Restaurant Brands International's (QSR) CEO Daniel Schwartz on Q4 2015 Results - Earnings Call Transcript

| About: Restaurant Brands (QSR)

Restaurant Brands International Inc. (NYSE:QSR)

Q4 2015 Earnings Conference Call

February 16, 2016 8:30 a.m. ET

Executives

Daniel Schwartz - CEO

Josh Kobza - CFO

Andrea John - Investor Relations

Analysts

Nicole Miller - Piper Jaffray

Andrew Charles - Cowen and Company

John Glass - Morgan Stanley

Perry Caicco - CIBC World Markets

Keith Siegner - UBS

David Hartley - Credit Suisse

Will Slabaugh - Stephens

Eric Gonzalez - RBC Capital Markets

Karen Holthouse - Goldman Sachs

Joseph Buckley - Bank of America Merrill Lynch

Operator

Good morning and welcome to the Restaurant Brands International Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Andrea John. Please go ahead.

Andrea John

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, 2015. A live broadcast of this call may be accessed through the Investor Relations page on our website at investor.rbi.com and a recording will be available for replay. Joining me on the call today are Restaurant Brands International CEO, Daniel Schwartz; and CFO, Josh Kobza. The team will be available to answer questions during the Q&A portion of today’s call.

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

Let’s begin with the agenda for today’s call on Slide 2. Daniel will discuss highlights at Restaurant Brands International for the year. He will then review brand-specific performance at Tim Hortons and Burger King. Josh will provide an update on development, including certain adjustments that we’ve taken to align restaurant definitions across brands, and will review consolidated financial results for the year. Daniel will share some concluding remarks before opening the call up for Q&A.

I'll now turn the call over to Daniel.

Daniel Schwartz

Thanks, Andrea, and good morning everyone and thanks for joining us on the call. It’s been a great year for RBI and for both of our iconic brands: Tim Hortons and Burger King. And I am happy to report we finished the year off on a really strong note.

Our main priorities at RBI are delivering a great guest experience and growing franchisees’ profitability. Ensuring that we excel in both of those fronts is what drives our continued success, and it’s through the hard work of our employees and our franchisees that we've achieved strong comparable sales growth and net restaurant growth as well as meaningful growth in franchisee and corporate profitability.

Starting on Slide 4, we’ve had one of the best years for both the brands in comparable sales growth and international expansion. Tim Hortons and Burger King increased global comparable sales by 5.6% and 5.4% respectively in 2015. Despite the macroeconomic headwinds in some of our key growth markets, we achieved unit growth of 4.2%, adding 786 net new restaurants and ending the year with more than 19,000 restaurants around the world.

As we look out into 2016, we continue to build a very strong restaurant pipeline and are excited to bring great restaurants to our guests all around the world. For the year, positive comparable sales growth and net restaurant growth contributed to constant currency system-wide sales growth of 9.3% and 10.3% at Tim Hortons and Burger King respectively. We recorded full-year adjusted EBITDA of $1.666 billion, which was up 21% organically versus last year's pro forma results.

Moving on to Slide 6. We had a truly historic year at Tim Hortons with a number of successful product launches, accelerated restaurant development and strong financial results. In Canada, we recorded our 24th consecutive year of positive comparable sales growth with full-year comparable sales growth of 5.5%. Similarly, in the US we delivered strong same-store sales growth of 6.4%, marking the 25th consecutive year of comparable sales growth in the US.

Our marketing success was due to a balanced strategy of defending our leadership in coffee while expanding our presence in different dayparts with successful new product launches. For the year, comparable sales grew by 5.6% at Tim’s. Net restaurant growth of 155 units was driven by Canada and international segments. For the year, we achieved system-wide sales growth of 9.3% and organic EBITDA growth of 29% at Tim Hortons versus last year's pro forma results.

On Slide 7, we lay out our Q4 and full-year highlights in Canada. We continued to build topline momentum in Canada with full-year same store sales growth of 5.5%. The fourth quarter was our strongest quarter of the year in Canada as we grew same-store sales by 6.4% and we maintained our leadership in beverages and strengthened our presence in the lunch daypart. Favorable performance in Canada was driven in part by our new lineup of steak paninis and grilled lunch wraps along with impacful product launches like the Nutella pockets.

We also added 99 new restaurants in Canada, making Tim’s even more convenient for our guests. Looking out to 2016 we continue to see opportunity to grow our sales in Canada across regions, formats and dayparts where we have a growing presence today.

Moving to Slide 8, we highlight our results for the Tim’s brand in the US. For the full year, the US achieved 6.4% comparable sales growth driven by strength in beverages and breakfast daypart expansion. As part of our development strategy, we focused on identifying key markets and finding the right partners to run great Tim’s restaurants. And I am pleased to report that we have closed our second development agreement with the signing of the Columbus deal which combined with our Cincinnati agreement will bring hundreds of restaurants and thousands of jobs to the Midwest in the United States in the coming years.

This deal highlights two key points for us. First, it speaks our commitment to expand the Tim’s brand presence in the US, which is the world's biggest QSR market. And second, it highlights the momentum that we’re building in our US development strategy and the appeal of the Tim Hortons brand and operating model. We continue to be very excited about the growth opportunities for Tim’s in the US and look forward to continuing to work with great franchise partners to accelerate the pace of development.

For the year, the restaurant base was relatively flat as we chose to close some of our underperforming restaurants in selected markets, which Josh will discuss in more depth later on in the call.

Let’s continue to Slide 9. Full-year international comparable sales growth of 4.6% was driven in part by the sales of specialty beverages and limited time offers such as the Nutella pockets. Restaurant growth of 55 was more than doubled the prior-year results and we're very excited to report that our acceleration development has increased our international store count to 100 restaurants. To grow our presence globally with Tim’s, we continue to work with partners to expand all around the world, similar to how we've scaled the Burger King brand over the last several years. And we look forward to sharing new developments on some of those exciting opportunities with you soon.

We’ve also had great results in the Burger King brand in 2015. If you turn to Slide 11, we saw notable strength across all four of our geographic markets. Comparable sales growth of 5.4% and 4.4% unit growth led to system-wide sales growth of 10.3% in constant currency.

NRG at Burger King was 631 for the year, slightly lower than the pace of last year and we’ll go into further detail about this later on in our call. Our adjusted EBITDA increased by 13% year on year on an organic basis to $760 million as we continued to focus on initiatives across menu, marketing, image and operations while maintaining our strong cost discipline.

On Slide 12, full-year comparable sales growth of 5.7% in the US and Canada was led by the successful execution of our four-pillar strategy in the region. This included growing breakfast, which was our fastest growing day-part this year, continued focus on chicken where we relaunched Chicken Fries as a permanent menu item and launching successful limited time offers like the Buffalo Chicken Fries and A1 Halloween WHOPPER.

We were pleased to report favorable fourth-quarter same-store sales growth of 2.8% despite lapping our successful fourth-quarter performance last year and some of the heightened competitive focus on value in the quarter. Most notably, AUVs in the US have crossed the $1.3 million mark, a key milestone for us and our franchisees. As we’ve said before, we still feel that we have a long way to go in the US and we’re very excited about the prospect of continuing to grow our restaurant sales.

Our US franchisee profitability increased by over 30% versus last year, which is a tremendous accomplishment that exemplifies the results we strive for every day. And in addition, we’ve also made great progress in the reimaging front as we crossed 50% on the modern image in 2015 in the US. Overall, 2015 was a really strong year for our US and Canada region and 2016 is already off to a great start.

Our newest launch Grilled Dogs builds upon the momentum of our successful strategy of launching fewer and more impactful products. Grilled Dogs are a flame-grill take on one of America's favorite foods, the hot dogs, and with the launch of Grilled Dogs, we’re now going to be serving hotdogs at more locations than any other restaurant chain in the United States.

Moving to Slide 13, full-year comparable sales growth in EMEA of 4.5% was driven by strength in Russia, Spain Turkey and the UK. And despite some of the unfavorable macroeconomic headwinds, net restaurant growth in the region was 275 for the year as we saw reduced openings in Russia and Spain.

However as we look out to 2016, we’re very confident in the outlook for our restaurant development in EMEA. In Germany and Spain, new master franchise joint venture agreement that Josh will discuss later on in the call will accelerate the pace of growth in these key markets for us. Our master franchise joint venture in Southern and Eastern Europe, which were signed at the end of 2014, will continue to ramp up development in places like Italy and Poland. And with the closing of the Quick transaction in the fourth quarter of 2015, we now have a very strong pipeline of Quick restaurants to be converted to Burger King in 2016. The combination of these new master franchise joint ventures, the acquisition of the Quick Group by the Burger King France and the robust development pipeline that we have today gives us confidence in our ability to accelerate the pace of net restaurant growth in EMEA in 2016.

Turning to Slide 14, we achieved full-year same-store sales growth of 3.4% compared to the prior year driven by our outperformance in China with full-year and fourth-quarter same-store sales growth of approximately 15%.

On the development front, we reached a milestone of over 450 restaurants in China and we’re also pleased with the accelerated development that we’re seeing in India. another key growth market for the Burger King brand. Overall we added 260 net new restaurants in the region for 2015.

Turning to Slide 15, we had a great year in LAC, recording same-store sales growth of 8.4% driven by the success of Chicken Nuggets, Chicken Fries and various other premium offerings. We saw a notable strength in places like Brazil and improvement in places like Puerto Rico. Overall our NRG was lower compared with the prior year results. As you know, we're focused on running the highest performing restaurants and along those lines, we ended our franchisee relationship in Costa Rica and closed our restaurants in that country. We've already signed a new development agreement in Costa Rica and we look forward to opening great restaurants there soon.

In Mexico, we closed several of our underperforming restaurants in an effort to build the solid foundation for future growth in this market.

I’ll now turn it over to Josh to take us through RBI’s development update and financial results for the quarter and for the full year.

Josh Kobza

Thank you, Daniel. I’ll start on Slide 17 with the highlights of a very strong development year for us at RBI.

For Tim Hortons, we continued to execute on our US expansion strategy and signed two important development agreements in Cincinnati and Columbus. Internationally, we accelerated growth in the Middle East, more than doubling our restaurant count from the prior year.

For Burger King, we reached several important milestones with over 600 restaurants in Turkey, 500 in Brazil, 450 in China, 300 in Russia and in the aggregate, we ended the year crossing the 15,000 restaurant mark at Burger King. We are excited about our growth opportunities all around the world, and as Daniel mentioned, we made particularly large strides this year on the development front in EMEA.

We recently signed new MFJV agreements in both Germany and Spain, our second and third largest markets at Burger King respectively by restaurant count. And with the acquisition of Quick, Burger King France became the second-largest QSR in France and we’ll look to increase the number of Burger King restaurants in the country through the conversion of Quick units and the development of new BK restaurants.

Turning to Slide 18. We made great progress in the US for Tim’s in 2015. As part of our franchisee-led development strategy, we focused on building unit density in key markets with great partners. We signed two development agreements in our priority DMAs in Midwest and look forward to sharing more news on our US expansion this year.

As Daniel mentioned earlier, we look at the performance of existing restaurants on a regular basis in line with our vision to deliver a great guest experience and profitable franchisee base across the system. After reviewing the TH US system in 2015 we decided to close 27 underperforming restaurants in New York and Maine in the fourth quarter. These restaurants comprised only $14 million of systemwide sales and an immaterial amount of ongoing earnings. We believe that these actions will allow us to refocus resources on the markets where we see the greatest potential to set up partnerships that will be successful. And we are increasingly enthusiastic about the level of interest and the expansion opportunities that we see in the US.

Also, in an effort to reflect consistent restaurant definitions across our brands, we have redefined restaurant count at Tim’s to exclude limited service kiosks. We’ve applied this change retrospectively and have presented the updated restaurant counts and net restaurant growth figures in our earnings release.

Excluding limited service kiosks, average unit volumes for a standard restaurant are C$2.4 million in Canada and US$1.2 million in the US. While average unit volumes for a non-standard restaurant are C$1 million in Canada and US$0.6 million in the US.

Switching to Burger King, we’ve had some exciting developments this year in EMEA. On Slide 19, we show our current MFJVs in the region. This year we signed new MFJV agreements in Germany and Spain. In both deals, our MFJV partners are existing franchisees operating best-in-class restaurants. With Germany and Spain being two of our top markets globally by restaurant count, we believe that these MFJVs will continue to drive growth in these priority markets for many years to come.

In France, we ended the year with 42 restaurants and average unit volumes of approximately €5 million. With the closing of the Quick transaction by Burger King France, our franchise partner will look to convert Quick units in France to Burger King restaurants over time while continuing to develop Burger King restaurants in the country.

Stepping back, when we look at all of our efforts in EMEA, we are confident we have the best partners and development pipeline to move the brand in the right direction and to accelerate the pace of growth in each of these markets.

Turning now to Slide 21, I’d like to walk through the RBI financial results for the full year. We are very pleased with the progress that we've made at both Tim’s and BK during the year. 2015 adjusted EBITDA of $1.666 billion grew 21%, excluding the impact of FX, versus prior-year pro forma results, driven by strong same-store sales and net restaurant growth, along with cost discipline at both brands.

We also achieved significant interest expense savings during the year as a result of debt repayment and our May refinancing. These savings combined with strong business performance resulted in an adjusted net income of $561 million and adjusted diluted EPS of $1.18.

I would note that our current presentation of adjusted net income and adjusted diluted EPS excludes the impact of stock-based compensation expense. At the time of the Tim Hortons Burger King merger, we inherited legacy equity awards for Tim Hortons employees with stock appreciation rights which required mark-to-market accounting and created considerable volatility in our stock-based compensation expense. As a result, we excluded stock-based compensation expense from our adjusted net income and adjusted diluted EPS calculations in 2015. Ultimately, stock-based compensation expense related to mark-to-market awards in 2015 amounted to approximately US$16 million.

As of year-end 2015 we have converted or eliminated nearly all mark-to-market awards, and as a result in 2016 and future years, we plan to include stock-based compensation in our adjusted net income and adjusted diluted EPS calculations.

On Slide 22, we show our 2015 cash bridge. For the year, we achieved free cash flow of $1.064 billion which reflects growth in adjusted EBITDA and changes to capital expenditures. As part of our balanced capital allocation approach across debt repayments, dividends and share repurchase, we paid down $300 million of our total debt in May, paid $362 million in dividends and repurchased 8.15 million partnership exchangeable units in December. We ended the year with $758 million in cash.

On Slide 23, we lay out our capital structure. During the year we repriced our senior secured term loan, reducing our interest rate by 75 basis points to LIBOR plus 2.75% with a 1.1% LIBOR floor. We also prepaid $300 million in debt, bringing our year-end total debt balance to $8.9 billion.

As of December 31, 2015 our net leverage of 4.9 turns was down approximately 0.5 turns versus year-end 2014 net leverage. During the year, we experienced meaningful FX headwinds due to the strengthening of the US dollar. In an effort to match our assets with our liabilities, we entered into dollar-CAD and Euro-dollar swaps at the time of the merger between Tim Hortons and Burger King. At year-end the value of these swaps was approximately $825 million.

Turning to Slide 24, on February 16 the RBI Board of Directors declared a dividend of $0.14 per common share and partnership exchangeable unit of RBI LP payable on April 4, 2016.

I’ll now hand the call back to Daniel before moving onto the Q&A portion of our presentation.

Daniel Schwartz

Thanks, Josh. In our first year as RBI we set the foundation for long-term growth at Tim Hortons while building on the momentum at Burger King. We continue to be focused on driving topline growth and finding the right partners to bring great restaurants to our guests all around the world. We believe that we have the right combination to ensure strong opportunities and continued success for our franchisees, our employees and our shareholders for many many years to come.

Thanks to everybody for joining us this morning on the call and we will now open up the call for Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Nicole Miller of Piper Jaffray.

Nicole Miller

Thank you so much and congratulations on a great quarter and a great year. Would you talk a little bit about the big picture QSR environment, and how do you think about promoting and competing in the current environment?

Daniel Schwartz

Hey Nicole, it’s Daniel. As you say, we’re really pleased with the results across both of the brands, we couldn’t have asked for a better first-year for Restaurant Brands International and for both of the brands under the Restaurant Brands International ownership. As you saw both brands had same-store sales north of 5% for the year. As you know quick service restaurant industry is – it’s a competitive industry, it always has been. And when we look at, what we’re focused on is really running great restaurants and delivering great product at an affordable price with great service for our guests.

On the Burger King front, we’re really pleased with the growth. When we look at the results for the year, as we said were north of 5% same store sales, and when you look at what happened in the fourth quarter, it was really a big milestone for us, because we crossed the $1.3 million ARS mark for our franchisees’ restaurants. Our franchisees had profit growth of north of 30% for the year. We crossed the 50% mark with respect to reimaging, so a lot of good milestones in the fourth quarter of 2015. Having said that, we still feel like we have a long long ways to go. The restaurant sales can still be much greater and 2016 is already off to a good start and we’re about to launch Grilled Dogs which I'm sure you've seen, which we’re all pretty excited about.

On the Tim Hortons front, like I said, we’re just focused on really – on running great restaurants. We had a successful product launch in the fourth quarter with our grilled wraps – the AM PM grilled wraps, and it was nice to see us even further solidify our strength in the launch daypart on the Tim Hortons front. And as Josh mentioned, even with the really high sales per restaurant that we have at Tim Hortons, we still think there’s quite a long ways to go there. So stepping back, we really couldn’t have asked for a better first-year for Restaurant Brands International, for Tim Hortons brand, for the Burger King brand and all around the world a strong same-store sales, a strong franchise profitability, a continued reinvestment in our restaurants and delivering that great guest experience. So we're really excited.

Operator

And our next question comes from Andrew Charles of Cowen and Company.

Andrew Charles

Can you talk about the CapEx priorities in 2016 and as we look at the $115 million of total CapEx in 2015, is there any reason to believe CapEx in 2016 would exceed this amount?

Josh Kobza

Andrew, it’s Josh. Thank you for the question. As we look out to 2016, I think the CapEx priorities will be to continue to reinvest in the business and supporting our franchisees in remodelling. As Dan mentioned, we passed a big milestone this year with 50% of our Burger King US business on a modern image, and also we continue to reinvest in remodels in the Tim's business in Canada. So I think that will really be the priority, is reinvesting and dedicating our capital resources to remodels across brands and across our markets.

Andrew Charles

And then for the 115 million a good proxy for next year as well?

Josh Kobza

We don't have guidance for CapEx going forward at this point.

Operator

And our next question comes from John Glass of Morgan Stanley.

John Glass

Thanks very much. Appreciate all the detail on development and kind of maybe ‘15 was a little slower than prior years and the way it’s going to accelerate globally and maybe I am thinking mostly of Burger King but you could address both brands. Do you think you can get back to 5% globally in 2015? Can you give us at least some appreciation of kind of how these new developments will phase in at both Tim's and Burger King so we can maybe model it more accurately?

Josh Kobza

Yes, John, it’s Josh. Thanks for the question. I think as you think about kind of what have been 2014 to 2015, I’d highlight two main drivers for you. When we talked about them a little bit in our prepared remarks, first of all, starting in EMEA, we talked a little bit about the macro volatility in Russia and we saw a bit of a slowdown in Russian in terms of development. We reduced the amount of openings by about 60 in Russia in 2015 and really as we look at the environment in the country, we really decided to focus on the underlying business, focusing on sales and profitability and our teams work together with our local franchisee there. And I'm really pleased to say that we had a great year actually both on the sales and on the profitability front. Our team at BK Russia had a really great year. So even if we slowed down a bit on development the underlying profitability was great and that's what gives us a lot of confidence, that we’re going to re-accelerate the pace of development in Russia in 2016.

The other big driver there was in Latin America, where as Dan mentioned, we closed about 33 restaurants in Costa Rica and again there I think we’ve made a lot of progress in that we've already found a new partner to re-enter the market there in 2016. I think we’ll move back in the right direction in Latin America. One of the other things that I highlighted on the call was, kind of as we look at EMEA and some of the big steps that we've made with new partnerships, I think that's what gives me a lot of confidence about the direction that we’re going in terms of development. So if you look at some of those big markets, places like Germany where essentially our restaurant count was flat in 2015, we now have a new master franchise joint venture in that market where we think we’re going to grow a lot faster in 2016. In Spain, we signed a new master franchise joint venture that we think is going to accelerate the pace of growth in 2016. In Italy where we grew only about 20 restaurants this year. Our new BK Eastern Europe joint venture is getting ramped up and I think there's a bigger opportunity.

And one of the other joint ventures we’ve talked about a lot is France. We added about 20 restaurants in France in 2015 and now with the acquisition of Quick we’re going to continue to develop new restaurants in France but we’re also going to start converting Quick restaurants in France. So I think when you add up all of those different partnerships, you can start to get a sense for why we have a lot of confidence that the pace of growth both in EMEA but also in some of the other places across the Burger King world is going to accelerate.

Turning to Tim’s, we’re also really excited about the prospects for Tim’s. In the Tim’s international business we doubled the store count in the Middle East in this past year and we’re really looking forward to continued progress there in 2016. And I think the thing that I am probably the most excited about in the world is Tim’s US business. And over the last few months we've really gotten a lot of traction with Tim’s in the US. The underlying business is performing really well on both the sales and profitability front. And then we started to make a lot of progress on the development side, signing up new area development agreements in Columbus and Cincinnati and then this morning actually we just launched our newest area development agreement in Indianapolis. So I think we’re making a lot of progress there, finding really great partners and we think there's even more to come on that front. So I think there's a lot of things to be excited about in development for 2016 and we look forward to sharing more with you on that front throughout the year.

John Glass

Appreciate that. Dan, just one follow-up. You’ve commented a couple times about your enthusiasm for the Burger King US business, you are lapping tougher comparisons. Wasn’t sure if that was a forward-looking comment because the hotdog launch was going to be successful in your view or that was current state of business, if you could just kind of clarify how you look at the US business in the first half of this year given competitive dynamics and comparisons?

Daniel Schwartz

Sure, John. The comment referred was backward looking, not forward-looking. It was referring to the Q4 period. But as I said we’re pleased with the growth that we’ve experienced in the US. You saw for the year, the Burger King US business had north of 5% same store sales growth, we crossed the $1.3 million ARS mark .You remember just a few years ago, we were at 1.1 million, franchisees are making a lot more money in reinvesting – we’re all reinvesting in the business as well, having reached the 50% mark and 2016 is already off to a good start and we haven’t launched the Grilled Dogs yet which we’re all excited about. It was probably the largest market test that we’ve done since we’ve been here, had really exciting results. I personally visited the test market to confirm that the Grilled Dogs could be an operationally simple but pretty impactful product. And we’re all excited about it.

Operator

And our next question comes from Perry Caicco of CIBC World Markets.

Perry Caicco

Thank you. Your major competitors have been five months now with all-day breakfast. I wondered if you have seen any impact on your launch business from that program and how do you feel about something like all-day breakfast in your system?

Daniel Schwartz

Hi Perry, it’s Daniel. As a breakfast, we don't comment on specific competitors but across both brands, we think we’re doing the right things. Burger King, Tim Hortons, both brands enjoyed same store sales growth of 5% -- north of 5% in 2015. I think what’s important is we have a strategy at each brand and irrespective of the competitive environment we’ve stuck that strategy. So on the Tim’s front, we’re focused on further solidifying our strength in the lunch daypart, continuing to grow our breakfast business, growing our coffee business. We continue to see strength in the dark roast blend that we had launched over a year ago continuing to ensure that our guests are getting a great experience all day at Tim’s.

On the Burger King front, the strategy has been the same since we acquired the business back in 2011, focused on running great restaurants, operations, investing in the restaurants, remodelling, marketing -- new and innovative marketing really connecting with our guests and launching fewer impactful products, and really none of that changes regardless of the competitive environment, we still feel like we have quite a long ways to go on both the Burger King front and the Tim Hortons front with respect to sale per restaurant and the number of restaurants in all of our markets around the world.

Perry Caicco

And do you have a sense of the impact of low gas prices on your same store sales? I mean, how much impact if it’s had in the business, are there any franchise regions where it’s had more or less impact?

Daniel Schwartz

That’s something that’s tough for us to quantify. Lower prices is obviously something that’s helpful but it’s tough for us to quantify. And I’d say we need to grow our topline and our franchisees’ profitability regardless of gas prices.

Operator

And our next question comes from Keith Siegner of UBS.

Keith Siegner

Just two quick questions from me. The first one, it’s been 15 months since acquisition and if we think back to, to that time I think we talked about – Josh, you had mentioned something in the neighborhood of 18 months to completely integrate or to get the business close to potential. Just wondering does that still stand -- easy integration for the most part done, is there really much left to go, how do we stand against that original kind of 18 month outlook?

Daniel Schwartz

Keith, it’s Daniel. I think when you think about potential in integration, the biggest driver of this merger acquisition from the get-go was growth. And we don't feel like we’re anywhere near the potential of unlocking that growth, as Josh mentioned, we’re just starting to sign up a handful of these Tim Hortons US development agreements which we’re really excited about because we’re going to accelerate the pace of Tim’s and the largest quick service restaurant market in the world where the brand is already doing well but obviously has a small presence. We’ve made some good progress on the Tim’s international front but we still have to move, moving faster there and we’d already doubled the pace and the number of restaurants on Tim’s international and we look forward to announcing more good things at the international front in the months and years to come.

But when you think about the potential and integration, at the end of the day, what’s going to drive for the long term for our franchisees, for our guests, our shareholders is growth. It’s growth in the restaurant count, growth in the sale per restaurant and we’re nowhere near the potential, I don’t know, of 18 months, we’re in this for the long run. So we have quite a ways to go on the growth front.

Keith Siegner

I meant less on the growth than the other stuff, but we can move on to the other question which was -- we've seen mobile order and payment solutions finding tremendous success for some of the coffee players. Some other coffee players have been a little bit, say, slow to the introduction, but when you think about the Tim Hortons business, particularly as it relates to Canada but also now with this expansion in the US accelerating, where do we stand on kind of that digital integration for Tim Hortons? And maybe what's the opportunity? What might we see in the next 12 months?

Daniel Schwartz

Keith, we share your view on the potential of digital and it’s becoming an increasingly large priority here. I am not sure if you saw in the fourth quarter or maybe end of the third quarter of last year, we hired a startup in New York and we brought on a team of top talented engineers that are going to help us to develop our digital platform across both brands. And Tim’s Canada is a major priority and we do think that we could help drive that ultimate guest experienced by improving the ability to get great service via mobile, via digital, via prepay. So lots of good things to come, definitely a top priority and major focus of ours and we’ve made a significant investment to bring in top talented engineers to help build this out and we look forward to updating you in the months to come.

Operator

And our next question comes from David Hartley of Credit Suisse.

David Hartley

Hi, I was just wondering if you could talk to me a little bit about property equipment franchise costs, a line item you saw significant cost savings there, and if you can itemize anything for us?

Daniel Schwartz

Are you referring to the Burger King or to the Tim Hortons business?

David Hartley

Both, but probably more on Tim Horton’s please.

Daniel Schwartz

On the franchisee property margins? There is some amount of improvement in the reduction in capital intensity that you will see. And there's also some changes -- if you're looking year on year in the quarter just due to the timing of renovations. So the amount of renovations that you see in the quarter will impact the amount of equipment revenue and that adds a little bit different margin, so you can see some amount of variation, if you’re looking at the percentage margin, but I am happy to follow up and we can help you understand that a little better as a follow-up if you like.

David Hartley

Sure, that will be great. And just thinking about Tim Hortons in Canada, and the market-share in lunch you guys have been thinking on the door of overtaking the market leader previously. Just wanted to know if you can update us there and in terms of where you are with market share in lunch now in Canada, if you’ve kind of topped your competitor.

Daniel Schwartz

David, this is Dan. I am not sure if we disclosed that, I can check. We’re definitely pleased with the pace of growth in Tim Hortons Canada breakfast, lunch, snack, beverage across day-parts of our products. The Grilled Wraps launch obviously helped us a lot, it’s something that our guests told us they really enjoyed the Grilled Wraps and further helps us – kind of solidified our strengths at lunch which as you know is and will continue to be a priority for us.

David Hartley

And finally, just on the dividends. We've had four consecutive quarters, I believe, of increases. Is that how you're kind of going to structure dividend increases over time on a sequential quarterly basis or would you look to back-end that at the end of the year, if you're looking to make a change in your dividend policy?

Josh Kobza

David, it’s Josh. As you’ve seen over time we try to have a very balanced capital allocation strategy and I think the base that we laid out for 2015 really evidences that where we allocate capital across debt repayments and returns of capital to our shareholders. And we will look to continue to do that going forward, and that’s something that we will review every quarter and our board will evaluate it on an ongoing basis.

Operator

And our next question comes from Will Slabaugh of Stephens.

Will Slabaugh

Thanks Josh, wanted to ask about Burger King strategy in the US in particular. It seems like, over a multi-year period, that story has gone from very focused 18 to 35 year old male before you guys came in. Post the acquisition, a much broader approach, as you tried to broaden that guest base. And now it seems like with the value focus that you're becoming a little bit more targeted with your offerings and message? I wanted to see if you would agree with that statement, and then maybe offer a little more color there?

Daniel Schwartz

Hi, it’s Daniel. I’d say the marketing approach and overall strategy in Burger King US has been consistent over the past two years. Our guest base is everyone, it’s folks who are young, folks who are older. It’s not targeted at any particular demographic or age group, it’s broad. We operate over 7000 restaurants and convenience is one of the most important factors for our guests. We really try to have a balanced approach, so you look at things like Chicken Fries this quarter, A1 Halloween Whopper that we had launched as well on the premium side, we have the 2 for $5 which is good value. We have a value menu. So we really -- there's no silver bullet, it’s providing value and providing great food for all of our guests at a variety of price points, innovating and bringing fun interesting food for our guests and delivering that great guest experience. There is no silver bullet. When you look at really what’s driven the success of the Burger King business in the US, going from the kind of low 1 million to 1.3 million and driving significant increases in our franchisees’ profitability, it’s been all four pillars – reimaging our restaurants, running better restaurants, focusing on operations, good innovation, operationally simple but impactful product. So there’s really – there is no silver bullet and there's no specific group we’re targeting where we try to deliver a great guest experience for all of our guests.

Will Slabaugh

If I could ask one quick follow-up on the restructuring costs that we saw at Tim's this quarter. Josh, can you give us a little color on what those were? And now that we're a year into the acquisition, or a little more than that, I'm just curious what these are exactly and how long we should expect these to continue?

Josh Kobza

Thanks, Will. They’re primarily composed of severance costs and professional fees and I expect them to come down quite materially as we come forward.

Operator

Your next question comes from David Palmer of RBC Capital.

Eric Gonzalez

Hi, everyone. This is Eric Gonzalez in for Dave Palmer. Just real quick on re-imaging. Now that you've crossed the 50% mark at Burger King US, can you share with us some performance metrics, such as average cost and sales uplift on the program, and then maybe comment on what the pace of re-imaging looks like going forward?

Daniel Schwartz

Hey Eric, it’s Daniel. The average cost and sales uplift for the BK US re-imaging, they haven't changed materially from what we've reported in the past -- and nor do we think that 50% is the end state where obviously this is an ever evolving focus and we’re always focused on improving our restaurants. And we made great progress having gone from about one in 10 restaurants to being reimaged to now one in two restaurants, and now it's our job together with our franchisees to further reinvest in the brand and the business and continue growing that percentage of restaurants that are on the modern image. I think anytime you see restaurants that are getting renovated, enable us to deliver a better guest experience and keeps our guests coming back more often which is our ultimate goal here, which is driving the best guest experience and – so that’s going to continue being a priority into the foreseeable future for us.

Operator

And our next question comes from Karen Holthouse of Goldman Sachs.

Karen Holthouse

You called out that there's been some macro concerns in Russia, maybe a little bit slower unit growth there. Are there any other parts of the world that are just sort of on your radar screen, where you are also concerned about any growing macro risks and/or franchisees just having access to capital, if you're ending it, if franchisees are starting to run into just liquidity funding problems?

Josh Kobza

Hi Karen, it’s Josh. Thanks for the question. I think as we look around the world, we did want to call out Russia as it was an important part of bridge from NRG in 2014 to 2015. What I would say is that as we look around the rest of the world, obviously there was a lot of macro volatility in 2015. But I'm really pleased that, despite that if you look at our other big markets or our other big growth markets, look at places like China, as Dan mentioned on the call, we actually had a very positive performance in China in 2015. We continue to grow our restaurant base quite rapidly, hit a big milestone in terms of the number of restaurants we have there, grew our same store sales and grew our level of profitability at the restaurants. We made a lot of progress in India as we got started there. I think we’re really happy with the start-up of India and despite some of the macro volatility in Brazil we had a really good year in Brazil, continued to grow over 100 restaurants and also the sales and profitability of our venture in Brazil were very positive in 2015. So I would say, as we look back at the year, despite a lot of macro volatility we were quite pleased with the performance of a lot of our large markets.

Operator

And our next question comes from Joseph Buckley of Bank of America.

Joseph Buckley

A couple of questions. Could you put the Quick acquisition in perspective for us? How many restaurants did you end up acquiring, and are those company operated or franchised today, and how fast you'll convert them?

Josh Kobza

Joe, it’s Josh. So Quick has about 500 restaurants and of those, 400 are in France. There is a mix of franchised and company operated restaurants. And what we said is we expect to, to convert the majority of the restaurants over time. We don’t have a specific timeline that we’ve outlined. But we do have a plan to convert the majority of those and we’re working very hard to do so as quickly as possible.

Daniel Schwartz

Josh, it’s Dan, just to chime in, we have been incredibly strong partner in France who in addition to converting Quick restaurants for many years, is also abruptly building Burger King restaurants -- continue to build Greenfield Burger King restaurants and we just continue to be impressed at the sales per restaurant that we’ve seen in France as Josh mentioned, having $5 million per sales restaurants which is a really testament to the quality and strength of the local partner who we have running our business there.

Joseph Buckley

Some of the new master franchise agreements you mentioned, like Tim Hortons in Columbus, and for Burger King, Germany and Spain. These are kind of established markets where you had existing franchisees. How does that work? Do you roll them up with this master franchise agreement, or is the master franchise agreement for new restaurants with the existing ones operating the way they always have?

Josh Kobza

Yes, Joe, let me address Spain and Germany separately from the Tim Hortons US agreements. So in the case of Spain and Germany the new master franchise joint venture agreements are with existing established franchisees in each of those markets. And the agreements are to take those existing markets and to accelerate the pace of growth in those markets, necessarily to roll up the markets but to establish new entities that would go out and develop those new restaurants in the market at a more rapid pace. So the idea is to be able to grow faster in what we view as solid market but markets where we think the brand can be much larger than it is today. And so that’s the goal of the new agreements in Spain and Germany.

It’s a little bit different from what we’re doing in places like Cincinnati and Indianapolis with Tim’s where those are markets that while they’re adjacent to existing markets where we have Tim Hortons restaurants, we don't really have a material presence in either of those DMAs. So we're signing up new area development agreements with the partners that we’ve set up these agreements with and they're going to go in and execute on accelerated development agreements in those markets to build out a presence at scale so that we can develop the brand in those markets really from a base of more or less no present today.

Joseph Buckley

And in Columbus? Because that was one of the older, more established Tim's US markets?

Josh Kobza

Yes, Columbus is one where we already had a presence and the new partner is going to go in and build that out further or two even more efficient scale.

Joseph Buckley

And in effect for these master franchise joint venture agreements, does it increase the capital that RBI would be putting into these markets?

Josh Kobza

No, we’re not putting capital into any of these agreements.

End of Q&A

Operator

This concludes the question and answer session. I’d like to turn the conference back over to Daniel Schwartz for any closing remarks.

Daniel Schwartz

Thanks, Rocco and just want to thank everybody for taking the time to join us today. As we said earlier, we couldn’t have asked for a better first year for Restaurant Brands International and for the performance at both of our Tim Hortons and Burger King brands and we look forward to updating you on progress next quarter. Bye bye.

Operator

Thank you sir. Today’s conference has now concluded. And we thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.

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