Restaurant Brands International Inc (QSR) 2021 Q2 法說會逐字稿

Good morning, and welcome to the Restaurant Brands International Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Stephen Lichtner, RBI's Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the second quarter ended June 30, 2021. As a reminder, a live broadcast of this call may be accessed through the Investor Relations web page at investor.rbi.com, and a recording will be available for replay.

Joining me on the call today are Restaurant Brands International's CEO, Jose Cil; COO, Josh Kobza; and CFO, Matt Dunnigan.

Today's earnings call contains forward-looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings. In addition, this earnings call includes non-GAAP financial measures. Reconciliations of non-GAAP financial measures are included in the press release available on our website.

Throughout the call today, we will be referencing 2-year comparisons for system-wide sales growth and comparable sales to provide a cleaner indication of how the business is trending versus a more normalized period. These 2-year comparisons are calculated on a geometric stacked basis by using the 2020 and 2021 disclosed growth metrics.

And now I'll turn the call over to Jose.

Good morning, everyone. Thank you for joining us on today's call. I hope everyone is doing well. We're pleased with the results this quarter and the progress we've made on several key initiatives, including driving development, improving system-wide sales growth and enhancing our digital platforms.

Our franchisees, our teams and our restaurant team members continue to amaze us with the incredible work they're doing and their dedication to our brands and our guests. We remain confident in the strength of our long-term value proposition anchored by our guest-centric focus, 3 iconic brands, scalable franchise model, growing digital channels, commitment to innovation and relentless pursuit of maximizing value for all stakeholders.

We have a strong track record of driving growth and our prospects looking forward are bright. As we advance in our path to 40,000 digitally integrated restaurants, our scale, our growing digital business and our agility expands our capabilities, deepens the strength of our brands and positions us well for exciting, compounding growth in the years to come. And even with investments in digital and across the business, we remain highly cash flow generative, a testament to the strength of our business model, which has enabled us to consistently return significant capital to shareholders over the past years.

In connection with this and given our increased confidence in the outlook of the business, we announced that our Board of Directors authorized a new significantly expanded share buyback program of our common stock for up to $1 billion over the next 2 years. We also paid a $0.53 quarterly dividend on July 7, resulting in one of the highest dividend yields in our industry, and our Board of Directors declared a dividend for the third quarter of $0.53 to be paid in October.

Now before I dig into our brand level performance, I'd like to discuss the highlights from the quarter, starting with development. Around the world, we feel very good about the robust pipeline we've built with our franchise partners. And during the quarter, we opened a new restaurant on average every 6 hours.

Overall, for the first half, we generated net restaurant growth of 378, one of our best first halves ever, giving us confidence in our ability to return to our 2018 and 2019 levels of growth this year.

What's more? Our growth this year has been well balanced across markets and brands. It's been especially encouraging to see both existing and new franchise partners around the world building even more conviction in the power of our brands and business model than before the pandemic.

Over the past decade, we've built up a very strong and differentiated foundation for growth with our master franchise network around the world. One great example of this is Burger King France, where we've effectively built a brand in that market from scratch through a strong partnership with our master franchisee, Groupe Bertrand.

And earlier this month, we reached an incredible milestone, opening the 400th Burger King in the country, which puts us on track to generate over EUR 1 billion in system-wide sales in France by the end of this year. But France is just one of many examples of how quickly our brands can scale into large businesses when we create the right foundation for growth with strong ambitious partners. That's why we're so excited for the growth potential of our brands around the world, especially as we continue building relationships with new partners who are eager to move along a similar path and create exciting new pipelines for our business in high-growth markets.

A great example of this is Tim Hortons China, where we're seeing a pronounced acceleration in our development growth curve and remain on track to double the size of that business by opening over 200 new restaurants this year alone. These are just 2 examples of the many markets around the world where we're working with partners to develop our brands, and that includes the U.S. where we experienced a record second quarter NRG for Popeyes, reflecting a strong demand to expand Popeyes across new and existing markets and with new and existing franchisees.

With restrictions easing, we've also been excited to get back out in the field and meet with our global franchisees. I recently traveled to Switzerland and Spain to visit new sites with our partners, including new Popeyes locations in both markets and was encouraged to see our franchisee partners' enthusiasm to extend the footprint of our loved restaurants in these markets.

The second headline to highlight is that we had a solid quarter of system-wide sales growth, up 32% year-over-year and plus 4% versus 2019, a sequential improvement compared to our first quarter. This is one of the benefits of having diversified brands across global markets. So regardless of lockdowns that continue to restrict mobility in some regions, we can still drive solid system-wide sales growth from a global perspective.

I'll offer some more color on Tims in a moment. But even with a large population in Canada still working from home, it's been encouraging to see sequential 2-year sales comparables continue to improve every month, and now into the negative mid-single digits in July.

The third headline from the quarter that I'd like to call out is our progress on digital. A key focus area is we enhance our omnichannel guest experience through loyalty and other initiatives to form deeper, more valuable long-term relationships with our guests.

In our home markets, our digital sales are up 60% year-on-year, and we think this is just the beginning. We've seen the importance of digital in driving stickiness in check and traffic with delivery sales, for example, growing sequentially compared to last quarter.

Loyalty programs are a key driver of enhancing digital sales as well. Last quarter, we highlighted the success we had with Tims Rewards. This quarter, we continued to grow our digital sales at Tims in Canada to more than 30%, while at the same time, doubling known diner sales. While still early days, these are exciting levels of digital penetration and engagement, which demonstrate the power of what our digital platforms can deliver.

Last quarter, we also launched Burger King's loyalty program, Royal Perks, across the nation on digital ordering channels while testing Popeyes rewards. As of the end of this quarter, we've now launched loyalty programs nationally across all 3 brands in our home markets. We're in the early innings with our loyalty programs at Burger King and Popeyes, and we continue to see great progress, which we think will be a big unlock to help us on our journey towards building a strong and growing digital sales base.

Before moving on to each brand's performance, I wanted to take a moment to address commodity cost increases and labor pressures. It's been well documented that the restaurant industry, like many other industries, is facing rising commodity costs and wage inflation.

We're confident we have the right tools and processes in place to thoughtfully manage the current inflationary environment, and we're working closely with our franchisees to do so, like we always do.

Like most others across the restaurant industry, staffing continues to be a challenge. While the situation is evolving daily, we're working closely with our franchisees to provide tools and share best practices, including recruiting and hiring initiatives, employee retention programs and technologies that simplify the hiring process. For example, certain franchisees have piloted a process to receive job applications by text message, which has led to an increase in applications, interviews and hires. We're also supporting our franchisees' recruiting efforts by leveraging our social media scale and providing more targeted support, including an upcoming national media and in-restaurant campaign in Canada.

Let's turn to discussion to Tim Hortons in our home market of Canada. Overall, we saw 3 points of sequential improvement in 2-year comparable sales during the second quarter, with each month better than the prior month on a 2-year basis. And these trends continued to improve into July, with 2-year comparable sales performance now in the negative single digits across every province, including Ontario, which had previously been closed for most of the second quarter.

It's important to remember Canada and especially Ontario remained under strict lockdowns throughout the second quarter, even as vaccination rates improved. And while transit mobility remains far behind pre-COVID levels and where the U.S. is today, overall mobility did trend upwards as lockdown measures eased throughout the quarter.

We continue to see a clear link between vaccine rollouts and market reopenings and our path back to pre-pandemic traffic and sales levels. In addition, we saw sequential improvements in both traffic and sales overall during the quarter, primarily driven by growth in breakfast, lunch and coffee share. These improvements largely reflect the continued execution of our multiyear back-to-basics plan, under which we're prioritizing creating high-quality products in the categories we're famous for and extending those categories to a few strategic areas that are a natural brand fit where we can drive long-term growth, such as lunch and cold beverages.

Last quarter, we executed one of the biggest shifts in our morning daypart in the history of our brand, introducing fresh cracked Canadian eggs in our breakfast sandwiches. In the second quarter, we built off this new platform by enhancing the quality of our bagels for our delicious hot bagel breakfast sandwiches, featuring our fresh cracked Canadian eggs, and our guests loved it. We saw a continued recovery in our morning daypart despite continued mobility restrictions, while also gaining share in both breakfast sandwiches and the morning daypart overall.

Our Craveables lunch platform, which is one of the highest-rated food items by our guests, drove a recovery in the lunch daypart with high average check and high incrementality. In fact, during the quarter, our sandwich incidence reached its highest levels in recent history and drove our lunch daypart in June back to pre-pandemic levels.

On the beverage side, we remain focused on maintaining our leading position in hot beverages, highlighted by our Dark Roast launch earlier this year and enhancing our meaningful market share in cold beverages where we see continued opportunity for growth. To capitalize on this, we introduced new lines of cold beverages this quarter, starting with a successful Canadian launch of a cold brew coffee in May made with 100% ethically sourced premium Arabica beans.

Our cold brew launch drove both incremental traffic and sales and increased our iced coffee market share. We followed this platform with one of the most successful launches in the past number of years in the cold beverage space in Canada, our Real Fruit Quenchers. And we've seen them not only contribute strongly to sales performance, but also drive traffic back to our restaurants.

The Real Fruit Quenchers are a great example of our commitment to provide guests with menu items that are made without artificial colors or flavors, a benefit that is increasingly important for our guests. Related to this, we've continued to see improvements in our brand perception ratings, including food and beverage quality, driven by a renewed focus on food quality, taste and strong product delivery across the new platforms we're building.

Also, limited edition offerings like our NHL Superstar Collectible Sticks launched during the Stanley Cup playoffs this year, strengthen consumers' connection to the brand by building on our strong sports heritage.

Taking into account, overall advancements in market share, the strengthening of our brand metrics and continued enhancements in our digital experience through Tims Rewards and the accelerated rollout of our outdoor digital menu boards, we believe we're well positioned to capture the return of the Canadian consumer as the country reopens. In addition, and importantly, we've retained a majority of our CAD 80 million ad fund support to continue driving key initiatives in the back half of this year.

Let's now turn the discussion to Burger King, particularly in the U.S. We've done a lot of good things with the brand in recent years, cut through award-winning advertising, industry-leading category innovation like the Impossible Whopper, improving our menu quality with delicious natural ingredients and introducing $1 Your Way value menu. These accomplishments have helped us get back to growing against pre-COVID levels. However, we're not performing at the level that we expect from ourselves or aspire to.

We understand our biggest areas for breakthrough opportunity. So our underlying issue has really been focus and pace. We haven't put enough focus on the few priorities that will have the biggest impact, and we haven't moved fast enough on these priorities to accelerate the business performance to the level we know we're capable of.

I know the Burger King business well, and I know what we're capable of. Our franchisees, they know what we're capable of. I've talked with about 30 of our largest franchise partners in the last few weeks, and they have no doubt we should be leading the QSR industry here in our home market. I've been working closely with the team and they have a focused mindset to move with velocity on our most important priorities. So more than anything, I'm eager to get at it, the journey of transforming Burger King into the leading and most loved QSR in the U.S.

First and foremost, we're focused on driving innovation in our core menu and accelerating daypart and category extensions that will become core to our full-time menu. The hand-breaded King chicken sandwich is an example of this focus. This great-tasting chicken sandwich continues to show healthy volumes in restaurants around the country, doubled the previous chicken sandwich and has expanded Burger King's demographic attracting new guests to our restaurants, including those with higher incomes and spending power.

We're excited to have this new platform in the BK menu and expect it to be a driver of sustainable growth for years to come. We've also remained dedicated to offering great everyday value to our guests with our $1 Your Way value menu, which continues to be an important driver of traffic to our restaurants.

In addition, we launched our BOGO plus $1 offer during the quarter as an alternative to the 2 for $5 platform supporting guests who rely on our bundled value platforms with our iconic core offerings at a tremendous value while maintaining healthy margins for franchisees.

While we are pleased with our recent progress around menu innovation, real ingredients and everyday value, as I mentioned last quarter, we recognized significant opportunities remain in key categories and dayparts, such as breakfast. So you'll be seeing us doing a lot more focused work in the coming months to develop highly incremental parts of our menu offering.

Second, we're working collaboratively with our franchisees on consistent high standards of operational execution, and we've invested to enhance the capabilities of our field teams with strong talent to make sure we have the support that our franchisees need to train their teams and maintain a consistent, high standard of execution.

Third, we're committed to becoming an industry leader in fully integrating digital into the restaurant and online ordering experience. We've seen the rapid benefits of scaling a successful digital program at Tim Hortons in Canada, and it gives us even more confidence in our road map for Burger King in the U.S.

Josh will speak in more detail on our digital initiatives shortly, but I will say that we're pleased with the early results of Burger King's Royal Perks' loyalty program rollout and continue to prioritize driving program enrollment as we know that in addition to providing us with valuable data and insights, loyalty members typically show higher spending and frequency as compared to nonmembers.

We have also received positive feedback with over 80% of members likely to recommend the program.

Fourth, we're working on upgrading our entire portfolio of restaurants to provide an exceptional guest experience and a high ROI for our franchisees. We have an incredible group of franchise partners. And as we focus on accelerating the business, we're committed to continue growing their profitability. We know having a modern guest-centric and digitally integrated restaurant design is critical to driving further profitability for our partners, and we're dedicated to working together to accelerate our image transformation in the Burger King system over the next few years.

Finally, on the brand, we believe we can translate our global advertising creativity into even greater brand loyalty that drives long-term traffic and sales momentum in our home market. And ultimately, it's the combination of a powerful menu, reliable operations, integrated digital and restaurant experience and great advertising that results in long-term brand loyalty and visitation.

Looking at Burger King internationally, these markets have been the largest drivers of our growth for the brand over the last decade. While there has been fluidity to the changes in restrictions in many of our international markets, we were quite encouraged to see a strong rebound in markets where we saw restrictions lifted somewhat. For example, some of our largest markets, including Australia, Korea, the U.K. and Japan saw comparable sales increased double digits versus 2019, giving us confidence in our plans and in our recovery as markets continue to reopen.

With the high-quality growth markets and franchise partners we have in place internationally, we see an attractive path to continue driving exciting long-term system-wide sales growth for many years to come.

Now let's turn our attention to Popeyes. We see significant runway for long-term growth at Popeyes, which continues to generate an average of over $1.8 million in annualized sales per restaurant in the U.S. versus just $1.4 million prior to 2019, the year we launched the Chicken Sandwich. This game-changing launch and resulting sales increase has continued to drive interest in development from both existing and new partners in the U.S., leading this second quarter to be our best second quarter of net restaurant growth since 2017.

We continue to build a strong pipeline of restaurants to go along with a strong pipeline of new partners with great QSR experience to grow Popeyes in parts of the country that are currently underdeveloped. When compared to 2019, Popeyes has grown system-wide sales by over 40% year-to-date, a truly remarkable feat, thanks to the collective efforts of our franchisees and their teams. As a reminder, we had one of our strongest quarters in Q2 of 2020 at Popeyes with sales growth in the positive 30s and 40s last year as we entered the height of the pandemic.

We were fortunate to see our drive-thru and growing digital businesses more than compensate for lockdown restrictions during the beginning of the pandemic. While we did see some pressure over the course of the second quarter here in 2021 from competitors launching new chicken sandwiches themselves, coupled with industry-wide labor challenges, our nominal sales remain strong. And on a 2-year basis, our comparable sales were up a robust positive 25% with the majority of this growth driven by the continued strength of our Chicken Sandwich.

While a lot of our success over the past 18 months can be attributed to the overwhelming guest response to our Chicken Sandwich, a core product in a core category that we took our time to innovate, we're not standing still and are focused on what's next.

Earlier this week, you saw us launch our nuggets platform, adding an entirely new complementary category to our menu, while leveraging key learnings and product innovation from our Chicken Sandwich launch. With this launch, similar to the Chicken Sandwich, the key to success is an extreme focus on operational performance and execution at the restaurant level.

Just a few weeks ago, we sent over 110 corporate Popeyes employees from our office along with our field teams and trainers to more than 1,200 restaurants across the U.S. to work with our franchisees and their teams on operational execution in advance of our launch.

While still early days, the mainstream media campaign starts the first week of August, nuggets are already providing to be incremental in our market tests and have attracted new guests in an attractive demographic, that's kids and families, in an underutilized daypart, the afternoon and in a previously untapped occasion and that's snacking.

It's just the beginning for this amazing brand and there's a lot of work ahead of us, but the brand is stronger than ever and has some of the best unit economics in the industry to build on. We remain focused on continuing to make Popeyes more accessible to everyone and addressing gaps in our menu architecture to drive long-term sustainable sales.

I'll now hand things over to Josh to update us on our digital journey across the company.

Thanks, Jose, and good morning, everyone. During the second quarter, we continued to invest in technology that is core to modernizing and improving our guest experience as well as contributing to incremental sales and traffic for our brands.

We benefit from our significant global scale, which allows us to build industry-leading technology platforms at a competitive cost profile and helps us to attract and retain top talent. Our tech stack consisting mostly of in-house development, that is supplemented by third-party vendors, facilitates great guest experiences while generating rich data that provides us with the insights to drive decision-making across our brands and geographies.

Developing these in-house capabilities in areas like e-commerce, for example, will significantly improve our operational execution, removing friction when new enhancements are developed, while allowing us to remain efficient by outsourcing elements that are not core or unique to our brands.

We've learned a lot over the past few years about the importance of digital and crafting a superior guest experience and the importance and loyalty of our digital guests, who are generally more engaged, come more often and spend more on our products.

We continue to see evidence of many of these dynamics as we grow the digital channels across all 3 of our brands.

This quarter, we reached new records of digital sales in our home markets despite wide consumer migration back towards in-store dining and select regions. In the aggregate, our home market digital sales increased nearly 60% from this time last year, with Tims nearly doubling in both Burger King and Popeyes growing roughly 20%.

We see a significant opportunity to grow these channels over time and view key initiatives, including our loyalty programs, in-app engagement opportunities like Roll Up To Win and outdoor digital menu boards as important avenues for growth.

We are excited to now have loyalty programs at all 3 of our brands in their home markets. We follow a 3-step approach in our road map for these programs. First, build awareness and enrollment; second, focus on active user engagement; and third, drive frequency, check and profitable sales. In our view, it is critical to succeed with steps 1 and 2 in order to successfully execute step 3 and drive long-term growth across the business.

We've seen the early impacts of this road map at Tims, where our program is in the third chapter of its story. Tims Rewards in Canada represents the majority of the brand's digital sales and has seen growth in users and engagement over the past 16 months. During the second quarter, the Tims app in Canada surpassed all competitors, capturing and holding the #1 position in monthly active users for food and beverage. A few months ago, we discussed the powerful impact that our all-digital Roll Up To Win contest had on engagement. With the contest now in the rearview mirror, we're encouraged to see that it created a strong halo effect with the Tims Canada business, sustaining its new baseline of digital sales of over 30% and with registered users representing over 75% of digital sales.

We continue to see Tims Rewards driving check and traffic and, most importantly, contributing positively to comparable sales. And as we continue to learn more about our guests, we were able to create more personalized offers and encourage incremental visitation and spending, fueling the digital flywheel. For example, if a member visits a store 3 times a week in the morning for a double, we can offer them a buy 1 get 1 if they return that same day in the afternoon for one of our quenchers.

At Burger King and Popeyes, we are still on the first chapter of our loyalty story and remain focused on ramping up each brand's program in the coming months. With the next step coming at BK, as Royal Perks expands from mobile order only to in-store service modes in the second half.

Enrollment for each program has been encouraging thus far and overall customer satisfaction is strong. We are excited about the incremental possibilities of our loyalty programs, allowing us to connect with our guests and drive sales to our restaurants.

Across all 3 brands, our outdoor digital menu boards are another great example of a technology investment that drives results and touches our key focus areas within digital. We remain committed to modernizing the drive-thru experience with these menu boards at our 10,000-plus North American restaurants by mid-2022, including nearly all Tim Hortons Canada drive-thrus by year-end 2021. They are more efficient for the restaurants, create a better and more streamlined guest experience and allow us to better utilize data, which will enable us to improve the effectiveness of our suggestive selling as our learnings build over time.

We have already observed an uplift in comparable sales from outdoor digital menu boards at compared to static outdoor menu boards. In addition, we are seeing encouraging early results on our suggestive sell models, which will improve with usage and scale and are focused on enhancing our algorithms. One such enhancement was a recent improvement in the way we utilize weather data in the model, which, for example, has benefited our beverage sales by furthering our ability to dynamically recommend a cold beverage on a hotter-than-expected morning or a hot beverage on a cooler afternoon. Our model also proactively recommends 1 of the top 5 most popular items rather than just the top item, giving our guests a new item to try when they visit.

In conclusion, our technology focus continues to be centered around knowing our guests and owning the relationship with them, which in turn allows us to provide better service through a personalized enhanced experience. We believe these efforts will drive increased traffic, check and brand loyalty over time.

I'll now pass the call over to Matt.

Thanks, Josh, and thanks, everyone, for joining us this morning. Our global system-wide sales for the quarter increased roughly 32% to $8.9 billion, and our adjusted EBITDA grew about 52% organically year-over-year to $577 million.

Beyond the growth in system-wide sales, there were a few factors contributing to our growth in adjusted EBITDA year-over-year. This includes benefits related to a sizable shift in sales mix, driven by a recovery in sales and volumes at Tims, where in addition to franchise royalties, we also generate EBITDA from property and supply chain activities.

Also, as you may recall, last year, we increased our bad debt provision to reflect the increased risk environment around receivables. And similar to last quarter, we've continued to release some of those remaining cautionary provisions as the business continues to strengthen around the world. And finally, our year-over-year growth this quarter reflected the fact that we had a smaller differential between ad fund revenues and expenses during the quarter as compared to Q2 2020, driven by continued improvements in our business as we lap the trough of the pandemic last year.

It's worth noting that this year's ad fund expense included deploying a portion of the CAD 80 million support behind the Tim Hortons ad fund in Canada. As Jose mentioned, looking forward to the second half of the year, we have retained a majority of this investment to fully support our Back to Basics initiatives as the Canadian market continues to reopen. These benefits through our organic adjusted EBITDA growth rate were partially offset by higher G&A.

As we have discussed during our last few calls, we're proactively investing in digital and technology as well as hiring across a number of key areas like marketing and operations. These investments are leading to a sizable year-over-year increase in segment G&A, which will continue over the balance of this year as we invest behind our capabilities for the future.

Now turning to EPS. Our second quarter adjusted earnings per share of $0.77 grew at a higher rate than our consolidated adjusted EBITDA at over 130% year-over-year, including an FX benefit of about 15%. The higher growth was primarily driven by a lower adjusted effective tax rate, reduced share count, interest savings and lower equity-based compensation.

Our adjusted effective tax rate of about 11% this quarter included discrete noncash benefits such as net reserve releases for certain prior tax years, which reduced our adjusted effective tax rate by approximately 6% as well as excess tax benefits from equity-based compensation that we realized during the quarter, which reduced it further by approximately 1%.

It is also worth noting that equity-based compensation decreased quarter-over-quarter to $20 million from $26 million last quarter, primarily related to forfeitures of long-term incentives specific to the quarter. For the balance of the year, we currently expect equity-based compensation to ramp up to slightly above first quarter levels related to our commitment behind investing in our people for the long run.

Now turning to our capital structure. While the impact of COVID last year did result in a step-up in our leverage levels, we've seen that trend reversing with our business largely back on track. As Jose mentioned, we have an incredible cash flow profile. And during the quarter, we generated nearly $450 million in free cash flow. The strong free cash flow, coupled with our roughly $220 million sequential increase in LTM adjusted EBITDA, contributed to a sizable decrease in our net leverage ratio to 5.3x from about 6x in Q1.

We also took advantage of favorable market conditions to refinance the $775 million of outstanding principal on our 4.25% first lien notes due 2024 with an add-on to our existing 3.875% first lien notes due 2028, effective in July.

Over the past 3 years, we have opportunistically refinanced our entire capital structure, meaningfully reducing our interest expense by roughly $100 million annually and extending maturities such that a vast majority now fall beyond 2026.

In terms of liquidity, we ended the quarter with about $2.8 billion available, including nearly $1.8 billion in cash and about $1 billion of undrawn revolver. Between our current liquidity and the robust free cash flow conversion of our business, we're in a good spot to continue driving our long-term capital allocation strategy, which since 2015 has included returning nearly $6.5 billion to shareholders through approximately $4.9 billion of dividends and $1.6 billion in share repurchases.

With all our decisions, including capital allocation, we take a balanced approach with the goal of maximizing value for our shareholders over the long run. We prioritize reinvesting in our business in a thoughtful way, enhancing shareholder returns through significant returns of capital and evaluating strategic opportunities that can drive step function value creation.

Heading into the second half, as our visibility on leverage and performance continues to improve, we will be considering alternatives for the excess cash flow that we build beyond the targeted investments we're making back into the business.

On this front, as Jose mentioned, we announced this morning a continuation of our dividend into Q3 with another $0.53 per common share and partnership unit, keeping us on track for our full year target of $2.12 per share in 2021 and maintaining our industry-leading dividend yield.

We also announced this morning that our Board of Directors approved an increase to our open market buyback authorization from $300 million to $1 billion over the next 2 years. Buybacks have been a valuable tool for us historically with nearly 30 million units repurchased since 2015 through partnership exchanges. And going forward, we expect they'll continue to be a meaningful lever given the strength of our cash flow generation. and intend to use this increased authorization to buy back shares in the open market.

Having said that, our primary focus for the second half and beyond remains on driving the core business and delivering on the exciting organic growth potential we see globally for all 3 of our iconic brands.

With that, I'd like to thank everyone again for your support, and we'll now open the line for questions. Operator?

(Operator Instructions) Our first question comes from Patricia Baker with Scotiabank.

Jose, I really appreciate your discussion or identification rather of what you believe the issue is with Burger King in the U.S. and the 5 focused areas that you've identified. With respect to one of those, which is the image transformation and the upgrade of the BK network in the U.S., can you tell us where you are on that journey? And what's the pace of that network upgrade will be over the course of the coming years?

Patricia, thanks so much for the question. Images and transformation of the image on an ongoing basis has always been an important part of the business. Obviously, in QSR with the brand as well-known and penetrated and with the legacy and heritage that BK has, it's very, very important and it's an ongoing process.

We launched our Burger King of Tomorrow image and transformation initiative several years ago, and we've made good progress against that. We're seeing investments from our franchisees as well as from the company and the brand for transformation of restaurants and drive-thrus, in particular, integrating digital into all the restaurants and then upgrading the image of the restaurants in the interior as well as in the exterior, which is critical for curbside appeal.

And we're moving at a good pace. I think we've made some good progress on that, but I think we can go faster, and it's one of the things that our teams are considering and contemplating and working with franchisees, working on higher return on investment remodels, especially focused on drive-thru and double drive-thrus where we think there's an opportunity to drive increased capacity and throughput in our drive-thrus and integrating technology there in.

And so we've started that process with outdoor digital menu boards, that's going well with Burger King. And we continue to review and see if there's opportunities to go faster. And as we do that analysis and assessment, we'll keep you all posted on how and when and what we'll do to accelerate that. So thanks so much for the question.

Our next question comes from Dennis Geiger with UBS.

Great. And Jose, for Tim Hortons, down mid-single in July across Canada, certainly, I'd say, an encouraging recovery trajectory, seems to suggest that your strategies are resonating particularly as mobility increases. I just first wanted to clarify the comment you made about down single digits in '19 -- over '19 in July. Was that specific to all provinces individually or fall within that range?

And then more importantly, the question is just kind of curious if there's anything else that you could break down on the Tims' performance as it relates to how the system is directly impacted by pandemic factors as we try to assess the strength of the brand, isolating that impact? So if there's anything sort of on central businesses, like locations, how to think about that drag? Anything on that front, if you're able to kind of give some color?

Great. Thanks for the question, Dennis. Yes. As I mentioned, we're really excited about the progress we're seeing with Tims. We're making progress on brand perception, guest experience. Food quality ratings are improving as well year-over-year, and we're focused on executing the Back to Basics plan with quality improvements. The fresh cracked eggs and some of the new launches like cold brew and quenchers are really important.

I think that to your specific question, one of the things that was really encouraging about the quarter as the quarter kind of moved through June and we see it continue in July is that as things reopen, we're moving in the right direction, and we see positive indicators in the business sequential. We saw sequential improvement on a 2-year basis for same-store sales of 3 points. Transit scores improved steadily towards the end of the second quarter. Ontario, which is where we have nearly half of our restaurants, was the last to begin exiting the stay-at-home orders.

I think there's a lot of the folks on the call and listening in don't really understand the nuances between what's happening in Canada, Ontario in particular, versus what's happening here in the U.S.

The Ontario exited stay-at-home orders on June 2. On June 11, outdoor dining and retail stores opened. On June 30, it increased outdoor seating and retail store capacity. On July 16, indoor dining with social distancing, which is quite about a year of spread between what's happened in the U.S. versus what's happening in Ontario. And here is a stat, I think, that will give you all a better idea of how just -- how lockdown Ontario has been today, which is July 30, 2021.

The Toronto Blue Jays' baseball team are playing their first game in Toronto since 2019. They've been playing their baseball games in Buffalo for the last couple of years. And we're, by the way, really happy to see Vladimir Guerrero, Jr. and the rest of the team back in Toronto and in the Roger Center because it really means that things are beginning to open up there, and that's a huge indicator for us in terms of mobility, which is a key driver of the business.

Ontario improved to negative single digits in the final weeks of the quarter. And in the first few weeks of July, we've seen continued recovery in Ontario in line with the other regions. And to kind of -- to cross-reference to the other provinces, we've seen the other provinces performing better because things have opened up a lot sooner in those provinces.

So all indicators as we look today in July, provinces are now across the country in negative single digits compared to 2019. It's not the only thing we're focused on. We're focused entirely -- actually quite a bit on our plan. We still have a lot of work to do. We still have quite a bit of firepower in our marketing ad fund, as Matt mentioned in his comments, for the back half of the year. So we're really excited to continue to drive the plan and continue to work with our owners to be prepared for this reopening of Canada, in particular, Ontario in the coming months and quarters. Thanks for the question.

Our next question comes from John Glass with Morgan Stanley.

I wonder if I can just follow up on Tims. Jose, you said you were taking share in the current quarter. It's hard for us to benchmark Tims versus peers. Do you think you are outperforming the morning daypart just generally in the markets? And you could talk about it market by market or overall? And if you think back, whatever it is 5 years, where does your share in breakfast stand today versus that if it was a peak? Are you at new peaks, are you below, but you're now improving? How do we sort of frame where your share has gone over time and where it is today?

Yes. Thanks so much, John, for the question. As I mentioned, we have seen solid movement in share in cold beverages, iced coffee, breakfast as well and a lot of that, we believe, based on the consumer feedback and brand perception ratings that we track regularly is tied into the progress we're making on the quality improvements of the food and the beverages as well as how we're communicating them and the connection or the reconnection that we're making with our communities all across the country.

So we think it's very much an output of the work that we're doing. We've -- in some cases, in particular with breakfast, I think we've had a sizable share of the breakfast business given our penetration and the frequency that we have, especially due to coffee. But as I mentioned, quite a bit over the last many quarters and probably over the last couple of years, the research that we had done and the feedback we were getting from our consumers is that the decisions that people were making to come to Tims were driven mostly by beverage. But if someone was deciding to go somewhere for breakfast for food, we weren't really at the top of the consideration list.

And so our share on food, in particular, for breakfast wasn't as strong as it should be and as it could be as compared to our share for beverages. And so the benchmark is where we've been. We've seen progress against that. Obviously, COVID had an impact on share during -- especially, during the height of it through 2020 and into the early part of 2021. What gives us confidence is that we're chipping away of that and making really good progress versus where we've been. So we're excited about the share improvements, which are leading indicators of the ability to grow in this important market for us. Thanks so much for the question.

Our next question comes from David Palmer with Evercore ISI.

Just a quick one on Tim's loyalty and then just a follow-up on Burger King. The loyalty program at Tims was launched back in 2019, and I know that was a tough start where it was not the digital one that is today. You mentioned the doubling in the loyalty mix there. Could you give an update as to what that mix is running at today? How much of a step up is that?

And as you're lapping as we think about 2-year trends and even into 2022, we'll be thinking 3-year trends versus 2019. I'm wondering how much loyalty can be a lift, particularly, versus that rough start to the loyalty program when it was more of a punch card situation?

And then following up on Burger King U.S., it sounds like you're moving towards a premiumization strategy, reimaging renovation, product and assets. I'm wondering that feels longer term in nature, but I'm wondering if you -- how you're thinking about maybe shorter and medium-term type jolts you can give to sales?

Great. Thanks so much for the questions, David. I'll have Josh touch on the Tims loyalty, and then I'll take the BK U.S. question.

Yes. Dave, thanks for the question on loyalty. I would say, first of all, we're really pleased with the progress that we've made on loyalty in Canada with Tims Rewards. I think the team has done a fantastic job evolving the program over time and making it really engaging and really compelling to our guests there.

We had a big success with the Roll Up To Win contest in the first half of this year, and we succeeded, I think, in getting many more guests engaged in the program. And also in terms of driving behavior and engagement on our app with our existing Tims Rewards members. So we're really pleased with the thoroughness and the quality of the work the team is doing and how well it's resonating with our guests.

Specifically, to your question on where the program is, it's what -- I think we mentioned in our earlier remarks that our digital sales are over 30% of sales now at Tims and our loyalty sales are the majority of that. So it's a very large chunk, and it's grown very significantly year-on-year.

And with respect to the last piece of your question on where we go in 2022, I think our goal is to continue to grow the program and particularly more to make it even more engaging to expand all of the excitement that we can bring with the program and what we can offer to our guests to make them even kind of more excited about engaging with the Tims brand more often and to find more ways to visit our brand and engage with the brand every day.

I'll turn it over to Jose for the BK question.

Great. Thanks, Josh. David, on the second question on BK U.S., I wouldn't say it's a premiumization plan. I think it's a plan that's kind of -- I'm emphasizing focus and pace. I think the challenge -- we've talked quite a bit about the BK business in the past. And we're at our best when we have a balanced approach with a strong focus on core with premium products that drive check, but at the same time, having a balanced approach on value. That continues to be the long-term view on the business.

I think where I've seen the opportunity in the near term as I spend time with the team and speaking with franchisees and getting a better handle on what opportunities for acceleration we have, I think we can drive acceleration with a lot more work on the brand image and at further improving return on remodels and new builds.

I think there's an opportunity on menu platform with focus on breakfast, premium and value. I think there's a bunch of work to do in partnership with our franchisees on operational consistency. I think we have a tremendous opportunity, especially as we grow our digital business and integrate that into the restaurant experience, both in-store as well as off-premise through the drive-thru and through delivery.

And obviously, digital being a huge focus for us. And then finally, I think the communication side of it, we've had a -- I think we've been a bit mixed in terms of our execution on our brand communications. We spend a lot of time on price-driven communication, and I think we have a lot more work to do on cut-through brand and high-quality messaging around the quality of our products.

So that's the focus. I wouldn't call it premiumization only. It's all about balance, but it's been mostly about focus and pace and moving fast in the things that we think are fundamental to driving growth in the QSR industry, especially in the U.S. and that we know we're very capable of doing. Thanks so much for the question.

Our next question comes from Jeffrey Bernstein with Barclays.

Great. Thank you very much. Two questions for you. One, Jose, on the unit growth side of things, just as we think about the 5% plus worldwide unit growth, it seems like you're confident you're going to hit that in '21. And I guess, is there some help from what was a pause for the most part in 2020, helping the backlog of the pipeline. So I'm just wondering beyond '21, whether you think you're now at a steady state where you can resume that north of 5%. Just wondering whether there's any issues with supply or construction delays or labor perhaps that might pose a challenge.

And my follow-up was just for Matt on the cash usage. You mentioned in your prepared remarks, you'd consider alternative uses of excess cash. I wasn't sure whether that was exemplified by the dividend and the share repo solely or whether there's potential maybe to co-invest with franchisees? I know you mentioned trying to accelerate, whether it's remodels or digital menu boards or any other uses for excess cash that you might consider due to your strength in the balance sheet?

Jeffrey, thanks so much for the question. I'll take the one on unit growth, and then I'll pass it over to Matt. As I've mentioned several times, we have -- we feel really good about the progress we're making with the pipeline and our prospects for development.

We have focused -- we've said 2 things in the past. One is that we felt confident we can get back to pre-pandemic levels of growth in 2021. And I think the first half so far has validated that view that we've got really good partners, really healthy pipelines, a lot of interest and excitement about growth even more so after the impact of the pandemic because people believe much more so in the power of the business in the most difficult moments. It's resilient and generates positive cash flow. And so we've -- and especially given our off-premise and digital capabilities. So our partners are really excited about it, and we see the momentum building in our pipelines. And obviously, the results for the last 2 quarters speak for themselves.

We have a lot of excitement with all 3 brands. I think what's also exciting about the long term is that we're beginning to see the U.S., Canada as well as international pipelines get going on the BK side, but we're beginning to see strong movement with Popeyes and Tim Hortons internationally, which we hadn't seen before. And so we had record quarter -- second quarter for both Popeyes and Tims from an international growth standpoint. Popeyes in the U.S. also accelerated in the second quarter from a development standpoint.

So we still are very confident in our ambitions to reach the 40,000 restaurant goal that we set for ourselves back in May of 2019. There's a big gap that remains to some of the bigger competitors out there in many markets, even markets where we have strong presence already.

I think in larger, more penetrated urban markets where we have a decent presence with Burger King in particular. And by the way, there aren't that many of those. But with even those, we still have tremendous opportunities with new formats, delivery only with pickup as well. There's a lot of different opportunities for growth here, especially given the expansion of our service modes, including off-premise, drive-thru and delivery.

And as I said, I think Tims and Popeyes are early days, earlier than Burger King, and we're seeing strong momentum there. Excitement from new operators and partners to invest in the brands and an acceleration in terms of the investments and the growth that they're delivering in their market.

So we feel confident about the long term and are very focused in the short term. There are challenges certainly in terms of supply chain, especially in the equipment side as you've kind of included in your question. But we have really good relationships with the equipment suppliers and vendors, and we're working closely with them to ensure that we can continue to deliver what we have in front of us, and that's the work that we do and we're happy and excited to keep you posted on our progress.

Yes, Jeff, it's Matt here. Thanks for the question. As it relates to capital allocation, I think we've been really pleased with the performance and progress of the business and the recovery that we've seen. I think we believe we have an incredibly healthy cash flow profile. We've seen the balance sheet improve as well along the way, as we mentioned, with our leverage coming down quite a bit this quarter. So we feel really well positioned in terms of our balance sheet, our cash flow generation as well as our liquidity to -- in terms of our shareholder return potential and the capital that we can return to shareholders over time, as I mentioned in my prepared remarks.

I think we have significant allocation toward our industry-leading dividend. And as we continue to see the business improve and the balance sheet improve, yes, that's really what gave us confidence here to reset our authorization and upsize that from $300 million to $1 billion.

And I think this new program reflects a level that we think makes sense for our business and a really great launching point for us to start working actively in open market in terms of repurchases and returning capital to shareholders and adding open market repurchases to our tool set.

We also are very balanced, and we invest behind the brands already. You mentioned BK. Jose talked about this before. I think Jose is just getting into laying out the plans with the teams in terms of what our focus areas are going to be. But if you look back historically, we've always been investing in the BK business as well as Tims and elsewhere in terms of remodels that we put toward our property control and where we're involved in the property as well as investments here internally in people to help support the plans and drive things forward.

So I think when we consider any kind of investment, it all goes back to our capital allocation approach. And to the extent there's additional investments, it could be worthwhile, in our view, to drive strong returns for both us and our franchisees and our systems. We'll evaluate those and share them in due course. Thanks a lot for the question.

Our next question comes from Jon Tower with Wells Fargo.

Just coming back to the Burger King U.S. conversation, I'm just curious -- and thanks, Jose, for kind of going through some of the pace conversation and focus earlier. But I am curious, from your perspective, how much of the kind of sales underperformance or slow return to pre-pandemic levels relative to the competition do you think is controllable versus noncontrollable? That is, in terms of controllable, I would view staffing levels at your stores, product, marketing, operational execution versus noncontrollable, which is competitors just getting more aggressive with marketing, new product news and promotions. If you could just kind of comment on that, that would be great.

Yes, Jon, thanks for the question. Look, the industry has been competitive for a long, long time, right? It goes back to the burger wars in the '80s and even before that. So we feel that the opportunity for acceleration, the focus -- is all about focus and pace and it's entirely within our control. And I think our franchisees believe the same thing. Our teams believe the same thing.

So it's all within our control. It's certainly a lot of work to do on staffing and retention. I think everyone is dealing with these challenges, and we're working hard with the franchise partners to ensure that they have the ability and they put a lot of effort behind this as well since it's something that they control entirely. We're working with them closely on that.

I think the bigger work in front of us is what I laid out earlier in my prepared remarks. And on top of that with focus and pace, I think we have a really strong team with Burger King. We've added some top talent in the organization in marketing as well as in operations. And the team is beginning to gel together, putting a really strong plan in place, working closely with the franchisees. And I'm confident that it's all in front of us, all within our control and it's just a question of executing at the highest levels, which we know we're very capable of. So we're excited about where we are and looking forward to sharing our progress in the coming quarters.

Our next question comes from Gregory Francfort with Guggenheim Securities.

Thanks for the question. Jose, I think a couple of questions ago, you were talking about the acceleration in Tims International on the unit side. Can you talk maybe specifically about China? I think you have a couple of hundred stores in the ground there now and what either the returns are looking like or what the markets look like?

And is there a pace of development on China specifically that you think makes sense to balance taking advantage of the opportunity long term with operational complexities? I'm just trying to think about where that might accelerate you on a pace of development.

Greg, thanks for the question. Yes, look, we went from 0 in 2019 -- February '19 to 200 this first quarter of '21 with a commitment from the team there to take -- to double the size of the business to go from 200 to 400 in the full year of 2021. My view on this is that the business is super exciting. The brand is resonating well there. The product, in particular, our beverage lineup, which has expanded and really high quality at a great value with tremendous digital focus is striking a cord with the Chinese consumer.

And so we feel confident about the short term being able to grow at the pace that the team has communicated. And I feel very confident about the long term. It's a great market. Coffee consumption is on the rise, double-digit growth. A former tea market only, now it's becoming a high consumption coffee market. And so we're really well positioned in the market to do some great things.

I always tell the -- our franchise partners to go faster. But we want to do it the right way, the right image, the right technology focus, the right quality of our products through right execution. But the pace of growth in the near term has been exciting, and we have a great team there led by Yong Chen, who's been a partner of ours for quite some time.

So we're excited about the opportunities in China, continue to work closely with the team there and look forward to sharing the progress as we keep growing the brand in 2021 and well beyond that. Thanks so much for the question.

This concludes our question-and-answer session. I would like to turn the conference back over to Jose Cil for any closing remarks.

Great. Thanks to everyone for joining us this morning. We're pleased with the progress we've made this quarter, including driving strong growth and development, keeping us on track to reach our long-term target of 40,000 restaurants globally.

We remain committed to delivering high-quality, delicious food and improving the experience for each and every one of our guests through our digital initiatives and commitment to operational execution. We know we have the right pieces in place to drive long-term sustainable growth at all 3 of our brands and build the most loved restaurant brands in the world. Have a great rest of the day and stay safe. Thank you.

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