Restaurant Brands International Inc

NYSE:QSR

Earnings Call Transcript 2018-Q4

[Operator]

Good morning and welcome to the Restaurant Brands International Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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.

[Chris Brigleb, Head, IR]

Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the fourth quarter and full-year ended December 31, 2018. I'm pleased to join you today as RBI's new Head of Investor Relations, taking over from Markus. I've been working closely with Markus over the last few months and I'm looking for to working closely with all of you. As a reminder, a live broadcast of this call may be accessed through the Investor Relations webpage at investor.rbi.com and a recording will be available for replay. Joining me on the call today are Restaurant Brands International's Co-Chair of the Board, Daniel Schwartz; CEO, José Cil and CFO, Matt Dunnigan. Daniel, José and Matt will also be joined by our COO, Josh Kobza for the Q&A portion of today's call. Today's earnings call contains forward-looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings. In addition, this earnings call includes non-GAAP financial measures. Reconciliations of non-GAAP financial measures are included in the press release available on our website. Let's quickly review the agenda for today's call. Daniel will start some opening remarks and highlights for the fourth quarter and full-year on a consolidated basis and at Tim Hortons and Popeyes. José will then discuss our results at Burger King and Matt review consolidated financial results before opening the call up for Q&A. I'd now like to turn the call over to Daniel.

[Daniel Schwartz, Co-Chair of the Board]

Thanks, Chris, and good morning, everyone. Thanks for joining us on today's call. As you probably saw a few weeks ago, we recently announced some exciting leadership changes at RBI. Given how recent these organizational changes are for this quarter's conference call, I will discuss our key results for the consolidated business at Tim Hortons and Popeyes while José will walk through our results at Burger King. Going forward, José will be taking the lead in discussing our business results across all three of our brands on investor and earnings calls. In 2018, we continued to deliver strong growth in our top and bottom lines. On a consolidated basis, we grew our system-wide sales by nearly 7.5%, driven by comparable sales of roughly 1% to 2% at each of our three brands and consolidated net restaurant growth of 5.5%. This strong top-line growth allowed us to achieve 2018 consolidated adjusted EBITDA of $2,212 million, representing an organic year-on-year increase of over 4%. We also grew our adjusted diluted EPS by over 25% to $2.63 per share, up from $2.10 per share in the prior year. At Tim Hortons, system-wide sales grew by nearly 2.5% in 2018, driven by net restaurant growth of 2% and comparable sales of 0.6%. In the fourth quarter, Tim Hortons’ comparable sales continued to accelerate to 1.9%, reflecting sequential improvements in Canada comparable sales to 2.2%, as well as continued improvement in the Tim's U.S. comparable sales. At Burger King, we achieved 2018 system-wide sales growth of nearly 9%, reflecting net restaurant growth of 6% and comparable sales of 2%. Our fourth quarter global comparable sales of 1.7% reflected sequential improvements in U.S. comparable sales of nearly 1%. At Popeyes, we grew our system-wide sales in 2018 by nearly 9%, driven by net restaurant growth of over 7% and comparable sales of 1.6%. While we delivered stronger comparable sales results at Popeyes in the first half of 2018, our fourth quarter comparable sales were relatively flat due to flat results in the U.S. You’ll recall that at the beginning of 2018, we outlined the following priorities for the year. Number one, improved comparable sales for Tim Hortons, particularly in our home market of Canada; number two, build on our system-wide sales momentum at Burger King and further accelerate growth of the brand all around the world; number three, establish partnerships to meaningfully accelerate net restaurant growth for Popeyes including through new international master franchise arrangements; number four, leverage technology to enhance guest experience for all three of our brands; and number five, maintain a balanced approach to capital allocation to maximize value creation for our stakeholders. I'm pleased to report that we made good progress against each of these priorities in 2018. Our comparable sales at Tim Hortons in Canada accelerated 2.2% in the fourth quarter, representing the highest quarterly comparable sales we've achieved in Canada in the last 10 quarters. We intend to build on this momentum heading into 2019. We continued to maintain strong system-wide sales growth at Burger King of 9%, driven by similar level of global net restaurant growth and comparable sales in 2018 as we achieved in 2017. We established several new development agreements for Popeyes in the U.S. and signed our first international master franchise agreement for the brand in Brazil and Philippines. We accelerated net restaurant growth at Popeyes from 6% in 2017 to over 7% in 2018. And the full impact of partnerships recently signed is not yet reflected in our 2018 figures. In addition to these agreements beginning to translate into further net restaurant growth in the future, we are in active discussions of several prospective partners to develop the brand all around the world. Now, thanks to Joshua's leadership of our technology functions, we made significant progress adopting technology as a core strategic focus across each of our three brands. We have rolled out self-order kiosks, delivery and mobile apps across each of our brand’s home markets, and we continue to move quickly to further expand these technologies across our restaurant base. We also have exciting technology initiatives underway for 2019 and beyond, including a loyalty program at Tim’s and the rollout of our new Burger King of Tomorrow restaurant image, which emphasizes technology for kiosks and outdoor digital menu boards. We continue to maintain a balanced approach to capital allocation for our increased dividend, our $561 million share repurchase in the fourth quarter, our continued delevering, and our reinvesting in the business, including for our Tim Hortons remodel and supply chain initiatives. We also announced that we’re targeting an 11% increase in total declared dividend in 2019 as compared to 2018, illustrating our confidence in our growth model. But, while we're glad to have made good progress against our 2018 priorities, we’re even more excited about what we believe to be significant long-term growth prospects for our business over many, many years to come. Throughout 2018, we have developed a comprehensive bottoms-up strategic plan that outlines our priorities in areas of opportunities to deliver long-term value creation. We intend to share those plans in much more detail than we have historically at our first-ever Investor Day scheduled in New York City from May of this year. Let's now review results for our Tim Hortons business. Full year adjusted EBITDA for Tim’s was $1,127 million, which was relatively flat year-over-year on an organic basis. These flat results reflect continued system-wide sales growth, offset by decreases in the first half of the year in our supply chain business related to the previously disclosed lapping of our espresso equipment rollout in early 2017 and the lapping of savings passed on to franchise owners in the late 2017. Our 2018 global comparable sales of 0.6% include a consistent sequential improvement in comparable sales from Q1 through Q4. In the fourth quarter, Tim’s global comparable sales reached 1.9% and Canada comparable sales reached 2.2%. Our improving results in Canada reflected continued strength in breakfast foods driven by Breakfast Anytime, a successful hockey card program in October and a strong holiday offerings including beverage innovation. Importantly, our momentum in the fourth quarter is an indication that the Winning Together plan that we developed with our franchisees in early 2018 is working. As a reminder, the plan revolves around guest satisfaction and franchisee profitability through a focus on three main pillars, product excellence; restaurant experience; and brand communications. Within product excellence, we're pursuing several initiatives to elevate our product quality including the November launch of our kids menu called, Timmies Minis. It is a menu that kids are excited about, the parents also feel good about serving their children, especially given Timmies Minis products have no artificial colors or flavors and no added sugar. While we are already seeing incrementality from the program, we expect Timmies Minis to be even more impactful to our business over time as we build this program. We continue to be pleased with Breakfast Anytime, which is another initiative launched under our product excellence pillar. We launched the program nationally across Canada in the summer and it has driven healthy levels of incrementality both for restaurant level sales and profitability. Aside from Breakfast Anytime and Timmies Minis, we also have several opportunities that we plan to execute against in 2019 and beyond to drive further sustainable growth over the long run. We also made good progress on our restaurant experience pillar in 2018. Within 2018, we completed just under 400 renovations in the new image, which represents nearly 10% of our restaurants across Canada. This 2018 result marks the most renovations completed in the last 10 years at Tim Hortons. Feedback from team members, restaurant owners and guests has been very positive. We plan to continue to renovate several hundred restaurants per year, primarily as the remodel anniversaries come due under the 10-year remodel commitments stipulated in the franchise agreements. The loyalty program that we have been testing in Canada, which also falls under our restaurant experience pillar, continues to be very popular with our guests. We have seen loyalty adoption rates as high as 20% to 30% in certain test markets. We expect to finalize the mechanics of our loyalty program and roll out the program nationally through both analog cards and our mobile app later this year. Under the brand communications pillar, our results in 2018 benefited from a much improved narrative in the Canadian media. Leadership team and I have proactively spent more time with the media, particularly in Canada to share stories of the exciting things that we have been working on with our restaurant owners and their team members to drive an enhanced experience for our guests. This improved narrative around our business has translated into significantly improved brand positioning for Tim Hortons as evidenced by the Ipsos Reid brand tracker published this month in which Tim Hortons was reintroduced into the top 10 list of most influential brands in Canada. As part of our brand communications pillar, we also significantly improved the overall quality of our marketing in Canada. After listening to feedback from our restaurant owners and our guests, we brought back a refreshed version of an iconic Tim Hortons campaign, called True Stories. These segments feature True Stories in which Tim Hortons played a central role in the lives and memories of Canadians, many segments of which are heartwarming and each of which highlights how Tim Hortons is so uniquely and highly connected to the communities and the guests that it serves. You have heard us talking for several quarters about our efforts to improve our relationship with our Tim Hortons franchise owners in Canada. Core to our Winning Together plan is the ability to effectively work together. Alex and our executive team in Canada have made substantial headway in improving our relationship with all of our franchisees. This starts with our elected advisory board of restaurant owners and we have worked very closely with them to ask for their feedback and their advice on many aspects of our business strategy in Canada. Alex and the team executed a very strong convention just before the end of last year where we laid our plans for 2019 and we have several more cross-country road shows planned for this year to meet with Tim Hortons’ restaurant owners and continually receive their feedback. We have made tangible progress against each of the pillars under our Winning Together plan this year with good momentum in the fourth quarter of 2018. It is worth noting that we have had several additional initiatives under each pillar of the plan that we have not yet implemented but that we're very excited about. As it relates to restaurant development, we maintained a more selective approach to new site selection in Canada throughout 2018. Some of the year-over-year deceleration in net restaurant growth in Canada was offset by continued expansion in our international markets, including the Philippines, the UK, Mexico and Spain. While we still only have a handful of restaurants in each of these international markets, we are encouraged by what we're seeing. Our results do not yet reflect any openings in our newly formed master franchise joint venture in China where we intend to open over 1,500 restaurants over the next 10 years. We believe that we have a strong partner and strong plans in China to achieve rapid growth in the market. In November, we also completed the move of our Oakville office to a brand new office in Downtown Toronto. Our employees love the new space and we believe that it will help us in attracting and retaining top talent for the long run. Now, let's review our results for Popeyes. In 2018, we accelerated our system-wide sales growth at Popeyes for roughly 9%, driven by improved net restaurant growth of 7% and improved comparable sales of 1.6%. This top-line growth, when combined with effective cost discipline, resulted in double-digit profitability growth for the brand in each quarter of 2018. Our 2018 Popeyes adjusted EBITDA was $157 million, representing a 31% organic increase versus the prior year. Full-year comparable sales of 1.6% were a function of strong results in the first half of the year, partially offset by flatter results in the second half of the year. The deceleration in comparable sales in the second half of the year reflected less impactful limited time offers and softness in our family layer. In December of 2018, we launched the $20 Holiday Feast to address gaps in the family layer. And we saw better comparable sales in the month relative to October and November as a result of this. Heading into 2019, we will continue to have a balance across our menu with product and platform innovation that highlights our culinary traditions which we believe will drive sustainable comparable sales growth over the long run. On the technology front, we made great progress rolling out delivery to over 1,100 Popeyes restaurants in the U.S., representing nearly 50% of our U.S. restaurants within just one year. We have found delivery to be particularly incremental for the Popeyes business. And while delivery now represents a more meaningful portion of our sales in the U.S., we think it could be much bigger still. We also made significant progress developing two standardized POS solutions for our Popeyes restaurants in the U.S. with nearly a 100% of our franchisees signed up to implement one of these POS solutions in the coming months. These POS terminals will not only give us deeper insights into sales trends across all of our U.S. restaurants, but they will also allow for integrations with other technology initiatives such as mobile apps. As it relates to restaurant development, grew our Popeyes restaurant count by more than 7% in 2018, up from 6% in 2017. The majority of this growth was generated in the U.S., but it also included the opening of our first restaurants in Brazil by our local master franchise partner. Our fourth quarter net restaurant growth started to reflect the benefits of some of the development agreements implemented since we acquired Popeyes in early 2017. Looking ahead to future quarters, there are still several agreements that are not yet reflected in our 2018 results, and we also continue to actively pursue additional partnerships in the U.S. and internationally. Our partner in Brazil opened their first eight Popeyes restaurants in the fourth quarter and has received encouraging guest feedback from each of the new openings. We have strong conviction that the development agreements that we have assigned and that we intend to sign in the future, will set Popeyes up to be one of the fastest growing, global QSR brands in the world. And with that, I'd now like to hand it over to our new CEO, José Cil.

[José Cil, CEO]

Thanks, Daniel, and good morning, everyone. I'm pleased to provide an update on our fourth quarter and full-year 2018 results at Burger King. We grew our Burger King system-wide sales in 2018 by nearly 9%, driven by continued momentum in net restaurant growth of over 6% and comparable sales of 2%. Growth in our top-line resulted in 2018 BK adjusted EBITDA of $928 million, representing a year-over-year organic increase of nearly 6.5%. Our 2018 global comparable sales of 2% included U.S. comparable sales of 1.4% and international comparable sales of 2.5%. Internationally, our comparable sales for 2018 reflect strengths in markets like Russia, Spain, Brazil and India, partially offset by softer comparable sales in the UK, Germany and Australia. In the fourth quarter of 2018, U.S. comparable sales improved on a sequential basis, driven by a better balance in our menu including successful promotions relative to the third quarter such as our $1 10-piece nuggets promotion and our Whopper Detour offer. We continue to believe that we have several opportunities to drive sustainable comparable sales growth over the long run including through a balanced menu structure and a strong pipeline of innovative and relevant products and platform launches coupled with strong marketing. We're fundamentally brand-led company, and we've demonstrated this through impactful, edgy marketing campaigns including the Nightmare King, the Whopper Detour and most recently, our Eat Like Andy ad during the Super Bowl. In addition to the important menu and marketing related drivers of growth, our strategy of Burger King continues to center on enhancing guest experience through restaurant image, technology and service. On restaurant image, you’ll recall that last quarter, we unveiled our Burger King of Tomorrow image in our plans to aggressively roll this out across the U.S. and internationally. So far, feedback from franchisees has been encouraging. In particular, our franchisees share our belief that the new modern image, which integrates technology including outdoor digital menu boards and self-order kiosks will help in driving enhanced guest satisfaction, resulting in more visits and long-term comparable sales growth. We’ve also made good progress on other technology related initiatives at Burger King this quarter. Delivery continues to be an important and growing part of the business with delivery now available in nearly 3,000 restaurants in the U.S. and nearly 7,000 restaurants around the world. We also built on the success of the Burger King mobile order and pay app, which we launched across the U.S. in the third quarter of 2018. Another example of our unique, creative and marketing, we launched the campaign called Whopper Detour where users of the Burger King app were able to purchase a whopper for $0.01, if they were close enough to a restaurant of our largest competitor. We generated over 1.5 million downloads from the initiative, making the Burger King app the number one most downloaded app in the Apple store for several days in a row and the most downloaded QSR app in the U.S. among our direct competitors in December. As it relates to operations, since the majority of our sales in the U.S. occur in the drive-thru, we continue to place emphasis on further improving our drive-thru speed of service. While we still have lots of room to improve, we’re proud to have been recognized by QSR magazine as having the fastest drive-thru times among our QSR peers in the U.S., up from fourth place in 2017. We opened a net of over 1,000 Burger King restaurants throughout 2018, translating into over 6% net restaurant growth for the year. Our growth at BK was largely driven by expansion of the brand in countries like Brazil, Russia, France, China, and the U.S., while we opened a net of nearly a 100 stores or more in each country. We continued to accelerate the pace of growth in the U.S. in 2018 having opened more than a 100 net restaurants in the year. We believe this accelerated pace of growth in our home market is a testament to the improved franchise economics and to the meaningful prospects for further growth of our domestic business for many years to come. I’d now like to turn the call over to Matt.

[Matt Dunnigan, CFO]

Thanks, José. In 2018, growth in our top-line resulted in adjusted EBITDA of $2,212 million or $2,247 million under prior accounting standards, up over 4% organically year-over-year. As a reminder, for comparability purposes, we are presenting the 2018 organic growth figures, both on a constant currency basis, as well as under previous accounting standards in both periods. Our full-year adjusted net income was approximately $1,242 million or $1,267 million under prior accounting standards. This compares to prior year results of roughly $1 billion. And the year-over-year increase was driven by adjusted EBITDA growth and the accretive redemption of our preferred shares in December of 2017, partially offset by higher effective tax rate and unfavorable foreign exchange rate movements as compared to last year. Our 2018 adjusted diluted EPS was $2.63, up over 25% from $2.10 in the prior year. In the fourth quarter of 2018, our growth in organic adjusted EBITDA under previous accounting standards was somewhat lower than the third quarter, including at Burger King despite the fact that we sequentially improved our Burger King system-wide sales growth. We wanted to highlight a few key reasons for this. Each of which pertains to impacts from prior year events or to items that we believe are less likely to be as impactful prospectively. First, under previous accounting standards, we recorded roughly $11 million of lower fees and other income in Q4 of 2018, as compared to Q4 of 2017. Of that $11 million, roughly $6 million was attributable to Tim Hortons and $5 million was attributable to Burger King. Our lower fees and other income at Tim Hortons includes, among other items, fewer restaurant openings in the fourth quarter of 2018 relative to the prior year period. Our lower fees and other income at Burger King includes, among other items, fewer franchise agreement renewals, primarily with certain international partners who had renewed agreements for large portfolios of restaurants in the prior year period. As a reminder, it's worth noting that fees and other income include certain income streams that continue to impact our adjusted EBITDA under the new accounting standards and can vary from quarter to quarter. Secondly, as it relates to G&A, we incurred certain compensation related expenses in the fourth quarter of 2018 that were non-recurring in nature including life-to-date tax equalization adjustments for historical equity grants. Finally, whereas restaurants formerly could remain open during low scope renovations, restaurants under the new Tim Hortons Welcome Image remodel program now typically require more partial and full closure time, based on the enhanced scope of our Welcome Image. This results in a temporary loss of system-wide sales and therefore a temporary reduction in rents and royalty income for Tim Hortons. As a reminder, we completed a record number of Tim Hortons’ renovations in 2018 with most renovations completed in Q4. Unlike 2017, since sales losses related to renovation downtime are now reflected in our 2018 financials, results in 2019 and beyond should no longer face these year-over-year headwinds. Absent these three impacts to our fourth quarter results, our consolidated organic adjusted EBITDA growth in the fourth quarter of 2018 would have been higher than in the third quarter. As it relates to the impact of the new revenue recognition accounting standard, we wanted to quickly remind you about some factors influencing our financial results in 2018. Under the new revenue recognition standard, upfront franchise related fees are recognized as deferred revenues, which then amortized into revenue over the life of the underlying contract. As mentioned in prior quarters, the new revenue recognition standards pertaining to franchise fees have a larger impact on periods in which more openings occur, which in the case of our business is usually the fourth quarter. Accordingly, we saw a larger impact from the new standard on franchise fees in this quarter than we have in prior periods. It is also important to keep in mind that the franchise fee component of this new accounting standard is non-cash in nature. Regarding the impact of advertising funds, our results at Tim Hortons in the fourth quarter reflected a net benefit from revenue recognition, primarily due to the timing of ad fund related revenues and expenses. Respectively, we anticipate that in some quarters, there will be a mismatch in the timing of revenues and expenses. However, in the long run, these ad funds are managed such that the total cumulative revenues equal expenses. Next, we wanted to provide a brief update on tax. Earlier in 2018, we have provided an indication of our expected adjusted effective income tax rate for the year. Specifically, we had guided to the low 20% range, inclusive of various assumptions such as the benefits of stock option exercises. Our actual 2018 adjusted effective income tax rate was roughly 18%, below the range that we had guided towards in the beginning of the year, largely driven by discrete benefits which exceeded what we would normally anticipate, including outsized stock option exercise benefits and audit related reserve releases. Heading into 2019 and beyond, we continue to expect our adjusted effective income tax rate to be in the low-20s, based on more normalized expectations of discrete rate benefits and stock option activity. Starting this quarter, we have begun presenting some of our operational KPIs including system-wide sales growth, system-wide sales, net restaurant growth and total restaurant count on a consolidated RBI-wide basis. While we continue to manage each of our brands with dedicated independent teams, we thought it would be helpful to provide investors with consolidated KPIs in order to measure our overall business growth. Our consolidated KPIs also help in illustrating why we believe we are fundamentally a growth company. In the spirit of providing greater transparency to our investors, we are also now further desegregating our operational KPIs in certain cash payments and our cash flow statement. Specifically, starting this quarter and for each prospective quarter, we will be disclosing system-wide sales growth, system-wide sales, comparable sales, net restaurant growth and restaurant count for our brands in each of their respective home markets, and rest of world. We're also now presenting payments made under tenant inducements as a separate line item in our cash flow statement. As a reminder, tenant inducements paid to franchisees represent our cash contribution towards renovations for restaurant locations where we either lease or sublease properties to franchisees. Historically, these statements were included in the other long-term assets and liabilities line item in our statement of cash flows. While we continue to operate a capital light business model, we view these remodel contributions as important investments to drive sustainable comparable sales growth over the long run. Now, let's discuss our cash generation and capital allocation for the year. We generated free cash flow of approximately $1.1 billion, calculated as the sum of cash flows from operating activities and investing activities. In the fourth quarter, we completed the repurchase of 10 million partnership exchangeable units of RBI LP for a total consideration of $561 million. In 2018, we also paid a total of $728 million in common dividends and partnership exchangeable unit distributions. As of December 31, 2018, our total debt outstanding was $12.3 billion. Our net debt calculated its total debt less cash and cash equivalents of $913 million was $11.4 billion. And our net debt to adjusted EBITDA leverage ratio was 5.1. We also announced on January 23rd that the RBI Board of Directors declared a dividend and $0.50 per common share and partnership exchangeable unit of RBI LP, payable on April 3, 2019. In connection with the declared dividend, we also announced that we are targeting a total of $2 in declared dividends for common share and partnership exchangeable unit in 2009, representing an 11% increase relative to dividends declared in 2018. Throughout 2018, the combination of our dividend increase, our repurchase of 10 million partnership exchangeable units, our continued delevering and our reinvestment in the business, including through Tim Hortons renovations and our distribution center expansion, continued to demonstrate our balanced approach to capital allocation. We remain committed to this approach heading into 2019, since we believe such a strategy will support long-term value creation for all of our stakeholders. Thank you everyone for joining us on the call this morning and for your ongoing support. I'd now like to open the call for questions. Operator?

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Glass of Morgan Stanley. Please go ahead.

[John Glass, Morgan Stanley]

Thanks and good morning. Daniel, José, in the past, you’ve spoken a little bit about franchisee profitability in your major markets. And maybe if you could just comment on where you think 2018 ended, up, down, flat for franchisee profitability? And I did want to just clarify the question on the Burger King profit growth in 2019. Do you think that it’s closer to what you think system sales growth is, or do you think there are still some headwinds in the BK EBITDA, adjusted EBITDA growth in ‘19 as well?

[José Cil, CEO]

Hey, John. It José. Thanks for the question. Average -- on franchise profitability, we saw average profitability go up at Burger King; and at Tim's, we saw it flat; and at Popeyes, we saw it flat to slightly negative year-over-year. But we continue to see really healthy returns in the business, especially at Popeyes and in the U.S. Tim's and Canada and BK at the U.S. Our focus continues to be on driving top line sales. We know that when we have balanced menu offerings and calendar promotions that we drive top-line and that has a big impact on the bottom line. That's the focus that we continue to strive for in our business.

[Matt Dunnigan, CFO]

Yes, John. It's Matt here as well. Just to your question on profitability, I think, we wanted to provide some color in the prepared remarks and call out some items that affected the year-over-year comparability. We talked about some significant franchisee renewals that occurred in 2017 that affected the compatibility that we would not expect to recur going forward. However, we're not providing any guidance on profitability targets.

[Operator]

The next question comes from Dennis Geiger of UBS. Please go ahead.

[Dennis Geiger, UBS]

Great. Thanks for the question. I just wanted to circle up on unit growth. I think, on the recent preannounced call a few weeks ago, you mentioned acceleration at the Burger King and Popeyes brand going forward. I just wanted to clarify, are we talking about net units growth as a percentage accelerating going forward. And I guess, specifically the question is for Burger King there, just given the kind of growth you're already seeing in absolute units, and just specifically, what the key drivers are? Is it coming from a lot of those countries, José, that you just mentioned? Is there still opportunity for new development agreements in different countries to be signed? Just any commentary on the unit growth beyond what you mentioned already? Thanks.

[José Cil, CEO]

Hey. Thanks for the question, Dennis. We continue to open great restaurants in markets all around the world, including as we mentioned earlier, 100 net openings in the U.S., which is the best performance in a long time. Our results included acceleration in some markets, partially offset by slower growth in other markets versus the prior year. Now, I don't like to look back too often, but I think it's helpful in this case, to better understand how net restaurant growth has evolved through BK over the last several years. And you’ll recall, not too long ago, we were growing at a very modest pace of 1% to 2%, and we stepped up the pace of development the last two years and have crossed the 1,000 net openings threshold, which is more than 6% net unit growth each of the last three years. How did we do this? First, we’re still severely underpenetrated and have tons of white space to grow in most markets around the world including right here in the U.S. Second, we have we strong master franchise or development partners with really great teams and in some cases we own a minority stake in these master franchise JVs where we have a seat at the table. I think, third, we're seeing strong new unit economics with compelling returns and tremendous value creation for our franchise partners in many markets. Fourth, we have our BK case teams on the ground continuing to work closely with our franchise partners to drive improved guest experience and franchise profitability. And finally, our franchise partners have solid new restaurant pipelines and are improving in most key markets around the world. So, it's no surprise that we continue to be excited and confident in the long-term prospects for growth for the BK brand all around the world. And I think one final point that it's this experience with BK that gives me confidence in our ability to accelerate growth for Popeyes and Tim’s around the world.

[Operator]

The next question comes from Andrew Charles of Cowen & Company. Please go ahead.

[Brian Bittner, Cowen & Company]

Hey, guys. This is Brian on for Andrew, and thanks for taking the question. I appreciate the color on Tim's remodel program. I think, this is the first time we're seeing a breakout for the tenant inducements paid to franchisees. Could you just give us a sense of how much of this went towards Tim's? Thanks.

[Matt Dunnigan, CFO]

Yes. Hi, Brian. Thanks for the question. It’s Matt here. Yes. We called out a couple of the -- couple of items that would affect year-over-year comparability, just to provide some color. On fees and other income, we said that total impact was about $11 million. It was roughly split half and half between Tim's and BK in terms of that impact. And we also had some temporary reduction in sales from the Welcome Image renos, which you pointed out. We haven't quantified this. But, we wanted to make note of this for you as we significantly increased our pace of remodeling in 2018 versus prior years and renovated close to 400 restaurants in the Tim’s system. We expect to keep up a strong pace of remodeling going forward. So, as we continue on with this program, which we think is strategically important for the brand, to evolve the brand and guest perception in Canada, we'd expect that pace to continue into 2019.

[Operator]

The next question comes from Mark Petrie of CIBC. Please go ahead.

[Mark Petrie, CIBC]

Hey, good morning. I just wanted to ask about Popeyes. I understand that the international growth opportunity is significant, but the U.S. comp has remained challenged. So, I just wanted to focus on that. And you’ve spoken in the past about striking a better balance on sort of menu and promotions. And we've seen some evidence on the value side, and as you said, the family offer. But, I guess first, are you satisfied with that balance in Q4?And then, more broadly speaking, what do you need to do differently in order to accelerate the U.S. comp.

[José Cil, CEO]

Thanks for the question, Mark. It's José. As we mentioned, early in Q4, we experienced softness in the family layer of the menu, as we kind of rolled off of our $20 offer with no immediate replacement. And we corrected that in December and the business reacted well. Additionally, in December and in the fourth quarter, we saw less impact from our LTO promotions. And we're working -- as we speak, we're working on maintaining a balanced calendar, highlighting -- as Dan mentioned in the prepared remarks, highlighting our culinary innovation with more impactful LTOs while maintaining strong single guest and family bundle offerings. We think that's the right formula for the business going forward. We're also working on rolling out a unified POS solution for Popeyes in the U.S., which is going to help us have a better understanding of sales and product mix and help us evolve our marketing strategies further. And what's encouraging is that we continue to work well with our Popeyes franchise partners in the U.S. focusing on the guest experience, driving more guests into our restaurants and improving their franchise profitability. Thanks for the question.

[Operator]

The next question comes from David Tarantino of Baird. Please go ahead.

[David Tarantino, Baird]

A couple of questions on Tim Hortons comps. First, can you please just clarify whether this impact from the remodeling is embedded in the comps or whether you take those units out of the comp base temporarily? And then, second, just on the question of sort of the improvement you saw throughout 2018, just wondering what your thoughts are on the sustainability of that trend. And then, I think you referenced being excited about some initiatives you have coming up, if you could just elaborate on what you're most excited about for 2019?

[Matt Dunnigan, CFO]

Hi, David. It’s Matt. Thanks for the question. As it relates to the impact on Tim Hortons comparable sales, because the restaurants that we’re renovating are closer period of time, they're not included in the comparable sales metrics as they’re non-comparable.

[José Cil, CEO]

Thanks Matt. David on your second question, we were really excited to see sequential comps growth in Tim's Canada in the fourth quarter. And as we've mentioned, we're confident that our Winning Together plan is taking hold, it’s resonating with our guests in Canada, and our restaurant owners are engaged and executing well. You’ll recall that the Winning Together plan features three pillars, product excellence; restaurant experience; and brand communications. And in the fourth quarter, we hit on all cylinders. And we saw continued growth in the Breakfast Anytime platform; we saw good growth from beverage innovation, which is at the heart of our Tim's business; we saw some good performance with the Hershey’s Hot Chocolate, Candy Cane Hot Chocolate, and Holiday Lattes. We also had a really strong advertising and communications plan, which connected well with our guests including the True Stories campaign that you'll see more of in 2019, and we had a good hockey card promotion, and we launched Timmies Minis in the quarter as well. I think going forward, we don't give too much -- we don't give guidance on performance going forward, but we do feel confident in the plan that we have. We do feel confident in the pillars of the plan. And there's never a silver bullet in this business. It's about executing the plan consistently and working well with our franchise owners in Canada to deliver great experiences every day through each of the platforms.

[Operator]

The next question comes from Peter Sklar of BMO Capital Markets. Please go ahead.

[Peter Sklar, BMO Capital Markets]

José, I wanted to ask you about the global rollout of the Tim Hortons brand. I mean, you know that Tim Hortons is one of the strongest brands inside Canada, but outside Canada, maybe with the exception of Buffalo, just the banner is not well-known. It's not going to be like rolling out Burger King, as you know which is an iconic global brand. So, just wondering what your thinking is in terms of brand value outside of Canada, and why you're so confident that the brand is going to be successful, as you rollout through your master partners?

[José Cil, CEO]

The coffee segment in QSR is growing tremendously across the globe. And we're encouraged with early signs coming from our Tim's international business. Some markets of course are doing better than others, but we feel good about how consumers are engaging with the brand in all of our new markets. We've done a lot of work over the past year or so, adapting the concept internationally and proving restaurant profitability. We've adapted the brand more to the consumers’ needs and wants in each of our local markets. And we feel that the business is in a better place today to grow sustainably and profitably. Beverages are doing really well. Guests like the quality and the variety, and we made some adjustments on the food side, as you can imagine. And not surprisingly, consumer preferences vary from market to market. What's great is that we have amazing franchise partners in our new markets across the globe, and they and we remain super excited and confident in the long term growth prospects of the Tim’s international business.

[Operator]

The next question comes from Gregory Francfort of Bank of America. Please go ahead.

[Gregory Francfort, Bank of America]

Hey, guys. I think, McDonald's had disclosed that franchisee cash flow in Canada was down on minimum wage increases in 2018. I guess, the flat number was very impressive to me. Is that the mix of products or labor management tools you've been adding recently? What have you done on the margins that sort of offset some of the minimum wage pressures you've seen?

[José Cil, CEO]

Thanks for the question, Greg. As I mentioned earlier, the profitability was solid in Tim’s in Canada year-over-year. I think the top-line growth that we saw sequentially quarter-over-quarter in 2018 had a positive impact on overall franchise profitability and restaurant level profitability. What we focus on, we see movements up and down in cost in our business on a regular basis. It's part of QSR and it's been part of QSR for a long time. Our focus is on driving top-line, bringing more guests into the restaurants driving profitable growth. When that happens, the P&L reacts quite well. And we're excited about the prospects going forward.

[Operator]

The next question comes from Karen Holthouse of Goldman Sachs. Please go ahead.

[Karen Holthouse, Goldman Sachs]

Hi. Thank you for taking questions. On the Burger King remodel, how long do you think it will be to go from sort of prototype of restaurant in the future to really launching that out to the system? And what sort of metrics are you targeting, what are investments relative to annual cash flows, sales [ph] to investment ratio, that sort of thing?

[José Cil, CEO]

Hey, Karen. Thanks for the question. This is José. We've made good progress in 2018 since announcing the BK of Tomorrow restaurant image, and we have a strong pipeline for renovations in 2019. And we've been reimaging our restaurants in the U.S. and across the globe for years now. This is a big part of the business. It’s the right thing to do for our guests and the business case is strong. Franchise feedback continues to be positive and our franchisees are particularly excited with the technology elements of the remodels and the focus on the exterior and the drive-thru. Keep in mind that many of the elements of the BK of Tomorrow program, especially the double drive-thru, the outdoor digital menu boards, these were born from initiatives led by our franchise partners. As the vast majority of our sales in the U.S. are through the drive-thru, everyone agrees that it makes a lot of sense to focus our efforts on improving guest experience through these elements, especially with double drive-thrus and outdoor digital menu boards. We're just getting started in the process and we look forward to sharing more with you on our progress with BK of Tomorrow in the coming quarters and at our investor conference in May.

[Operator]

The next question comes from Will Slabaugh of Stephens. Please go ahead.

[Will Slabaugh, Stephens]

Yes. Thanks, guys. I had a question on Burger King and franchisee profitability. You had more deals going on this quarter than normal; I think 2 to $6 [ph] price point and $1 nuggets. So, I was curious how that impacted franchisee profitability in the fourth quarter versus the rest of the year. And maybe, if you could speak to this year versus prior year’s just from a percentage standpoint. And then how sustainable you feel like the current deal environment or deal structure that you have is? And lastly, if you could talk about sort of your discount mix today versus where it's been? Thank you.

[José Cil, CEO]

Well, thanks for the question. As I mentioned, average price probability was at Burger King in the U.S. was up versus the prior year versus 2017. And what's important is to drive comparable sales growth. And we saw improvements of comp sales sequentially in Q4 through, as I mentioned earlier, a focus on a balanced menu and more compelling promotional activity. The results continue to be strong. There's always going to be pressures on our restaurant profitability. You'll see it go up and down on commodities; you see it go up in down in labor cost. Our focus continues to be and the work that we do with our franchise partners in the U.S. continues to be focused on driving the top-line through a balanced approach with value offerings, core especially focused on our Whopper and crispy, whole muscle crispy chicken sandwiches and compelling premium offers and an ever growing digital presence, which we think will drive more guests into the restaurants, drive the top line and help us improve bottom line performance. Thanks for the question.

[Operator]

The next question comes from Jon Tower of Wells Fargo. Please go ahead.

[Jon Tower, Wells Fargo]

Great. Thanks for taking the question. I was just going to go back to Tim Hortons loyalty. I know it's in test now, and you mentioned some data points during the prepared remarks. So, I'm just curious, I think roughly 8 out of 10 cups in Canada are drink -- that are drink are Tim Hortons branded. So, I'm curious to get your thoughts on how you manage the program as to incent greater frequency to the stores versus potentially giving away the product given the high usage today?

[José Cil, CEO]

Thanks, Jon. You're well informed. You're right. As the coffee leader in Canada, we sell nearly 8 out of 10 cups of coffee in Canada. And we're constantly looking for new ways to interact with our guests and reward those loyal guests that come many times, more than once or twice a day. We're currently in the middle of the testing of the loyalty program. We've actually implemented various different tests with different programs structures, some analog, some digital. We've seen very high loyalty adoption rates in many of these test markets and adoption rates, as high as 20% to 30% of transactions in some of the markets. We are still finalizing the test results and making decisions on which are going to be the final mechanics that we roll out to the system. And we'll be doing so in the coming months on a national rollout. So, we look forward to sharing more with you on that in the future.

[Operator]

The next question comes from Jake Bartlett of SunTrust. Please go ahead.

[Jake Bartlett, SunTrust]

Great. Thanks for taking the question. My questions were about Tim Hortons’ unit growth. and just wondering, in the U.S., you’ve slowed here. Is the plan to wait until as you’re really kind of focusing on same store sales for next few years, or is it a matter of seeing the same-store sales momentum build? And then, kind of more quickly, reaccelerate unit growth to the prior pace in Canada? And then, internationally, if you could help by desegregating how many -- whether they were net units opened in the U.S. or maybe net closures, just to get a better sense as to the momentum in international markets.

[José Cil, CEO]

Thanks, Jake. In Canada, as we mentioned, we moderated net restaurant growth in 2018, and we chose to be more selective in our development approach and site selection. I think, in the U.S., it's been a bit slower in 2018, relatively flat year-over-year. But, we're committed to growing the brand with our partners for the long haul. We've seen good progress in building the top line and franchise profitability. We saw good performance in Q4 from a sales standpoint, and that's encouraging to us with the business model getting stronger. And we look forward to making progress on the development front in ‘19 and beyond. And internationally, as I mentioned earlier, we're excited about the -- how we started with Tim Hortons in the new markets that we've launched the brand and we've done well with beverages. We're adapting the food offering and we have great franchise partners that believe in the brand, believe in the offer -- the product offering and are excited about investing long-term in Tim Hortons internationally.

[Operator]

The next question comes from Jeremy Scott of Mizuho. Please go ahead.

[Jeremy Scott, Mizuho]

First of all, really appreciate the initial disclosures. I think that definitely helps a lot. And then, a three-part question on Popeyes and the international development. It looks like the pacing of development picked up this year. First, as you're signing these new master franchisees, are you allotting some flexibility in the first couple of years for your partners to develop a nucleus of the branch or should we expect a steady march upward? And then second, the partners that you're seeking, I think when you made the acquisition, the thought was that you're going to be able to plug in the Popeyes brand as your established BK partners. Wonder, if you can share an update there? And then, thirdly, can you share how you're addressing the awareness gap in the early stages as you go against some of the more established players? You mentioned a strong opening in Brazil. So, maybe some insight on your marketing strategies? Thanks.

[José Cil, CEO]

I think, a couple of comments here. It's hard to build restaurants internationally. The focus for us is to have great partners, well capitalized with great teams and exciting business plans to grow the Popeyes brand around the globe. And so, we've got -- we've started well with Burger King Brazil, opening eight restaurants in the fourth quarter in 2018, and we're excited about the prospects there. We think we have really long-term opportunities for growth with Popeyes in many markets internationally. I think, the challenge which is an exciting challenge from an awareness standpoint, it's just to open restaurants. That's how we drive awareness with the brand initially. It happened to Burger King years ago, it's happening with Tim Hortons in several markets, it's happening with Popeyes in the U.S. And so, the focus for us is to have great partners, well-capitalize with good teams focused on developing the brands in each of the markets in which we open. And we look forward to sharing more with you on in upcoming calls and our investor conference in May.

[Operator]

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

[José Cil, CEO]

Thanks everyone for joining us on the call this morning. And we look forward to updating you further on our next earnings call in April, as well as at our upcoming Investor Day on May 15th in New York City. As a reminder, attendance will be by invitation only, and we will broadcast live via our Investor Relations website. If you have any additional questions, feel free to reach out at [e-mail]. Thank you all, and have a good day.

[Operator]

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