Restaurant Brands International Inc. (QSR) Q4 2023 Earnings Report, Transcript and Summary

Good morning, and welcome to the Restaurant Brands International Fourth Quarter 2023 Earnings Conference Call. All participants will be in a 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 Kendall Peck, 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 fourth quarter and year ended December 31, 2023. As a reminder, a live broadcast of this call may be accessed on the Investor Relations webpage at rbi.com/investor and a recording will be available for replay. Joining me on the call today are Restaurant Brands International's Executive Chairman, Patrick Doyle; CEO, Josh Kobza; and CFO, Matt Dunnigan. Today's earnings call contains forward-looking statements, which are subject to various risks set forward 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. During portions of the call today, we will be referencing franchisee profitability measures that are based on unaudited self-reported franchisee results. In addition, the consolidated gross metrics discussed during the prepared remarks, including consolidated system-wide sales growth, comparable sales, net restaurant growth and organic adjusted operating income growth exclude results from our franchised restaurants in Russia, as we did not generate any new profits from restaurants in Russia in 2022 or 2023. As a reminder, our Tim Hortons, Burger King, Popeyes, and Firehouse Subs segments include results from each brand's restaurants in the U.S. and Canada, while our International segment represents consolidated results from all four brands outside of the U.S. and Canada. Finally, this morning we published updated trending schedules and provided restaurant counts by brands and market. Both documents can be found on our Investor Relations webpage under financial information. And now I'll turn the call over to Josh.

Good morning, everyone, and thank you for joining us today. With our Investor Event coming up in New York on Thursday, I plan to use today's call to focus on Q4 and 2023 performance, and then we'll use Thursday's event to give a longer term outlook on the business, including sharing for the first time long-term guidance. Today's call marks our first quarter reporting under five segments: Tim Hortons, Burger King, Popeyes, Firehouse, and International, and reporting adjusted operating income. This shift fully aligns with how we are now managing the business and provides each of our five business unit leaders with even greater autonomy over their strategic decisions and greater accountability to deliver strong returns. We are also lapping the one-year anniversary of our commitment to provide public accountability for reporting on franchisee profitability. I'll let Patrick share the results in a bit because this was really his push. But I want to acknowledge our incredible franchisees and their restaurant teams who are doing a great job driving sales, generating cost efficiencies, and delivering operational improvements. We are proud of the progress they have made, including delivering average home market franchisee profitability growth of over 30% in 2023, and we are working to drive continued strength in 2024. Turning now to results. For 2023, comparable sales grew 8.1% and net restaurants grew 3.9%, resulting in 12.2% system-wide sales growth and 7.5% organic adjusted operating income growth. For the fourth quarter, we delivered 5.8% comparable sales and 3.9% net restaurant growth, which drove year-over-year system-wide sales growth of 9.6%. This quarter organic adjusted operating income was relatively flat year-over-year, largely due to incremental spending behind our Fuel the Flame initiatives at Burger King in the U.S. We also delivered solid overall traffic this quarter with Tim Hortons Canada, seeing nicely positive traffic and Burger King U.S., reaching positive traffic for the first time since the second quarter of 2021. Firehouse U.S. traffic was also positive, while Popeyes U.S. and International declined slightly year-over-year with International impacted by the conflict in the Middle East. We grew full-year global digital sales 20% to over $14 billion, representing over a third of consolidated system-wide sales. We opened 695 net new units during the quarter and 1,168 net new openings for the year, resulting in net restaurant growth of 3.9%. Net restaurant growth was impacted by our incremental closures at Burger King U.S. and a higher mix of express units at Tims China, which as a reminder, our smaller format units with lower average revenue that are not included in our restaurant count. I'd now like to turn to our segment results, starting with Tim Hortons in Canada. This year, we are celebrating the 60th anniversary of Tim Hortons in Canada. Axel and team kicked off the festivities with the return of our four retro donuts, and as a fun fact, the Walnut Crunch has been the best seller of the retro showcase. In 2023, Tim Hortons Canada successfully grew share in sales and traffic year-over-year, an impressive accomplishment driven by the hard work of the team and restaurant owners to deliver a great experience to Canadians. For the fourth quarter, we saw a very healthy balance of check-in traffic, aided by operational improvements and strong calendar initiatives, all of which drove Tims Canada comparable sales growth of 8.7% and system-wide sales growth of 9.3%. Our hot, cold and specialty beverage selection continues to gain traction with our guests. Sparkling Quenchers helped fourth quarter cold beverage sales grow 19% year-over-year. We also broadened our beverage and baked good strengths with our Baileys collaboration, including Baileys Cold Brew with infused foam, Baileys Latte, and our delicious Baileys Boston Cream Donut. This partnership proved to be one of our most successful and contributed nicely to traffic growth during the quarter. Our PM-led snacking initiatives like our savory twists and dream cookies, as well as our loaded bowls and wraps contributed to PM food sales growth of 7% year-over-year, lapping 18% growth in the prior year, so strong year-on-year results. These initiatives also helped us to make progress, growing PM food market share to nearly 9%, up from approximately 8% in 2022. We are also maintaining excellent operations by working closely with restaurant owners to deliver an amazing and consistent guest experience. The team has been delivering targeted restaurant trainings that address new product builds, equipment optimization and the adoption of a single QR code for guests to scan their loyalty and pay for their orders at the same time. This helped to drive 9% year-over-year improvements and drive-thru speed of service, an important contributor to traffic growth this quarter. Our digital community of over 5 million monthly active users continues to drive over 30% of sales in Canada. In 2023, 45% of our Tims rewards loyalty guests visit us in the morning and returned in the afternoon on the same day. And we see an opportunity to grow this number even further through the continuation of targeted personalized offers. In addition to our strong and loyal digital community, we also have an amazing restaurant owner community that is dedicated to giving back. Since 1996, Tim Hortons has held an annual Smile Cookie campaign that raised nearly $20 million in the summer. And in November, we launched our first-ever Holiday Smile Cookie campaign that raised another CAD10 million for 600 local charities. This included our very owned Tim Hortons foundation camps. This is a really impressive community achievement for our restaurant owners and from their guests. Shifting now to our International segment, which ended the year with over 14,700 restaurants, over $17 billion in system-wide sales and grew system-wide sales 17.6% for the full-year. You've heard us say that the international business is an important growth engine for our brands, and that is one of the reasons why we are so excited to now have international as its own segment. Each brand is well positioned for growth in some of the most attractive global quick service restaurant categories, all aided by the resources and development expertise we've developed over the years through our scaled global Burger King business. For the fourth quarter, our International segment grew comparable sales by 4.6% and net restaurants 8.9%, driving system-wide sales growth of 12.8%. Although comparable sales were still quite solid, they were impacted by softening performance in China and select markets in Western Europe, continued price moderation and the effect of the conflict in the Middle East on upwards of a dozen countries. We estimate the conflict resulted in a 1.5 point headwind to comparable sales and a 3-point impact to traffic this quarter. We are not going to speculate on how long this headwind may last. In the impacted countries, our entire focus is on the safety of our team members and our partners. Despite these pressures, a combination of thoughtful calendar initiatives and high-quality core offerings across over 120 markets we operate in around the world, has allowed us to still deliver solid performance in the segment. Including growing share in Burger King France, where guests consider us the preferred option when it comes to value for money and great tasting food credentials. In 2023, we grew in over 75 markets outside of the U.S. and Canada and signed 15 development and master franchise agreements for 15 new markets, including Tim Hortons Singapore and South Korea, Firehouse in Mexico and the UAE and Popeyes and Burger King in Bosnia, which all serve as long-term opportunities for our brands. Our largest contributors to net restaurant growth this year included Burger King China, which delivered 176 net restaurants followed by Burger King India, France and Spain, which collectively contributed 135 units during the year. During the fourth quarter, Tim Hortons had new openings in South Korea and Singapore. Meanwhile, Popeyes surpassed the 100 unit mark in Spain, just 5 years after opening its first restaurant in November of 2019. We also continued Popeyes expansion in Eastern Europe by opening in the Czech Republic and recently announced we are bringing our [awesome] Louisiana Chicken to Italy. At Firehouse, we just opened our first location in Mexico and are excited to start bringing our newest brand to more markets around the world. At Tim Hortons and Popeyes, our partners are building brand awareness in new markets and ramping up the pace of development. These two brands contributed to over 45% of net restaurant growth in 2023, an impressive step up from the 10% mix in 2019. Their development strength helped drive strong double-digit system-wide sales growth in the quarter, including over 20% at Tim Hortons International and 55% at Popeyes International. I'll now turn to our modern image and digital strength, both of which significantly enhance the experience we offer our guests. Given that nearly 90% of Tim Hortons and over 50% of Popeyes stores were opened in the past five years, we have a very high proportion of modern image restaurants overseas at over 75%, including Burger King. International digital sales grew 20% year-over-year to represent over 50% of international system-wide sales in 2023. The ongoing addition of kiosks in many markets around the world is helping to contribute to this growth in digital sales and importantly, improve the overall guest and team member experience while also being more profitable for our franchisees. Before I shift to Burger King U.S., I'd like to discuss our 2024 net restaurant growth expectations. Last year, we shared our expectations for 5% plus net restaurant growth in 2024. A key factor to delivering this level of growth was our expectation that our development in China would accelerate in 2024 off of 2023 levels. We now believe that outlook is less certain and have updated our outlook to reflect a lower level of net unit additions in China this year. As a result, we now expect consolidated global net restaurant growth in the mid-4% range for 2024, with growth expected to ramp up over the course of the year and improve into 2025. We have a strong belief in China as an attractive growth market for our brands. Given the incredible geographic scope and population of the market, success that requires a serious long-term capital commitment from our partners, a long-term time horizon and a commitment to grow the brand in the face of tough competition. In the U.S., we have demonstrated our willingness to do what it takes to succeed, particularly as it relates to our Burger King business in the past 18 months. And in the U.S., we entirely control menu innovation and advertising spending and have demonstrated our willingness to invest significantly behind each of our businesses. In China, we rely on our master franchisees for that level of commitment. Burger King China is a good business with nearly 1,600 units, and it's a profitable business. But ultimately, we are going to need to grow further to compete effectively with the largest players in this market. On the Tims business, we believe our partner is going to need to commit more capital to grow that business in an exciting way, and we believe it's critical that they do so. We are working with them both to lay the foundations needed to meet the growth aspirations that we know we are capable of. Shifting now to Burger King in the U.S. 2023 was an incredible year for the brand. Burger King U.S. grew franchisee profitability nearly 50% year-over-year, significantly surpassed our year-end 2024 Fuel the Flame target well ahead of schedule, and achieved low single-digit positive traffic growth in the fourth quarter and saw significant improvements in operations across the system. Burger King U.S. grew fourth quarter comparable sales by 6.4% and system-wide sales by 4.6%. Our total net restaurants declined 3.7% year-over-year driven by elevated gross closures this year as part of our planned efforts to strengthen the system for the long-term and address the underlying issues of franchisees whoever extended themselves in the last few years. We believe most of these closures are behind us and expect a more normalized level of closure activity in 2024. Results in the quarter were driven by guest experience enhancements and strong calendar initiatives like our Royal Crispy Wraps and [Halsey's] combo that highlighted our [indiscernible] way brand positioning that differentiates us in the category. Guest satisfaction will always be a top priority for the system. The dedication of our franchisees to operations is why we were able to increase the product satisfaction of our core products, attract more new and lapsed guests and deliver low single-digit positive traffic during the quarter. We have also seen success in our purposeful marketing of the Whopper, including the Whopper Jingle and Ways to Whopper campaign. We've taken this one step further with our $1 million Whopper campaign that launched last week. It's designed to let guests help decide the next Whopper through a unique experience that leverages advanced AI technology, brings guests to our Royal Perks app and lets them win some cool prices along the way. We've already seen guests create about 1.5 million new Whoppers. If you haven't seen it yet, please download the VK app and check it out. It's a lot of fun. This campaign is one of the many ways we'll accelerate digital adoption to drive higher guest frequency. Digital sales grew 40% year-over-year, resulting in a digital sales mix of 15%, including 27% mix in our company-operated restaurants. The positive results from our kiosk pilot across our company restaurant portfolio led us to expand our trial, and now we are testing this new kiosk pilot across over 100 stores in our franchisee system. During Q4, we spent $40 million of our $150 million Fuel the Flame advertising and digital investments. This included $37 million deployed towards our marketing efforts, in line with the guidance we shared in Q3, leaving us with $58 million to spend on marketing in 2024. Based on our franchisee profitability results to date, we expect that as we enter 2025 and our marketing contribution rolls off, franchisee contributions to the ad fund will step up from 4% to 4.5%, ensuring we maintain our strong share of voice throughout least 2026. As a reminder, should average franchisee profitability reached $230,000 by year-end 2026, this elevated ad fund contribution would remain in place through 2028. I'd also like to give a quick update on our $250 million Royal Reset Program. Given the strong early results from our short-term refresh program as well as the impact of our pending acquisition of Carrols, we now expect to shift approximately $50 million of the $200 million investment previously earmarked for remodels to an expanded short-term refresh initiative. As a result, we expect to spend approximately $100 million in total on our Refresh program and roughly $150 million on our Remodel program. We have seen an overwhelmingly positive response to our refresh program from franchisees who are seeing the results show up in their sales and operating metrics. The incremental refresh dollars will be dedicated to participating A and B operators and support assets that improve the drive-thru and digital experience. As a result of the incremental refresh investment, we now expect to positively influence more than 6,000 restaurants. Early results of the remodel program also continued to exceed program benchmarks with average sales uplift of approximately 20% net of control for the roughly 50 remodels that have been open for at least six months. While we are really encouraged by these results, I'd note we'd expect the uplift to migrate lower as the number of remodels grows and overall scope shifts. That said, they are clearly outperforming what we and our franchisees underwrote our investments for, and we are excited to continue the program in the year ahead. In 2023, we completed 264 remodels, one-third of which were normal course and outside of the Royal Reset program, and we exited the year with 46% modern image. This year, we expect to ramp up our remodel program and plan to complete nearly 400 remodels with over 80% committed to full remodels or scrapes and rebuilds. And of course, we are aiming to have our sizzle format and as many of these restaurants as possible. A couple of weeks ago, I was in Philadelphia and North Carolina visiting two of our first 10 modern image sizzle restaurants with Tom and Demon. I can tell you I am very excited about this new restaurant format. Sizzle is not only beautiful, it also really puts both the team member and guest experiences at the heart of the restaurant's design. It is awesome to see the diligent execution of our team and franchisees over the past year translate into positive results. We have more conviction than ever in our plan to Reclaim the Flame, which is why we are so confident in our pending acquisition of Carrols Restaurant Group. This acquisition offers a compelling strategic opportunity to accelerate our modern image efforts with a clear path to 75% modern image by 2028 to be funded entirely by Carrols operating cash flows even after our interest payments. That 75% expectation is up from 65% that we would have achieved just based on our existing Reclaim the Flame remodel funding program. Importantly, the acquisition also enables us to refranchise restaurants into the hands of local strong owner operators, many of whom we plan to develop within the existing Carrols operator network. We see firsthand the benefits of being a smaller operator. The numbers speak for themselves. Operators with less than 50 restaurants have 51% modern image and delivered average franchisee profitability of $15,000 per store above that of franchisees in the 50-plus restaurant group in 2023. Not surprisingly, they are also generally better capitalized. I cannot stress enough that while accelerating our modern image efforts is a key benefit of bringing Carrols together with Burger King. I think what makes me, Patrick and Tom, just as excited as our ability to further accelerate change in the franchisee community and give even more great operators the opportunity to become great franchisees. I'll save the rest of my comments on Burger King U.S. until later this week at our New York Investor event. Turning now to Popeyes. Sami and team are one-year into their easy to love plan. Popeyes U.S. grew comparable sales by 5.8% and net restaurants by 4.5%, resulting in another quarter of double-digit system-wide sales growth of 11.2% and a record digital sales mix of 25% up from under 20% in 2022. Our November expansion of wings into a five flavor platform has quickly established us as the number three wings flavor in quick service restaurants in the country and help drive traffic across digital channels like delivery and Mobile Order & Pay. We are pleased to see this positive impact, but know there is more incrementality to unlock in 2024 and beyond, starting with driving mass awareness. Two days ago, Popeyes ran its first-ever Super Bowl commercial, featuring well-known comedian Ken Jeong in a funny and impactful ad that made sure everyone watching the game would know Popeyes now has the best wings in America. We have also seen extensive media coverage about the ad. So great execution by the team to bring mass awareness to this important growth platform. We are also in the early stages of implementing our easy-to-run kitchens at Popeyes that will transform the guest and team member experience. These retrofits provide new equipment, updated kitchen layouts, technology upgrades and process simplification, all geared to help solve fundamental operational hurdles that impacts speed and overall guest satisfaction while upholding our excellent product quality. We are now transitioning from initial pilots to more scaled test clusters. I'll be visiting one of these test clusters in L.A. later this month and I'm looking forward to seeing the progress the team is making firsthand. At Popeyes, we are also focused on building a system of best-in-class operators to deliver a more consistent experience while driving convenience. We made solid progress towards this goal by achieving another impressive year of unit growth, with growth across a broader set of partners and most of our openings coming from top scoring operators. We saw a clear progress in 2023 against our strategic plan easy-to-love, and this gives us confidence that the priorities in place are the right ones to ultimately drive franchise profitability to $300,000 by 2025. Lastly, Firehouse Subs which grew comparable sales in the U.S. 3.8% and increased system-wide sales by 7.4%. There is a lot of excitement among current and new franchisees to grow this incredible brand, and we're seeing good progress in both the U.S. and Canada. In Canada, we expanded from Ontario this quarter, opening restaurants in three different provinces in Western Canada with incredible local operators. Earlier this year, Mike and team leaned into the brand's public safety routes and launched an exciting addition to our development incentive program to attract veterans and first responders who want to continue to serve their community in a new way as part of the Firehouse family. We're looking forward to seeing Firehouse's development ramp up this year as we bring the brand's flavorful subs to more locations across North America. We're also focused on being a leader in digital and saw strength in our mobile order-and-pay channel which helped to drive digital sales to a record 40% of system-wide sales, an exciting accomplishment driven by the continued enhancements and investments the team is making to fuel the brand's overall tech strategy. As a result of this great work, we've seen close to one-fifth of all transactions coming from our first-party mobile order-and-pay or web ordering platforms during some of our recent promotions. With that, I'll now turn it over to Matt to discuss our financial results for the quarter. Matt?

Thanks, Josh, and good morning, everyone. For the fourth quarter, our global system-wide sales grew 9.6% year-over-year, while our adjusted operating income was relatively flat, up 0.5% year-over-year and our adjusted EPS was up 4.4% organically. The primary drivers of the difference between system-wide sales growth and organic adjusted operating income growth where our $40 million of support behind our Fuel the Flame program at Burger King U.S. and an $11 million true-up to trade expenses in our Tim Hortons consumer packaged goods business. Combined, these had an impact of negative 7% on our year-over-year growth in adjusted operating income for the quarter. For background, in the Tims CPG business, we have typically held a steady run rate of promotional spend as a percentage of revenues that has been tight versus industry. But in 2023 saw consumer price sensitivity and competition in Canada intensify considerably as the year progressed, which resulted in a greater-than-expected investment required to maintain our leading market share. We successfully held our share but realized an $11 million true-up to close our year-to-date promotions from prior quarters. Given the continued pressures across Canadian retail, we expect our trade investments to remain elevated in 2024. Aside from this impact to our Canadian CPG business, our underlying Tims supply chain business has continued performing well with stable margins over the past few quarters. For the fourth quarter and full-year 2023, this business grew positive mid-single digits year-over-year, in line with the healthy traffic and volume growth that we've been driving across Canada. Our adjusted operating income was also impacted by higher segment G&A and increased bad debt expense of $13 million, primarily impacting our Burger King segment as an expected result of finalizing a few portfolio restructurings in the quarter. Segment G&A, which included equity-based compensation of $53 million, came in at $176 million, up $21 million year-over-year. The increase in segment G&A largely reflects higher compensation-related expenses associated with hiring, mainly across operations and franchising. Shifting to EPS. Our fourth quarter adjusted earnings per share was $0.75 compared to $0.72 last year, representing an organic increase of 4.4% year-over-year. Our adjusted EPS also included a $0.05 per share net benefit related to discrete non-cash tax items, which was offset by a negative $0.08 per share headwind from the combined impact of our Burger King U.S. Fuel the Flame investment and true-up related to our CPG trade spending attempts. Our adjusted EPS was also impacted by higher interest expense due to higher U.S. benchmark rates which flow through to approximately 20% of our debt. Turning now to capital structure and cash flow. During the quarter, we generated $356 million in free cash flow, reaching $1.2 billion for the year. Our free cash flow generation allowed us to continue executing on key aspects of our capital allocation policy, including $56 million of investments behind Reclaim the Flame at Burger King U.S. and returning roughly $634 million of capital to shareholders through our dividend and share repurchases. During the quarter, we repurchased and retired 5.9 million shares of our common stock for $385 million. And today, we declared our Q1 dividend at $0.58 per common share in unit, targeting a $2.32 per share dividend for 2024 up 5.5% year-over-year. As part of Reclaim the Flame, this quarter, we deployed $40 million towards our Fuel the Flame advertising and digital investments and $16 million of capital toward our Royal Reset program including $8 million for our Royal Refresh program. We have $77 million of Fuel the Flame investment left to deploy in 2024 and $189 million of Royal Reset remaining. Our free cash flow was also impacted by higher cash interest impacting the 20% of our debt that is not fixed. However, free cash flow metric does not reflect the benefit of our FX and interest rate hedges which added approximately $49 million of positive cash flow in Q4. We ended the year with a liquidity position of approximately $2.4 billion, including $1.1 billion of cash and saw our adjusted EBITDA net leverage ratio remained consistent at 4.8x given our share repurchase activity in the quarter. Looking ahead, we remain confident in reaching our mid-4x target net leverage ratio by the end of this year even after accounting for the pending acquisition of Carrols. Now I'd like to wrap up with some guidance for 2024 on G&A, capital expenditures and interest expense. Excluding the pending acquisition of Carrols, we currently expect segment G&A between $680 million and $700 million, including equity-based compensation between $190 million and $200 million. Following the ramp-up of our G&A investments over the past few years, we exited 2023 in a solid place and expect our level of segment G&A on an absolute dollar basis to be more consistent from quarter-to-quarter in 2024 as compared to 2023. We currently expect total aggregate 2024 capital expenditures, tenant inducements and remodel incentives which, as a reminder, flow through working capital to be roughly $300 million, primarily driven by continued Burger King U.S. image investments, like our expanded Royal Refresh program and remodel investments, increased remodels at Tims in Canada, technology investments across segments and other brand-led growth initiatives like our Firehouse development incentive program. Finally, based on the current interest rate environment, we expect 2024 net interest expense, excluding the acquisition of Carrols in the $555 million to $565 million range based on an average SOFR rate of 4.6%, flowing through to approximately 20% of our debt. With that, I'll now hand it over to Patrick for some additional thoughts on the business.

Thank you, Matt, and good morning, everyone. Before I talk about the really exceptional improvement in franchisee profitability year-over-year, I'd like to give you my perspective on the expectations Josh shared for 2024 net restaurant growth. Last year, we shared our plans to reach 5% plus net restaurant growth in 2024. There are a number of opportunities to generate that growth. Burger King U.S. returning to normalized closures, Firehouse Subs ramping up development, continued acceleration in growth of all brands in our international markets and acceleration in China, specifically with Burger King recapturing pre-pandemic levels of growth. Our Burger King U.S., Firehouse and broader international assumptions are still very solid. Tom and team made great progress last year, taking the necessary steps to close underperforming restaurants to improve the long-term health of the system. As a result, we should see a roughly 50 basis point year-over-year improvement from lower gross closures at BK U.S. in 2024. At Firehouse, Mike and team have already turned on the development engine in Canada and are setting up the U.S. for growth through new incentive programs that really lean into Firehouse's strong community ties. Meanwhile, David and team signed development agreements in four markets, and are actively working to continue building the brand's overseas pipeline. But we're being practical about the pace of growth we're forecasting in China, as Josh noted. Given each of these dynamics, we believe it's important to be upfront about near-term implications. So I think, Josh's perspective of potentially slower development in China for the balance of this year is accurate. Depending on pace of capital improvements in the system, there may be upside to our mid-4% net restaurant growth range for 2024. I'll wrap up today on franchisee profitability where our teams and franchisees have really delivered terrific results. Last year, we told you that our long-term growth as a company is entirely dependent on the growth and profitability of our franchisees. We reminded you that while our franchisees are responsible for being great operators and stewards of our brands, as their franchisor we are responsible for giving our franchisees the opportunity to generate compelling financial returns. If we can deliver great returns for our franchisees, the entire flywheel of future reinvestments moves much more smoothly. Franchisees are excited to invest in their restaurants, great operators. Not yet franchisees are excited to work hard for the potential opportunity to become a franchisee one day and deliver over and above guest experiences. And guests receive the consistent great experiences they deserve every time they visit or order from one of our restaurants. We committed to publicly sharing 4-Wall EBITDA for our home markets annually so that you, our investors and our franchisees can hold us accountable to continue pushing forward and making progress. In 2023, we made a lot of progress. Average home market franchisee profitability is up by 30%, while our profitability as the franchisor is up 9%, and I think that's awesome. We need to deliver compelling profitability growth for our shareholders, and we're doing that. Our franchisees need to realize compelling profitability growth to continue to invest in their business and they are seeing that. This is exactly how this is supposed to work. At Tim Hortons in Canada, average 4-Wall restaurant EBITDA in 2023 was over C$280,000, up nearly 30% from $220,000 a year ago. Burger King U.S. saw average restaurant profitability of over $205,000, representing nearly 50% growth from $140,000 a year ago and putting us well ahead of the 2024 Fuel the Flame threshold of $175,000 to unlock a higher ad fund rate from franchisees for the coming years. At Popeyes U.S., average 4-Wall restaurant EBITDA grew approximately 17% year-over-year to roughly $245,000 compared to $210,000 last year. And on Firehouse Subs, we saw a 38% increase in restaurant profitability, reaching $110,000 compared to $80,000, a year before. While these results are really impressive, especially in just one year, we need to continue demonstrating a growth path this year and in future years. There's a lot of opportunity for our franchisees still ahead of us. To achieve this, we need to further improve operations. We've said it before, but better operators have better profitability. On average, A operators for each home market generated restaurant profitability that was 30% higher than the system average. In fact, Tims, Popeyes and Firehouse A operators have already achieved our long-term profitability targets, which I plan to share with you on Thursday. And as a result, these franchisees are generating strong unlevered paybacks. I strongly believe that we must deliver our part of this equation. But ultimately, execution is in the hands of our franchisees and those that do it better, make way more money. That should be inspiring for everyone. I'd like to echo Josh's comments around franchisee profitability. I'm very proud of the progress our teams and franchisees made this year. Delivering results like this does not happen overnight. It requires hard work, patience and collaboration and dedication. I'm confident we will continue to move the ball down the field in the year ahead. With that, let's take your questions.

Thank you. [Operator Instructions] Our first question today comes from Brian Bittner of Oppenheimer. Please go ahead. Your line is open.

Thank you. Good morning. The updated franchisee profitability for your home markets was obviously very impressive, particularly with Burger King U.S., up 46% versus last year, and it's already way ahead of your 2024 targets by $30,000 per unit. So it seems the ad contribution step-up is obviously inevitable. But maybe, Patrick, you could unpack how else these better metrics can help fuel the Burger King momentum moving forward? Is it just momentum drives momentum? Or are these metrics going to help you unlock more remodels or anything else to point out? And secondly, it does seem like between 4Q and 1Q of this year, you've acquired 127 Burger King U.S. restaurants, which is surprising. It's happening at a time that franchisee profitability is exploding. So can you just help us understand the reasoning or perhaps the strategy behind these acquisitions going into the Carrols acquisition? Thanks.

Yes, Brian. So Brian, there are really a couple of things on that. First of all, clearly, the momentum drives momentum, the flywheel is working. The other thing that I would add to your question is the 20% return on remodels that we referenced. And some of you, I've seen some speculation out there that perhaps those numbers weren't as good as we had been expecting that we talked about 12% because we hadn't shared those yet. In fact, we wanted it to go longer because, frankly, the numbers were coming in so strong that we really needed to see it go a bit longer before we were ready to believe it. We believe that will work its way back down a bit over time as we get more numbers in. But there is a lot of momentum in that business right now. And look, ultimately, as franchisees get more confident about this business, as they get more confident about the return that they're going to get for remodeling restaurants, from building new restaurants. All of that generates system sales growth, which generates more advertising dollars, even off of a comparable percentage of sales. So I mean, the momentum does build on itself. Our job is to keep that going. And I guess what I would say is 205-plus is great progress, but we're not there yet, right? I mean it's got to be higher than that. And we're looking at plans for how do we continue to increase that. Obviously, we're excited about the momentum of the business, but we're not satisfied with the level that we're at yet. And I guess the last thing or the last question that you asked was about corporate restaurants and the addition of restaurants at the end of the quarter. That's simply from some of the workouts that you read about last year. We provided a home for some of those restaurants as we work through those three bankruptcies last year. Most of them already from those were sold to smaller, great franchisees. We were excited to have join our system. Some of the restaurants that you saw on our books at the end of the year will still be sold off soon, and we expect that number is going to work back down over time. But we're fine holding those until we find a great long-term operator for those franchisees. We're going to work through those expeditiously. We don't expect to hold those particularly for the long-term. There are a few in South Florida that we may. But ultimately, that's kind of a transitory thing.

Brian, if I could just add on the first part on your question of how does this flow back into the system. I think there are some really kind of practical day-to-day things that are happening that are fueling our growth. And I think as we're seeing sales and profitability improve, that also allows our operators to increase the staffing levels in the restaurant. So we've got better staffing. It means our speed is getting faster. We're also being able to expand operating hours. Again, that helps a lot. And the improvements in the franchise profitability are also allowing our operators to reinvest in some of these initiatives like the short-term Royal Refresh where we're getting new technology into the restaurants, new equipment. I'll tell you, I see it when I'm out in the restaurants with Tom. There's a lot of improved technology in the restaurants, and we have a lot of updated new pieces of equipment. And I think our guests are seeing that, and they're feeling that in improved product quality that we're getting out of the new equipment. So there's a lot of things that sort of drive the flywheel forward, and I think we're benefiting from a number of them right now.

Thanks.

Our next question today comes from Danilo Gargiulo of Bernstein. Your line is open.

Good morning. Can you please elaborate maybe a little bit more on the strategic rationale for shifting the budget from remodeled to refresh? Maybe if you can also help us understand the uplift post refresh that you're seeing today?

Yes. Thanks, Danilo. So as I mentioned, we just saw a ton of excitement within the system. Our franchisees really like that short-term Royal Reset. And we started to make those investments, and we started to see a big impact on those restaurants. So all of the restaurants that we were able to touch with upgrades, with new equipment, we started to see those outperform the rest of the system. And I think that generated a lot of discussion between Tom and team and the franchisees on how we could do even more of that. So we decided to shift a little bit more money to that just based on the returns that we were seeing. And on top of that, if you think about – once we do the Carrols acquisition, Carrols would have been a meaningful part of that kind of the first couple of years of remodels. And now that's taken out of the program. So it frees up some capital for us to do other things. And so we're deploying it in some of the things that we can do to impact as many restaurants as possible as quickly as possible and keep the positive performance going.

The next question comes from John Ivankoe of JPMorgan. Please go ahead.

Hi. Thank you. I think in your prepared remarks, correct me, but I heard some softness or perhaps slowing in Burger King in Western Europe. So I wanted to elaborate kind of on those comments and if you think they're specifically related to the Middle East conflict. And if you can juxtapose those comments with what you said about fiscal 2023 development were some of the highest rates of development were in France and Spain, I think, specifically, and whether we could potentially see slower overall unit development as same-store sales have slowed in 2024 and perhaps 2025?

Yes, John, thanks for the question. A few thoughts on this one. So we did see a bit of a sequential slowdown in terms of same-store sales in Western Europe. I think some of that was expected just as you're seeing inflation decelerated a bit. So I think that's the biggest driver of what we're seeing there. Though I would say we still did pretty well in markets like France, which has been a fantastic market for us. It was a little bit slower, but we were still positive, and we're still taking share there. So I think we're happy with the business performance. We don't see any particular correlation with the conflict in Middle East in terms of the performance that we're seeing in Western Europe. And I think on your last point, John, in terms of development, it is true that France and Spain are some of the bigger contributors to development, and we expect that to continue into 2024. We're not seeing any big impact on development expectations in Western Europe. So we expect continued positive progress there this year.

Our next question comes from David Palmer of Evercore ISI. Please go ahead. Your line is open.

Thanks. Good morning. Great job with the North America brands. But I wanted to ask you about Tim Hortons supply chain and the CPG coffee profit. Over the last couple of years, I think the profit for that has been something like 3%. There's been some quarterly volatility like you've talked about. I'm wondering what is the profit outlook for these businesses or that combined line item, sales net of cost of sales for 2024? And what's the future outlook for this business in your view? Thanks.

Hey, Dave. It's Matt here. Thanks for the question. Yes, so I think the way – just to point out for everyone, the CPG business and supply chain both roll up into our sales cost of sales lines. And so those are together. I think for 2023 for the full-year, what you saw in terms of our margin there was around 18%. And if you adjust for the true-up that happened in Q4, the Q4 margin levels were kind of at a similar place. Looking forward, I think given normal seasonality that we've seen in the beginning of the year, we would expect Q1 to come in at kind of a similar level of margin. But then I think for the full-year in 2024, we see an opportunity to recover to more normalized levels that we saw in 2022. So I think overall, though, we feel good about the direction of the business and the core margin profile that we're seeing in the supply chain business. And it's tracking very nicely in terms of organic growth along with the Tim Hortons business across Canada and the traffic and volumes that we're driving there. The CPG business, as we called out, had very challenging conditions through – especially into the second half of the year. And so that's what drove the true-up of the promotional expense there. We're going to continue spending a bit more in that business, but we still have leading market share. We held our market share over the past couple of quarters. And we've also brought in a new team and experienced leadership. And I think we have a good outlook on being able to deploy those promotional investments more effectively going forward and more of an even cadence in 2024. Thanks for the question.

Next in queue, we have Dennis Geiger of UBS. Your line is open.

Great. Thanks and good morning, guys. Encouraging progress for the BK and Tims brands in their home markets. Wondering off the back of some of the comments on the CPG business with Tims in Canada and the consumer there. If you could talk a little more about what you're seeing from your customers across the U.S. and Canada as it relates to those two brands beyond CPG, anything with the low-income consumer or other behavior changes to call out? And I guess more importantly, if you could highlight kind of how those two key brands in their home markets are positioned – if we're in a more challenged spending environment, what that means for the brands, for market share? Perhaps anything on that front? Thank you.

Hey, Dennis. Good morning. So in terms of what we're seeing with the consumer – overall, we're not seeing big behavioral changes. I would point out a couple of things from Q4 that are most relevant in our mind. One, within the Tim Hortons business in Canada, we pointed out that we had really solid same-store sales, but it was combined with a really good mix of traffic. We've seen that throughout the year, but we're kind of half-and-half mix, which means we had solid traffic. And I think that's the consumer in Canada reacting to some great new products and really great operations. So we haven't seen a big deviation from the Canadian consumer. And then similarly in – with Burger King in the U.S., our biggest business there, we noted that traffic was positive in Q4 for the first time in a while. So we've seen pretty good health within the consumer and the U.S. QSR space, and we're pretty happy with it. So no big behavioral shifts that I would point to. In terms of how our brands are positioned. I always go back to the fact that our brands are in a great place for any part of the cycle. We offer great value, high-quality products and convenience. I think that's true across our entire portfolio. So I think we're already really well positioned. And as long as we keep doing what we're doing, which is focusing on the basics of the industry, trying to do everything right around quality, service and convenience. That's what's driving our results right now, and I think that's going to serve us well and allow us to keep driving good results into 2024 regardless of what happens with the overall consumer environment.

Yes. Maybe just one quick thing to add there to Josh's comments on the U.S. and BK. On the positive traffic, we did see positive traffic across all income groups as well.

That's a great point. Thanks, Matt.

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

Great. Thank you. Josh or Patrick, I just hit the last question, maybe ask it a different way. Curious about your level of confidence of sustaining BK U.S. and Tims Canada traffic growth in 2024. And really specific to BK U.S. recognizing what could be an intensified value focus for the U.S. industry in 2024, suggested by your largest competitor? Thanks.

Yes. Thanks, Andrew. I'll share a couple of thoughts, Patrick, feel free to jump in as well. Like I said, I just think there's so much stuff that Tom and team are doing that's focused on the basics. That's going to allow us to drive traffic, not just this year, but for many years to come. We're improving our operations. We're doing really cool things, focusing on our core equities, whether it's the new commercials about it ain't the same without the flame, focusing on the whopper with $1 million whopper, it's a lot of stuff that's going to create consumer excitement around our strongest core equities. I think that's wonderful. And we're also doing a lot more remodels. I mentioned we're going to go from just over 250 remodels to 400 remodels. Those are the kind of things that drive more customers into your stores, and we're doing more and more of them and doing them really well. So that's the stuff that I think gives us a lot of confidence in the outlook for this year and beyond. And at Tims, we're – I think we noted, we're now, I think, in year five of back to the basics and Axel and the team up there are doing a really nice job driving growth. They're doing it through all the ways we've been talking about with PM food and cold beverage. And we have a pretty exciting pipeline of new innovations that are coming on those fronts in 2024 that I think are going to keep bringing our guests back even more often.

Yes. I guess the only thing I'd add is, I mean, first, at Burger King, you're just seeing more and more things that we're getting done that are going to contribute to the growth. So more remodels coming on working through some of the tough situations with some franchisees, continued great advertising. And most importantly, franchisees getting more and more aligned and excited about the progress that we're making in the brands. That increase in profitability is not only important in the absolute, but it's important in the belief of our franchisees and what they're going to be able to accomplish with the brand. So you can feel that momentum building around BK in the U.S. On the Tims side, this is, as Josh said, the continuation of returns from the investments that they made a number of years ago as they got everything right in that business. I love that business. The team is leading it exceptionally well. The franchisees are doing well. Their profits being up the way they were, was terrific year-over-year. Still more progress to be made there, but just very, very excited about the strength of that brand and glad that I don't have to compete with them. They are really good. They are really, really good in Canada, doing a lot of things right.

Thank you. Our next question comes from Chris Carril of RBC Capital Markets. Please go ahead.

Thanks. Good morning. So on the development outlook update that you provided, you highlighted the slower-than-expected China growth this year. Patrick and Josh, I know you touched on this briefly in your prepared remarks, but can you maybe expand a bit more on what or which markets you're most confident will contribute to the acceleration in development this year even if it is a little bit lower than you previously thought?

Yes. Thanks, Chris. So a few different things that I think are going to be helpful this year. And Patrick, I think, mentioned a few of them earlier, but I'll give a quick recap as well. In terms of BK U.S., that's definitely one of our focus areas. We had a bit more closures in 2023. Based on the incredible sales and improvements in profitability that Tom and the team have been driving, that gives us a lot of confidence that we're going to be able to improve the unit trajectory there in a meaningful way this year. So that feels like it's on track and move it in the right direction. The second big bucket is Firehouse. And there – we've talked a lot about some of the new development programs we've put in place. We're getting a lot of uptake on those and we're starting to see the pipelines fill up and a lot of the sites moving through those pipelines. So I'm pretty confident we're going to see a meaningful step-up in the Firehouse development, both in the U.S. and Canada. We had some incredible openings out in Western Canada in Q4. And I think there's a lot of excitement for the brand across Canada. So those two things feel like they're moving in the right direction. We've got some good stuff happening in International across our new brands, especially some of the stuff that we're doing with Popeyes and Tims. We have some of the Popeyes markets that are ramping up. Think of places like Popeyes in India or Popeyes in the U.K. There are a number of those markets, Popeyes in France is another great one. We were there just a few months ago, and they're doing a really nice job. So there's a lot of good Popeyes markets that are ramping up, and I think we'll see some positive momentum on in 2024. The other side of that, obviously, is what's going on in China. And I think there's a – there are a couple of factors that are going in there. One, we've seen a continued shift to some of these smaller express units within Tims that as we mentioned, we don't count in our restaurant count. So that has some impact on the KPI. And we also do believe that there needs to be some more capital put into that business to really realize its potential. And then on BK China, you probably saw – we actually did see a step forward in 2023. We were up to around 176, I think, net new units for the year. But I think there is some question on the outlook and kind of appetite and alignment for growth there. That's impacting our outlook for the full-year. So that's sort of the puts and takes of it, which, as we said, we think gets us to around 4.5%. And we'll keep updating you throughout the year as we get more visibility into where that's likely to land.

The only thing I'd add is, look, we've got longer-term confidence in net unit growth. We really do. This is simply about China and how much capital is available to grow near term this year. All of the rest of the things that we have looked at that are going to generate unit growth are very, very much on track.

Our next question comes from Brian Harbour of Morgan Stanley. Please go ahead. Your line is open.

Yes. Thank you. Good morning. In Burger King U.S. in the fourth quarter, how much do you think – I know there's a number of initiatives that are working very well. How much of that, though, do you think was a consequence of the marketing you did? Also, do you think that kind of the marketing investment in 2024 will look similar with respect to timing? Or what else do you think was sort of a swing factor there in the fourth quarter?

Hey, Brian. Good morning. So in terms of BK U.S. in the fourth quarter, it's hard to quantify the exact breakdown, but I do think there was a positive impact from the advertising spend for sure. We're investing more. And I think the team is doing a wonderful job on the effectiveness of that advertising. But I also think there's a big impact there from operations. It's one of the things that's underappreciated, but we're seeing a big improvement in the quality of operations and our franchisees are doing a fantastic job there. And we think that's a big part of the overall comps for the year. Potentially up to about half of the comps for the year, we think could be due to operational improvements. So I'd say that's the other largest factor in our mind. In terms of the 2024 outlook, as we mentioned in our earlier remarks, we're about caught up in terms of where you'd expect us to be in terms of that advertising spend in the program to date. So I think we have just under $60 million left to spend in 2024. We're probably – we're not ready to give an exact pacing of that throughout the quarters quite yet, but I would hope it will be a little bit more even than what we saw in 2023.

The next question is from Sara Senatore of Bank of America. Your line is open.

Great. Thank you. I just wanted to ask about just a point of clarification and then a quick question. I'll start with the question first. So you talked about positive traffic in the – at Burger King, and I wanted to dig in there a little bit. Because you did close stores this year and historically, what we've seen is that store closures do tend to benefit the system in terms of positive comps. So I'm trying to understand as we think through kind of that balance of unit closures versus positive traffic in the remaining stores. If you saw any benefit from that sales transfer or closing lower-performing stores? So that was one question. And then just quickly the clarification was on China. You said you're working with your Tims and Burger King partners to encourage growth. But what does that mean exactly if you're not planning on committing capital as you are in the U.S.?

Yes. Sara, thanks for the questions. On the first one, in terms of traffic, a couple of comments I would just make there. If you look at the sequencing through the year, we had been taking some closures throughout the year. And so while there may be some positive impact to that, we don't see it super clearly. And I think what's most striking to me at least is – we saw that very consistent movement in a pretty pronounced way in terms of the trajectory of our traffic, right? We went from a pretty negative place up to low single digits negative, flat and then quite improved kind of positive low single digits in Q4. So I think that traffic improvement is really outpacing anything you'd expect to see related to the pace of closures there. And then on China, we kind of talk through some of the factors there. We're definitely working closely with our partners. We obviously have, as I mentioned, we have really big ambitions for what we think we should do in the market and what we think our brands can accomplish. There are a lot of different ways that we work with our partners on that related to operations and profitability and capital. And we're working through all those different options with them. We don't have anything more to share on it quite yet today, but we'll bring anything back as soon as we do.

Next, we have Brian Mullan of Piper Sandler. Please go ahead.

Thank you. Just a question on Popeyes specific to the U.S. Can you just update us on the simplifying the operations journey that you're on? Maybe touch on what the key priorities are for 2024 as a part of the plan? And related – I asked because the unit growth is very solid already at 4.5% last year. But is the thought that you'd actually be able to accelerate that unit growth pace once more and more operational improvements are made?

Thanks, Brian. So in terms of where we are on improving operations, especially around what we've called our easy-to-run kitchens. So throughout 2023, we were focused on improving the model, kind of making sure we had the right combination of elements in that easy-to-run kitchen, whether that's software improvements or new pieces of equipment, new procedures, new technology. And I think we've got that increasingly well refined through those early pilot restaurants. What we're working on now is starting to ramp up deployment in clusters. So one of the ones that I mentioned is out in California. That's been one of the first places that we've got a lot of interest from franchisees. So we're going to go and do like a larger deployment in the cluster in California, and then we'll start to do a few more of those throughout the course of 2024. So we can really figure out how to refine the deployment model and do it effectively market by market. There's a big element of training that goes into that. So we want to really make sure we've got it right. And from there, what you think we'll be able to scale it to the entire system hopefully later in 2024 and into 2025. So that's sort of the game plan. In terms of the impact that the easy-to-run kitchens can have on the business, I would tell you, I probably think about it more in terms of operations and guest experience than I do in terms of restaurant growth. I think what's going to be magical about this is if we can make it easier to run for the team members, and therefore, improve the guest experience through things like order accuracy, the speed of service and the drive-through friendliness. Those are the things that I think are going to really unlock the unit level potential. And I would expect to see that in our guest feedback and our product satisfaction and ultimately in the same sort of traffic and sales that we're able to drive at the restaurants. That for me will be the biggest measure of success of easy-to-run, and that's what we're looking at in the restaurants. Patrick, anything you want to add?

Yes. The only thing I'd add is, as you look at the returns we're going to generate on Popeyes as it gets easier to run. There are really two things that happen when you improve service in restaurants. One is the customer is happier because they're getting a better experience, they're moving through more quickly. But the other is, frankly, just being able to fulfill against incremental demand. And if you look at Tims – one of the reasons Tims is generating traffic growth is because they have improved their service times in Canada. You go to a Tims at 7:30 in the morning in Canada, and you are going to see very busy drive-thrus. So if they can improve the speed of service, it's not only a better experience for the customers, but you're just simply able to generate more sales because you're able to get more people through the drive-through over the course of an hour. As we build more demands with great new products at Popeyes like wings, our ability to fulfill against that, our ability to get them through the drive-thru, to give them better service times not only will make the customers happier, which will, in turn, generate more demand, but frankly, just our ability to get more people through the drive-through is going to increase sales.

The next question is from Lauren Silberman of Deutsche Bank. Your line is open.

Thanks for the question. I had another one on Tim Hortons supply chain margins. Can you just talk about the underlying supply chain margins, excluding the CPG business and expectations there? And if you could just remind us on how you price the franchisees in the commissary, the timing of that pass-through, how that influences the margins? Thank you.

Yes. Thanks for the question, Lauren. So yes, in terms of margins, we look at it holistically across the whole category of sales – cost of sales. And kind of as I said, I think we exited the year in 2023, we're around the 18% margin. Q1 is seasonally lower. So it will probably be pretty consistent with that. But we do see some opportunity to drive that back up toward 2022 levels which were a bit higher around the 19% level. As it relates to pass-through of commodity prices, we do that, as you recall, we do that with a bit of a lag. So we try to price through in a reasonable way what we see happening in the commodity market, but we do that in intervals throughout the year a couple of times a year. It doesn't happen on a frequent recurring basis. Having said that, I think the overall commodity cost environment has balanced out and stabilized quite a bit over the past few quarters.

Thanks for the question.

Next we have a question from Eric Gonzalez of KeyBanc. Your line is open.

Hi. Thanks for the questions. Congrats on the strong improvement in franchisee profitability at BK U.S. I'm just curious what this might mean for your U.S. franchisees and their ability to fund remodels at a faster pace. With these numbers out there in the public domain, do you think this helps franchisees get better access to capital to fund their projects? And also, I think you attributed about half the improvement to operations. To imply the other half is commodity relief and assuming you won't get much more relief on the commodity side, do you think you could continue to drive meaningful improvement in solo profitability without significant progress on that remodel program?

Yes. Thanks, Eric. Good morning. Appreciate the question. I think it's for sure the case that increasing franchise profitability, it impacts the attitude of lenders towards the system. It impacts our franchisees' appetite to invest and their ability to invest. And I think it also just shapes confidence in the future. When we have sales, traffic and profitability all moving in the right direction, I think the overall excitement of the system about where we're going, definitely has an impact on everybody's excitement about investing. You saw that with our decision to acquire Carrols, I think that shows pretty clearly our optimism about where the system is going. So I think that is definitely the case, and we're definitely feeling better about the outlook for remodels and BK U.S. One thing I would just add there, and we mentioned a little bit earlier, we already had a line of sight to getting to around 65% of the system on modern image just through the first couple of years of our Reclaim the Flame program. That was before the Carrols acquisition. Now with Carrols, we think that line of sight goes up to about 75%, which is good. But ultimately, I think we want to get the BK U.S. system. I've said it many times to a place where almost every Burger King you see around the country is a modern convenient location. We think that probably means something like 85% to 90% of the system needs to be modern over the next few years. So there will probably be some further investments. Just to give you a couple of data points to be in the right ZIP code there, we already have line of sight to 75%. If we want to get to 85% or 90%, that's about 1,000 more restaurants that we think we would need to – we need to create a remodels on. And in terms of the cost of that for us, if you look at what we're putting into the existing first couple of years, it's just a little bit shy of 300,000. So hopefully, those data points kind of give you a sense of where we want to go and some of the related investments that will come over that sort of 2025 to 2028 time horizon. And then in terms of the kind of the contributors to the performance, we do think a big part of that sales and traffic performance came from operational improvements. There's obviously a lot of other stuff going on as well in terms of effectiveness of marketing and advertising spend. And I think our confidence in the ability to continue that is just driven by all the fundamentals that Tom and team are driving. And we think there's a lot more – we just think there's a lot more to do in the BK system that will take us more years to fully realize. Patrick, do you want to add anything?

Yes. The only thing I'd add is Josh just took you through the rough math on what could be the spend to kind of get us up to that 85%, 90% level. And the only thing I would say is we want to reward franchisees who are leading and investing early and are excited about the brand and the business. So if we do something at that level, that would be equal to what we had done before. And frankly, what we want to do is reward franchisees who are doing these things ahead of the curve, not at the end of the curve.

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

Thank you. Good morning. I wanted to ask about the international business and in particular, store level profitability. Obviously, you've got lots of countries and formats, but I wonder if you can give any clarity on this. And I wonder how you look at store level profitability internationally, is it by country or by region or by brand? Do you have as much visibility internationally, at least in your most important markets as you do for your domestic markets? And I know you don't – well, you want to save a lot of this for Thursday, but is store level profitability is something you plan to offer long-term guidance on?

Yes, John, thanks for the question. I think it's a great point. And I would tell you, as we've thought about the last year or so, I think we really brought a big level of focus, especially to our home market franchise profitability. It's where we felt like we had the most work to do, and it's a little more straightforward. As you pointed out, it's a few markets and it's a little bit closer, we operate those markets. So I think we made a lot of progress on that, and we're going to bring increasing focus to our international markets over the next year or so. We do tend to look at it. We look at it by brand market combinations. So we're looking at Burger King France, or Popeyes in Spain. So that tends to be the lens. And as you can imagine, that's a lot of brand market combinations for us. It's a little bit more complicated. We're looking there – when we look at each of those, we are looking at profitability per unit. But I think probably the easiest metric to look at across all those markets is the payback period. We want to get to a model where our franchisees are realizing compelling paybacks. That's what drives the viability of the business and causes folks to want to reinvest and grow those businesses more. So that is exactly the right way. I think as we shift increasing focus to those international country paybacks, we'll bring more visibility over time, and we'll figure out the right ways to communicate that sort of balance, I think, simplicity with trying to be clear and transparent with everybody. Patrick, do you want – anything else you want to add on kind of long-term outlooks or anything?

I mean, it's complicated on the international side. What we've focused on, and we have had that discussion many times inside. And there's no way to kind of give you a clean, single answer on that. What we look at is our team, David and his team's job is to find great partners and then help those partners in the early years work their way to a good return on those units. There is a point at which the master franchisee kind of takes over that job. You're going to continue to help them over time. But if you've gotten them to a good cash-on-cash return, they understand the business well. In France, we've got great returns on our business. In Spain, we've got great returns on our businesses, and these are very experienced master franchisees. We can help them some, but frankly, it's probably more important for us to get, for instance, Popeyes launch in France right versus the contribution we're going to make to Burger King in France where they've already got 500 units. So we've spent a lot of time kind of working through that. And there's – I don't think there's a way we're ever going to be able to give you kind of a clean answer for overall on international. Really, what we're going to give you more, I think, is just guidance on look, and this is true. Overall, returns are very good in our international business. But it clearly varies market to market, brand to brand, and particularly, is going to vary early in the launch of a new brand in a new market.

The next question comes from Gregory Francfort of Guggenheim Partners. Please go ahead.

Hey. Thanks for the question. I want to ask on – I don't think it's gotten a lot of attention today. But just on Popeyes, I know the wings launch was pretty late in the fourth quarter. But can you talk about what you're seeing either from a sales contribution or how it's attracting new customers or changing your delivery business? Just any thoughts on that would be helpful. Thanks.

Yes, Greg. Thanks, and I say we're all really excited about the new wings at Popeyes. Most people are probably surprised to know that Popeyes didn't have a flavored wing platform. So we're really happy we could do that. And I think it's another terrific example of the work of our culinary team led by Chef Amy. They did a really outstanding job on these wings. If you haven't tried yet, please do. We were already starting to see some impact of the wings in Q4. I would tell you more of the behavior that we saw initially was add-on behavior as opposed to new guests. And that was a lot of what was behind the thought of doing the Super Bowl ad because we didn't have high awareness, mass market awareness that Popeyes had wings and the Super Bowl is a tremendous vehicle to drive vast market awareness. And I think the Super Bowl this year was no exception. It was one of the best. I think the viewership was actually the highest ever. So we got even more bang for our buck. And I think now that we have greater awareness, we're hoping to see even greater incrementality to traffic over the course of Q1 and beyond. But really happy with the wings so far. I think it's a terrific addition to the Popeyes menu, and we'll keep you updated as we see progress through the quarter and for the rest of the year.

The next question is from Jeffrey Bernstein of Barclays. Your line is open.

Great. Thank you very much. Actually, just two clarifications. The first one, Patrick, I think the U.S. and Canada home market franchisees are probably pretty happy with the direction of profitability. I'm wondering with you or Josh, as you travel around meeting with franchisees, what's the new number one topic of discussion? Or what's the greatest pushback or concern, whether it's topline or bottom run related. Just curious how those conversations are going. And the second one was just the Reclaim the Flame commitment. Just wondering whether you think those levels were set at the right level now that you get a chance to look back over the past year. I think you talked about shifting dollars towards refresh, but I'm just wondering the potential to actually increase the dollars. I think, Josh, you just gave an example of the math around the $300 million needed to hit those 1,000 Burger King units. I'm just wondering who's expected or who's potentially considering foot in that bill, whether that's a potential corporate consideration or whether that's more just encouraging franchisees to do so. Thank you.

So I'll let Josh handle the second question. I'll take the first. We are more aligned with our franchisees, and I think we have ever been. There is great excitement about the progress that we're making. Clearly, great excitement about the focus we're putting on their profitability and the progress we've made and the number one concern that they have is whether or not there's any sense that this is a one and done that we would get happy with the progress that we have made. And the answer for all of them listening is absolutely not. And we will talk about goals on Thursday for each of the home market brands. But we are not happy yet with where we are. We are very happy with the progress, but more to be done, and we are going to keep hammering away on it.

Thanks, Patrick. And on the Reclaim the Flame original program, if we're happy with it. I would tell you, I am really happy with it. I think it was very thoughtfully structured. And I think it was the right plan for that moment. Tom talks a lot about the importance of sequencing and I think he got it exactly right here. We started with advertising, which we could move quickly. And now we've been deploying dollars into the short-term royal reset to a lot of those equipment and technology upgrades. And increasingly, we're shifting to these high-return remodels. And I think that was – I think it was the right sequencing and the right form of partnership. All of those things, we're investing together alongside our franchisees, and we all achieved results and returns together. So I think it was right structure, right sequencing, and I'm very happy with it. In terms of future investments, I referenced a little bit. I've said over and over again, I think it is absolutely critical that we have to get the BKU system to where nearly every Burger King in America is modern and convenient and we are totally open to investing alongside the franchisees further in that. We still have to work – we've got to work through that with our franchisees. Tom and team will be doing that over the coming months and talking to them about where the future takes us. And once we've got that all figured out, we'll definitely come back and share more detail on those plans.

The next question comes from Andrew Strelzik of BMO Capital Markets. Please go ahead.

Hey. Good morning. Thanks for taking the question. Curious if you could share some color on the same-store sales gap that you're seeing across the BK U.S. system between the better performing and lower performing units or however you think about bucketing that? Are you seeing that gap narrow? And in particular, curious what you're seeing on the lower end of the system as you gain momentum across the initiatives you put in place as well as the closures?

Yes, Andrew, we do see a gap, frankly, in all metrics between our sort of our higher-rated and lower-rated franchisees on the sort of ABDF scale. So everything, whether it's same-store sales, same-store traffic, restaurant profitability, that's been pretty constant over time. We haven't seen kind of a big shift in those gaps amongst the cohorts. And I think it's just reinforced for everybody in the system both for us and for the franchisees and the value of good operations. I think to Patrick's point earlier, when you see it on the page, it becomes really compelling to realize that being an A operator means a whole different level of profitability than it is to be a lower-rated franchisee. So I'd say it all just reinforces where we're going in terms of our focus on operations, and we're pleased with that. One of the things I would point out is we've seen our franchisees moving up sort of some of those rating scales. It feels like the message is working, people get it. And I'm very thankful that our franchisees are investing to improve their operations. I think they have a huge hand in the results that we've seen over the course of the past year.

The next question comes from Jon Tower of Citi. Your line is open.

Great. Thanks for hanging in to take the questions. Just two unrelated quick ones, hopefully. First, on the China business, I know you have a couple of franchisees in that market, but I'm curious what sort of recourse you might have should either franchisee not live up to expectations with respect to hitting their unit growth or perhaps committing more capital to the brands? And then the second question, I know we talked a lot about the health of the franchisees and the consumer across some of the core markets, but specifically Tim Hortons Canada and BK U.S. Can you help us think about how the franchisees are thinking about pricing in 2024 relative to 2023 levels? Thank you.

Hey, Jon. So in terms of China, it applies to all of our international businesses. We have master franchise agreements with our partners. And those tend to outline kind of the expectations – mutual expectations of the parties. So our preference is always just to work collaboratively with our partners anywhere in the world to build those businesses. But there are some – there are certain expectations that are set out in those agreements. In terms of Tims and BK profitability and pricing expectations, I would just say broadly that we – I would expect to see less pricing taken in 2024 versus 2023. I think you all have probably seen that across the restaurant space and in other spaces like grocery, for example. I think some of that is a reflection of commodity prices that have started to stabilize a bit. So I think you'll see a pretty decent step back in level of pricing across the industry, and I expect that will be the case for Burger King in the U.S. in Tims and Canada as well.

The next question comes from Jim Sanderson of Northcoast Research. Please go ahead.

Hey. Thanks for the question. Just real quick, I wanted to go back to the U.S. performance for BK. You mentioned that performance improved across all income groups. Any insight on the sale mix for promotions, whether consumers are leaning in more frequently to deals that are offered in the quarter?

Jim, it's Josh. No, I haven't seen anything particularly of note in terms of changes in behavior there.

Employment drives consumption in the category. You've heard that from me often, but that is the answer. It's really about employment levels. And as long as employment stays strong, I think the categories continue to be good.

We'll now take our last question from Jake Bartlett of Truist Securities. Your line is open. Please go ahead.

Great. Thanks for taking the question. Mine was about the focus on smaller franchisees in the U.S. I'm wondering if you could just frame that out into, for instance, how many total franchisees or average size in 2023 versus maybe 2022 and what you expect that to land on in 2024. And really with an eye on how that impacts G&A spend. In the past, I thought that consolidating the franchisee base was a source of efficiency for you. It seems like that's unwinding. So I'm just wondering what the impact of that might be.

Hey, Jake, thanks for the question. I would tell you, we have been focused on having more local operators in their communities. You've heard that expressed in different ways across each of our businesses. If you look at Tims in Canada or Firehouse in the U.S., we already have that. We have operators that have 1, 2, 3, 4 stores. I think that's fantastic. And I think it reflects itself in the engagement of those operators with their communities and the operations of those restaurants. And so we have articulated that we want to move to something not – maybe not as small as that in Burger King and Popeyes. But we certainly do – we do want to have our operators living and operating in their communities. I would say it's just so clear to us that, that has a big impact on the quality of the operations that we get. And that can manifest itself in a lot of different ways. We have 50 or 100 store operators that live in their markets that do an incredible job. They're A operators all day long, and that's great. We're super happy about that, and we'll support those operators. But we've also had some of the situations that you've seen, particularly in Burger King in the U.S., where you have larger operators who have a couple of hundred stores, they're spread out across some pretty geographically divergent areas. And that's one of the common denominators that we've seen in some of these portfolios that have gotten in trouble. So we'll probably try to steer away from some of those situations as we move forward. And where some of the portfolios change hands, we'll seek to move to some of these smaller portfolios with local operators in those communities. You've seen us do that in a few of these BK U.S. workout situations over the past year. And I think you'll see us keep kind of nudging the systems in that direction over time. So that's what I would expect. It really doesn't have anything to do with views on G&A spend. It's really about the quality of service that we're able to provide and the success of our business in these local markets. I think that's going to dwarf any differences in G&A structures, which I don't really expect to see much of. So I would just tell you, it's entirely focused on driving better operations in our restaurants. And that's what we're focused on.

Thank you. This concludes the Q&A session. So I'll hand back to Josh Kobza, Chief Executive Officer, for any closing comments.

Well, thank you so much, everybody, for taking the time to join us today and for the great questions, as always. We're very thankful to our teams, our franchisees, our restaurant teams for all the great work that they did to produce the results that we were able to share today. We look forward to seeing a number of you on Thursday in New York and sharing some more outlook on the future there. Have a great day, and thanks for joining the call.

This concludes today's call. Thank you for joining. You may now disconnect your lines.