. Yes. Look, we -- from levels of -- in the low 40s – negative 40s in April when the crisis was at its peak in Canada and here in North America, we've seen, as I've mentioned -- over the last several seen, we've seen sequential recovery quarter over -- month-over-month in the business. And we've seen that initial improvement came from a bunch of hard work from our teams. We went from having about 200 restaurants -- just over 200 restaurants with delivery in Canada to now around 1,200 restaurants, which gave us an opportunity to expand our off-premise offering in Canada to meet the needs of Canadians, even if they couldn't come to our restaurants. We saw the drive-thru performance improve. It's now double-digit up versus where it was last year. And as we mentioned, the part of the business that's been impacted the most in the part of the industry that's been impacted the most is breakfast and kind of those high-frequency routine visits. Canada, as I mentioned in my prepared remarks, it's been a bit slower to reopen as confirmed by third-party mobility data and industry traffic data that we look at. We've seen same-store sales steadily improving throughout the last quarter and into July. But we've seen our biggest market, which is Ontario, be a little bit slower in terms of the recovery. It's driven by the high urban and routine traffic exposure that we have in that business. And as I said, we've seen this through pretty clear evidence on third-party mobility data. The good news is, we've -- as I mentioned, Québec is a good example, it gives us confidence around a path to improve sales as reopenings continue and as behaviors resume in the country. That said, we're not sitting back and waiting for reopening. We're moving and we're driving the business alongside our owners. We've put in place a really strong program around, improving the quality of our coffee offering, as well as our breakfast offering. We just launched improvements in our hot breakfast sandwiches with a better English muffin and a better bacon. We've highlighted -- we've gone out with a two for $5 promotion. We have Dollar Iced Coffee promotion that goes along with any lunch wrap. I think our team has done a great job, as Josh mentioned, with digital and personalized offers continuing to be a focus for us, and we're continuing to invest and have now turned on the capital expenditures to invest in quality with fresh brewers being a priority for us -- fresh brews and water filtration, which will be completed by the end of this quarter or beginning of next, and then the outdoor digital menu boards, which represent a big opportunity for us to modernize the experience in our restaurants and in our drive-thrus, which represents a growing part of our business. So we're excited about the long-term, and excited about the progress we're making. The teams are doing a great job and the franchisees and the restaurant owners are really engaged and doing a fantastic job on that front. So we continue to be excited long-term on these priorities and look forward to keeping you posted on our progress.

Our next question comes from John Zamparo of CIBC. Please go ahead.

Thanks. Good morning. I wanted to ask about the breakfast daypart, in particular. You mentioned it's been disproportionately impacted. Just would like to get a sense of how you help rebuild traffic here? And maybe that means increasing drive-thru throughput with dual lanes or emphasizing breakfast anytime. But just would like to get a sense of how you get this to return to the growth level you'd like it up? José Cil: Yes. Thanks for the question, John. I think it's the stuff that I've mentioned already and touched on quite a bit. It's focusing on quality, focusing on service, expanding our off-premise capabilities through drive-thru and as well as our digital capabilities. We've added curbside pickup. We've added pickup at the front door in many locations that are in line. So our focus will be and continues to be on great service, great quality offering, great everyday value for money with our coffee and baked goods in Canada and hot breakfast sandwiches, and continuing to expand and improve on that off-premise capability that we have, and that we're so strong in. Thanks for the question.

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

Thanks. Good morning. I'm going to beat the dead horse a little bit more on Tims here. But this is one of those stories where we have the comps negative going into the crisis. And I guess, we have the external factors, obviously, COVID itself, the competitive environment, the closures maybe that you'll see from competitors, maybe that slow recovery of that Greater Toronto area. But offset from -- offsetting that might be the fact that you're doing a lot of internal stuff. So I'm trying to get a sense from you, any help you could give in sort of squinting through the numbers and give us a sense of your confidence that you can get to positive comps. And then that rate of recovery, do you see that tail of the Greater Toronto dragging on into 2021, pretty -- as the commuting is down, or do you see those being overcome by some of the internal things that you're doing or even the closures you're going to see from competitors? Any commentary on that would be helpful. Thanks. José Cil: Yeah. Thanks for the question, David. Look, I think it goes back to some of the comments I made earlier. I think we're excited and confident in the long-term in Canada. I think the investments we're making in digital is proving to be a big benefit for the business there, as Josh mentioned in his comments and I did as well earlier this morning. We're seeing now that Tims Rewards is becoming a positive for the business, not only in terms of engagement, but also in terms of being able to give our very loyal consumers and guests exactly what they're looking for, and that's allowing us to drive incremental visits and sales for the business, which we think, over time, will be a big driver and a key part of our marketing our marketing initiatives in the business. We're focusing on quality. We're focusing on expanding the capabilities and the experience in the drive-thrus with technology as well as expanded throughput. And we think all of those, in addition to the process that's taking place in the municipalities and in the provinces of reopening, that combination overtime will get us into a really positive momentum for the business. Hard to say when. We're working like crazy to make it now, but it will take time, and we're working closely with our partners and our franchise owners in the market to make sure we do it the right way, safely, taking care of our guests and our team members, which remains the top priority. Thanks so much for the question.

Our next question comes from Sara Senatore with Bernstein. Please go ahead.

Thank you. Just a quick question about the Kansas state. I know you had mentioned that you're seeing an acceleration of trends, including drive-thru. Is it possible to retrofit Tim? I guess I'm trying to think about what – how do you think about the Tims of status is now with Canada only two-thirds drive through versus what it should be on a go forward? I mean one of your big competitors is working on shifting their footprint and shrinking some stores and drive-thrus to others. I guess have you contemplated that? How fast could it happen? And sort of what does the CapEx look like associated with that? Just to the extent that there are any lingering effects from the pandemic, the most per ounce would probably be just, again, shift – greater shift – greater shift to all permits and to drive-thru. Thanks. José Ci: Thanks for the question, Sara. Our – we have an amazing portfolio and real estate offering in Canada. We've got nearly 4,000 locations. We're able to serve all of our guests. I mean the ability that we have with our penetration there is probably as well evidenced with our shift to delivery. We're now one of the strongest delivery businesses in terms of penetration anywhere in the country. So we have a really strong portfolio. We think there is an opportunity to continue to enhance the off-premise abilities that we have, expanding drive-thrus to double drive-thru, expanding the experience in our existing drive-thrus with ODM – Outdoor Digital Menu board investments. We have curbside now in mobile order and prepayment and pickup with our digital offering. So we think off-premise will continue to be an opportunity. We felt that was the case pre-COVID, which is why we made all these investments in technology as well as have outlined a game plan to invest in our delivery and our drive-thru business. So we continue to see that as an opportunity, and to the extent there is some involvement in remodels and other investments in the real estate, we'll continue to do that in order to drive the business forward. Thanks for the question.

Our next question will come from Chris Carril of RBC Capital Markets. Please go ahead.

Thanks. Good morning. And just following up on that last question, I did want to ask about the remodel programs at Tims and Burger King. Where do you currently stand in those programs? And what is your franchisees current thinking of remodels? Particularly in light of the commentary around development as well as the plans around portfolio optimization and closures that you discussed this morning?

Chris, it's Matt here. Thanks for the question. I think as it relates to the remodel programs. We – both at BK and Tims, these continue to be an important piece of our strategy going forward. I think, as we talked about in the past, given the impact of COVID, we temporarily paused capital investments for the time being. But we think of an traction that we're seeing in the business, it makes sense to start reengaging in investments and part of that will be the continued renovation of our restaurants, which we look to restart in the second of the year and get back on track as we move forward. Thanks for the question. Operator: Our last question will come from David Tarantino of Baird. Please go ahead.

Hi. Good morning. Just a clarification question and then another one, but what – I guess, first, what percentage of the global system unit count is expected to close this year? And what percentage of system sales does that represent? So that's kind of first question. And then the second question is, I was wondering if you could give an update on the Burger King international business, and how that business is trending, given it's such a big part of your income stream? And then if there is any call-outs related to markets that might be underperforming during the pandemic. That would be helpful as well. Thanks.

Yeah. Hi, David, it's Matt. Thanks for the question. I'll share some thoughts on the first part there on closures. I think José mentioned in the prepared remarks, we are going through a proactive process of looking through our systems all around the world, and where it makes sense to close restaurants that will help improve the overall health of the system profitability. And then also longer term, makes sense for our partners and for us in terms of the business models and supporting future development, that's something we're going to do, and we're going to be proactive about that in the second half. I think as it relates to the size of that, it will be significant relative to prior year closures. So we have a significant increase. However, in terms of percent of overall restaurants and system-wide sales around the world, it will be relatively small, so a couple of percentage points. José Cil: Thanks, Matt. David, on the second question, as I mentioned, I think we're really excited about the progress we've made in reopening our restaurants internationally and across the globe, including our home markets. We're now about 93% of our restaurants open, and we've seen – substantially, all of the restaurants in APAC are open. North of 90% of them are open in EMEA and just over 80% in Latin America. And North America is roughly in the – above 98%. So we're making good progress on reopening and system-wide sales have gotten back to about 90% of where they were pre-COVID. So, we're working closely with our partners there. We see some different nuances by market in terms of performance, but generally, everyone is making progress on reopening. They're driving significant growth through off-premise capabilities. Delivery is a really big part of our business as well digital in many of our international markets and we have strong growth that's taken place over the last five years or so in our drive-thru business in many of our international markets in Europe, in Western Europe in particular, as well as in Latin America. So, we see continued progress in those markets. We continue to work closely with our franchisees in those markets to ensure that we set them up for success long-term, and I think we can get back to growth as we had seen in 2018 and 2019. Thanks again for the question.

This concludes our question-and-answer session. I would like to turn the conference back over to José Cil for any closing remarks. José Cil: Hi, everyone. The COVID-19 pandemic, as I've mentioned, has introduced a host of challenges, but the improvement in our results speaks to the strength and resilience of our incredible brands and our business model. It also reflects our proactive and coordinated approach to confronting this crisis, which has put us in a strong position going into the back half of this year, both to keep advancing in our reopening around the world and to restart our to restart our engine for system-wide sales growth looking ahead to 2021. Thank you again for your time today. Take care, and stay safe.

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