Restaurant Brands International Inc (QSR) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Restaurant Brands International Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Chris Brigleb, 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 Third Quarter Ended September 30, 2020. 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.

Let's quickly review the agenda for today's call. Jose will start with some opening remarks on our performance during Q3 and our ongoing recovery from the COVID-19 pandemic before providing additional detail around our performance at Tim Hortons, Burger King and Popeyes. Josh will then provide an update on technology at RBI. And to conclude, Matt will review our financial results before opening the call up for Q&A.

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

Thanks, Chris, and good morning, everyone. Thank you for joining us on today's call for the third quarter of 2020. I hope everyone is doing well and staying safe.

Since the onset of the COVID-19 pandemic in March, we've mobilized behind a clear set of priorities to confront the crisis, and our considerable progress behind these objectives over the past 7 months has helped drive a significant recovery across our business. The recovery we've seen since March highlights the resilience of our 3 iconic brands and our network of strong and well-capitalized partners around the world. It's also a testament to the incredibly hard work of our restaurant team members, franchisees and employees to reopen our restaurants and continue serving our guests through this difficult time.

In the third quarter, our continued recovery reflects the strength of our platform and positioning. And we shared some of the key details around our performance in the pre-release we issued ahead of a refinancing earlier this month. Through September, we've reopened nearly 6,000 restaurants globally since the peak of the crisis. And as of the end of Q3, over 96% of our locations are open worldwide. As of September, substantially all of our restaurants are now open in North America, APAC and EMEA, and approximately 92% are open in Latin America.

In our international markets, where approximately 50% of our restaurants were closed at the peak of the crisis, we've seen a significant improvement in sales as markets have reopened. At Burger King, which represents about 85% of our international restaurant footprint, comparable sales outside the U.S. improved from negative 18% in Q2 to negative 10% in Q3, with September comparable sales improving into the negative mid-single digits.

Given our steady progress on reopening and the recovery and sales we've seen across regions, in Q3, we generated over 94% of prior year consolidated system-wide sales, a significant sequential improvement versus the second quarter. As we noted in Q2, the strength of our off-premise channels, particularly in our home markets, has been an important differentiator for our systems and a key component in our recovery. After a strong performance in Q2, comparable drive-thru sales were again up in the double digits from last year across brands in the U.S. and Canada while total delivery sales were up well into the triple digits across our systems. Given the momentum we've seen in off-premise, we're excited to have ramped up our work to revolutionize our drive-thru experience with the installation of outdoor digital menu board technology at over 10,000 drive-thrus in the U.S. and Canada, the bulk of which we expect to complete by the end of next year. We provided some exciting details around the program in a separate release this morning, which Josh will take you through a little later in the call today.

While we made considerable progress during the third quarter, our performance also reflected certain more challenging impacts of the pandemic on consumer behavior. Routines remain on hold for a significant percentage of people as many offices, schools and other establishments remain closed. Millions of people are still working from home. And the recent spike in cases in different parts of the world has caused some localities to reinstate certain restrictions, including the closure of dining rooms in some cases. Our guests are grappling with considerable uncertainty around the evolution of the pandemic and associated response measures as well as the implications for the economy and availability of stimulus and other resources. For our brands, the resulting impact to consumption patterns has caused some variability in the pace of recovery across regions and dayparts, and we remain vigilant as we continue to serve our guests and respond to their evolving needs.

Despite these near-term challenges, we're confident in the long-term positioning of our brands as we look ahead. Our 3 systems are in great shape as franchisee profitability has recovered significantly across regions, particularly in our home markets, and we're aligned with our partners on the path to return to growth. On the development front, we're similarly focused on positioning our systems for long-term growth. We're proceeding as planned with the portfolio optimization we noted in Q2, which will replace older, underperforming restaurants with new, modern ones in great locations, and we believe will enhance the image and health of our brands across markets.

On average, the stores we're closing generate revenue 30% lower than the average in their regions, so we expect that closures will have a relatively small near-term impact on our store count and an even smaller impact on system-wide sales. We expect the replacements will drive a meaningful top line uplift and benefit to franchisee profitability and support attractive returns for both our partners and for us over a multiyear period. We also believe this initiative will provide our partners with greater flexibility to capitalize on the opportunities we see amidst the dislocation caused by the pandemic. While this optimization will result in more closures than we'd see in a typical year and the pandemic has delayed some of our openings time lines, we still expect to end 2020 with a similar number of restaurants relative to where we ended 2019. And looking ahead to 2021, we've been working closely with each of our partners to build strong pipelines for next year. We're confident that we will return to strong net unit growth in 2021 as we advance towards the goal we shared last year to reach 40,000 restaurants worldwide.

From early on in this crisis, we made a deliberate decision to continue investing behind the long-term initiatives we outlined earlier in the year. We've made considerable progress and believe we're setting a strong foundation to build on as we emerge from the crisis. This includes our commitment to making our food and operations more sustainable and ensuring that we attract and retain great talent with a rich diversity of perspectives. Earlier this year, we announced our Restaurant Brands for good framework and published a number of major initiatives on our website. But I'd like to point to just a few important developments from this last quarter.

First, with regards to our food, we've made important progress on upgrading our core products with real ingredients. In Q3, this includes our flagship product at Burger King, the Whopper, as well as our English muffins and Biscuits at Tim Hortons, which are now free of all colors, flavors and preservatives from artificial sources. We also launched our innovative Cows Menu at Burger King where we partnered with scientists to reduce the methane produced by cows that we use in our iconic 100% beef burgers.

Second, on packaging, Tim Hortons has announced a number of adjustments that will result in environmental improvements to more than 3 billion pieces of packaging a year as well as the removal of more than 1 billion single-use plastics in Canada alone and the economization of about 200 million cups per year by eliminating double cupping.

Finally, on the people side, we made substantial progress in our commitment to building a diverse and inclusive team at RBI, which we're confident will enable us to build an incredibly talented team and make the best decisions for our business over the long run. This is anchored by a commitment that at least half of all final round candidates interviewing for roles at RBI will be from groups that are diverse. And in reviewing the new hires we made since this commitment, we're proud to have hired diverse candidates for more than 50% of all open positions. We made a number of other commitments around diversity and inclusion that we're accountable for, all of which can be renewed on our website.

I'll now take you through a bit more detail on our results by brand before handing over to Josh for an update on our progress in digital. At Tim Hortons, in Q3, our system-wide sales decreased approximately 14% to $1.5 billion, driven by a decrease in global comparable sales of approximately 12%, which was partially offset by net restaurant growth of 1%. At the beginning of this year, we shared our plans to reinforce Tim's positioning across Canada by enhancing the quality of our core platforms, focusing innovation on high-impact products and investing to modernize our system by leveraging technology. Since January, we've added a number of professionals across key roles with deep experience in the Canadian QSR market, and we're confident we're executing in the areas most critical to our long-term success.

In Q3, our team continued to make substantial progress behind our strategy, which we believe will drive strong growth over the long term. For example, we push forward with the rollout of fresh brewers and water filtration systems. And as of the end of September, we've installed them at about 90% of locations across Canada. Since the start of the year, we've seen a substantial improvement in product satisfaction scores nationally and an increase in our already significant market share leadership in coffee. We've also completed market test for the relaunch of our Dark Roast blend, which will roll out across Canada in early 2021 and will reinforce the depth and quality of our most important platform.

In addition, as mentioned earlier, we're excited to have restarted the installation of outdoor digital menu boards in our drive-thrus across the U.S. and Canada. And while it's still early, we're encouraged by the sales impact we've seen at the nearly 800 locations we've upgraded so far. Our network of drive-thrus is by far the largest in Canada and has been a particularly important differentiator since the onset of the pandemic. And as a result, we believe this investment will have an especially pronounced impact. We expect to have upgraded all of our Tim Hortons drive-thrus in the U.S. and a little less than half of our 2,700 drive-thrus in Canada by the end of this year and upgrade the remaining Canadian locations in 2021. We've also made important strides in digital at Tims during Q3, especially through our Tims Rewards program. Over the course of the quarter, we continued to ramp up our personalized offers and CRM capabilities. And though we're still in the early days, our targeted offers contributed approximately 1% to comparable sales for Q3. We're pleased that the investment we've made to scale the program over the last 18 months have started to bear fruit and believe that Tims Rewards will be a powerful tool to engage with our guests, particularly as they reestablish their routines.

We're confident that our progress behind these core initiatives will put Tims on a path to strong long-term growth in Canada as we emerge from the pandemic. As I mentioned earlier, however, in Q3, the pandemic continued to have a substantial impact on activity levels in Canada that resulted in an uneven pace of recovery in sales at Tims.

In Canada, comparable sales declined 14% for the quarter, driven by a continuation of the trends we noted during our remarks for Q2. The spread of COVID-19 and resulting stay-at-home orders have had an especially significant effect on high-frequency routine base visits in the morning, which are a particularly important part of our business in Canada, given our high rate of visitation. This is especially true in large metro areas like Toronto that have large commuter populations.

Since the beginning of the crisis, many Canadians have paused their normal commuting routines. Using third-party mobility data, we saw transit activity fall by as much as 80% in March and April, and it was still down by about 50% in July. It's worth noting that transit mobility data did show incremental improvement in August and into the beginning of September, which we believe contributed to a slight sequential improvement in comparable sales in each month.

In the back half of September, the increase in cases of COVID-19 and reinstatement of restrictions in different parts of Canada had a negative impact on mobility. As cases have continued to increase, municipal governments have reimposed restrictions, including a mandate to once again temporarily close dining rooms in Ontario in early October. As a result, the environment in Canada remains challenging.

In this context, we've rolled out a number of proactive measures to drive sales in less affected dayparts at lunchtime and in the afternoon. We brought back our popular Oreo Iced Capp, which helped drive positive growth in our cold bev. Both of these products are high quality and offer compelling everyday value, characteristics that tie directly into our longer-term positioning.

Despite the near-term challenges stemming from the pandemic, we continue to execute on our strategy for long-term growth. We've made significant and steady progress through the first 3 quarters of this year and believe we're taking the right steps to emerge even stronger on the other side of the crisis. Even considering the recent spike in cases, we believe our system is well positioned, given the strength of our off-premise platform and the unique position our brand holds with millions of Canadians.

From a franchisee perspective, restaurant level profitability has improved in every month since March, and the vast majority of our franchisees exited Q3 with healthy balance sheets. It's important to note that prior to the pandemic, our restaurant started from a strong sales base. And as our system has recovered, unit economics continue to be strong, and nearly all of our franchisees are well capitalized. We've maintained frequent communication with our system and work closely with our advisory Board and are thankful to have strong relationship with our franchisees who share our confidence in the long-term vision.

Turning to Burger King. In Q3, our system-wide sales decreased approximately 8% to $5.5 billion driven by a decrease in global comparable sales of 7% and temporary closures in our international markets, which were partially offset by net restaurant growth of approximately 2.5%.

In the U.S., we continue to proactively confront the challenges posed by the pandemic while also working to position a more than 7,200 restaurants for long-term growth. Especially in light of the disruption caused by the crisis, we believe it's critical to reinforce the foundational elements of the Burger King brand and product offering. Since the beginning of the year, we've done a great deal of research to identify what's most important to our guests and have built those preferences into our long-term strategy to drive growth through our core platforms. In particular, it's clear that quality is a key point of focus for our guests.

Our reputation for flame grilling naturally aligns with our guest expectations around quality, but we've identified a number of other important ways to enhance our offerings. As I mentioned earlier, in Q3, we moved to reinforce the quality perception of our flagship product with the Whopper now free from colors, flavors and preservatives from artificial sources. At the same time, we updated our branding and packaging to showcase our use of real ingredients. We have a number of other upgrades that we'll be launching across dayparts in the coming quarters, all of which will be focused on reinforcing our core platforms to drive sales over the long term.

In addition to quality, value is another important point of focus for our guests. In recent quarters, we've seen success with limited time offers like our dollar nuggets, our 5 for $4 and our 2 for $5 deals, and we've sharpened our focus on the value for money equation as we move into 2021. As with our initiatives around quality, we're approaching value with a long-term mindset that supplements our strong promotions with compelling everyday value.

Finally, we continue to make progress on modernizing the Burger King system, particularly in our off-premise channels, given the growth we've seen in the wake of the pandemic. The system has now installed outdoor digital menu boards in over 1,500 of our Burger King drive-thrus, and we expect to complete upgrades across 75% of our system between this year and next before installing the remaining 25% in 2022. Josh will provide more details in a few minutes, but we believe this technology will be an incredibly valuable tool to improve guest experience and drive sales in our largest channel.

We made substantial progress behind these long-term initiatives in Q3. We saw a mixed pace of recovery across different parts of our business as the pandemic continued to have a pronounced impact on consumer behavior. This dynamic continued through September when our comparable sales were slightly better than our average for the quarter. In Q3, breakfast and late night were comparatively slower to recover, while encouragingly, our core lunch and dinner dayparts recovered more quickly. In breakfast, the pandemic's disruption to morning routines and mobility has contributed to our softer performance in the morning daypart. That said, there are also clear areas for improvement in our breakfast offering at Burger King that we will actively address during the first part of 2021 as an important part of the initiatives I outlined earlier.

In late night, our slower recovery is largely attributable to the limitations to nightlife activity we saw over the summer, although our strong growth in delivery in Q3 helped offset some of this impact. As I mentioned, our core lunch and dinner dayparts have recovered at a faster pace with Q3 comparable sales back to about flat year-over-year. Off-premise has been an important contributor to this recovery with comparable drive-thru sales up 28% and total delivery sales up over 100% versus Q3 of last year. We've also now rolled out delivery to over 90% of eligible Burger King locations in the U.S. and have over 6,200 stores offering the service, most of which offer delivery via multiple aggregators as well as our own mobile app.

During the quarter, our 2 for $5 offer was a meaningful contributor to lunch and dinner, and the Impossible Whopper continued to perform as well as we lapped its successful launch during August of last year.

With regards to innovation, we didn't launch any new products in Q3 as we focused on simplifying our menu and highlighting our quality upgrade to Whopper. While innovation remains a critical part of our strategy going forward, our upcoming launches will link into our long-term focus on enhancing our flagship platforms.

In Q3, our focused approach had the added benefit of allowing our franchisees to concentrate on the health of our team members and guests as well as restaurant operations and profitability, which has made a strong recovery and is substantially positive for the vast majority of franchisees. Despite the recent spike in COVID-19 cases across certain markets, we believe our system is well-capitalized and strongly positioned to continue pushing through the crisis and emerge all the building blocks necessary to drive sustained long-term growth.

In our international markets, system-wide sales decreased 12% to nearly $2.9 billion, driven by a decrease in comparable sales of 10% and temporary closures, partially offset by net restaurant growth of nearly 5%. As I mentioned at the top of the call, this represents a significant improvement versus the second quarter when system-wide sales decreased 38%.

Since Q2, we've worked with our partners to reopen almost 5,000 Burger King restaurants that had been temporarily closed. And as of the end of September, approximately 95% of our international Burger King locations are now open versus about half at the beginning of Q2. We've also seen a substantial improvement in sales across many of our largest markets, both for Q3 as a whole and sequentially over the course of the quarter. For example, Burger King Germany, France and Russia all had comparable sales in the negative single digits for Q3 and improved to approximately flat year-over-year in September. The recovery we've seen across many of our global markets has demonstrated the resilience of the Burger King brand internationally and reinforce the position of our master franchisees. We've been actively engaged with each of our partners to finalize plans for 2021, and they share our excitement around the brand and emerging opportunities for growth.

In Q4, we remain focused on continuing to proactively confront the pandemic as case counts have risen. But the encouraging pace of reopening we saw over the summer, coupled with our strong off-premise capabilities and network of well-capitalized partners, gives us confidence in the positioning of our international business as we close out the year and look ahead to 2021.

Finally, at Popeyes, system-wide sales increased over 21% to over $1.3 billion, driven by over 17% growth in global comparable sales and unit growth of over 7%, partially offset by temporary closures in our international markets. Sales growth was especially strong in the U.S. where comparable sales rose almost 20% for the quarter and rose at a similar rate in September. This result comes on top of 10% comparable sales growth during the third quarter of 2019, which is when we initially launched the Chicken Sandwich in August. Millions of people have been coming back for the Chicken Sandwich, but it's been really exciting to still see a significant number of first-time purchasers in Q3. And while the Chicken Sandwich continues to be the largest single driver of sales growth during the quarter, we saw substantial growth across all categories. For instance, we saw a double-digit sales increase in the family occasion this quarter and continue to see a great deal of potential.

You'll recall that we relaunched the Chicken Sandwich on a permanent basis in November of last year, and we're excited as we head into the second year of what has become an iconic product for the brand. The top line momentum at Popeyes between 2019 and 2020 has propelled average restaurant sales at freestanding and in-line locations to over $1.8 million on a last 12-month basis and augmented Popeyes already incredibly strong unit economics. As we mentioned in the past, the #1 reason for nonvisitation continues to be the lack of a nearby location. Taken together, these 2 data points have created a tremendous amount of appetite for new development, and we've been building a strong pipeline of restaurants with an outstanding set of partners.

While the pandemic has disrupted construction and permitting time lines this year, we're nonetheless making progress on our goal to transform Popeyes into a mainstream national brand in the U.S. and around the world. Our over 7% net unit growth this quarter represent a substantial acceleration versus the approximately 5.5% net unit growth we delivered in Q3 2019, and we're confident that Popeyes is just getting started.

We see a long runway for growth internationally as well and continue to see very positive results for Popeyes in China. We've generated a very healthy level of sales and profitability at the stores we've opened to date, and we believe there's considerable white space all over the globe that will fuel growth for years to come.

With that, I'd like to hand it over to Josh, so he can walk us through the technology update. Josh?

Thanks, José, and good morning, everyone. This quarter, we continued to make important advances in building out our digital capabilities and deploying them across brands. With many elements of our technology infrastructure now in place and fully integrated, we've increased our focus on improving and personalizing our interactions with our guests through our digital platforms. We believe this type of tailored interaction will be an increasingly important differentiator as digital adoption continues to increase over time.

One key example of our efforts around personalization ties into our initiative to upgrade our drive-thrus with the installation of outdoor digital menu boards. These updated menu boards offer a variety of advantages versus the legacy paper-based menu boards. Key among them is the ability to adjust displays in realtime to account for anything from weather patterns to the basket of items a guest has started to build while ordering.

As José mentioned earlier, we've now installed outdoor digital menu boards in over 800 Tim Hortons' drive-thrus across the U.S. and Canada. We've also installed them in over 1,500 Burger King drive-thrus across the U.S. where in Q3, we started to roll out our predictive selling technology designed by our guest intelligence team. Though it's still early days, we're really encouraged by the increases to check and overall sales we've seen at both brands.

In addition to personalization, the digital menu boards we're installing also have the functionality to add remote contactless payment to allow guests to both order and pay at the menu board and speed up our drive-thru lanes. And we're about to go into field testing with one of our long-standing payment providers. We've also designed the menu boards to be easily modified to integrate loyalty scanning at the menu board to simplify operations at the pickup window and improve speed of service. We're really excited about the potential this technology upgrade has to transform our guest experience in our most important channel and feel that there is no better time than now to make the significant investment.

At Tims and Burger King, we expect to install about 40,000 screens at over 10,000 drive-thrus in the U.S. and Canada, a considerable majority of which we expect will be completed by the end of next year.

Another key example of our progress on personalization in the third quarter is our Tims Rewards program. As José mentioned, we are now pushing out personalized offers at scale, and we're really encouraged by the level of engagement we've seen. These offers have had an increasingly positive impact and added approximately 1% to our comparable sales for the third quarter. As we've ramped up our tailored offers, increasing digital registration remains a key priority so that we can actively engage with our guests and maximize access to personalized rewards. We've already made significant progress on this front. In late September, we announced some important changes that we expect will further boost registration. With these changes, which will go into effect this week, we expect to convert to an all-registered program throughout the fourth quarter.

Ahead of the shift, we've rolled out additional signage and provided special training to our team members in-store to highlight the benefits of registration and make the process simple and easy. We also recently activated delivery directly through the Tims mobile app, giving guests another compelling reason to join our integrated platform. We're confident that the personalized offers and other features available via registration will add significant value for our guests over time, and we're excited about this important transition.

Overall, we saw significant growth across our digital channels in the third quarter, continuing the trend we've seen since the onset of the pandemic. On a year-over-year basis, digital sales in our home markets grew more than 100%. While on a quarter-over-quarter basis, they grew well into the double digits. In Q3, digital sales in the U.S. represented 8% of total sales at Burger King and 15% of total sales at Popeyes. And at Tim Hortons in Canada, digital sales represented 20% of total sales during the quarter.

I'll now turn things over to Matt to provide additional detail around our financial results.

Thanks, Josh, and good morning, everyone. Our results for the third quarter reflect the continued recovery across our business. Consolidated system-wide sales were approximately $8.3 billion, representing a 5% decrease year-over-year, but a nearly 30% sequential increase versus the second quarter.

In the third quarter, consolidated adjusted EBITDA was $561 million, representing a nearly 6% decrease on an organic basis year-over-year, but an increase of over 55% versus the second quarter. In addition, our adjusted EBITDA growth was approximately in line with our system-wide sales growth in the third quarter.

We did see a continued impact to adjusted EBITDA growth from our ad funds in Q3, although we saw a reversion of the trend we've called out in recent quarters. In Q3, growth in ad fund revenues exceeded growth in expenses by nearly $14 million, resulting in an impact of approximately positive 2% on our consolidated organic adjusted EBITDA growth rate. Offsetting this impact was the shift we saw in sales mix across brands, reflecting a relatively greater decline in sales at Tims where, in addition to franchise royalties, we also generate EBITDA from property and supply chain activities.

Moving on to segment level performance. At Tim Hortons, our third quarter adjusted EBITDA was $258 million, which represents a decrease of approximately 13% on an organic basis. This decrease was driven primarily by an approximately 14% decrease in system-wide sales, which included an approximately 12% decrease in global comparable sales that was partially offset by global net restaurant growth of 1%. The year-over-year decrease in adjusted EBITDA at Tims also reflected a decrease in supply chain sales, which was driven by the decline in restaurant traffic and volumes we experienced during the quarter in Canada. The rent relief we provided to Tim Hortons restaurant owners in Canada has continued to diminish and impacted our growth rate at Tims by just negative 1% in the third quarter.

And finally, approximately half of the ad fund-related positive impact to consolidated adjusted EBITDA was attributable to Tim Hortons and increased our Tim Hortons adjusted EBITDA growth by approximately 2%.

At Burger King, third quarter adjusted EBITDA was $245 million, representing a year-over-year organic decrease of approximately 2%, driven primarily by a decrease of nearly 8% in system-wide sales. The change in system-wide sales reflected a decrease in global comparable sales of 7% as well as the temporary closure of some of our restaurants due to the COVID-19 pandemic, which were partially offset by global net restaurant growth of over 2%.

Our adjusted EBITDA growth this quarter also reflected a decrease in G&A expenses at Burger King, primarily from temporarily reduced travel and certain fees, which increased our Burger King adjusted EBITDA growth rate by approximately 2%. In addition, approximately half of the ad fund-related positive impact to consolidated adjusted EBITDA was attributable to Burger King and increased our adjusted EBITDA growth rate for the brand by approximately 3%.

At Popeyes, in the third quarter, adjusted EBITDA was $58 million, up over 24% organically year-over-year. This increase was driven by strong system-wide sales growth of approximately 21%, continuing the brand's strong momentum from last year and driven by global comparable sales growth of over 17% and net restaurant growth of over 7%. This growth was slightly offset by some temporary closures due to the COVID-19 pandemic.

On a consolidated basis, our third quarter adjusted net income was $320 million, which compares to third quarter 2019 adjusted net income of $337 million. The year-over-year decrease was attributable to the decrease in adjusted EBITDA and unfavorable exchange rate movements, which were partially offset by lower interest expense resulting from our refinancing activities in the second half of last year as well as a slightly lower adjusted effective tax rate.

Our adjusted diluted EPS for the third quarter was $0.68 compared to $0.72 in the prior year, representing a nominal decrease of approximately 5%. Included in this decrease is a $6 million headwind from unfavorable foreign exchange movements. Absent this, our organic EPS growth rate would have been approximately negative 4%.

Our third quarter 2020 adjusted effective income tax rate was again just under 18%, reflecting the larger relative decline in income we've experienced at Tim Hortons, which carries a higher tax rate. However, it's important to remember that the rate in any given quarter can vary, and we may see additional volatility moving forward as our mix of income continues to evolve.

Turning now to our cash flow and capital allocation. During Q3, we continued to see a significant stabilization across our business. Our strong balance sheet and a high degree of cash flow conversion have allowed us to maintain a proactive approach to confronting the pandemic and provides us with valuable flexibility as we navigate through this to the other side of the crisis. Despite the ongoing impact of COVID-19, we generated $380 million of free cash flow in Q3, calculated as the sum of operating cash flows less CapEx, which we believe further highlights the resilience of our business model.

Given the timing of disbursements between Q2 and Q3, we paid 2 quarters' worth of common dividends and partnership exchangeable unit distributions in Q2 and made no dividend payments or distributions this quarter. This morning, we announced that the RBI Board of Directors declared a dividend of $0.52 per common share and partnership exchangeable unit of RBI LP payable on January 5, 2021.

The flexibility our balance sheet affords us has also allowed us to be opportunistic in terms of capital allocation. As we've noted in the past, when holders of our exchangeable units elect to convert, we can choose to exchange those units for cash from the company or for common shares. In September, we took advantage of one such conversion and exchanged approximately 6.8 million units for $380 million in cash and canceled all of those units following the completion of the exchange in early October.

Given the strength of our long-term prospects and resilience of our business model, we believe this transaction represented a compelling use of capital while also maintaining complete flexibility and optionality as we continue to invest in the business and drive meaningful long-term value creation for shareholders.

On the investment front, as we mentioned, we move forward with several strategic initiatives in Q3, including the installation of outdoor digital menu boards at our Tim Hortons and Burger King locations in our home markets. We believe this investment will meaningfully enhance our drive-thru experience at a critical time and solidify a key point of differentiation for our brands.

In Q3, we also continue to make progress on our project to expand our distribution centers in Canada, with facilities in Calgary, Alberta and Nova Scotia fully operational as of this summer and the third facility in British Columbia ramping up now. So far, the transitions to the new facilities have been seamless, and the reaction from our franchisees has been very positive. We're on track to complete the project by the end of this year and are encouraged by the improvements to efficiency and service levels we've seen thus far.

As of September 30, 2020, our total debt outstanding was $12.9 billion. Our net debt, calculated as total debt less cash and cash equivalents of $1.9 billion, was $10.9 billion. And our net debt to adjusted EBITDA leverage ratio was 5.5x. Following quarter end, we took advantage of favorable market conditions to refinance all $2.8 billion of our 5% second lien notes due 2025, with new 4% second lien notes due 2030 and meaningfully reducing our annual cost and moving our maturity profile out an additional 5 years. Also, as announced last week, we're redeeming $725 million of our 4.25% first lien notes due 2024, with new 3.5% first lien notes due 2029. We are pleased that through these 3 transactions, we are extending maturities on over $3.5 billion of our capital structure by approximately 5 years and have locked in historically low rates to generate go-forward interest savings of nearly $30 million.

As we move towards the end of the year, we remain in a strong financial position with meaningful flexibility to navigate through a wide range of scenarios. We believe we have the right strategy and all the resources to pursue opportunities for growth together with our partners as we look ahead to 2021.

With that, I'd like to thank everyone for joining us on the call this morning and for all your support. We'll now open the line for questions. Operator?

(Operator Instructions) And our first question will come from Nicole Miller of Piper Sandler.

In terms of franchisee cash flow, I'm wondering what level of comp makes them whole either on a year-over-year basis? Or maybe what the prior plan was pre-pandemic? If you could just compare and contrast what might be just low margin or labor benefits? I'm thinking it's less comp than we might think. It could even be a negative comp.

And then you have a very committed pipeline for development. So when you think about that playing out, what is likely to happen first? To return to 5% plus global BK growth or a possible acceleration for Popeyes into the double-digit range?

Nicole, thanks for the question. It's Matt here. I think on the first part here, in terms of your question around franchisee profitability and cash flow, I think it's really both sides. We've seen a good recovery in sales from the lows of the peak of the crisis. But that's also been combined with some really strong operational adaptation by our franchisees, plus the work that we've done together with our franchisees and some of the support programs that were put in place in the early days. And I think where we see ourselves now is we've gotten back to pretty healthy average restaurant sales across our brands with strong unit economics. And then on top of this, there's been some cash flow savings. As we mentioned earlier in the year, some of the capital projects were paused. And so there's been some cash flow savings there. So I think overall, we're pretty confident our franchisees will end the year in a strong position to return back to growth and are in a pretty healthy position as it relates to profitability as well as cash flow.

And then I think in terms of your second question on development, we've been working hand-in-hand with our partners, as we mentioned last quarter, to build strong pipelines of growth for next year. I think we've made good progress shoring up capital and making plans and budgeting for growth with our partners. And they're very eager, as we are, to return to growth as part of the expansion of their business and their value creation as we head into next year. And we feel very confident that we have the right partners that have -- will have access to capital as we move forward to move back to our use of growth and our goal of getting to 40,000 restaurants over the next 8 to 10 years. Thanks for the question.

Our next question comes from John Glass of Morgan Stanley.

First, I had just a clarification and then a question. The clarification, José, is I think you gave some color on September for some of the brands. But could you just be clear what maybe the exit rate was for the Burger King U.S. business and the Tims Canada business? And does any -- why you want to kind of color what you think September -- October looks like.

And then the question I have is -- how are the menu board installations funded? Is that through the franchisees? Is it through the ad fund? Is it through the -- is there a corporate contribution? What's the cost? And how is that funded for those menu board installations?

John, thanks for the question. We'll start with the second question on menu board installations. So Matt, you want to touch on that briefly?

Yes, sure. John, so on the menu boards, as we mentioned, we have a really big push in what we think is a critical and important strategic project for both BK and Tims with some big goals here. I think we're already well underway, as we talked about earlier this year, in rolling out our ODMs across the Tim system. We are -- we're at about 800. We have a few hundred more to go this year, and we think we'll complete the system sometime next year. We talked about that being about CAD 120 million investment in the past, which has been funded through the ad fund and access that they have in terms of liquidity from the float of gift card cash that exists there.

And then on the BK side, I think we're also moving pretty quickly here and very excited about rolling out ODM across the system. We've been making good progress. I think Josh touched on that in the prepared remarks. We've had good alignment with our partners around the business case and the opportunity of rolling out ODMS, and they're excited about the project and aligned with the time line.

I think in terms of funding for those, where we're involved in the property, which is a little bit more limited in the U.S., these contributions that we would make. But by and large, I think it's a rollout plan that our partners in -- at BK are aligned with and excited about rolling out.

Thanks, Matt. And John, on the first question, as I discussed in my prepared remarks, we saw strong quarter-over-quarter recovery for Tims in Canada from a low of about minus 30% in Q2 and same-store sale to about 14% negative in Q3. We saw in Q3, the continuation of the factors we noted in Q2, obviously, breakfast being the most impacted, and that being an important high-frequency base visit for the Tims business. We saw that continue to be an impact in the third quarter. Mobility in transit channels in Canada continue to be impacted. It was down about 80% in March, April. It improved to about negative 50% in July. We saw a sequential improvement in mobility and kind of, hence, as a result, partly improvements in same-store sales in Q3, each month of Q3, but that changed a bit towards the end of September. We've seen and we've mentioned restrictions coming back in Ontario, in Québec as well and closure of dining rooms in several provinces in the country.

On the positive side, we saw continued improvement off-premise with drive-thru in the -- and our digital business continuing to grow. So as we headed out of September, the situation is currently still quite dynamic. And we're working very closely with our franchisees and our partners in Canada to ensure we continue to focus on the things that we believe are having an impact with the guest experience, safety, protocols, focusing on our quality products, including coffee and some of the other breakfast items that we've touched on as well as investing in technology through the drive-thrus as well as our loyalty program.

And then with Burger King, it was relatively consistent throughout the quarter. We had the strong lap versus -- impossible in August, but we saw the business roughly in line throughout the quarter. Thanks for the question.

Our next question comes from Mark Petrie of CIBC.

I wanted to follow up on the topic of net restaurant growth. And obviously, there's lots of moving parts and unknown factors. But 2 things, I guess. Do you expect closures are largely captured in 2020? Or do you think some of that's still like beyond sort of typical run rate would spill into 2021?

And also in 2021, do you expect you're going to be able to get back to sort of the previous expectations on opening pace? Or should we think of that -- think of it as more of a transition year? And how might that vary in brand's home market versus international?

Yes. Mark, thanks for the question. I think as we talked about, this year was heavily impacted by COVID, obviously, and we had a CapEx pause. And as part of that, we really wanted to focus with our partners on optimizing the portfolios and setting ourselves and our partners up with the best base to grow from as we move forward and get back to development. And as I mentioned before, I think we're making good progress. We think about development really over a multiyear period. And we've been really focused here over the last few months on capital reinforcement and balance sheet management with our partners as we go through '21 planning and development and at the same time, look to optimize those portfolios as we talked about. As part of that, we think about closing out this year, we mentioned we sort of -- we expect to be roughly around the same-restaurant count to end this year as last year. And then moving forward into next year, we think we're moving in the right direction with strong partners who are eager to lock in capitalization and eager to grow again. And we think about that over a multiyear time, and we feel very confident that we will have a path with our partners and the line of sight that we see in the growth opportunities our big markets, our big priority markets around the world that we'll be able to get back to strong growth and move toward the 40,000 restaurant goal that we set out for ourselves and get back on track there.

Our next question comes from Dennis Geiger of UBS.

José, thanks for the commentary on the Tim Horton strategic plan to drive further improvement from here. Just wondering if it's possible to talk a bit more about that recovery. And if you're kind of able to isolate the COVID impact to some extent and talk about how the brand is positioned now relative to the beginning of the year. I'm not sure if it's some of the customer satisfaction metrics that you mentioned or if it's performance at some of the stores that are in less restrictive regions right now and how they're looking. But just kind of what all that means for the recovery from here. Obviously, it's tough with mobility and restrictions, I assume. But just given all the initiatives you have, if you can kind of give some high level comments around where the brand is from where it was and what that means for the recovery maybe into next year?

Thanks for the question, Dennis. Yes, look, I touched on in quite a bit of detail on our Q3 performance. I think despite some of the near-term challenges, we're making significant progress behind the long-term initiatives that we laid out at the beginning of the year. As you'll recall, the 3 areas we talked about and are focusing on quite intensely our -- quality of our core platforms, modernizing -- or modernization of the brand via technology at the drive-thru as well as through our loyalty program and then innovation in high impact products and platforms that support the core.

And so we've made a lot of progress on these initiatives over the last 7 months. First, in terms of the quality initiatives, fresh brewers and water filtration, as I mentioned in our comments, we're about 90% installed, and we've seen good progress on guest feedback from that. So we measure product satisfaction through a third-party program, and we've seen really good progress on product satisfaction on brewed coffee over the last 7 months since the beginning of the year. We've seen improvements as well in market share on brewed coffee and other specialty items as well. So there's been good data points to suggest that we're making progress in the things that we felt were important, and we prioritized on the quality side with fresh brewers and water filtration on our core platform. We're also, as I mentioned, excited about launching Dark Roast at the beginning of the year, which we think will be an important platform to continue to highlight the quality aspects of our core platform.

In terms of modernization of the experience in the restaurants, I mentioned the ODM rollout. We're about 800 locations so far. And we have a path to install about half the system by the end of the year and then continue into 2021. Encouraging impact so far in terms of results, but it's early days. And -- but we're excited about what that can do for our business, given the strength of off-premise and drive-thru, in particular. We have, by far, the largest network of drive-thru locations in Canada of any QSR. And so we're really doubling down on the importance of that business and that channel for the long term. And our owners are really excited about that.

And then as it relates to Tims Rewards, we've seen improvements in terms of registered guests, talked about that before, that we've gone for about 1/4 of the transactions being with registered users to nearly 1/2. And that continues to allow us to scale up our personalize one-on-one offers, which we've seen add about 1 point in same-store sales so far. And it's just early days, but we're excited about that.

And then finally, as it relates to innovation in some of our in some of our other core platforms, we've seen progress in terms of cold beverages with Oreo Iced Capp during the quarter. And we also launched Roast Beef and Crispy Chicken Sandwich, Craveables for the lunch daypart, which really resonated well and address an opportunity that we see over the long term in building out our lunch and late night and dinner daypart. So we feel really good about the initiatives we're working on. They're the right ones. They're core, the basics of this business that have made Tims the famous brand and the dominant brand that it is in Canada. And we're going to continue to work with our owners in Canada to execute well on these priorities. Thanks for the question.

Our next question comes from Sara Senatore of Bernstein.

Great. I also had a question on Tims. You did talk a lot about the mobility. I guess it's sort of a 2-part question. One is, is there any risk that there are kind of longer-term implications in terms of work from home, that kind of thing? That's a category that seems to be most likely to have a sort of structural change, if there is one. And on the -- secondary to that, are there -- do you contemplate things that you could do to mitigate the exposure? As Matt pointed out, EBITDA exposure is a lot higher than system-wide sales. So whether it's the real estate or the supply chain, the ways to unlock value and then maybe return cash to shareholders? Which I think is something that a lot of your shareholders would advocate.

Thanks for the question there, Sara. I think Doug had a question as well. Anyhow, I'll touch on the first point, and Matt, maybe you can touch on the second point. I think as it relates to mobility in Canada, it's really -- it's hard to -- I'm not in the business of predicting and projecting, so hard to tell how this is going to evolve in the coming quarters. Our focus has been on ensuring in the immediate term, ensuring that we deliver our great products, our coffee and our baked goods and donuts other products safely. We're working very closely with our owners to ensure we do that consistently across the country. And I'm really proud of the work that our franchisees, our owners have done -- have executed and done over the last 7, 8 months as well as our teams. So on that front, we're very focused and continue to be focused on executing our game plan, our short-term game plan, and then continue to invest heavily into our long-term plans that I just kind of laid out in response to Dennis' question related to modernizing -- modernization of the brand on the drive-thru side and loyalty, continuing to invest in quality on the product side, on the coffee side and then innovating where we think there's an opportunity to innovate to drive frequency and trial. So we're excited about the long term. We continue to stay vigilant in the short term and make sure we do the right thing for the business. And then how this evolves, we'll continue to stay close to it and keep you posted on our progress.

Yes. And Sara, I think José sort of described everything very well there in terms of the core priorities. But I think just overall, I'm thinking about how we move forward and how we set ourselves up in the best possible position to deliver and grow over the long term. I think it's all about the long-term plans. It's all about investing and sticking to our investment behind the quality of our core platforms, the innovation that we talked about and investing, I think, importantly, investing to modernize our brands via tech and focus on off-premise. And so you mentioned on the real estate side, we participate in the real estate across Canada. And we think that's a great opportunity for us to really take advantage of the amazing asset that we have in the Tim Horton system and the network of drive-thrus and off-premise capabilities that we have across the country and push that even further to the next level as we think about modernizing our drive-thru capabilities and integrating tech even more into what we're doing through our loyalty program, where, as Josh mentioned, we've made a ton of progress over the past year and moving that forward into an impactful program that's driving positive incremental returns for us. And then I think along the way, as we continue to invest behind our core, behind our core products, as we talked about with the fresh brewer rollout and some of the early success we've seen there in terms of product satisfaction and share, we think those things are going to position us very well to come out of this situation stronger than when we entered and be on a good path to drive growth in Canada over the long run. Thanks for question.

Our next question comes from Chris Carril of RBC Capital Markets.

So given the continued industry-wide focus on drive-thru, and in your case, the rollout of the digital menu boards, where is your current thinking on the reopening of dining rooms? I mean obviously, there are safety and capacity restriction considerations. But curious to hear how you're weighing other factors as those restrictions or concerns are alleviated primarily the benefit to margins from focusing on drive-thru?

And then related to this, how would you characterize drive-thru efficiency and capacity currently given utilization and where sales are today?

Great. Thanks, Chris, for the question. I'll take the first one. I think as it relates to dining rooms and the reopening of dining rooms, we're -- obviously, the first priority there is ensuring that we do it safely, and we're working closely at the local and municipal level, both with the communities as well as with our franchise owners to ensure we do that safely. Our teams have put incredible focus on what procedures and what steps we need to take to do so in a safe manner. We've added PPE and all sorts of other protections in the restaurants to ensure that our team members as well as our guests feel safe. We have a strong off-premise business. We have a strong drive-thru as well as digital business, delivery as well as mobile order prepayment and curbside pickup, which allows us to operate well and continue to serve guests in almost any circumstance and to do so safely.

As it relates to -- there's different unit economics for each of these service modes. But our focus is on ensuring that we do so. We serve our guests any way they want and do so in a safe manner, and that will continue to be the focus of our teams and our business at this time. Josh, do you want to touch on the second question on drive-thru?

Yes. Chris, thanks for the question. Just with respect to the question on drive-thru efficiency and capacity, certainly, the shift to more off-premise and more volumes and the drive-thru where we've seen a ton of growth does put some pressure on the drive-thru. And I think you've seen us have a lot of focus on operations and a lot of focus on simplicity of our offering and less innovation. That's allowed us to work with our franchisees a lot more on operations and speed in the drive-thru.

And I think you also see -- I think you also see a lot of focus on the drive-thru and a lot of the operations innovation that we've been focused on. Just a few examples of that, some of which we talked about in the other releases this morning. I think if you look at some of the drive-thru digital menu board innovation that we brought out, one of the big elements of that is very efficiency focused. So for example, at Tim Hortons, we're looking at ways to have our guests pay and/or scan their loyalty cards at the menu boards, which would allow for significant efficiencies in the drive-thru process and allow us to both enhance the guest experience and speed up that experience. So we think that would be an amazing innovation, something that we haven't really seen others do, and we think it could really enhance the guest experience for all of our guests at Tims.

Another big focus for us throughout our BK systems has been converting single drive-thru to double drive-thrus. We've done this in quite a number of our restaurants in the U.S. We're doing it in as many of our new restaurants as we can in the U.S., and we think that's a huge advantage to drive both guest experience and throughput in our drive-thrus.

And I'd say that the -- maybe a third angle on this that we've really been focused on is our kitchen engineering. This has been a particular focus in -- especially in Popeyes, where the concept has evolved a lot as we've added a chicken sandwich, and that's a whole new process for our teams and for our kitchens. So we've been looking at ways to make our kitchens more efficient and allow us to drive faster drive-thru throughput. So we're doing a ton of work on this front to make sure that we can drive greater efficiency in our drive-thrus and continue to make the guest experience better every day.

Our next question will come from David Palmer of Evercore ISI.

And thanks so far for your color on Tims. Just a follow-up to your answer to, I think it was Dennis Geiger's question. You mentioned improving coffee share. Are you back to growing coffee share in Canada? And is that translating to a broader share gain within Canadian quick service? Any color there would be helpful.

And then when you do update drive-thrus at Tims or Burger King with better technology and the better AI-enabled functionality, not just the hardware, but also some of this new software, what's the impact of same-store sales from that? And what is the return on investment proposition to franchisees?

David, thanks for the question. Yes. On the question of coffee share, we -- as I mentioned, we've seen some progress over the last 7, 8 months since the beginning of the year on coffee share. I think overall, the pie has gotten smaller given mobility and all the other issues that I touched on earlier. I think our brand being well positioned in the country with drive-thrus, 2,700 -- approximately 2,700 drive-thrus throughout the country gives us the ability to continue to serve Canadians even in the most difficult of circumstances. So our focus has been on doing with our teams, with our franchise owners and making sure we do so safely. And I think it's been a really strong effort on the part of the team in the pandemic, and we continue to be focused on those elements of service and delivering our great-tasting coffee consistently. And I appreciate the question. I'll pass the second one to Josh to touch on that.

Thanks for the question on the drive-thrus. So just a couple of thoughts on this one. I'd say that when you look holistically at the investments we're making in the drive-thrus. So I would look at a combination of, especially with Burger King, where we're doing a lot of conversions of single drive-thrus to double drive-thrus, we're upgrading to digital menu boards. And then when we're adding the AI-driven suggestive selling, we're seeing probably some of the best ROI that we think there is out there for our franchisees, and that's why there's so much interest from the franchisee community and making these investments. So we're seeing really strong sales uplift from the investments that our franchisees are making. And I think it's a combination of all 3 of those elements, the conversions to double drive-thru, the investments in the digital menu boards, which really create I think a much more attractive guest experience, and the software that's able to do the suggestive sell. And I think we're seeing similar things at Tim Hortons. We're just starting in Canada to implement some of the suggestive sell software was a little bit earlier there. But I think it's going to -- we're going to see really attractive results over time.

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

Great. Thank you so much. We've made a lot of progress over the past 7 months and are confident we're advancing in all the right areas to emerge from the pandemic well positioned for long-term growth. Thank you again for your time today. Take care and stay safe.

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