Restaurant Brands International Inc (QSR) 2015 Q3 法說會逐字稿

Good morning, and welcome to the Restaurant Brands International third-quarter 2015 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Andrea John.

Please, go ahead.

Thank you, operator.

Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the third quarter ended September 30, 2015.

A live broadcast of this call may be accessed through the investor relations page on our website at investor.rbi.com, and recording will be available for replay.

Joining me on the call today are Restaurant Brands International CEO Daniel Schwartz and CFO Josh Kobza.

The team will be available to answer questions during the Q&A portion of today's call.

Today's earnings call and presentation contain forward-looking statements which are subject to various risks set forth in the press release that we issued this morning.

In addition, this earnings call and presentation include non-GAAP financial measures.

Reconciliations of non-GAAP financial measures are included in the earnings presentation and press release available on our website.

Let's start on slide 3 with the agenda for today's call.

Daniel will discuss highlights at Restaurant Brands International for the third quarter.

He will then cover business strategy and performance at Tim Hortons and Burger King.

Josh will then review financial results for the quarter, and Daniel will share some concluding remarks before opening the call up for Q&A.

And with that, I will now turn the call over to Daniel.

Thanks, Andrea, and good morning, everyone.

I'm excited update you on the continued progress we made during the third quarter at Restaurant Brands International.

We could not have achieved another strong quarter with great sales growth and net restaurant growth across both of the brands without the continued support of our employees and our franchise owners.

So I would like to start out the call by thanking them for all of their hard work.

Thank you.

This quarter we reported adjusted EBITDA of $441 million and adjusted diluted EPS of $0.34 per share.

I'd like to take a few minutes and discuss some of the drivers contributing to our performance this quarter.

Let's start on slide 5.

We continued to execute on our brand-specific strategies and recorded another strong quarter of comparable sales performance across both of our iconic brands.

Tim Hortons' same-store sales grew by 5.3%, and Burger King's same store sales grew by 6.2%, driven by successful product introductions and our continued focus on guest satisfaction.

On the development front, NRG of 210 units represented 5.2% growth on a trailing 12-month basis.

We are pleased with the net restaurant growth of 69 at Tims this quarter, but more importantly we're excited to bring the aggressive franchise-led development strategy to Tims.

As evidenced by our recently announced accelerated development agreement for the Cincinnati area, we're making good progress toward our goal to bring Tim Hortons to guests all around the world.

Burger King achieved net restaurant growth of 141 this quarter.

As in prior years our development tends to be higher in the last quarter of the year, and we remain very confident in our ability to convert our strong restaurant pipeline into successful profitable openings in the fourth quarter.

For the quarter, positive comparable sales growth and net restaurant growth contributed to system-wide sales growth of 8.2% and 11.2% at Tim Hortons and Burger King respectively.

Momentum in the business continues to increase franchise profitability and contributed to RBI's organic adjusted EBITDA growth of 23%, versus last year's pro forma numbers.

On slide 7 we highlight the Tim Hortons results for the quarter.

Strong same-store sales performance was primarily driven by our launch of breakfast and lunch wraps and the continued strength in beverages.

This comparable sales growth, along with our continued acceleration of net restaurant growth, led to system-wide sales growth of 8.2% compared to the prior year.

The following four slides describe our business strategy at Tims in Canada and the US, and internationally.

Consistent with what we've said in prior quarters, we want to grow our market share in Canada while meaningfully accelerating the pace of expansion in the US and around the world.

On slide 9 we lay out our strategy for Canada.

To keep growing in our home market we're focused on bringing more guests to our restaurants with compelling product offerings across all day parts.

We also earned increasing restaurant penetration in urban markets primarily through nontraditional formats, making Tims even more convenient for our guests.

Moving to slide 10, we highlight our path to scaling our US business.

We have continued to improve restaurant level unit economics and will look to increase unit density in new and in existing markets in the US.

Along those lines we are really excited to have announced our first development agreement for Tims in the US since the creation of Restaurant Brands International back in December.

Under the terms of the agreement, our partners will look to develop more than 150 Tim Hortons restaurants over the next 10 years in the Cincinnati area.

The deal underscores two key points for us.

First, it speaks to our commitment to expand Tims presence in the US, and second, it highlights the franchisee led expansion model we intend to the US to increase our pace of development.

Let's continue to slide 11 which shows our global restaurant footprint.

To grow our presence globally with Tims we'll continue to work with our existing partners as well as new partners to expand all around the world similar to how we've scaled our Burger King brand over the last few years.

We look forward to sharing more news with you on this front in the coming quarters.

Turning to slide, 12 we review the Tim Hortons' KPIs by geographic market.

We're very pleased to have achieved comparable sales growth in Canada of 5.4% and 4.3% in the US this quarter, particularly given the lapping of last year's dark roast coffee launch.

Successful product introductions, including the grilled breakfast and lunch wraps and the Creamy Chocolate Chill, along with continued strength in a dark roast, contributed to favorable results this quarter.

Net restaurant growth at Tims for the third quarter was 69.

Development was primarily driven by restaurant openings in Canada, and we continued to identify priority markets with strong and local operators to grow our presence in the US and internationally.

On slide 14 we discuss our third-quarter results at Burger King.

We saw notable strength across all four of our geographic markets.

Comparable sales growth of 6.2% and 5.1% unit growth on a trailing 12-month basis led to system-wide sales growth of 11.2% this quarter.

Let's spend some time discussing our strategic initiatives at Burger King.

Moving to slide 15, our four-pillar strategy demonstrates our balanced approach to menu, marketing, image, and operations in the United States and Canada.

We were again pleased with our balanced approach to menu and marketing.

Our 2 for $5 platform, including our extra long jalapeno cheeseburger and chicken fries, all contributed to our positive same-store sales.

Our launch of fiery chicken fries limited time offering this quarter, was consistent with our approach of introducing impactful yet operationally simple products as we strive to deliver great guest service.

Positive same-store sales enabled us to continue to grow our franchisees' restaurant profitability.

Turn to slide 16.

Scaling our Burger King brand globally continues to be a key focus for our international strategy, and we've accelerated the pace of development over the last several years via the master franchise joint venture and development agreement model.

As of September 30, there were over 14,600 Burger King restaurants in approximately 100 countries and territories, and since the beginning of 2011 we've added over 2,000 restaurants creating tens of thousands of jobs along the way.

Although we recognize it will take time, we get really excited when comparing this map to the map back on slide 11 when we think about the potential for Tim Hortons around the world.

At Burger King we accelerated net restaurant growth in key strategic markets where we operate, and since the beginning of 2011 we've increased our restaurant count by more than 325 restaurants in China, 300 restaurants in Russia, 275 in Turkey, and over 350 restaurants in Brazil.

In addition to growing in the emerging markets, we remain excited about restaurant expansion in developed markets as well.

A great example of our expansion in the developed markets is Burger King France's proposed acquisition of Quick Group which was announced last month.

Under the proposed terms in the agreement our master franchise joint venture would purchase Quick and convert restaurants in France to Burger King restaurants over time.

Josh will provide more details on this transformational deal later on the call.

Moving to slide 17, Burger King same-store sales growth was strong across all markets, with US&C, EMEA, APAC, and LAC reporting comparable sales growth of more than 5%.

We are particularly pleased with the strong results in the US, where despite lapping last year's relaunch of chicken fries we achieved same-store sales growth of 5.1%.

Comparable sales were also up by 7.3% in EMEA this quarter largely attributable to strength in Turkey, Russia, and Spain.

In APAC outperformance in the market was primarily driven by top line strength in China.

And finally, our LAC comparable sales growth increased by 11.4%, with good results in both Brazil and Mexico.

I'll now turn it over to Josh to walk us through RBI's financial results for the quarter.

Thanks, Daniel.

Before getting into our financials this quarter, I wanted to take a moment to discuss Burger King's history in France, and the recently announced offer to acquire Quick Group by our master franchise joint venture Burger King France.

After exiting the market in the 90s, Burger King reentered France in 2013 through a master franchise joint venture agreement forming Burger King France.

As of September 30, 2015, we had 30 restaurants in France, and by year end we expect to have approximately 50 restaurants.

Our restaurant openings have been met by tremendous enthusiasm from our guests, and have achieved AUVs of approximately EUR5 million, some of the highest in the world.

The proposed transaction is a natural extension of our master franchise joint venture model, in that we are partnering with Groupe Bertrand who brings extensive local operating and financial resources to further accelerate the expansion of our brand, in an exciting market where we feel there are significant growth opportunities for years to come.

Over time, BKF plans to convert restaurants in France to the Burger King brand, under a similar economic model used in other markets around the world.

Turning to slide 19 of the presentation, we continued to build on momentum from the first half of the year.

Third-quarter RBI adjusted EBITDA of $441 million was up 23%, excluding the impact of FX versus prior-year pro forma third-quarter results, driven by strong organic adjusted EBITDA growth across both brands.

As Daniel mentioned earlier, the increase in adjusted EBITDA was driven by positive same-store sales growth and net restaurant growth combined with cost discipline at both brands.

The ownership mindset we have brought to cost management has enabled us to concentrate on the most impactful initiatives that will create the most value over the long term.

Adjusted net income for the third quarter was $163 million, which translate to adjusted diluted EPS of $0.34 per share.

Moving to slide 20, we show major movements in our cash balance year to date.

Our September year-to-date free cash flow of $831 million, reflects growth in adjusted EBITDA and the change in CapEx.

We ended the quarter with $976 million in cash on our balance sheet.

On slide 21 we lay out our capital structure.

As of September 30, 2015, and a pro forma LTM adjusted EBITDA basis, our net leverage of 4.9 times was down 0.6 turns year to date.

The reduction in net leverage over the first nine months of the year highlights our commitment to reduce our debt load over time.

Year to date we have produced strong financial results, despite significant FX headwinds relative to the US dollar.

Same-store sales growth has been consistently positive across both brands as a result of consistent and effective marketing strategies.

With the announcement of our first area development agreement at Tim Hortons since the creation of RBI, and the proposed acquisition of Quick by BK France, we continue to build our restaurant pipeline for years to come, while demonstrating our commitment to a global franchisee-led expansion model.

Strong sales performance across our core markets and successful new store openings is driving significant growth in our franchisees' profitability, and is also impacting our bottom line, allowing RBI to delever and pursue a balanced strategy of returning capital to shareholders.

As part of that strategy, on October 27 the RBI Board of Directors declared a dividend of $0.13 per share.

I will now hand the call back over the Daniel for a summary of the quarter before taking questions.

Thanks, Josh.

As you mentioned, our growth and profitability this year has set a strong foundation for our first year as Restaurant Brands International.

The strong results we've achieved are a result of our continued focus on the two most important drivers of this business, guest satisfaction and franchisee profitability.

And that's what we plan to focus on for the long term.

I personally believe that we have the best employees and the best franchisees all around the world to enable us to generate sustainable value for all of our stakeholders.

Thanks to everyone for joining us this morning, and we will now open up the call for Q&A.

Operator?

Thank you.

(Operator Instructions)

And our first question comes from Nicole Miller of Piper Jaffray.

Please, go ahead.

Good morning, thank you.

Two quick ones.

Could you please discuss Burger King North America and Tim Hortons Canada comp in terms of price, mix traffic, anything you can share?

And then also how comp looked by day part or region?

Thank you.

Hey, Nicole, it's Daniel.

Thanks for the question.

Yes, on the Burger King North America comp, you've been following our business here for some time.

Obviously, we're pleased with the results.

We saw strength across multiple day parts, and Burger King -- and really as you know, it's really be driven by the four pillars plan that we put in place that we've been discussing now for almost five years focused around menu, marketing, image, operations.

The number of restaurants that have been remodeled has increased from around 10% of the system a few years ago to closer to 40% at the end of last year.

We're running better restaurants, launching fewer more impactful products, having great new marketing innovative initiatives every quarter, and the combination of all of those are enabling us to run better restaurants, deliver great guest experience, helping our owners earn stronger profits.

And all those contributing to the strong same store sales that we are seeing in the Burger King brand across multiple day parts.

And then on Tims front it's actually -- it's quite similar.

We're running great restaurants.

Had a few big product launches this quarter, great execution of the AM/PM grilled lunch wraps.

So this is a good example of launching a pretty impactful product that works across multiple day parts really helping us build the already strong lunch business.

And we saw continued strength in our beverage business as well.

A year ago we launched the dark roast and that's obviously continued to perform quite well.

Also the Creamy Chocolate Chill did really well over the summer.

And all these things together across both brands are enabling us to generate the strong same-store sales.

But at the end of the day it's having great teams running great restaurants which is encouraging our guests to come back more and more.

And this is kind of along the same lines but meant to be of a different question, but the results are phenomenal, and so you're not ceding shares to any legacy QSR player.

Where do you think you're taking share from?

Is it smaller chains, independents, or were people previously eating at home more?

Thank you.

Nicole, it's hard to say exactly.

We see the industry growing.

We see ourselves growing, and we're growing a little bit faster and we're just focused on delivering great results for our guests, our franchisees.

And you know we don't comment on our competition and our strategy doesn't change regardless of how the industry is or isn't performing.

Each and every quarter for the past five years we've talked about the four pillars at Burger King, and at Tims we're just focused on running great restaurants, delivering great guest experience.

It's hard to say where share comes from, but we are just focused on running great restaurants every quarter.

Thank you.

Congratulations.

Thanks a lot, Nicole, appreciate it.

And our next question comes from Brian Bittner of Oppenheimer and Company.

Please, go ahead.

Thanks very much.

I also have a question on the Burger King domestic side.

Your same-store sales have been great, trending much better than the industry for awhile now.

As we look forward over the next several quarters your comps do get a lot tougher, and at the same time your largest competitors had their performance versus the industry got much better.

So how should we think about the strategy going forward?

I know you've had a strategy in place, but how do we think about it going forward as you start to ramp these tough comps with the competitor that's maybe getting a little smarter?

And how should we think about how to think about the expectations for the same-store sales as we go through the next three to four quarters?

Hey, Brian, it's Josh, thanks for the question.

As Dan said, we've been really pleased with the execution of the Burger King business in the US and Canada throughout the course of this year.

And really it's been execution across the same four pillars plan that we've been executing on over the last five years.

And it has produced really strong results throughout the year and in the quarter.

And I would tell you that based on what we're seeing in the business, we continue to be confident in the outlook for the remainder of the year and we'll plan to execute on the exact same strategy.

The same strategy of the four pillar plan across all of those different aspects of the business with few impactful products and you should just expect to see more of the same from us.

Okay.

And one more on the balance sheet, the $1 billion in cash.

What is the cash balance that you feel most comfortable having on the balance sheet going forward on a sustainable basis?

And why not maybe pay down debt a little faster with all that cash you have sitting there?

Brian, it's Josh again.

Yes, so I would say we don't have a target cash balance.

As you've seen we've allocated cash in a pretty balanced manner over time.

You saw us pay down some debt earlier the year in connection with our refinancing in May, and we've also allocated cash to a dividend.

And you saw that we just raised our dividend a little bit further.

So I think you should expect to see us continue to allocate cash in a balanced manner that we'll determine going forward.

Great.

Congrats on a great quarter.

Thank you.

And our next question comes from Andrew Charles of Cowen and Company.

Please, go ahead.

Great, thanks.

I wanted to ask about Tim Hortons' international master franchise agreements.

And as we think back to Burger King, master franchise JV was reached in Brazil less than a year after 3G acquired the brand.

If there are already Burger Kings in operation in Brazil under several different franchisees, I'm curious what other factors led to a faster undertaking of master franchise agreements for the Burger King brand as we weigh an international agreement for Tim Hortons?

And then I have a follow-up question.

Hi, Andrew, thanks for the question.

I think actually for the quarter we were really pleased to announce our first accelerated development agreement for Tims in Cincinnati where we're going to build over 150 restaurants over the next 10 years.

And I think that transaction should serve as a model that we hope to replicate in a lot of additional markets and allow us to really ramp up the pace of growth for Tims in the US.

We're also obviously working on potential partnerships in many exciting markets outside of the US and Canada for Tims, and we look forward to be able to update you on those potential partnerships in the coming quarters.

Okay.

And it looks like six Tim Hortons stores opened in the GCC this quarter, which year to date implies opening fewer stores from the first three quarters of 2014.

What are the factors just leading to the lack of a ramp in unit openings in 2015 the GCC?

I think we continue to be really happy with the GCC business.

I think it's been performing well and we've been working very closely with our partners there.

And we remain very confident in the full-year outlook for growth and really in the long-term outlook for growth and for that business in the GCC.

Thanks.

And our next question comes from Will Slabaugh of Stephens, Inc.

Please go ahead.

Yes, thanks guys.

I wonder if you could talk a little bit about the environment in some of your international emerging markets where much of your development is taking place.

It looks like both the comps and the unit growth are strong there, but just given some of the volatility in GDP and then what some of your competitors have noted, I was curious if you see any change there in franchisees' ability to either build their unit pipelines at an acceptable site, or any other challenges that may have popped up here recently?

Thanks.

Hi, Will it's Daniel.

As you know, we put in place what we view as a quite strong master franchise joint venture model in some of the fastest-growing emerging markets around the world.

And we've been really pleased with the success that this model has enabled us to achieve over the past few years.

Places like Brazil, where we have a great local team, great local partner, growing restaurants, growing same-store sales; China, where we're really improving the business and it's becoming one of the fastest-growing markets for us in the world.

Russia, again, despite some of the macro issues going on there, the business continues to achieve strong momentum, continues to develop restaurants, and that's really a function of having great partners on the ground in these places and capitalizing on what we view as a huge opportunity to increase the number of Burger King restaurant in these fast and important growing markets around the world.

In addition to this, I think it's probably one other comment to make that one of our master franchise joint ventures actually made a quite a big move this quarter.

Josh could talk a little bit too in France, so it's a good example that Burger King is growing in these obviously fast-growing emerging markets but also mature markets.

I don't know if you want to share some of the news in France this quarter?

Yes, I think it's a good illustration of a broader point which is that we work very closely together with our partners in all of these markets.

And we've worked closely together with our partners in Brazil, Russia, and China and I think that's been a large component of why we continue to perform well despite some of the macro volatility that you've seen in those markets.

But also we're performing well in some of the more developed markets in places like France, where we see a huge opportunity to grow the brand over time.

France is an interesting example of a really attractive and very large quick service restaurant market where we had no presence as of a couple of years ago.

And we just reentered the market very recently.

We have about 30 restaurants there in a market where some of our competitors have over 1,000 restaurants.

And it has also been one of the markets where we've had some of the most successful restaurant openings that we've seen in the world, where our average restaurant sales are around EUR5 million, one of the highest levels that we've seen.

So the quick transaction marks an opportunity for us to really accelerate the plans that we had for growth there and we think to add even more units in that market.

And we also think it's a really interesting example of partnering with our local joint venture partner and working on a transaction that we think can add a lot of value for our partners and for the Burger King brand.

So we're very excited about it and look forward to working together with them and with the Quick team towards a successful conclusion of that transaction.

Got it.

Just a quick follow up if I could.

I know you're still busy with the Tims acquisition, but with the debt on your balance sheet slowly coming down, I'm just curious on any sort of time line you may have as far as being open to looking at other acquisitions?

Yes, I think what's really exciting about our business is that we have two really fantastic brands and huge opportunities in front of us.

Even though we've been working with Burger King for about five years now, the size of the opportunity around the world is really enormous.

I think France is an interesting example of that where we're only such a tiny fraction of the potential in that market.

And I think that example repeats itself in so many markets around the world.

And in Tims, obviously, we're just getting started.

We just announced our first accelerated development agreement this quarter.

We see a lot of work ahead and a lot of opportunity, and so I think we are very happy with the two brands we had.

We see years of growth and years of value creation ahead of us and have had no interest at this point in thinking about any other M&A.

Thanks, guys.

Thank you.

And our next question comes from John Glass of Morgan Stanley.

Please, go ahead.

Thanks, good morning.

Could I just first follow up on the two deals that you announced this quarter, or your franchisees announced?

You say on Quick similar economics versus other deals, so what does that mean exactly?

Does it require capital commitment on your part since you are a joint venture partner or is it entirely theirs?

Do you get the royalties immediately when they convert or if you altered the agreement because this is such a large transaction?

Can you comment about that first and then I have a question about the US.

Yes, thanks, John.

With respect to the two specific questions, similar to other master franchise joint venture transactions we're not putting in capital.

And as is the case with most of our franchise restaurant arrangements we will receive royalties on Burger King restaurants once they are converted.

Okay.

And then on the Tims transaction can you talk a little bit about the structure of that deal to the extent you're willing to, who the partner is?

Is it exclusive?

Is the how you plan on going about this in the future, or would others maybe get territory rights if either milestones don't get met or just in general?

And I know I'm sneaking in a third, but also your CapEx this year is only $80 million year to date and you've talked about $180 million.

Is still $180 million the right number?

And is it back end loaded or is it going to be lower?

Thanks.

Yes, John, so on the Cincinnati deal, I think there are a couple of characteristics that we look at in that transaction that we will look to replicate across other transactions.

And the real keys there are one, there is significant upfront capital that's committed to ensure that we have the resources that are needed to deliver on the development agreement.

And that's a characteristic that you've seen across our Burger King development deals and it's one that we'll seek to replicate in our Tim Hortons deals.

You will also see a pretty aggressive development plan.

We view it as one of the critical elements to success that we need to achieve a certain level of density, and we've seen that across our Tim Hortons market in Canada and in the US.

And so we're going to seek to achieve a certain level of density that will allow us to be successful, allow our franchise partners to be very profitable.

And you will see territorial rights, so that our partners who commit to developing in an aggressive manner have the right to oversee development in that area.

So those are the really critical elements of those transactions that I think are common with the models that we've seen in Burger King, and you should expect to see us replicate it in other transactions going forward.

On your CapEx question, I think the $180 million you reference was our estimate at the beginning of the year, that was our disclosure.

And we don't have any updates.

We're not going to update that at this point.

Okay.

Thank you.

And our next question comes from Karen Holthouse of Goldman Sachs.

Please, go ahead.

Hi, guys, thank you for taking the question.

Congratulations on another strong comp quarter.

I have a question about also international development, and going back to some of the original agreements that were signed where my understanding has been that they came with some pretty significant upfront unit growth commitments.

In the three or four years, or I guess three years, since then I'm curious what sort of progress has been made against those original unit commitments and how much of the pipeline -- the committed pipeline is left?

Hello, Karen, it's Daniel.

We're obviously very pleased with the model that we took at Burger King several years ago when we put these great joint ventures in place in places like Brazil, Russia, China.

As Josh mentioned, since then we've actually struck new agreements in places like France, Italy, Poland.

So while we're pleased with the results from some of these existing joint ventures, in the coming quarters and coming years we're going to see the restaurant development ramp up from these other countries.

Actually, in most of the cases if you go back, we're outperforming what we thought we would achieve.

And when you look at the restaurant pipelines that some of these bigger joint ventures have, the pipeline for the rest of this year, the pipeline for next year, the pipeline for years after, they remain quite robust and the relationship we have with our partners all around the world remains strong.

The returns on capital developing new Burger King units remain quite strong as well.

So the combination of successful partnerships, well-capitalized joint ventures, great returns on their capital, and just very positive momentum in performance with the brand gives us confidence that we will be able to continue growing the pace of the Burger King brand around the world.

And equally exciting is the prospects of bringing the same development model to Tim Hortons.

You saw the two maps that we put in our presentation.

There is so much opportunity in the world for us to be developing Tim Hortons.

And if you go back just a few years, if you look at the pace of growth at Burger King back in 2010 when we had acquired the brand, it was actually similar to where Tims was last year.

And obviously, it takes some time and a whole lot of hard work and great partnerships, but last year we crossed 700 restaurants on Burger King.

So when we look at the outlook for Tim Hortons we really see great opportunity to develop Tim's brand all around the world.

Thank you.

Thanks, Karen.

And our next question comes from Jeffrey Bernstein of Barclays.

Please, go ahead.

Great.

Thank you.

Two questions.

Just one, you mentioned in your prepared remarks the focus on the franchisee probability.

Just wondering if you could talk maybe a little bit about, specifically the US Burger King franchisees?

Seems like there are increasing pressures primarily related to labor.

I'm just wondering when you talk to these franchisees what's your suggestion in terms of pricing or price increases, I should say, to mitigate it or maybe you're hearing from the franchisees that the sales have been relatively strong and therefore they're perhaps more comfortable lagging on price and maybe better supporting value?

Just wondering how those conversations are going as we're hearing from franchisees that they're under increased pressure.

That are follow.

And then I have a follow-up.

Hi, Jeff, it's Daniel.

Thanks for the question.

We have two big goals here which are delivering great guest experience and growing our guest satisfaction and growing our franchise owner profitability.

And pleased to report we're executing well in both of those fronts, and we view the best way of growing owner profitably is growing sales.

And you've seen from the results we've done just that, and franchise profitability in Burger King North America is up quite substantially year to date, year on year to high levels.

And we're really pleased with the results.

We're pleased with how we are performing, and it's obviously a balanced approach.

We have premium products, we have value products, we have quarter products.

We reinvest in restaurants.

So there is no silver bullet, but we view the best way of growing franchise profitability is growing our top line.

And there is always going to be -- there is always input pressure, sometimes commodity, sometimes wages, but the way to offset that is to deliver great guest experience and grow our sales.

Got it.

And just as a follow up, in the Asia region you mentioned a couple of times that China and Japan are seeing strong comps.

I think you mentioned China was actually outsized comps.

So I'm wondering would you view part of that strength just due to the lapping maybe weaker compares from the year ago that some your peers are talking about?

Or maybe you can provide some directional color or sequential trends?

Because it does seem like those are industries, those segments, geographies that are really seeing challenges from some of your competitors?

Sure, Jeff.

I'll probably talk to China, which is a very important and growing market for us.

We put a master franchise joint venture agreement in place there, and we have incredibly strong partners and we've grown our scale their significantly over the past few years.

We were quite small and we're opening up a significant number of restaurants.

I think you saw in the presentation we mentioned how many we had open.

We're around 400 restaurants in China.

We're opening up more restaurants, opening up better restaurants, better locations, and have a very balanced approach to our menu and our marketing, and having great partners on the ground running great restaurants enabling us to grow our same-store sales, albeit off a small base still, but very excited.

I was actually there just last week touring restaurants and I liked what I saw.

Great.

Thank you.

And our next question comes from Perry Caicco of CIBC World Markets.

Please, go ahead.

Yes, thanks.

Just a couple of questions specific to Tim Hortons, Canada.

If I could, one, any sense of what the long-term outlook is for the restaurant growth in Canada for Tim Hortons and the role of traditional and non-traditional units?

Yet, thanks for the question, Perry, it's Daniel.

Actually if you see the pace of growth in Canada it still growing at quite a healthy pace, despite the penetration and the strength that the Tim's brand enjoys in our home market.

We view this as still a pretty big opportunity for many years to come.

We're not going to quantify it, but we don't see ourselves slowing down any time soon.

And is non-traditional as much of an opportunity as traditional?

Both, both.

And my second question is do you think the SG&A line at Tim Hortons Canada has pretty much hit its run rate?

Yes, thanks, Perry, it's Josh.

I would say stepping back we've been really pleased with the progress that the team has made at Tims implementing our ownership mindset to costs really across the business.

And I think you see that in the results.

I think you see that across the business though, you see that on the top line where the team has done a really great job driving sales.

You see that in the restaurant growth which has been strong year to date.

You see that in our franchisees profitability, which is at historical highs.

And you see that in our profitability.

So I think overall we've been pleased with the ownership mindset that's been evidenced across the business, and that comes through in all of the lines of business including SG&A.

Okay.

Thanks.

And our next question comes from David Hartley of Credit Suisse.

Please, go ahead.

Yes, thank you very much.

Just two questions here.

On Tim Hortons, the plan to expand the business outside of Canada was, I believe, to be focused more in the US than it was internationally initially.

Have I got that correct?

Is that still the case?

Or maybe you can give us some color on that?

Yes, David, I would tell you that our focus on growing Tims, as you said, was really outside of Canada one of the biggest opportunities that we saw in creating RBI.

But I would say it's really in the US and everywhere else around the world, and we are pursuing both of those opportunities aggressively in parallel.

So I don't think any -- either one of opportunities comes before the other.

It happens to be the case that we signed up our first transaction in Cincinnati this quarter, and we're very excited about that.

But at the same time we are pursuing a lot of really exciting opportunities in a number of other countries around the world.

And we hope to have more to share with you on those opportunities as well in the coming quarters.

Okay.

And just on the pace of growth, when I think about Burger King and I think about Tim Horton units, I think someone was trying to get at the pace of the growth over the next couple of years.

I understand the pipeline is still robust, but in terms of numbers or percentages on your existing store count, do you see that continuing to -- do you see that growing or falling back?

An then where do you see Tim Hortons filling up the gap if it is falling back?

Do you expect a steady growth rate there?

I know I'm asking for a lot, but is there any kind of cadence, color, outlook that you can give us?

Yes, so obviously we don't give guidance, but what I can say is that we're really pleased with the progress we've made at Burger King.

As Dan said, we went from just around 170 net new restaurants a year to now over 700.

And I think we have a number of new master franchise joint ventures in places like France, Southern and Eastern Europe, and India that are just beginning to ramp up their growth.

So I think we see even more exciting prospects for the Burger King brand going forward.

And at Tims we're just getting started.

Even though we are already seeing a very positive pace of net restaurant growth for Tims, we see even more opportunity and we think we're just at the beginning.

So I think our goal over time will be to ramp up pretty aggressively the pace of growth at Tims.

Thank you.

And our next question comes from Joe Buckley of Bank of America.

Please, go ahead.

Thank you.

Quick question, the Tim Hortons deal that was announced obviously in Cincinnati is contingent to areas where Tims has been already expanding in the US.

Is that going to be the game plan over the next couple of years?

Or do you think you will be broader geographically the US?

Hi, Joe thanks for the question.

Yes, I think what you can expect from us over at least the near to medium term is that we will look to build out density in the markets where we are already present as well as expand aggressively into new markets that are generally contiguous with the markets that we're already present in.

So in general that's likely to be the strategy that you see from us in the near term.

Okay.

And then on the Quick deal, could you share some of the factual size elements of the deal?

How many restaurants they have?

How many of those restaurants will be converted to Burger King?

And whether they are all in France or do any spillover into other European markets?

Yes, so Joe, there are about 400 restaurants in France, and we expect to convert the majority of those over time, assuming that the deal is closed as it is proposed.

Okay.

That's helpful.

Thank you.

Thanks.

And our final question today comes from Keith Siegner of UBS.

Please go ahead.

Thank you much.

Josh, the Burger King North America business got to that 40% current image very quickly post your acquisition and using some pretty innovative and creative ways.

We haven't really gotten an update on that.

Are you happy with that status at 40%?

Is this pace still continuing?

Is the pace slowing?

How do we think about system investments continuing along that path, slower, faster, or same rate?

Hi, Keith, it's Daniel.

I know you asked for Josh, but I'll take this one.

Yes, we are excited to take the modern image on the Burger King brand from about 10%, 9% or 10% a few years ago to 40%, and it doesn't stop there.

We need to continue to reimage.

We're going to give you an update at the end of the year on that front, and it's not -- were going to give you an update then and it's not going to stop there either.

We're going to continue to reimage.

Our franchise owners are excited about the Burger King brand reinvesting in the Burger King business.

And one of the ways for us to deliver a great experience for our guests is to deliver in a modern and friendly incredibly strong restaurant.

So that's something that obviously, we are always focused on, and we're not stopping now.

And we look forward to updating you on that in a few months.

Okay.

Thanks.

And then just a quick one on Tim Hortons' distribution business, when you first took over the business we heard a lot about transition, different markets using third parties, and some adjustments that were being made or at least looked into.

What have you done lately with that business?

Has there been any change?

Do you have any new thoughts on the distribution business?

Thanks.

Yes, Keith, as you mentioned we have some markets where third parties deliver the goods to the restaurants, and we have some markets where we, RBI, Tim Hortons, where we delivered the goods to the restaurants.

And we view our goal -- our strategy here is just to make sure we're always having optimal service to the restaurants.

And we don't have any plans to change the method by which we deliver goods.

Some markets are company-supported, some markets are third party, and there's no plans to change that.

Okay.

Thank you.

And this concludes our question-and-answer session.

I'd like to turn the conference back over to Daniel Schwartz for any closing remarks.

Thanks, and thanks for everybody for taking the time to join us today.

We're obviously really excited about the results so far and all the future prospects for these great brands.

We're 100% focused on continuing to deliver great guest satisfaction and growing our franchise owner profitability, and we look forward to updating everybody on our full-year results early next year.

Thanks.

And thank you, sir.

The conference has now concluded and we thank you all for attending today's presentation.

You may now disconnect your lines and have a wonderful day.