Restaurant Brands International Inc (QSR) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Restaurant Brands International Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Markus Sturm, Head of Investor Relations.

Please go ahead.

Thank you, operator.

Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the second quarter ended June 30, 2018.

A live broadcast of this call may be accessed through the Investor Relations web page at investor.rbi.com, and a recording will be available for replay.

Joining me on the call today are Restaurant Brands International's CEO, Daniel Schwartz; and CFO, Matt Dunnigan.

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

Today's earnings call contains forward-looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings.

In addition, this earnings call includes non-GAAP financial measures.

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

Let's quickly review the agenda for today's call.

First, Daniel will start by discussing highlights for the second quarter and will then review our performance at Tim Hortons, Burger King and Popeyes Louisiana Kitchen.

Matt will then review consolidated financial results for the quarter, following which we will open up the call for Q&A.

I'd now like to turn the call over to Daniel.

Thanks, Markus, and good morning, everyone.

Thanks for joining us today.

I'm pleased to provide an update on our progress against the 2018 priorities that we outlined on last quarter's call.

As was the case last quarter, we plan to provide more details than we historically have on initiatives across each of our brands on the call today.

On a consolidated basis, this quarter we grew our adjusted EBITDA to $562 million or $563 million under prior revenue recognition standards, which represents an organic year-on-year increase of roughly 4%.

As a reminder, for comparability purposes, we're presenting 2018 organic growth figures both on a constant currency basis as well as under previous accounting standards in both periods.

Our adjusted diluted EPS was $0.66 per share for the quarter, up from $0.51 per share in the prior year period.

This growth was driven by continued improvement in our top line combined with the redemption of our preferred shares in December of 2017, partially offset by a higher tax rate as compared to last year.

At Tim Hortons, systemwide sales grew by just over 2%, driven by net restaurant growth of 3% and flat comparable sales.

Similar to our results from last quarter, this quarter's results reflect slightly positive comparable sales in Canada, offset by softness in the U.S.

At Burger King, we achieved systemwide sales growth of over 8%, reflecting net restaurant growth of over 6% and comparable sales of 1.8%.

Our global comparable sales this quarter reflect similar results in the U.S. and internationally, with U.S. comparable sales of 1.8%.

At Popeyes, systemwide sales growth accelerated to roughly 11%, driven by net restaurant growth of nearly 8% and comparable sales of 2.9%.

Our comparable sales reflect improved results in the U.S. this year and a continuation of strong sales momentum in our international markets.

We remained confident in our long-term strategies to drive sustainable comparable sales and profitability growth for all 3 of our iconic brands for many years to come.

The 2018 priorities that we outlined in detail last quarter will serve as the foundation for that growth, and we believe that we've made good progress against those priorities.

Let's start by reviewing our results for Tim Hortons.

In the second quarter, adjusted EBITDA was $286 million or $289 million under prior accounting standards, which represents a year-on-year organic decrease of 1%.

Similar to our results last quarter, our year-on-year decrease this quarter is driven by a decrease in our supply chain business, which is lapping last year's pricing structure and the rollout of espresso equipment, both of which only occurred in the first half of 2017.

Looking ahead, we expect our organic adjusted EBITDA growth profile for Tim Hortons to improve in the second half of this year.

Comparable sales at Tim Hortons in the second quarter improved sequentially from the first quarter.

However, we still have more work to do to further improve our results.

This quarter, global comparable sales were flat, reflecting Canada comparable sales of 0.3%, offset by continued softness in the U.S. Comparable sales in Canada reflect growth in cold beverages, breakfast foods and lunch, while softness in the U.S. was driven by weaker sales of brewed coffee and baked goods, partially offset by strength in breakfast foods and cold beverages.

We have continued to make tangible progress against the Winning Together plan that we announced earlier this year.

The plan, which was established in partnership with our franchisees to improve results in Canada, centers around driving improved guest satisfaction and franchisee profitability through a focus on 3 main pillars: product excellence, restaurant experience and brand communications.

As it relates to product excellence, we are focused on a number of important initiatives, including Breakfast Anytime, which we officially launched across all of Canada last week.

According to third-party CREST data, breakfast foods were the fastest-growing products sold in the p.m.

daypart in Canada.

However, our Tim Hortons restaurants have historically only served breakfast until noon.

As the market leader in breakfast with great breakfast offerings, we believe we're well positioned to capitalize on this evolving consumer demand.

But we wanted to ask our guests directly before pursuing the initiative.

The feedback was clear.

Based on third-party quantitative research of our guests, this is what we learned.

Our Breakfast Anytime program appealed to roughly 75% of respondents, and roughly 60% of our guests indicated they would likely buy a breakfast sandwich after 12 noon, representing a sizable incremental take at opportunity; and 1/3 of our guests said that our Breakfast Anytime program would increase their frequency of visits to Tim Hortons restaurants overall.

In short, Breakfast Anytime is something that our guests are asking us to provide.

This program, which involves serving the majority of our breakfast products all day, will allow us to capture this consumer demand, and we firmly believe that it will drive comparable sales momentum.

We're also making good progress in the restaurant experience pillar.

Within just a matter of weeks after launching our new Welcome Image, more than 1/3 of our Canadian franchisees signed up a total of over 650 restaurants to complete a remodel in 2018 or 2019.

We are well on our way to reaching our objective of having a majority of our restaurants in Canada on the Welcome Image by 2021.

On brand communications, we had several positive developments over the past few months.

Within the last few weeks, we rolled out new in-restaurant signage as well as new Timbits packaging across Canada, which reflect improved brand imagery.

We have plans to launch many more updates to our brand's visual cues, including further packaging updates throughout the balance of this year.

We also held our Annual Camp Day at Tim Hortons restaurants across Canada and the U.S. this quarter, and we are proud to have raised over CAD 13 million for our Tim Hortons Children's Foundation.

Thanks to the generosity of our guests, franchisees and their team members, approximately 20,000 children from low-income families will be given the opportunity to participate in a life-changing camp experience at 1 of our 7 camps across Canada and the U.S. this year.

Also under our brand communications pillar, we have improved the frequency and the quality of our communication with franchisees and with the media.

Alex Macedo and his team traveled across Canada this quarter to conduct regional franchisee town halls.

We've also implemented biweekly, all-franchisee calls to discuss the status of our initiatives under the Winning Together plan.

This improved frequency and quality of communication with our franchisees has helped to further bolster support within the Tim Hortons system.

This quarter, Alex and his team also did several interviews with the media to provide updates on some of the great initiatives that we've been working on with our franchisees.

But it's worth highlighting that most of these great initiatives that we've talked about today, including the rollout of our Welcome Image and Breakfast Anytime, are not yet reflected in our results at the end of the second quarter.

As we execute against these initiatives, we expect that they will improve our comparable sales results, and core to executing well against our plans is listening to and working closely with our franchisees.

Every month, we meet with our Tim Hortons franchisee advisory board, which is comprised of 38 franchisees who are elected by their peers to advise us on topics ranging from operational excellence to profitability to marketing and menu.

Every fall, an open nomination process allows all franchisees the opportunity to seek election to our franchisee advisory board, and a secret ballot vote is held annually where franchisees elect their representatives to our advisory board, the outcome of which is determined by a majority vote.

These elected representatives of the franchisee community each give us hundreds of hours of their time every year, and I think we haven't done enough talking about their important contributions to our business.

In the second quarter, among many other initiatives, they helped shape how we tested Breakfast Anytime.

They gave us guidance on how to structure our new loyalty program test.

And they're advising us on our test of a new kids' menu.

We mentioned last quarter that we are committed to being more proactive in our communications with restaurant owners and with the media.

In addition to making tangible progress doing precisely that, this quarter we also hired Duncan Fulton as RBI's Chief Corporate Officer.

Duncan has a successful, long-standing history managing retail businesses in Canada, with a particular expertise in communications and brand building.

We're glad to have him on the team to help us on the brand communication pillar of our Winning Together plan and to also help us more broadly on improved communications across RBI as a whole.

This quarter, we also announced that we will be investing CAD 100 million to strengthen our Tim Hortons supply chain network in Canada over the next 2 years.

The investment involves building 2 new distribution centers in Alberta and British Columbia and expanding our existing facility in Nova Scotia.

This investment will allow us to in-source the distribution business for cold and frozen products to most of our restaurants outside of Ontario and Québec, where we are the primary distributor of such products.

We believe that this in-sourcing will provide both operational and financial benefits to franchisees in Western and Eastern Canada because it will meaningfully streamline the ordering and shipment-receiving processes for them.

We expect to complete these projects in 2020, and at such time, we will generate additional income as a result of the in-sourced distribution responsibilities.

This initiative is a good example of us investing alongside our franchisees to strengthen and grow the Tim Hortons brand for all stakeholders.

As it relates to restaurant development, we continue to maintain a more selective approach to new site development in Canada, while at the same time making good progress accelerating the pace of growth in international markets.

This quarter, we entered into a master franchise joint venture agreement with Cartesian Capital Group to develop and open over 1,500 Tim Hortons restaurants throughout China over the next decade.

Expanding into China represents a tremendous opportunity to introduce our iconic Tim Hortons brand to more than 1.3 billion people, and we're confident that the Tims offering of high-quality coffee, great value and a modern and inviting restaurant setting will resonate well with guests in China.

Let's now turn to our results at Burger King.

Systemwide sales growth of over 8% during the second quarter was driven by continued momentum in both net restaurant growth of over 6% and comparable sales of 1.8%.

Growth in the top line resulted in BK adjusted EBITDA of $236 million for the second quarter or $232 million under prior accounting standards, which represents a year-on-year organic increase of over 6%.

Our global comparable sales this quarter were in line with our U.S. comparable sales of 1.8%.

Our results in the U.S. reflect continued strength from our promotional offers and product innovation.

Internationally, our comparable sales reflected continued strength in markets like Russia and Turkey, partially offset by softer comparable sales in Germany and in Australia.

We're proud to have achieved continued momentum growing our systemwide sales at Burger King.

We believe that strengthening and growing each of our brands will drive the greatest return for all of our stakeholders in the long run.

We often describe our company as having an ownership mentality.

However, sometimes that description is misinterpreted as being interchangeable with a prioritization on cost management.

That's wrong.

Fundamentally, we are a growth company.

The long-term results that we've delivered at Burger King clearly demonstrate this.

Over the last 8 years, we have grown Burger King systemwide sales by more than 40% from $14.8 billion in 2010 to $21.2 billion on a trailing 12-month basis, while at the same time maintaining this cost discipline.

Our ability to prioritize and achieve significant top line growth, while also being disciplined on cost, is something that we've had a consistent track record of.

So much so, that the INSEAD School of Business recently published a case study on Burger King that focuses exactly on this point.

In particular, the case study highlights how we've been able to cost efficiently launch many successful marketing campaigns, each of which has helped to strengthen the brand.

And our accomplishments in marketing and brand building at Burger King continue to be highlighted by many others as well.

For example, this quarter, Fernando Machado, our Chief Marketing Officer for Burger King, was named one of the top 10 most innovative CMOs in the world by Business Insider.

Under his leadership, Burger King won the Creative Marketer of the Year Award at Cannes Lions last year and also received roughly 25 unique Cannes Lions Awards this year, which brought our total such awards over the past 4 years to nearly 100.

As of June 30, we also earned 12 Yellow Pencil Awards from D&AD within the past 4 years, making us the second-most highly awarded brand of all brands in the world.

This quarter Burger King was also announced as the Client of the Year for the first time ever at the One Show, which is the most important advertising and design award show in the U.S. Achievements such as these speak to the hard work and the creativity of our marketing teams at Burger King, and they also represent third-party validations of us being strong custodians and promoters of brands.

With the marketing teams and the plans that we have in place at Tim Hortons and Popeyes, our goal is to one day have all 3 of our brands similarly recognized.

Recognitions of our Burger King brand strength also extend beyond marketing.

Just weeks ago, for the first time, Burger King was voted the #1 Best Food Brand in Brazil by Ipsos based on consumer surveys completed all around the country.

This is a goal that our partner in Brazil has been working long and hard to achieve for over 7 years now and is a testament to the strength of our partners, our master franchise business model and our focus on building the brand over the long run.

I want to congratulate our partner in Brazil for such a great accomplishment.

As it relates to development, we grew our Burger King restaurant count by roughly 6.5% year-on-year.

This represents a modest sequential deceleration versus the first quarter, largely because our improved first quarter results this year reflected earlier openings in certain countries as compared to the prior year.

Net restaurant growth can sometimes vary quarter-to-quarter, but our pipeline for Burger King remains robust for the second half of this year, and we're confident in our full year outlook.

Now let's review our results for Popeyes.

Second quarter systemwide sales growth was roughly 11%, driven by net restaurant growth of nearly 8% and comparable sales of 2.9%.

This top line growth resulted in Popeyes' adjusted EBITDA of $40 million, or $43 million under the prior accounting standards, up 28% organically versus the prior year period.

Because we acquired Popeyes at the end of the first quarter last year, this was the first quarter that we started lapping the revised G&A structure under our new ownership of the brand.

While our organic year-on-year adjusted EBITDA growth for the brand remains strong this quarter, it has declined on a sequential basis versus the first quarter since most of the integration-related synergies at Popeyes were realized quickly last year.

We continue to see significant growth potential for the brand for many, many years to come, which will be driven by accelerated systemwide sales growth.

Comparable sales for the quarter were driven by U.S. comparable sales of 1.8% and to a lesser extent significant strength in international markets, including Canada and Turkey.

Our results in the U.S. reflect a continuation of improved balance in our menu across price points and successful limited-time offerings as well as the benefits from our delivery tests.

Popeyes restaurants testing delivery in the U.S. have performed particularly well, and we intend to further expand the number of restaurants offering delivery throughout the balance of the year.

In addition to our continued rollout of delivery, this quarter we released 2 brand-new point-of-sale cash register solutions to Popeyes franchisees.

For several years, much of the Popeyes system has operated on a very antiquated point-of-sale technology, with upwards of more than 40 different cash registers in operation across the U.S. However, under Josh's leadership as Chief Technology and Development Officer, working closely with our Popeyes franchisees, we're now rolling out unified POS solutions across the country.

This is going to significantly enhance the frequency and the quality of our data and help facilitate app-related integrations and simplify operations for our restaurant staff and their guests.

As it relates to restaurant development, we grew our Popeyes restaurant count by nearly 8% this quarter, primarily reflecting accelerated U.S. growth, driven by the numerous development agreements that we have signed domestically since acquiring the business last year.

We signed even more development agreements for Popeyes in the U.S. this quarter, which will support further acceleration in net restaurant growth in the coming quarters.

We're also working closely with our partner in Brazil in anticipation of our first openings in the country, which we hope to complete before the end of this year.

We are also having several conversations with existing and prospective partners in other countries to pursue similarly structured development arrangements, which we believe will collectively fuel net restaurant growth for many years to come.

Given the small base of existing restaurants today, our goal, which we have high conviction in, is to make Popeyes one of the fastest-growing global QSR brands in the world.

The momentum we have had in signing development agreements within the first 15 months of owning the brand puts us well on our way to achieving that goal.

I'd now like to turn the call over to Matt.

Thanks, Daniel.

This quarter, adjusted EBITDA was $562 million or $563 million under prior accounting standards, up organically nearly 4% year-on-year.

Our second quarter adjusted net income was approximately $313 million or $312 million under prior accounting standards.

This compares to prior year results of $242 million, and the year-over-year increase is attributable to adjusted EBITDA growth and the redemption of our preferred shares in December of 2017, partially offset by a higher tax rate in 2018.

This led to adjusted diluted EPS for the quarter of $0.66, up from $0.51 in the prior year period.

As it relates to the impact of the new revenue recognition standard, we wanted to point out some factors influencing our results this quarter under the new standard for Tim Hortons and Burger King.

Our results at Tim Hortons in the second quarter reflect a smaller impact of revenue recognition than would normally be expected purely from the amortization of franchise fees, primarily due to the timing of ad fund-related revenues and expenses.

Last quarter, ad fund expenses exceeded revenues at Tim Hortons, whereas in this quarter the opposite occurred.

Prospectively, we anticipate the quarterly mismatch in the timing of revenues and expenses may continue.

However, in the long run, these ad funds are managed such that the total cumulative revenues equal total cumulative expenses.

As a reminder, under the new revenue recognition standard, upfront franchise-related fees are recognized as deferred revenues, which then amortize into revenue over the life of the underlying contract.

In circumstances where the underlying contract is modified, the remaining unamortized balance of the deferred revenue is recognized in full.

This quarter, we modified certain franchise contracts at Burger King, which resulted in the recognition of unamortized franchise fees under the new accounting standard but not under prior accounting standards.

Accordingly, our second quarter adjusted EBITDA at Burger King was higher under the new standard than it was under prior standards.

While franchise agreement modifications such as this can happen from time to time, they are situation specific; and as a result, we anticipate that the impact of the new revenue recognition standard on our results will be larger in future quarters.

In addition, as mentioned last quarter, the new revenue recognition standards will have a larger impact on periods in which more openings occur; and therefore, we anticipate a larger impact on franchise fees in the second half of the year.

Now let's discuss our cash generation and capital allocation for the quarter.

In the second quarter, we generated free cash flow of approximately $398 million, calculated as the sum of cash flows from operating activities and investing activities.

We also paid a total of approximately $210 million in common dividends and partnership exchangeable unit distributions this quarter.

As of June 30, 2018, our ending cash balance was just under $1 billion, our total debt balance was $12.2 billion, and our net debt was $11.3 billion.

As Daniel mentioned, this quarter we disclosed that we plan to invest a total of CAD 100 million to strengthen our Tim Hortons supply chain network.

We anticipate that the majority of the overall investment will be incurred in 2019 during the construction of our facilities.

However, there will also be some expenditures in 2018 related to the acquisition of real estate in British Columbia and Alberta.

This morning, we also announced that the RBI Board of Directors has declared a dividend of $0.45 per common share and partnership exchangeable unit of RBI LP, payable on October 1, 2018, which is consistent with our previously announced target of $1.80 in total dividends to be declared in 2018 and also with our strategic priority of maintaining a balanced approach to capital allocation.

Thank you, everyone, for joining us on the call this morning and for your ongoing support.

I'd now like to open up the call for questions.

Operator?

(Operator Instructions) And our first question comes from John Glass of Morgan Stanley.

On Tims and the launch of breakfast all day, I think, Daniel, in your comments that it really drives sales over the long run.

But it sounds like from your comments this is an immediate desire from the consumer.

So can you talk about how you think the impact of breakfast all day unfolds?

And operationally, how are you handling this?

Has there been incremental equipment that's been necessary?

How do you ensure that speed of service, for example, doesn't get bogged down with the new initiative?

Yes.

Thanks, John.

Yes, so on the product excellence front, we launched Breakfast Anytime this past week.

Although early, we're encouraged by the initial results.

Strategically, we think it makes a lot of sense for our business because our guests have been asking for it.

Breakfast is the fastest-growing market segment and area where we've seen more growth, and it's a natural connection with coffee, and we have Canada's best coffee.

You're right.

It didn't impact our Q2 results because we'd just launched it here in July.

We didn't have to bring new equipment on for this initiative.

We had a pretty robust operational test together with our franchise -- members of our franchise-elected advisory board, to ensure that we would be able to execute on this in a way that we could deliver that great Tim Hortons experience to our guests.

So we are predominantly a breakfast and beverage brand, and this is a great way for us to extend that throughout the day.

But this is just the first of many initiatives under the product excellence pillar of the Winning Together plan.

We're working closely with the restaurant -- with our restaurant owners, with our Advisory Board on developing a kids menu, something that we're really excited about.

We're working on ways of integrating loyalty, both card-based loyalty and app-based loyalty.

We're already market testing that.

And so we have a number of these initiatives that we expect to come in the coming months, which give us conviction in the improvement in our same-store sales in the future.

Our next question comes from Mark Petrie of CIBC.

I also wanted to ask about Tims.

And I guess, maybe 2 parts.

One, in terms of the U.S., could you just sort of outline what steps you're taking to reposition that business for growth?

Or should investors look at the U.S. as more of a maintenance market as you turn your focus to international growth?

And then, I guess, related on the international growth side, just wondering if you can give a bit of background to the deal in China with a long-time BK partner in terms of how that deal came about?

Why now?

And then more broadly, how you think about leveraging existing partners for international growth as a potential accelerator for Tims and I guess Popeyes too?

Yes, sure.

So we would expect that many elements of the Winning Together plan, many of the elements within the pillars are -- will, ultimately, also be relevant for the U.S, and we would look to pull certain initiatives from Canada to the U.S. No, I would not look at it as a maintenance mode.

We are still excited about the long-term growth opportunities for the brand in the U.S. We did struggle early on, but that does not change our conviction and our ability to drive the long-term growth of the brand in the U.S. And I think pulling some of the elements of Winning Together into the U.S. will help us achieve that.

We're excited about China as well.

As you know, we -- since acquiring the brand, we have taken Tims to the Philippines, the U.K., Mexico.

We've now announced plans to build a number of restaurants in the coming years with a long-standing BK partner for China, and we're well on our way of building out our team, working with our supply chain, building out our menu, all of the natural steps in the process to successfully launch a brand -- our brand there.

And I think, look, stepping back, what's interesting, if you look at the pace at which our business is growing, I think if you look at our kind of -- our blended same-store systemwide growth, it's around 7% this quarter.

And we haven't scratched the surface with Popeyes or with Tims yet.

And I think these are just some examples.

If you look at Tim Hortons in China or Popeyes in Brazil or elsewhere where we're working, I think that these development agreements, successfully executed, that's what's going to enable us to really accelerate the pace of growth all around the world.

Our next question comes from David Palmer of RBC Capital Markets.

A question on your unit growth.

Just looking globally across all of your businesses, it's about 5%, Popeyes higher than that, Burger King slightly higher than that.

Looking medium to long-term, do you think unit growth will accelerate, remain the same?

And thinking through it conceptually, do you think you'll get to a law of big numbers, perhaps, with areas like Tims Canada but that will be picked up by Popeyes?

How are you thinking about how the unit growth will play out?

Yes.

Dave, thanks for the question.

I think -- if you look back to Burger King in 2010, that was a brand that was growing around 170 restaurants.

And last year, I think we crossed the 1,000 incremental.

And that was by building out our businesses in places like Brazil, Russia, China, France and in the U.S. as well, which is now a growth market.

With Popeyes, we're already starting to see the benefits of some of the development agreements that we've signed with partners in the U.S. Tim Hortons, we've already planted the seeds internationally.

Popeyes, we're working hard.

We've signed 1 agreement already in Brazil, and we're working hard to sign several other agreements.

And I hope the next time we're all together here in the Q3 or Q4, I'll be able to report on more progress there.

And then if you kind of look at our growth, the percentage of our growth -- a percentage growth across the brand, as you mentioned, is at around 5%.

Look, over time, we would expect this to increase as we expand the pace of growth, as we accelerate the pace of growth for Popeyes and for Tim Hortons.

I think in my prior answer to the last question I was saying we've kind of barely scratched the surface on the international growth front for both of those brands.

So as we start ramping that growth up, we would expect -- over time, we would aspire to grow faster.

Our next question comes from Andrew Charles of Cowen and Company.

Two questions from me.

Daniel, you mentioned the creation of the Chief Corporate Officer role.

Within his first month, what has Duncan been more focused on?

And what gives you confidence and early signs of traction improving Tims franchise relations?

My second question is for Matt.

Looking at Tims supply chain -- look, we saw that, obviously, there were outages in April while you lapped the sale, the high-margin espresso equipment in April 2017, as well as experienced the last quarter before lapping the new pricing structure implemented in 3Q '17.

Yet, we saw that there was a sequential improvement in Tims' distribution margins from 1Q to 2Q '18.

What do you attribute that to?

Yes, sure.

So I'll -- I can take the first question, and I'll pass it to Matt.

Look, I think -- on the communication front, we made a commitment to improve our communication.

We shared this with you last quarter.

And I'm pleased to say we've made great progress here.

In Canada, we've been much more proactive with the media, with Alex Macedo and his team doing a number of interviews.

We hired Duncan, who's a very experienced Canadian communications executive, to join our team.

We had an amazing Camp Day.

We raised CAD 13 million for our Foundation.

And we've improved communications with our franchisees; biweekly, all-owner webcasts give good updates on the progress of our initiatives.

We have a great agenda here, and I'm excited that we're doing a better job sharing it with the world in a positive way.

I think you've seen a real shift for the better in our relationships with the Canadian restaurant owners over the last 6 months.

And Alex and his team have been traveling the country, sharing the Winning Together plan with restaurant owners, and we feel that we have strong support across the system to execute on this and grow the size of the business in Canada for many years to come.

Thanks for the question, Andrew.

Regarding the Tims supply chain, I think -- as you mentioned, in the past we talked about some of the pricing adjustments that we made and how that affected margins.

And what we saw here from Q1 to Q2, I think reflects pretty typical seasonality differences between the quarters in our supply chain business as a result of product mix and, as I mentioned, seasonality.

So if you look back historically, our Q2 margins tend to be generally higher than Q1, and the trends followed a similar path this quarter.

Our next question comes from Dennis Geiger of UBS.

I'm wondering if you can talk a little bit more about the Tims sales trends in Canada for the quarter beyond the contribution from cold beverage, from breakfast and some from lunch.

Can you just comment on what else you saw with respect to any difficult weather impact earlier in the quarter and if anything else drove results?

If the macro is getting better, or if you saw any benefit from improved media headlines in recent months.

And then just wanted to ask one more broadly, just about the Winning Together plan.

Lots of positive developments recently, a whole bunch of sales initiatives coming soon.

How much can solid execution against the plan benefit the international master franchise development agreements and, ultimately, growth?

Yes.

So within the Canada comps in the quarter, I think we said they were slightly better during the second quarter.

We grew our cold beverage business, including Chocolate Chip Iced Capp, we grew our breakfast.

That was offset by some softness in brewed coffee, and that was kind of the picture for the quarter.

As I mentioned, the results from the Winning Together plan and the initiatives from the Winning Together plan didn't quite impact those results just yet.

But when I look at what we're focused on, the Breakfast Anytime, kids, loyalty to reward our more frequent heavy users, these are all initiatives that will contribute to kind of positively driving profitable sales for our restaurant owners.

Look, certainly, improved communications is helpful.

It's hard to kind of quantify it, but I think we've done a much better job and much more proactive job with the media.

And I think you're going to continue seeing is do that for the long run.

And as it relates to international master franchises, we're excited about all the great growth prospects for them all around the world.

Each country is kind of different, and they are at very different stages than Canada.

But our team is committed to working hard, to making them work and making them very profitable ventures for our partners all around the world.

Our next question comes from Nicole Miller of Piper Jaffray.

I wanted to ask about delivery.

So I think it's very fascinating that the role sits at the corporate level in terms of the Chief Technology Officer.

So I'm trying to understand, are you creating something sort of brand agnostic at the corporate level and engineering that down to support the brands?

Or is something else happening differently?

And then just maybe as a proxy or an example, could you talk about Burger King and why not faster?

When I think about the peer set, they're benefiting from remodels, value and also delivery.

And it seems that your ramp is a little bit slower, whereas others have sort of this national ambush.

Is that something that you expect to roll out faster?

Yes.

I think, more broadly, stepping back, part of the benefit of the creation of RBI and part of the benefit the brands have with RBI is to benefit from these global functions, like technology, like development, where we can kind of leverage best practices, best partners and enable our brands to move faster.

Within the brands, we do have kind of ownership of digital projects and delivery, and we've moved fast on Popeyes.

We saw how strong their delivery sales were when we kind of got involved in the brand, we've rapidly accelerated the pace of delivery rollout for that brand in the U.S.

But Burger King restaurants, we have thousands of restaurants in the Burger King system all around the world doing delivery now, and we've made that a major priority for us to increase that number.

We have been increasing across a number of partners in the U.S. more recently, and we're continuing to expand the size of that test.

It's no longer kind of insignificant.

It's pretty big for us.

And we're actually piloting now in Canada too with SkipTheDishes with Tim Hortons.

So it's something that's important and another channel, another sales channel and one that we feel that we should be present with across all brands and increasingly -- increasing geographies as well.

Our next question comes from Brian Bittner of Oppenheimer.

Two completely separate questions.

First question, would you be willing to maybe walk us through how you guys think about where your EBITDA growth should be moving forward over the long term?

We kind of are seeing mid-single-digit EBITDA growth now that you're lapping the Popeyes acquisition.

And maybe you could kind of get us all on the same page on how you think about that over the long-term and maybe give us a bar to critique you against moving forward.

That's the first question.

Second question on Burger King comps.

As you analyze those comps this quarter versus the first quarter, is the slowing in the trend all related to the tough comparison that you're obviously facing?

Or is there anything else that can unpack for us as it relates to the slower Burger King comps?

Yes.

It's Daniel, I think I can handle both questions.

Look, our ultimate goal here is to grow the size of the brands all around the world.

We want to grow our systemwide sales in a way that's profitable for our restaurant owners.

And as we grow our sales, both through new restaurants and the sales at existing restaurants, we need to do that in the way that's going to continue driving profitability growth for our restaurant owners.

I'm pleased to say through the first half of this year we've grown profitability for our restaurant owners at Tims in Canada, at Burger King and Popeyes in the U.S. And that's our primary goal here.

And as we grow the size of our systemwide sales and we maintain cost discipline, that over time will allow us to grow our EBITDA or EBIT, whichever metrics you want to look at.

We haven't guided their historically and we don't plan to guide.

But I think if you kind of understand our first and primary goal is growing the top line at -- in a way that's going to allow our franchisees to be profitable, that will ultimately allow us to grow our profitability.

As it relates to the BK comp, the comp was a little bit softer than it was in the first quarter.

I think if you take a step back, we grew sales -- at least for Burger King in the U.S., we grew sales from around $1.1 million per restaurant to around $1.4 million over the last 7 years.

In doing so, we did that at the same time by dramatically improving franchisee profitability.

We did it by renovating restaurants, improving operations, communicating to our guests through some award-winning marketing and innovating and offering great products at affordable prices.

We continue to grow our business in the second quarter.

We've always said that some quarters will be a little bit little stronger than others, and we look out for the long run.

We're confident that 7 years from now, or pick a time, that we'll be able to kind of make similar statements, that we'll be able to have grown our business significantly.

Our next question comes from Peter Sklar of BMO Capital.

This is Jennifer Panes filling in for Peter.

My question is just a simple one.

On the Tim Hortons Canada comp, was there any pricing increase involved in that comp?

Or -- and if there was, how much?

Yes.

So we take -- we do take price from time to time across all the brands, and there was price involved there, though we haven't quantified that.

Our next question comes from Gregory Francfort of Bank of America.

I got 2 questions.

The first is, I think when you bought the Tims business the message there from you guys was that there was a sizable, mostly fill-in opportunity in Canada.

And I think since then, you've added roughly 500 stores up there.

How far the way through that process, the fill-in process, are you?

And then the other question I have is, can you provide us an update on what profitability levels are for Burger King U.S. and Tims Canada?

Yes.

So we're confident that we can continue growing the business in Canada at the pace that we're growing it now.

We work just kind of very selectively with our restaurant owners to develop restaurants that are going to be profitable for them.

And again, that's our primary goal.

And I'm sorry, what was the second question?

Around...

What's your unit (multiple speakers)

Yes, sorry, profitability.

Yes, on profitability, we had given an update earlier this year, and what I could say is that profitability is up year-to-date across all 3 of the brands.

Our next question comes from Karen Holthouse of Goldman Sachs.

You've mentioned in the prepared comments, the commentary on ad funds, revenue versus cost mismatches at Tims this quarter versus the last quarter.

Was there anything notable at Burger King in terms of a revenue or cost mismatch this quarter or last quarter?

Thanks for the question.

It's Matt here.

So as you mentioned, we did point out that there -- last quarter that over time we would have some timing differences from quarter-to-quarter in the ad funds between revenue and expenses.

But we would expect over the long run that, that generally evens out and is flat.

And we saw a bit of that in Tim Hortons this quarter.

At Burger King, didn't really see a significant impact there to note related to the ad funds in the quarter.

Our next question comes from Patricia Baker of Scotiabank.

My questions are on Tim Hortons ex Canada.

So first of all, in the U.S, you noted that you saw particular weakness in coffee and baked goods.

Is there anything you can share with us or any insights you have on what might have caused that, why that might be?

And then looking at Tim Hortons internationally in the markets that you're in, the U.K., Philippines, et cetera, you noted that every market is a little bit different.

And I would be very curious to hear how the markets are differentiated and what the early learnings are in the international markets with Tims.

Yes.

No, look -- I think -- in the U.S., it's been a competitive environment.

As we said at the beginning of the year, we brought a new team in, led by Alex Macedo, to oversee the Tims business.

They've been primarily focused on developing the Winning Together plan in Canada.

And now I think there are elements of that around restaurant renovation, new product introduction that we are looking to bring to the U.S. to help offset some of the softness that we had there.

I think -- it's very early in the -- in terms of the expansion in the international front.

Each of the markets is different.

As these markets are for -- and our other 2 brands as well, we are encouraged by the pace of initial growth.

And our encouragement and confidence in the business is one of the things that let us further expand the brand to China.

So I hope in the coming quarters we have more good news to report in terms of further Tim Hortons international expansion for you.

Our next question comes from Matt McGinley of Evercore ISI.

On the Horton supply chain, you've already commented on some of the noise with espresso brewers and seasonality.

But my question is more on should the supply chain margin rate more closely reflect what we saw in the back half of last year as a steady state?

So when you quote the CAD 100 million investment in the supply chain in the future, is that a capital investment?

Or are you quoting or saying that's the reflection of what the cost of running the network will be when established?

Matt, thanks for the question.

It's Matt here.

As it relates to the supply chain margin, we mentioned some of the structural changes that occurred last year and that we felt we're operating with the right structure in place going forward.

And as I mentioned before, there can be some seasonal fluctuations like the ones that we saw from Q1 to Q2.

As it relates to investment, I think in supply chain was your -- distribution centers was your second question?

We -- can you just repeat the question?

So when you're quoting the CAD 100 million investment in the supply chain, is that something that will be more of a capital expenditure that we can expect to see, I think you said in 2020?

Or is that just a reflection of what the cost of running that system will be at steady state?

No, that's exactly right.

The CAD 100 million investment that we mentioned is a capital investment that we expect to occur over the next couple of years, with a bid in 2018, as we mentioned, related to the acquisition of some new properties for the project, and the bulk of it occurring in 2019.

Our next question comes from Jeremy Scott of Mizuho.

On the China master franchisee deal, it appears to be an aggressive target over that time frame, and there have been a lot of beverage-led brand expansion in China in the last 20 years.

Some of your closest competitors have signed master franchisee agreements that have struggled to accelerate.

So I guess the first question is how does Tims succeed where the others have failed in China?

And then more generally, how is the master franchisee model for Tims different from other brands in your portfolio?

I suspect that a concept like Tims would need an early spurt of concentrated unit growth to drive awareness and availability and entails unit expansion to follow.

Can you expand on how that might be different?

Yes.

So I think if you go back in time to kind of 2012, I think Burger King back then had around I think -- could be directionally wrong but directionally accurate -- around 50 restaurants.

And last year, we crossed 800 so -- in China -- so we've proven in kind of short periods of time that we could rapidly increase and expand the size of our restaurant portfolio in a profitable way for our partners, which gives us conviction that over the long run we'll be able to do the same with Tims.

I don't know that it's that -- I don't know that the expansion strategy is that different than some of the other brands.

It's important for any of these brands to expand in a way that is going to allow them to create a lot of consumer awareness.

And we're excited.

The model works similar to our other master franchises, and we're excited about Tims in China.

We're excited about Popeyes in Philippines.

And we're excited about all the other -- I'm sorry, Popeyes in Brazil.

We are excited about all the other initiatives that we're working on.

Our next question comes from Will Slabaugh of Stephens.

Just a clarification on the CAD 100 million investment you mentioned earlier.

Just wanted to clarify that, that was going to be on the cash flow statement through CapEx and not any true G&A, first?

And then second, should the eventual revenues from that investment be at a similar margin as the current supply chain margins?

Yes.

Thanks for the question.

It's Matt here.

You're right.

The CAD 100 million investment that we mentioned will flow through CapEx in our cash flow statement over the next couple of years.

And as Dan mentioned, we would expect to earn incremental income from the distribution business on this investment in the future.

However, we haven't provided detailed guidance on the level of that income.

This concludes our question-and-answer session.

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

Thank you, everybody, for joining us today, and we're looking forward to updating you on our progress next quarter.

Thanks.

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