Restaurant Brands International Inc (QSR) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Restaurant Brands International Third 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 third quarter ended September 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 third 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.

Good morning, everyone, thanks for joining us today.

I'm pleased to provide an update on our third quarter results.

On a consolidated basis, this quarter, we grew our adjusted EBITDA to $571 million or $576 million under prior revenue recognition standards, which represents an organic year-on-year increase of roughly 6%.

As a reminder, for comparability purposes, we're presenting the 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 $0.63 per share for the quarter, up from $0.58 per share in the prior year period.

This increase was driven by adjusted EBITDA growth combined with the accretive 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 3%, driven by net restaurant growth of 3% and slightly positive comparable sales.

This quarter's results reflect a continuation of sequential improvement in Canada comparable sales to nearly 1%, partially offset by softer sales in U.S.

At BURGER KING, we achieved systemwide sales growth of nearly 8%, reflecting net restaurant growth of 6% and comparable sales of 1%.

Our global comparable sales this quarter reflect softer results in the U.S. of negative 0.7%.

At Popeyes, we grew our systemwide sales by roughly 8%, driven by net restaurant growth of nearly 8% and slightly positive comparable sales.

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

We remain 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.

Our focus remains on the 2018 priorities outlined earlier this year, most of which we have already made good progress against, but some of which we hope to improve in the fourth quarter.

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

In the third quarter, adjusted EBITDA was $299 million or $294 million under prior accounting standards, which represents a year-on-year organic increase of 4%.

Our comparable sales at Tim Hortons this quarter continued to improve sequentially, but they do not yet reflect several important initiatives in Canada that we plan to launch through our Winning Together plan in the coming months and quarters.

This quarter, global comparable sales were 0.6%, reflecting Canada comparable sales of nearly 1%, partially offset by softer results in the U.S. Our improving comparable sales in Canada reflect growth in breakfast foods driven by our Breakfast Anytime launch, while softer results in the U.S. were driven by weaker sales of brewed coffee and baked goods, partially offset by strength in breakfast foods and cold beverages.

Our improved results in Canada reflect continued progress that we've made against our Winning Together plan, which centers around guest satisfaction and franchisee profitability through a focus on 3 main pillars: product excellence, restaurant experience and brand communications.

Under product excellence, we have several initiatives underway to elevate or product quality with a commitment to offer our guests the absolute best product in the industry for every single item on our menu.

Some of our efforts in this regard are more near term in nature, whereas others will take a little bit more time to perfect, but we are committed to getting it right.

One of the more immediate initiatives within our product excellence pillar was Breakfast Anytime, which we launched nationally across Canada.

We have seen healthy levels of incrementality from this program, both for restaurant level sales and profitability.

While we are pleased with the results of the program, Breakfast Anytime is only the first of many steps we're taking to improve comparable sales in Canada.

Another more immediate initiative we are exploring under our product excellence pillar is a kids menu.

Our Tim Hortons restaurants are already heavily visited by families, and despite that, our current menu has virtually no dedicated kids offering.

As a business that is highly ingrained in local communities across Canada, we believe that we have an opportunity and responsibility to do better than that.

Our goal is to offer a kids menu with products that are both exciting for kids, but that also have the right nutrition for parents to feel good about serving them to their children.

We plan to launch our kids menu in the coming months.

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

Only a few short months after announcing our new Welcome Image, we have now completed roughly 100 renovations under the new image, and we anticipate completing hundreds of additional renovations in the fourth quarter.

We're also currently testing a loyalty program in Canada across several different markets, with each test market offering a different loyalty structure.

We have seen very high loyalty card adoption rates in these test markets, giving us confidence in the potential of the program.

Our current focus is on establishing the most effective offer.

Once we've established the best mechanism, our goal is to launch the program more broadly, initially using analog loyalty cards and then over time, integrating loyalty into the digital channel, including through our mobile app.

Under the brand communication pillar, we've also made good progress with our proactive initiatives translating into a much improved narrative in the Canadian media.

Our team has proactively spent more time with the media, particularly in Canada, to share stories of the exciting things that we have been working on with our restaurant owners and their team members to drive an enhanced experience for our guests.

One key example from this quarter was our annual Smile Cookie week, which received millions of positive media impressions.

Our Smile Cookie Campaign involves the sale of $1 chocolate chip cookies decorated with smiley faces, which are handmade by our Tim Hortons team members in each of our restaurants, and 100% of the sales proceeds are donated to local charities and organizations across Canada.

Thanks to the generosity of our guests, franchisees and their team members, it was our most successful Smile Cookie fund-raising week ever with roughly CAD 8 million of total donation proceeds raised.

We also continue to improve the overall quality of our marketing in Canada, including with the recent launch of our hockey cards program.

We supported this launch with several promotional initiatives, including a viral uplifting video documenting a Tim Hortons-sponsored trip to Canada for Kenya's only ice-hockey team with surprise visits from hockey All-Star's, Sidney Crosby and Nate MacKinnon.

The video has secured over 270 million media impressions in Canada and the U.S. and already has over 1.5 million views on Facebook and nearly 1 million views on YouTube.

Another component of our brand communication pillar involves enhancing our brand imagery and packaging.

In addition to launching a new Timbits box last quarter and a hockey theme donut box this quarter, we plan to launch new significantly improved coffee lids and other packaging updates in the coming months.

As it relates to restaurant development, we continue to maintain a more selective approach to new site development in Canada this quarter, offset by accelerated development in our international markets.

Now let's turn to our results at BURGER KING.

Systemwide sales growth of nearly 8% during the third quarter was driven by continued momentum in both net restaurant growth of over 6% and comparable sales of 1%.

Growth in the top line resulted in BK adjusted EBITDA of $231 million for the third quarter or $238 million under prior accounting standards, which represents a year-on-year organic increase of 5%.

Our global comparable sales this quarter were up by 1%, reflecting continued growth in the international markets, offset by softer comparable sales in the U.S. of negative 0.7%.

Internationally, our comparable sales reflect strength in markets like Brazil and Russia, partially offset by a continuation of softer comparable sales in Germany and Australia.

Our softer results in the U.S. this quarter reflect less compelling value offers and the lapping of our strong 2 for $6 launch last year.

Heading into the fourth quarter, we intend to return to a more balanced approach, and in October, you've already likely seen us move in this direction with recent promotional activity.

We continue to believe that we have several opportunities to drive further sustainable growth in the comparable sales over the long run, including through a good pipeline of product innovation to address current menu gaps.

In addition to focusing on menu-related opportunities such as these, our strategy at BURGER KING continues to center around focusing on the following priorities: restaurant image, technology, operations and marketing.

Each of which we believe will help drive sustainable comparable sales over the long run.

As it relates to restaurant image, this quarter, we unveiled our new modern Burger King of Tomorrow restaurant image and our plans to roll out the image across the U.S. While we've made significant progress remodeling and modernizing our restaurants in the U.S. relative to our restaurant image back in 2010, we have continued to refine and to test new design standards to place the greatest emphasis on elements that most positively impact guest experience.

Our Burger King of Tomorrow image contemplates upgrading our restaurants to our most recent Garden Grill design, which has demonstrated strong benefits in guest satisfaction and dine-in comparable sales.

With the majority of our restaurant-level sales generated in the drive-through, our new image also includes exterior guest-facing enhancements like the construction of double drive-through lanes and outdoor digital menu boards.

Double drive-throughs allow for significantly improved throughput and speed of service.

Outdoor digital menu boards drive increased check, allow for integration with other technologies like mobile apps and provide franchisees cost savings on printed media and menu signage.

This image is also focused on building a digitally integrated experience for our guests, including the implementation of outdoor digital menu boards and in restaurant self-order kiosks.

We have also made good progress on other technology-related initiatives at BURGER KING this quarter.

We continue to expand the size of our delivery program with delivery now available in nearly 2,000 restaurants in North American and over 5,000 restaurants around the world.

We also launched our BURGER KING mobile order and pay app in the U.S. this quarter.

The app is already fully integrated with roughly 2/3 of our restaurants in the U.S., and within a few short weeks of launching the app, we have already experienced roughly 2 million downloads.

We will continue to enhance the app over time based on guest feedback, and we'll also pursue integrations with other technologies in an effort to offer our guests a seamless digital experience.

As it relates to operations, since the majority of our sales in the U.S. occurs through the drive-through, we continue to place emphasis on further improving our drive-through speed of service.

While we still have lots of room to improve, we are proud to have been recently recognized by QSR magazine as having the fastest drive-through times among our QSR peers in the U.S., up from fourth place last year.

And as it relates to marketing, we continue to be focused on unique, creative and edgy marketing initiatives.

In the third quarter, some examples include the highly successful emoji and blank ballot campaigns in Brazil and the viral artificial intelligence ad campaign in the U.S. Our accomplishments in this regard continue to be recognized by third-party advertising agencies as being among the best in the world.

In terms of development, we grew our BURGER KING restaurant count by just over 6% year-on-year.

While this represents a modest sequential deceleration, we remain confident in our full year outlook, and we have a robust pipeline of new openings planned for the fourth quarter.

As a reminder, we manage our development pipeline on an annual basis, rather than quarterly, which is consistent with the manner in which the targets are structured in our franchisees development agreements.

This quarter, we also celebrated a development milestone in Latin America, having crossed 2,000 restaurants in the region this quarter.

This accomplishment means that we have almost doubled our footprint in Latin America, since we first acquired the BURGER KING brand back in 2010 and is a testament to the strength of our brand and of our partners in the market.

In particular, it highlights the strength of our partner in Brazil, who has opened a net of over 600 restaurants in the country since 2010.

Now let's review our results for Popeyes.

Third quarter systemwide sales growth was roughly 8%, driven by net restaurant growth of 7.6% and comparable sales of 0.5%.

This top line growth resulted in Popeyes' adjusted EBITDA of $42 million, or $44 million under the prior accounting standards, up 21% organically versus the prior year period.

Comparable sales for the quarter reflect relatively flat comparable sales in U.S., offset by very strong comparable sales in other markets including in Canada.

Our softer results in the U.S. this quarter reflect a shift in media spend toward limited time offers and away from value, which negatively impacted our results as compared to the first half of the year.

To address this going forward, we plan on rebalancing our media spend between value on limited time offers, and we plan to launch more impactful products.

Over the last few months, we have also been highly focused on improving guest experience at our Popeyes restaurants through a variety of operations-focused initiatives.

These initiatives have already translated into material improvements in several guest feedback metrics, including a 10% increase in operational satisfaction within the last 5 months.

As it relates to restaurant development, we grew our Popeyes restaurant count by nearly 8% this quarter, primarily reflecting accelerated growth in the U.S. We also celebrated the opening of our 3,000th Popeyes restaurant.

But what excites us even more than the size of our existing footprint is the several thousands of additional restaurants that we have yet to build.

In that pursuit of growth, we have 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 also announced a master franchise development agreement in the Philippines, marking our first major development agreement for the Popeyes brand in Asia.

With a population of over 100 million people and a strong and growing QSR in chicken market, we believe that the Philippines represents an exciting opportunity for development for our Popeyes brand.

We also recently opened our first Popeyes restaurant in Brazil.

And though still very early, we're encouraged by the positive reception that the restaurant has received from guests.

We continue to work closely with our partner in Brazil to support additional openings in the coming months.

We have strong conviction that the development agreements that we have already signed, combined with additional agreements that we are actively pursuing in other geographies, will set Popeyes up to be one of the fastest-growing global QSR brands in the world.

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

Thanks, Daniel.

This quarter, adjusted EBITDA was $571 million or $576 million under prior accounting standards, up approximately 6% organically year-over-year.

Our third quarter adjusted net income was approximately $298 million or $302 million under prior accounting standards.

This compares to prior year results of $276 million, and the year-over-year increase is attributable to adjusted EBITDA growth and the accretive 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 $0.63, up from $0.58 in the prior year period.

As it relates to the impact of the new revenue recognition accounting standard, we wanted to point out some factors influencing our results this quarter.

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.

As mentioned in prior quarters, the new revenue recognition standards pertaining to franchise fees have a larger impact on periods in which more openings occur.

Accordingly, we saw a larger impact from the new standard on franchise fees at BURGER KING in the third quarter than we have in prior periods.

And we anticipate that the impact will be even larger in the fourth quarter across each of our brands.

It is also important to keep in mind that the franchise fee component of this new accounting standard is noncash in nature.

Regarding the impact of advertising funds, our results at Tim Hortons in the third quarter reflect a net benefit from revenue recognition, primarily due to the timing of ad fund related revenues and expenses.

In the third quarter, ad fund revenues exceeded expenses at Tim Hortons.

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.

This quarter, our adjusted effective income tax rate was higher year-over-year and on a sequential basis.

This year-over-year increase was primarily due to the impact of certain aspects of U.S. corporate tax reform and a significantly lower benefit from stock option exercises in the third quarter of 2018 versus the comparable period in 2017.

The sequential increase in our tax rate this quarter primarily reflects the accrual of year-to-date impact from the realignment of certain intercompany financing arrangements and the nonrecurrence of certain benefits in the Q2 2018 tax rate, including audit-related reserve releases.

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

In the third quarter, we generated free cash flow of approximately $357 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 September 30, 2018, our ending cash balance was $1.1 billion, our total debt balance was $12.2 billion and our net debt was $11.1 billion.

This morning, we announced that we received an exchange notice for approximately 11 million outstanding partnership exchangeable units.

In connection with this exchange, we intend to satisfy 10 million of these exchange requests using cash on hand, which will reduce our fully diluted share count, with the remaining exchange requests, satisfied through the delivery of common shares on a one-for-one basis.

Per the terms of our limited partnership agreement, the exchange notice can be revoked by the unitholder, in part or in full, until October 30, 2018.

And after such time, the exchange notice becomes irrevocable.

We also announced this morning that the RBI Board of Directors has declared a dividend of $0.45 per common share and partnership exchangeable units of RBI LP payable on January 4, 2019, which is consistent with our previously announced target of $1.80 in total dividends to be declared in 2018.

Our increased dividends in 2018 are announced intention to exchange a significant number of partnership exchangeable units for cash, our previously announced investments in our Tim Hortons remodel program and supply chain distribution network, and our continued delevering, illustrate our balanced approach to capital allocation as we look to create further value for all of our stakeholders for many years to come.

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) First question comes from Patricia Baker with Scotiabank.

I just have a quick question on Tim Hortons.

And Daniel, in your opening remarks, you talked about the Breakfast Anytime program and indicated that you saw healthy levels of incrementality with that initiative.

So I just would like you to clarify and just talk about that a little bit more, when you are talking about healthy levels of incrementality, I am assuming that what you're saying there is that this did not cannibalize your breakfast sales, but rather that you had incremental sales of breakfast products beyond what you would normally do in the breakfast daypart?

Yes, Patricia, thanks.

It's Daniel.

Yes, that's right.

Our -- As you saw, overall, our Canada comparable sales continued to improve during the quarter and they're moving in the right direction.

And when you look at the impact from Breakfast Anytime, we -- it enabled us to drive incremental breakfast sales and profitability for our restaurants.

So it resulted in incremental sales to our restaurants and incremental profitability for our franchise owners.

When you kind of take a step back, you look at what we're doing at Tim Hortons, we're pleased to see the sequential improvement in the sales results and really, that -- this is just the first of many initiatives that we are planning on launching as part of our Winning Together plan with our franchise restaurant owners.

We're excited about the upcoming launch of the kids program this quarter and a whole host of other initiatives, including innovation around beverages and potential loyalty that we would expect in the coming months.

So we're excited about the outlook for the Tims business, working very collaboratively with our franchise restaurant owners and excited to make our Winning Together plan reality and translate to increased same-store sales.

The next question comes from John Glass with Morgan Stanley.

On the BURGER KING business in the U.S., you discussed remodel program.

So how many stores are in this new image right now?

And what kind of, if you want to discuss or can discuss, the sales benefits you're getting from it?

And what's a reasonable time frame you're going to remodel the system?

And are there -- is there are a corporate contribution?

Or is this a franchisee-funded effort?

Yes.

Thanks, John.

So we were excited to officially unveil the new modern Burger King of Tomorrow restaurant image today and our plans to roll out the image to the system.

We're just getting started now.

We have a pilot of this in our Miami company restaurants.

We -- as you know, we upgraded, together with the restaurant owners, a significant portion of the system over the last 8 years.

And what we could say about this, this is really, this is the next evolution of our image.

And we have a pretty significant focus on technology.

We're going to have double drive throughs, outdoor digital menu boards, kiosks, internally a more open kitchen, giving the, kind of, the full kitchen theater experience and some other exciting features.

Each year, as franchise agreements expire or come to midterms, we have renovation requirements, and we would expect that the Burger King of Tomorrow image is going -- that our restaurant owners would renovate to that image as their franchise agreements come due and in the midterm.

In addition, as we've been doing over the past many years to the extent that restaurant owners want to, kind of, pull forward the renovation and renovate the restaurant before it's, kind of, officially due, we do provide royalty incentives as we've historically been doing.

As far as capital contribution, unlike the Tim Hortons system, as you know, in the BURGER KING system, we really only control the real estate to about 10% of the system.

And on that 10%, to the extent that those are renovated, in those cases, we do make a capital contribution as we have been doing historically.

The next question comes from Joshua Long with Piper Jaffray.

I wanted to see if we might circle back to, kind of, the overall consumer environment, the competitive dynamics of the space right now, and how you're thinking about that?

Couple times in the prepared commentary, the importance for shifting back to value messaging came up, and so just curious on what you're seeing out there currently?

And maybe what the appetite for specific value messaging, affordability messages, et cetera, are across the brands?

And how you're thinking about that from a marketing and strategic perspective as we go through the back half of the year and into 2019?

Yes, thanks for the question.

And I think -- I mean, I think that the comments kind of particularly relate to the BK U.S. results.

And I think if you kind of zoom in on those, what I'd say, our results this quarter probably reflected a little bit less compelling value offers and really the lapping of the strong 2 for $6 launch that we had last year.

It is a more competitive environment than we've seen historically.

And I think, when you look at how we operated during the quarter, I don't think we had the right balance between premium and value, we've already shifted to that, kind of, more balanced approach that we've had historically, particularly with the $1, 10-piece nuggets promotion that has driven good results for us already.

And -- so we're confident in the outlook for the BURGER KING brand as we kind of have that right balance between value and premium.

But stepping back, kind of, more broadly, I mean, in spite of this maybe not having the right balance and being a little bit more competitive, when you look at our -- the size of our business globally, we're still making really good progress growing our systemwide sales, nearly 7% top line this quarter are driven by restaurant openings all around the world, and we still see a very strong outlook for restaurant growth and good plans in place across the 3 brands to drive comparable sales into the coming quarters.

The next question comes from Dennis Geiger with UBS.

Just wanted to touch to Tims and specifically, with improving momentum at that business following the launch of the Winning Together plan, anything else you can say as it relates to customer satisfaction scores, brand perceptions, very recently that have improved, that maybe give you confidence in accelerating momentum this quarter and into '19 beyond some of the better results we saw this quarter?

As you launch breakfast really just 2 months -- Breakfast Anytime, just 2 months of the quarter, the improved communication plan, et cetera, are you seeing other things that are kind of leading indicators for what seemingly was improving momentum through the quarter and as we go into the next couple of quarters?

Yes.

No, thanks for the question.

I think, more broadly, just stepping back, the way we're working with our restaurant owners and the relationships with the franchisees, it's much stronger today than it was even at the beginning of this year.

I think that the brand leadership team, Alex Macedo, Duncan Fulton and his -- their team, I think, we're doing a really good job working with our restaurant owners, traveling around the country, getting direct feedback, working collaboratively.

We've built the plan, the Winning Together plan, with them.

We're executing on the plan together now with them.

I think, when we look at the results of this quarter, just with, kind of, the start of the Breakfast Anytime, we're already seeing, kind of, positive momentum.

And when we look out prospectively, things like the kids meals launch, we have more families coming to our restaurants than any other chain in the country.

And despite that, we didn't have a dedicated kids meal, so it's something we're really excited about.

We're testing a few different mechanisms for loyalty, already seeing quite high incidents on that, on the different test markets that we're running.

So once we get the right mechanic there, it'd be a great way to reward our guests for their frequency to Tim Hortons and something that could positively contribute to our growth.

We have a whole host of innovation plan around our beverage platform.

I think you've seen a little bit about -- a little bit of that over this past summer and a whole bunch more to come this winter and into next year.

And plans to make some changes to our, kind of, overall lunch architecture as well.

So a whole host of initiatives that we have that are, kind of, yet to be reflected and yet to, kind of, become reality, but initiatives that we're working very closely with our restaurant owners.

And I think, also the quality of the communications is getting much better.

You've seen this already.

I think you're going to see more to come in the fourth quarter.

And the overall narrative on Tim Hortons in our company has been much better, and it's a function of the collaborative work that we've done with our franchisees and the good plan that we have in place.

So that's -- that -- all of the above is what gets us really excited about this business.

The next question comes from Mark Petrie with CIBC.

I just wanted to come back to BK U.S. and sort of that balancing of premium and value.

And I guess, I'd be interested to hear more about what you're thinking behind the shift in Q3, if that was just simply timing?

Or whether it was more strategic?

And then, perhaps related, the impact of commodity costs and just generally higher operating costs in your business and for the franchisee, and how that impacts your thinking around menu construction and promotion?

Sure.

I think -- I don't think it was strategic, it was bit of a timing and bit of how our plan unfolded during the quarter.

We've always said that some quarters will be stronger than others.

As I mentioned, I think that we didn't have quite the right balance between premium and value.

And that, coupled with the lapping of the strong 2 for $6 launch last year, resulted in the performance that it does.

We are still confident in the, kind of, the full year outlook.

We are still confident in our ability to grow same-store sales for the long run with this -- with the BURGER KING brand in U.S. Our franchise partners are invested heavily in the brand, both in terms of renovations and new development.

And we've already, kind of, shifted that balance back toward the better balance, better mix between value and premium and have already seen results from that.

As it relates to, kind of, the commodity environment and operating costs, what I can say is, this is something that we are -- we follow closely across all 3 of our brands, all of our markets around the world.

In the home markets, in BK U.S. and in Popeyes U.S. and Tims Canada, what I can say is, all 3 year-to-date have grown franchise profitability.

So our franchise restaurant owners are earning more money in each of these 3 markets year-to-date than they did last year.

And that's something that's always, always top of mind for us and always a top priority, both driving that profitability at the restaurant level and driving guest satisfaction.

The Next question comes from Andrew Charles with Cowen and Company.

Over the last 2 quarters, BK global net restaurant unit counts have trailed the 2Q '17 and 3Q '17 net openings, and I know you mentioned that unit growth is going to be more 4Q weighted in 2018.

But just looking at this and taking a step back, given how you have master franchising agreements in place across pretty much all major international geographies, what could be done to help reaccelerate the openings as you look to 2019 and beyond?

And then Dan, if I can sneak in a quick follow-up, for Tims, what kind of decision to prioritize kids meals relative to the introduction of cold brew?

This has been an offering that major coffee shops have seen tremendous success with, and just wanted to see where Tim Hortons is with plans to introduce the offering?

Yes.

So the first question, what we've said historically, this -- the development can be, kind of, lumpy from quarter-to-quarter.

We manage the pipeline on an annual basis rather than quarterly.

And that's actually -- that's consistent with the manner in which the targets are structured in our franchisees development agreements.

We've been growing -- we've been accelerating the pace of BURGER KING growth in each of the past couple of years.

We have some great partners developing all around the world, obviously, at different kind of stages and different life cycles.

And -- but when we look out for the full year and the fourth quarter, we're confident in the outlook for the year, and we have quite a robust pipeline of openings and plenty of work for us to be doing and our partners for to be doing all around the world this fourth quarter.

And we're still confident in the outlook.

And as it relates to Tim Hortons, as I mentioned, we have -- we look at size of opportunity, operational feasibility and a whole host of other factors in terms of prioritizing different launches.

And I think, as I mentioned, with kids meals, we're excited about that we have more families coming to our restaurants than any other chain, and we don't have a dedicated kids offering.

And we saw a big -- we and our franchisees saw a big opportunity to kind of fill that gap in our menu.

We do have a whole host of beverage innovation slated for next year.

So stay tuned for more news on that.

The next question comes from David Palmer with RBC Capital Markets.

Daniel, I think you touched on the global system sales growth and a big percentage of that coming from unit growth.

Last quarter, you said the outlook for unit growth was one-off acceleration from here.

I think a lot of longer-term-oriented investors are -- they want to get more feel for the international profitability, the pipeline, just to -- and otherwise a sense of confidence, that you're going to be able to sustain and accelerate that unit growth in these markets they don't know as well.

What can you tell us, metrics or pipeline feel, anything that would make us feel confident that you'll be able to sustain or even accelerate unit growth going forward?

Yes.

Look, the return on capital for our partners all around the world is a -- is something that we follow very closely with.

As you know, with these master franchisees that we've set up, we're not only -- in many cases, we are not only franchisor, but we're also shareholders and board members of these companies, and we work very closely with the teams and the owners of our master franchise partners all around the world, both in terms of marketing initiatives and development initiatives and operational initiatives.

And how close we are to these businesses that gives us confidence, and what I say here, that we are confident in the outlook for the year, and we are confident in sustained growth.

And in many cases, we have development agreements that go many more years from where we are today.

And when you look at the pace that we are growing, and -- across the 3 brands, BURGER KING is, historically, or at least on an LTM basis, growing north of 1,000 restaurants.

And the other 2 are, obviously, much smaller at this stage.

And we're working closely with our existing partners at BURGER KING and existing partners at Popeyes and Tims internationally and talking with new prospective partners about new development agreements for Popeyes and for Tim.

And that's an opportunity that we see in the longer term, that we would -- we aspire to grow those 2 brands much, much faster.

I think we've already done a good job with Popeyes in the U.S., having signed a number of development agreements that will lead to increased growth for the brand in the U.S. We've already signed a development agreement with Popeyes in Brazil, where we've successfully opened the first restaurant and have a pipeline of several more to open toward the end of the year.

We've signed an agreement with Popeyes in the Philippines where we plan on opening restaurants next year.

And we have teams working all around the globe to set up more of these agreements with new and existing partners to accelerate the pace of Popeyes growth in the years to come.

And the same goes for Tim Hortons.

I think, last quarter, we mentioned the structure that we recently set up in China.

I spent some time in China this quarter visiting our BURGER KING operations and our Tims start-up, where we have plenty of work to do.

We're excited about the outlook for the brand in that part of the world.

And I think, when you look at our growth rate, this is a quarter where despite may be the softer comps and not yet reflecting the benefits of the potential accelerated growth for Popeyes and for Tim Hortons, we grew our systemwide sales by nearly 7%.

And so that's something -- as we ramp up the pace of growth in our -- in Popeyes and in Tims, and we resume to better same-store sales, that would be a number that we aspire to grow much faster in the long run.

And I think we have the right team and the right partnerships and the right setup around the world to achieve that.

The next question comes from Brian Bittner with Oppenheimer.

I just want to follow up on that, on how you closed that answer out with Popeyes.

I mean, there is a big gap between Popeyes, the #2 global chicken player and the #1 global chicken player.

And I guess, the question is, like, now that you've owned Popeyes for about 1.5 years, is closing that gap something that is realistic?

Or are there reasons why there should be that gap between KFC and Popeyes?

And then just a follow-up real quick, Daniel.

In general, in the U.S., just the BURGER KING business, who's really taking the share now?

Because McDonald's was taking a lot -- so they're taking a lot less share.

And they're taking lesser now than they were when we were counting at a much better trajectory than the BURGER KING business.

So just also some color on, really, what's going on there from a share perspective?

Yes.

Well, on Popeyes, we were pleased to have crossed 3,000 restaurants this quarter.

We do view this as a huge opportunity to have a much larger restaurant count in the future.

As I said, the first place that we've started to accelerate our growth at Popeyes, really, has been the U.S. and Canada, as there was a lot of demand, both from existing and new partners in the BURGER KING system and in the Popeyes system to grow that brand.

And we've started, kind of, planting the seeds internationally.

The first in Philippines, then -- sorry, the first in Brazil, now the Philippines, and we're working hard to strike the right partnerships and the right structures to grow the Popeyes brand all around the world.

Look, I think if you, kind of, look back over time, at BURGER KING when we bought the band, we were growing around 170-or-so, 180 restaurants per year back in 2010 and with a lot of hard work and some -- lot of hard work both from our teams and our franchise partners, we're able to kind of massively accelerate the pace of that growth.

And we're -- we have a similar playbook now with our other 2 brands, and we're working really hard.

So in a few years, when -- on one of these calls, we'll be able to talk about growing much faster in Popeyes.

It takes time.

You have to set up teams, infrastructure, supply chain.

So -- but we have time as long-term owners of the business and we're committed to doing it.

And then as it relates to the overall industry, I think, as you've mentioned, the industry has been quite competitive, has been a little bit softer.

But I think, when you look at kind of where we stand, we've made a lot of good progress with the BURGER KING brand in the U.S. when we got involved, we were -- our sales per restaurant and profitability per restaurant was much lower than it is today.

We made a lot of progress.

I think when you look at the results from this quarter, as I mentioned, I think that when we look at, kind of, our performance, I think we didn't quite have the right balance for the environment that we're in.

We've already made that shift, and we would expect, in the coming quarters, to perform better.

The next question comes from David Tarantino with Baird.

I was wondering if you could help to frame up the opportunity on the remodeling project for Tim Hortons?

You mentioned that you've already completed 100-or-so of those renovations.

So just talk about maybe what you're seeing in those first 100 that you've done from a sales or return perspective and guest feedback?

And then I think you mentioned that you wanted to have the majority of the system completed by 2021.

Just wondering if there's an update on your outlook for the pace at which you complete this?

Yes.

No, thank you.

We're making good progress on the Welcome Image program.

Just after a few short months after announcing, we've already completed nearly 100 renovations under the new image, and we would anticipate completing hundreds more in the fourth quarter.

So far, the feedback from our guests and our restaurant owners has been quite positive.

I think it's a little bit early to talk about sales uplifts.

I think when you look at the image program along with the other initiative that we have, they're really toward -- they're really geared towards driving long-term sales growth.

And I wouldn't say, we're expecting an immediate sales jump in renovations, it's more of a longer-term investment in the restaurant image and improving guest experience.

And as I mentioned, we've been already receiving very positive responses from our guests, our team members and our franchisees and the like.

And again, this is one component of the 3-pronged plan -- one component of 1 of the 3 pillars of our Winning Together plan.

This is one of the many initiatives that we're working on as it relates to restaurant experience, but we're also improving our communications and our product excellence.

The next question comes from Karen Holthouse with Goldman Sachs.

There was a comment about your year-over-year increase in franchise profitability at BURGER KING stores, which would be pretty unique for low single-digit comp and the current labor environment.

Are there still, sort of, outright cost types or cost programs happening at the store level that are helping drive that?

Or have commodities really been offset to labor pressures?

Yes.

I think, Karen, without kind of driving into the specific lines of the P&L, I mean, what we can say is that on the low comp, we have still grown our restaurant profitability year-on-year.

It's something that we look at very closely with our franchise partners each month, something that kind of contributes to our decisions around calendar.

And we're always looking to find ways, together with our restaurant owners, to be more efficient to drive their profitability while also driving guest satisfaction.

The next question comes from Matt McGinley with Evercore ISI.

As a follow-up on the Tim Hortons remodels, I'm sure there is a lot of excitement around getting those underway.

But is there any disruption that you would -- you experienced in the third quarter as those renovations went underway?

Is there any close time as that construction is occurring?

And would you expect, as you accelerate the number of projects, would that have any impact on either comp or revenue into the next few quarters?

Yes.

Any time you do a large number of renovations, there is always some downtime and there is an impact on sales.

We haven't really quantified that though.

But what we can say is that as we ramp up the various initiatives on our Winning Together plan, even if we're renovating restaurants, we would still expect to drive positive comparable sales growth in the system.

The next question comes from Peter Sklar with BMO Capital Markets.

Daniel, I noticed that your net store openings for Tim Hortons on a global basis, I believe, was 11 units, which is a lot lower than you typically do in any quarter.

So I'm just wondering, whether a lot of store closures, or is there deferral openings, just timing, and we're going to see a lot more openings in Q4, can you elaborate please?

Yes, thanks, Peter.

As I mentioned, across all the brands, it's a bit lumpy from quarter-to-quarter.

We would expect, obviously, there to be more in the fourth quarter given the back-end loaded nature of many of the restaurant openings.

And as we look at the future with Tim Hortons, we do see an opportunity to have, kind of, a more robust growth profile as it relates to development.

We will continue to be more selective in Canada, but we still -- we see opportunities to accelerate the pace of international growth, both in the markets that we're in now and some of the new markets that we would expect to come onboard like China next year.

The next question comes from Eric Gonzalez with KeyBanc Capital Markets.

Can you give us an update on what you're seeing in emerging markets?

Have you seen any of the macro issues Impact your brand results or franchisee willingness to develop?

And as it relates to China, Daniel, you mentioned you were just over there.

The market seems to be embracing delivery and digital technologies in a significant way.

As you continue to expand your footprint in that market, do you believe you're positioned to benefit from those trends?

Thanks, Eric.

We haven't seen any deceleration in emerging markets.

In fact, I think, our partners in places like Brazil and in Russia are -- continue to develop restaurants at quite a healthy pace.

We've already benefited from -- our business has already benefited from delivery in China.

It's quite a high percentage of sales for our BURGER KING restaurants in China and has been for some time now.

And we would expect delivery in China to be quite relevant, both for Tims and hopefully, eventually, for Popeye.

The next question comes from Jeremy Scott with Mizuho.

Just on the technology initiatives, I think Joshua has been in the CTO or COO role for more than 10 months now, so it's arguably still an early innings in developing the pipeline.

But I'm guessing, we can read into that new image launch on BK U.S. as indicative of maybe some higher urgency to lean in on some of those technology initiatives here?

And just a follow-up on John's point on capital contributions, given that this will be your second round of upgrades in a decade and as you mentioned, there is a big competitor putting money to work towards accelerating upgrades in their stores, is there a precedent being set on what's expected by your franchisees in terms of partnering on these upgrades above and beyond the royalty relief and the contributions to your 10% of stores on the real estate?

Is there a precedent being set on what's expected?

Yes.

I think, maybe there's 2 parts to your question.

So I think on the technology on the digital front, I think we made a lot of progress this year.

I think Josh has made a lot of progress in his new role as our Head of Digital, Head of Technology.

It really starts by building a really strong team under him.

So I think the folks that we've been able to recruit to work on Josh's team have helped us increase the pace at which we're moving.

And you've probably seeing -- you see that in tangible results, we've launched the BURGER KING mobile app that enables our guest to have great offers and order and prepay in 2/3 of the restaurants.

We're able to launch a new image that has outdoor digital menu boards, indoor kiosks.

We've rolled out delivery at a much more aggressive pace.

We're on a path together with our Popeyes franchisees to really converge the system down from over 40 different POS systems to 2. Next year, we've ramped up the pace of delivery there.

We've also launched an app there.

We're working on Tims on loyalty, in piloting kiosks and delivery.

So I think, in just 10 months, under Josh's leadership, we've shown, kind of, the sense of urgency that we brought to really catching up on technology, and hopefully, having the right team will enable us to do a whole lot more in the years to come because we're really just playing kind of catch up at this point.

And as it relates to renovations, I think across the different brands and businesses, where we do own the real estate, we always have historically contributed.

And we have done -- and we have historically provided generous incentives to our franchisees on terms of royalty and other franchise incentives to enable us to renovate the system at quite a healthy pace.

And we've already seen a lot of interest in the new Burger King of Tomorrow image upgrade.

The next question comes from Gregory Francfort with Bank of America.

I got 2 questions.

The first, just on dayparts for BURGER KING U.S., we've been hearing some softness generally in the breakfast daypart for the industry, are you guys seeing that in your business?

Or anything on that front will be helpful?

And then the other question I had was on menu simplicity at Tims?

How do you measure it and maybe where does it stand today versus where you want it to be?

Or you kind of where you wanted to be?

Are you high or are you low?

Where are you trying to take that over time?

Yes.

On the BURGER KING comment, I don't think there is anything specific for us to call out on the daypart.

As it relates to menu simplicity with Tims, this is something we work closely with our franchise restaurant owners, and we're always looking at opportunities of doing things more efficiently and making sure that we have kind of the highest return on the efforts that we're putting in to our restaurants.

Having said that, we have very high-volume restaurants, and we see opportunities to increase the sales out of those restaurants.

In some cases, it will be launching new platforms like kids meals, where it will -- we will add additional SKUs, but only if we think it's going to generate additional sales and profitability, in some instances, where we are innovating on existing platforms.

So some of the beverage innovation that we've already had over the summer and what we expected to come next year.

And an initiatives like Breakfast Anytime, where we're really just selling more of what we already have.

So I think, you always have to find that right balance between kind of sales generation and incremental profitability and complexity.

And that's something that we'll always -- we work closely with our franchise restaurant owners to make sure that we have that right equation.

The next question comes from Jon Tower with Wells Fargo.

First on the BK U.S., are you willing to provide an expected range of capital required for the remodels, similar to what you did with Tim Hortons earlier this year?

And then just thinking about the franchise base, what's the appetite amongst the franchisees to remodel versus, say, build new stores in the U.S.?

and then lastly and separately, do you have any plans in the future to offer investors some high-level, long-term financial targets for the overall company?

Yes.

So on the capital requirements, it would be a little bit more than the current renovation that we're doing now, given the increased scope.

We see demand both for renovations and for new development.

And as you know, BURGER KING is one of the fastest growing and one of the brands that opens the most new restaurants in the United States, so we're seeing demand across both of those.

We historically haven't been provided long-term guidance.

As long-term owners of the business, we run the business for the long run, and we didn't really see the benefit of doing that.

It's not something we've historically done.

We focus on driving good results for the long run.

And that's been kind of successful -- a successful formula for us historically.

The next question comes from Will Slabaugh with Stephens Inc.

I had a question on Tims.

And obviously, nice to see the improvement there, especially on a 2-year basis.

Can you talk a little bit more about what you're seeing as it relates to that improvement from a daypart basis?

How broad-based that is?

And where there might remain an opportunity also from a geographic basis?

I know there we've talked about the West being a little softer in the past than the rest of Canada, so curious on those 2 points.

Yes.

Nothing really to call it on a geographic basis.

Obviously, we did see benefit -- we did see a benefit during the quarter of selling more breakfast food, both during the breakfast daypart and across other dayparts through the Breakfast Anytime launch.

We see kind of a couple opportunities on Tims, we talked about loyalty earlier, we would expect kids to be more focused on the lunch daypart, and we see some opportunities to increase lunch sales as we look into next year by changing some of the architecture -- overall menu architecture on the lunch menu.

So we see opportunities across multiple dayparts there coupled with beverage innovation, which will drive beverage sales across the entire day.

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, everyone, for joining us, and we look forward to speaking with you again next quarter when we report on our full year results.

Have a great day.

Thanks.

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