Restaurant Brands International Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Q2 Progress: Comp sales accelerated to 2.4% year-over-year, net restaurant growth of 2.9%, driving system-wide sales of 5.3%. Organic adjusted operating income growth of 5.7%. Results reflect strength of brands and teams' focus and execution.
• Tim Hortons Highlights: 17th consecutive quarter of positive comparable sales in Canada. Launched Scrambled Eggs Loaded Breakfast Box, filled Timbits, and summer cold beverage lineup. Beverage sales grew, speed of service and guest satisfaction improved. Advancing development and hosting successful charity campaigns.
• International Segment Highlights: System-wide sales growth of nearly 10%, strong performance in major markets. Burger King India, Turkey, Japan received awards. Burger King China showed improvement with positive comparable sales and improved unit economics. Popeyes and Firehouse Subs expanding in Brazil.
• Burger King Highlights: U.S. comparable sales grew 1.5%, marketing focused on family relevance, core brand equities, and value-conscious guests. Operating satisfaction rose, restaurants extended hours. Carrols restaurants outperformed, plan to complete 400 remodels this year.
• Popeyes and Firehouse Subs Highlights: Popeyes U.S. system-wide sales growth, Firehouse Subs system-wide sales growth. Firehouse Subs laid out 3-year road map for growth.

Segment Performance

• Tim Hortons: Accounts for about 43% of the business. In Q2, Canadian comparable sales accelerated to 3.6%, breakfast food sales grew over 10%, beverage sales grew 4% year-over-year. Speed of service improved across all dayparts and guest satisfaction rose over 4 points year-over-year. On track to return to modest net restaurant growth in Canada in 2025. Restaurant owners launched successful charity campaigns.
• International segment: Accounts for 26% of adjusted operating income. Delivered nearly 10% system-wide sales growth in Q2, supported by 5.4% net restaurant growth and 4.2% comparable sales. Burger King China's comparable sales turned positive in Q2 and unit economics improved meaningfully.
• Burger King: Represents around 19% of the business. U.S. comparable sales grew 1.5%, marketing focused on three areas, operating satisfaction rose, around 1,200 restaurants extended hours. Carrols restaurants outperformed BK system and other burger QSR peers. Plan to complete roughly 400 remodels this year.
• Popeyes and Firehouse Subs: Popeyes U.S. system-wide sales grew 1.9% in Q2. Firehouse Subs system-wide sales grew 6.3% in Q2. Firehouse Subs hosted annual family reunion and laid out 3-year road map.

Guidance

• Expect at least 8% organic adjusted operating income growth in 2025.
• Expect adjusted net interest expense to be around $520 million for the full year, assuming an average SOFR rate of 4.3% flowing through to approximately 15% of debt.
• Expect 2025 CapEx and cash inducements to be between $400 million to $450 million, likely at the lower end of the range.
• Anticipate Tim Hortons supply chain gross margin of roughly 19% for the full year, with Q4 being the lowest margin quarter.
• Expect Burger King Carrols restaurants' second half margins to compress by approximately 100 basis points year-over-year. Popeyes China and Firehouse Brazil's AOI loss expected to increase to around $15 million in the second half.
• Expect adjusted effective tax rate of 18% to 19% for the year.

Risks

• Dynamic consumer environment could impact performance.
• Burger King China as held for sale may continue to impact financials.
• Commodity price fluctuations, such as beef price increases, could affect costs and profitability.
• Debt-related risks including interest rate fluctuations.

Q: As it relates to Burger King U.S., the Carrols restaurants and your RH segment had nearly 3% same-store sales growth, biggest outperformance versus the rest of the system in a couple of years. Is this a product of the remodels happening at Carrols, or is there other factors driving this outperformance? And just secondly to that, you did mention that you're ahead of schedule on refranchising. What does that mean exactly? Does that mean you're planning on going faster?

A: Brian, it's Josh. Thanks for the question. I would tell you, we've been really proud of the performance across both the Carrols restaurants and the rest of our BK company restaurants. And I think it comes from a couple of -- from a lot of focus on getting a couple of the most important fundamentals right. In both of those portfolios, they're operating at a very high level. We've got great teams. We have really good restaurant managers. We see it in all of our op stats. And I think that's driving a lot of the outperformance. And on top of it, the remodels. Both of those portfolios are making significant investments in remodels and the returns from those remodels have been very good. They're doing the right scopes of work. They're executing them well, and they're really making sure that they get the results out of them. So I think that's what gives us a lot of confidence in where the rest of the system can go, because we've got a lot of other operators that are doing that increasingly, too. But I think that's what's driving the consistent outperformance that we started to see from the Carrols portfolio. In terms of the refranchising, we're also making a lot of progress there. We mentioned we've started to do some refranchising activity already. I think if you go back to when we first acquired Carrols, we said that we were going to do the refranchising between years 3 and 7. And we've obviously started that early, and we're working on plans to kind of move that ahead at a reasonable pace. It's incredibly important for us that all those restaurants go to very good operators. That was the intention of the acquisition in the first place was to make sure that those restaurants get remodeled and they're in the hands of excellent local operators. So we want to make sure that we preserve that intent, but we would like to move it along at a reasonable pace, and we're happy that we've kicked it off already, and we'll try to keep doing that, keep moving along at as good of a pace as we can over the next couple of years.

Q: I'll just squeeze in 2 quick ones. One is on the conditions in Canada for the fast food market up there. One competitor mentioned that trends had worsened in Canada. It looks like Burger King perhaps in Canada was a drag to results in North America, speaking to what might be a slower market up there, but you can't really see that if you look at the results of Tim Hortons. So love to have your comment about the QSR market in Canada and if you think that there's reasons why Tim Hortons trends are perhaps widening versus the competitive set in Canada? And then secondly, I know you're not a huge fan of speaking about intra-quarter trends, but I know people are certainly interested in what is happening with Burger King U.S., given you saw snack wraps introduced by a major competitor at $2.99. You've had a lot of success with Royal Crispy wraps. So if there's any comment you can make about July trends with that major competitor launch, that would be helpful.

A: Dave, thanks for the question. It's Josh. I'll take those 2 in turn. I think in terms of the Canada trends, we were really pleased to see the improvement from Q1 to Q2. I think you've heard all of us say consistently that we're just so proud of the work that the Tims team is doing. I mentioned earlier, we're on our 17th quarter of consecutive same-store sales. I think that's because they're doing all the fundamentals right. And I think that's perhaps why you might see the consistent outperformance versus the peer set. If you look at what's been happening up here, you've seen Tims do really well consistently, but you've also seen a bit of like a sequential improvement in some of the consumer confidence indices. And that happened throughout the second quarter, but it's continued into the third quarter. So I don't see any real reason to expect any change in trend or any deterioration up here in Canada for our Tims business. In terms of Burger King in the U.S., similar story, really happy to see what happened from Q1 to Q2. I think Tom and the team are doing a great job. They're sticking to the plan, and we haven't seen any impact in July from competitor activity. So continue to be really confident in where we're going with BK. We're going to stick to our plan, and we're excited about the stuff that we have planned for the second half.