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Edited Transcript of QSR.TO earnings conference call or presentation 28-Oct-19 12:30pm GMT

Q3 2019 Restaurant Brands International Inc Earnings Call

Oakville Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Restaurant Brands International Inc earnings conference call or presentation Monday, October 28, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Brigleb

Restaurant Brands International Inc. - Head of IR

* José E. Cil

Restaurant Brands International Inc. - CEO

* Joshua Kobza

Restaurant Brands International Limited Partnership - COO of Restaurant Brands International Inc

* Matthew Dunnigan

Restaurant Brands International Inc. - CFO

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Conference Call Participants

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* David E. Tarantino

Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst

* David Sterling Palmer

Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst

* Dennis Geiger

UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants

* Eric Andrew Gonzalez

KeyBanc Capital Markets Inc., Research Division - Restaurants Analyst

* Jeffrey Andrew Bernstein

Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst

* John Stephenson Glass

Morgan Stanley, Research Division - MD

* Nicole Miller Regan

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Sara Harkavy Senatore

Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst

* William Everett Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Restaurant Brands International Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

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

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Chris Brigleb, Restaurant Brands International Inc. - Head of IR [2]

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Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's Earnings Call for the Third Quarter ended September 30, 2019. 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 CEO, José Cil; and CFO, Matt Dunnigan. 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. José will start with some opening remarks and highlights for the third quarter and then discuss our performance at Tim Hortons, Burger King and Popeyes, Matt will then review financial results before opening the call up for Q&A.

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

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José E. Cil, Restaurant Brands International Inc. - CEO [3]

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Thanks, Chris, and good morning, everyone. I'd like to start with a quick summary of the third quarter results and then spend some time sharing my views on the key drivers of our performance and the confidence we have in our plans for each of our brands to continue driving significant system-wide sales growth around the world.

Overall, we had a strong quarter with nearly 9% consolidated system-wide sales growth and 5% year-over-year unit growth to over 26,300 restaurants worldwide. This nearly 9% system-wide sales growth represents the highest rate we've achieved since the beginning of 2018 and was led by Burger King at approximately 11% and Popeyes at approximately 16% while Tim Hortons was roughly flat versus last year.

Our results in the quarter were highlighted by continued restaurant expansion around the world coupled with very strong global comparable sales results at both Burger King and Popeyes, which in the case of Burger King represented our strongest results since 2015, at about 5%; and in the case of Popeyes, represented one of the strongest results since the company went public as part of AFC in 2001 at about 10%.

On the other hand, our results at Tim Hortons were not where we want them to be with global comparable sales dipping into negative territory. However, we remain confident in our focus on the most important fundamentals of the business through our Winning Together plan, which is designed to reinforce the strength of our Tim Hortons brand and create a strong foundation to drive sales growth over the long run through important improvements in image, technology, product quality, drive-through and overall customer experience.

Now jumping into a bit more detailed results for each of our brands. As I mentioned, in Q3, Tims' comparable sales were weaker than planned, coming in at negative 1.4% globally and negative 1.2% in Canada. In Canada, softness in comparable sales reflected a tough year-over-year comparison as we lapped the launch of Breakfast Anytime in 2018. In particular, we saw softness in our lunch food offering, where we continued to see a gap in sales of our sandwiches and wraps.

As we noted in Q2, we're taking steps to address this part of the menu and given our leadership in convenience and frequency, we continue to believe that we can win market share in lunch over time with the right investment and focus.

Our third quarter results in Canada also reflected a weaker contribution from our cold beverage lineup. Specifically, we saw a decline in performance from our Iced Capps line due to weaker-than-expected performance from some of the LTO's we ran in the quarter including our Oreo and Chocolate Chip Iced Capps. However, we were encouraged by the performance of our new Creamy Chills products and believe they have the potential to be a strong platform for future innovation and growth. Though the cold beverage category tends to be less impactful during the late fall and winter months as you'd expect in the place like Canada, we expect to build on the Creamy Chills platform during the warmer months next year and over time. The declining contribution from cold beverages also coincided with softness that we experienced in hot beverages sales during the quarter.

On this front, we believe we're making the right investments behind important initiatives that will reinforce our leadership position in the category over the long run, including the system-wide fresh brew implementation we recently launched to improve the consistency, quality and efficiency of our coffee experience all across Canada. We continue to make progress toward our national rollout and expect to finish by early next year.

Recognizing the near-term challenges we faced this quarter, we're concentrating our energy in further enhancing our Winning Together plan across 4 key areas; coffee leadership, food quality and innovation, guest experience and community connection. Just last week, we met with over 1,000 of our restaurant owners at the annual Tim Hortons owners' convention and laid out a number of exciting new initiatives around these 4 themes. We received positive and encouraging feedback from our owners that were focused on the right areas and are pushing the brand forward in the right direction together.

Now for a bit of color around recent progress we've been making against each of these important themes. First, among the core focus areas is leadership in coffee. Coffee is at the core of Tims' brand identity, and we believe it's absolutely critical to serve the best cup of coffee in Canada, period.

I mentioned earlier the rollout of our new fresh brewers, which improve the consistency of our coffee while also freeing up time for our team members to better serve our guests. The brewers also incorporate a new water filtration system that ensures that each cup of coffee has the same great taste and aroma as a cup prepared in our coffee lab in Toronto. This past quarter, we moved swiftly to roll out the new brewers in hundreds of restaurants across the country and have received good feedback so far.

In the third quarter, we also completed the rollout of our redesigned lids to all Canadian locations. As many of you know, a majority of our sales come through the drive-through, and portability is one of the most important considerations for our guests as they commute to work or take their kids to the rink. We've collected feedback from our guests and the response to the new lids has been really positive especially around spill prevention and recyclability. This type of change may seem simple, but enhancing our core everyday offerings is absolutely essential to maintaining and growing our leadership in the industry over time.

Our second key focus area is food quality and innovation. In July, we opened our flagship innovation café in Downtown Toronto, which we're excited has been packed from day 1. For those of you who haven't visited or seen pictures, the café looks fantastic, sleek and modern while still totally consistent with the Tims brand.

We've been delighted with the positive feedback we've gotten so far from thousands of guests, particularly the millennials you'd expect to see in Downtown Toronto. Of course, we serve all of our core products at the café but we've also incorporated several new and really exciting menu items. We completely reinvented our doughnut lineup with more premium Dream Donuts, including the Maple Bacon Dream Donut and the PB&J Dream Donut. The doughnuts are not only selling at $1.99 but are also driving nearly half of our product mix in the café. We're planning to roll out a selection of these dream doughnuts across Canada as step one in a larger strategy around product innovation and leadership. We also introduced a nitro bar featuring nitro cold brew and nitro iced teas that have so far exceeded our expectations, and we'll be testing our nitro line in some of our newer urban locations early next year. Going forward, we'll use the innovation café as a lab for exciting new products and technology, some of which will make into our stores all over the country. Given the dominant position we have in the Canadian market, we think it's critical to be out in front, leading menu innovation with exciting new products that resonate with guests of all ages, especially around the core.

Moving to our third focus area. We're excited about several initiatives to enhance guest experience both physically at our restaurants and also digitally. We've made good progress on our Welcome renovation program this year and are on track to complete several hundred reimages together with our restaurant owners. We're upgrading many of these stores with double drive-throughs, which will continue rolling out across the country into next year. We're also very excited to be opening our first super urban location in the fourth quarter and believe we have significant runway to grow the concept and fill in gaps in our coverage in downtown and urban areas in many of Canada's great cities. Our digital platforms and mobile app represent another important component of our strategy around guest experience. Our Tims Rewards loyalty program sits at the core of our digital suite and we continue to be very excited about the ramp up over the past 2 quarters. 50% of transactions now feature either a scan or a swipe, demonstrating a level of engagement far beyond what we expected to see so early on. We're already collecting a tremendous amount of insight through the program and in the future, we expect to be able to leverage this information to engage one-to-one with our guests and provide promotions tailored to their preferences. We're working hard to put these tools in place and believe they'll provide us with a unique advantage to establish deeper relationships with our guests over time. Given the high and sustained levels of usage and loyalty, we're excited to begin harnessing greater guest engagement in the next phase of the program.

Our final focus area centers on weaving a clear and consistent thread into our brand messaging that highlights our connection with local communities across Canada. Many of our dedicated guests come to Tims not only for our great products but also for the sense of community that pervades over thousands of neighborhood stores. Between our well known Tim Hortons foundation camps, our support of community sports through Timbits and our support of thousands of smaller charities through our Smile Cookie Campaign, we're undoubtedly the most connected community brand in Canada. In fact, our Smile Cookie Campaign in September performed 25% better than last year and raised $10 million for local charities. We recognize that we have somewhat taken this important brand attribute for granted and heading into next year, you'll see an increase in community orientation in our brand marketing.

Overall, we continue to feel really good about the long-term growth prospects for Tim Hortons both in Canada and internationally. It's a rarity in the QSR space to have the degree of penetration and frequency that Tims has in Canada, and we believe that our positioning remains one of the strongest of any brand in any market across the globe. With the right mix of many improvements, investments and guest experience including drive-through and the activation of the digital loyalty and brand messaging, we're confident that Tims will regain momentum. We're also happy to have a healthy relationship with our owners and increased alignment over the path forward coming out of our convention. This was a challenging quarter, but we continue to be focused on delivering results and have our sleeves rolled up as we finish the year.

Turning to Burger King. In the third quarter, we generated system-wide sales growth approaching 11% globally, including comparable sales growth of 4.8% and restaurant growth of nearly 6%. Our results this quarter included another strong contribution from our international business where system-wide sales expanded 14.6%. BK has now more than doubled to almost 11,000 restaurants outside the U.S., up from approximately 4,700 in 2010 and continues to deliver exciting growth for our business outside its home market with approximately 5% comparable sales growth and over 9% unit expansion this quarter. This performance was broad-based across international regions, but we saw particularly strong system-wide sales growth in markets like France, Italy as well as the U.K., China, Korea and Mexico.

As we saw during the second quarter, a large percentage of our sales in these international markets is coming through digital channels. In China, for example, we're routinely seeing delivery penetration rates north of 35%. We continue to see a long runway for growth for the BK brand around the world and credit our amazing team in our Switzerland and Singapore offices as well as our fantastic franchise partners around the world for working day in and day out to bring the best of Burger King to more and more guests around the globe. We believe our balanced menu offering and great-tasting products together with a consistently superb in-store experience and rapidly growing digital connection with guests provides us with an engine for growth for many years to come.

At home in the U.S., comparable sales were positive 5%, representing a significant acceleration versus our performance during the first half of the year and our strongest comparable sales growth since 2015. The Impossible Whopper is a huge hit with our guests and has quickly become one of the most successful product launches in Burger King's history. What's especially exciting is that the sales of the Impossible Whopper have been highly incremental and have attracted new types of guests into our restaurants. It's really been something to see as I visited stores across the country, and our team has been getting a lot of questions as to just who this guest is that's coming in for the Impossible Whopper. We've done a lot of research and found that the appeal is quite broad-based across several types of consumers. We see a lot of millennial and Gen Z customers who tend to really connect with the message around sustainability. We also see older guests that perhaps used to come to Burger King but haven't visited in a while.

Just recently, I was visiting a restaurant in LA and was behind the counter when a woman in her mid-'40s came in and ordered 2 Impossible Whoppers. I started a conversation with her and she said she hadn't come to Burger King for over a decade but came back because the product really resonated with her and tasted great. We couldn't be happier with the performance of the Impossible Whopper both during its initial launch phase and on a sustained basis over the course of the quarter. We're very pleased with the mix of growth between check and guest count and have seen really healthy rates of repurchase intent in line with those of the original Whopper.

We're especially proud to have been on the leading edge of launching the plant-based trend in QSR nationally and see a great deal of momentum for continued growth in the category going forward as adoption continues to spread across the U.S. and beyond. We believe the Impossible Whopper gives us one of the best plant-based platforms in the industry and look forward to building further on the success over time.

We're already working to expand our platform outside the U.S. as we don't believe the impact of the plant-based trend is unique to the U.S. We recently launched plant-based beef and plant-based chicken products in Sweden, the Rebel Whopper and the Rebel Chicken King and are developing great new products for markets in Latin America and Asia as well. The uplift provided by the Impossible Whopper in the third quarter was great, but it's important to note that we saw considerable success across other key layers of the menu as well. For example, our 2 for $6 platform had a strong quarter and we saw high levels of attachment in our $1 taco offer, which helped us address a gap we noted in Q2 in the value segment of the menu.

The Rodeo King and Pulled Pork sandwich LTOs performed well in the lunch and dinner dayparts, and sales of the French toast sandwich LTO exceeded expectations in the breakfast daypart. On development, our global net unit growth for Burger King was 5.8%, down slightly versus last year, driven in part by the timing of openings, which we expect will be weighted toward the end of the year.

Also, we continue to work closely with our franchise partners in the U.S. to upgrade restaurants to the brand-new, modern Burger King of Tomorrow image, which we're seeing drive sales uplifts in the double digits. We expect Burger King to remain at the top of the list of fastest-opening brands in the U.S. in 2019 and believe the Burger King of Tomorrow renovations meaningfully enhance our brand image over the long term. As I mentioned earlier, we saw strong international unit growth of over 9% and now have a base of just under 11,000 restaurants.

We work closely with our great network of partners around the world to drive continued growth including in markets like China, Russia, Brazil, India, France and Korea. Our growth has been broad-based, and we're expanding significantly both in more established markets like those in Western Europe as well as many emerging countries.

Just a couple of weeks ago, we celebrated the opening of our BK restaurant number 3,000 in the Asia-Pacific region, which is a remarkable milestone considering the fact that we had only about 800 restaurants in APAC back in 2010.

Within APAC, I'd like to highlight our progress in India in particular. Since signing our initial development agreement in 2013, we've opened over 200 restaurants starting from scratch. The restaurants are doing very well, and that success reflects several years of hard work with our partner Everstone. From tailoring the menu to fit local taste and cultural norms to developing a national supply chain network and building a healthy real estate model, everything was built in just the past 5 years. Our stores there are also ahead of the curve as it relates to digital penetration, and the team there has done a great job of growing swiftly into the delivery channel.

As we expand Burger King and our other brands into other new countries, India is a great model for how we can build new markets from the ground up. Looking towards the end of the year, we feel good about our full year openings pipeline for Burger King in the U.S. and around the world. With our network of high-quality partners, significant white space and strong returns on capital, we feel we still have very significant growth opportunities.

Now let's take a look at the results for Popeyes. This was a fantastic quarter from a sales perspective and one that we're confident will be a significant milestone for the brand. The performance of the chicken sandwich far exceeded our most ambitious expectations and brought Popeyes into the national and international spotlight. We also continued to make important strides in establishing the foundational building blocks to drive long-term comparable sales growth in the U.S. through a compelling layered offering.

Combining the contribution both from the sandwich and from our foundational work in Q3, we grew comparable sales 9.7% globally and 10.2% in the U.S., representing one of the highest growth rates for the brand in the past 2 decades.

While the chicken sandwich was an important component of overall sales growth in Q3, it's important to remember that it was only in stores nationally for about 2 weeks. The demand was so overwhelming that the supply we secured to support an aggressive sales forecast over several months ran out in approximately 14 days.

By the end of its first week on the national stage, the chicken sandwich had generated millions of dollars of free media and garnered a huge response from existing Popeyes' guests and thousands of new ones. We've shared in the past that our research suggests that for Popeyes, trial is a key obstacle to purchase intent. However, the same research shows that when people try our products, they love them and they come back for more. The chicken sandwich craze was great in attracting new guests, many of whom had never experienced the brand or its Cajun-influenced menu before. And you may have seen earlier this morning, it's back. We're excited to announce the return of the Popeyes' chicken sandwich in less than a week. Our teams and franchise partners have been working around the clock over the past 2 months to make sure we're ready to relaunch. And we're excited it will be back out in the market in just a matter of days. It's worth noting that while the sales from the sandwich and the buzz online were fantastic, we also saw remarkable positive reaction to our menu across the board in the quarter. Our $10 2 Can Dine offer drove impressive volumes in our bone-in chicken segment, while our double dipper and wild honey mustard wing promos accelerated momentum in our boneless chicken segment.

In addition, our buttermilk shrimp LTO in August also performed really well. This may occasionally get lost in the mix, but Popeyes is one of the only national QSR brands serving this type of seafood, and our LTOs in the category tend to perform really well. Asian-inspired seafood is also totally in line with the Louisiana heritage of the brand, which we see as a great and important differentiator for Popeyes.

On the digital side, we once again saw a strong incremental contribution from delivery in Q3 as we rolled out the service to additional locations. We also made progress on implementing our new POS systems across the U.S. and are now up and running at more than 80% of locations providing us critical mass we need to generate high-quality, real-time sales and product mix information from our restaurants to sharpen our sales and marketing plans. This has also allowed us to start moving even faster on digital initiatives like the continued rollout of delivery and implementation of multiple aggregators at certain restaurants.

On the development side, we continued expanding the Popeyes' brand in the third quarter with global net unit growth of 5.6%. This reflects a slower pace versus last year but as is the case with Burger King, we build our development plans in the 12- to 18-month time frame and continue to feel very good about our openings pipeline going into the fourth quarter. This is especially true in the U.S. where we're one of the fastest-growing QSR brands in the country based on unit growth and generate very strong returns on capital at our stores, even before considering any uplift from the chicken sandwich.

We believe we're significantly underpenetrated in the U.S. relative to our potential. And with great brand image and fantastic products, we're confident we have the space to drive significant growth for a long time to come.

I mentioned earlier, the celebration of our BK restaurant number 3,000 in APAC, which was the product of nearly a decade of hard work alongside our fantastic partners in the region. Today, the Popeyes brand has fewer than 120 locations in Asia, and we see enormous potential to build our network there in the coming years.

We announced in Q2 a deal to bring Popeyes to China with TFI and the Kurdoglu brothers, the same partner that has done a tremendous job of scaling Burger King up to over 1,000 restaurants across China and continues to deliver strong unit growth through this Q3.

We're excited to have already started working together towards the first Popeyes in China and are confident as we set out after our shared target of building 1,500 Popeyes restaurants there over the next 10 years. There are significant opportunities all over the globe for this great brand, of course in China, Philippines and the rest of Asia but also in countries like Brazil and Spain and right here in the U.S. where we have similarly excellent partners that are helping us build Popeyes into one of the fastest-growing QSR brands in the world.

So to conclude, we believe the fundamentals are very strong at the Burger King and Popeyes brands, and we're confident we can tackle the headwinds Tim Hortons currently faces in Canada. Despite the tough quarter for Tims, on a consolidated basis, our global system-wide sales increased by nearly 9% in Q3, illustrating the strength of our unique and diversified global platform for growth.

We look forward to finishing 2019 strong in the fourth quarter and believe we're on the right path across all 3 of our brands, focusing on the most important long-term drivers of the business across image, menu, guest experience and branding. We've outlined some of the key components of our plans for you today and look forward to providing updates against our progress as we move forward.

I'd now like to hand it over to Matt to take you through our profitability and cash flow results for the quarter.

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Matthew Dunnigan, Restaurant Brands International Inc. - CFO [4]

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Thanks, José, and good morning, everyone. In the third quarter, system-wide sales growth across each of our brands led to consolidated adjusted EBITDA of $602 million, up 6.7% organically year-over-year, representing our strongest quarter of growth in the past 7 quarters going back to 2017. Our growth this quarter also reflected ad fund revenues exceeding expenses by $6 million less than they did in the third quarter of last year, resulting in an impact of approximately negative 1% to our consolidated organic adjusted EBITDA growth.

As we've mentioned in the past, while in some quarters there may be a mismatch in the timing of revenues and expenses, in the long run, these ad funds are managed such that total accumulative revenues equal expenses. At the segment level, Tim Hortons third quarter adjusted EBITDA was $301 million, which represents a 1.7% organic increase year-over-year. This increase was driven primarily by supply chain sales, which includes a combination of changes in product mix, growth in our retail business and growth in equipment related to our fresh brewer rollout as well as the timing of certain cost recoveries and G&A.

Also, a majority of the negative impact to consolidated adjusted EBITDA related to the timing of ad fund revenues and expenses was attributable to Tim Hortons. At Burger King, third quarter adjusted EBITDA was $254 million, representing a year-over-year organic increase of approximately 12%, our strongest quarter since the fourth quarter of 2017. This increase was driven primarily by strong system-wide sales growth of approximately 11% with continued momentum in global net restaurant growth of nearly 6% and global comparable sales growth of nearly 5%.

Finally, at Popeyes, this quarter's adjusted EBITDA was $47 million, which was up nearly 12.5% organically year-over-year. This increase was driven by very strong system-wide sales growth of over 15.5%, among the brands strongest growth rates in the past few decades, including net restaurant growth of just over 5.5% and global comparable sales of just under 10%, partially offset by slightly higher segment SG&A. On a consolidated basis, our third quarter adjusted net income was $337 million. This compares to the third quarter 2018 adjusted net income of $297 million. The year-over-year increase was attributable to adjusted EBITDA growth and a favorable year-over-year improvement of our tax rate, partially offset by unfavorable exchange rate movements, higher interest expense related to the annual step-up in our interest rate swaps that we noted in the first and second quarters as well as higher expenses year-over-year related to stock-based compensation and depreciation and amortization. Our adjusted diluted EPS for the third quarter was $0.72 per share compared to $0.63 in the prior year, representing growth of 14.5%. Included in this increase is a headwind from unfavorable foreign exchange rate movements, which reduced our EPS growth rate by approximately 1%.

Our third quarter 2019 adjusted effective income tax rate was approximately in line with the range we had provided earlier this year. However, it is important to remember that the timing and amount of stock option exercises can vary materially quarter-to-quarter and can thus have a more or less material impact on a specific quarter's tax rate. On a full year basis, our view on the adjusted tax rate has not changed from the low 20% range we shared earlier this year.

Now let's discuss our cash generation and capital allocation for the quarter. We generated free cash flow of approximately $418 million, calculated as the sum of cash flows from operating activities less payments for property and equipment. Including the results of the third quarter, our free cash flow generation over the last 12 months totaled approximately $1.3 billion.

During the third quarter and prior 12-month period, we also paid a total of $232 million and $880 million respectively in common dividends and partnership exchangeable unit distributions. We also continue to make progress on key investment projects including our previously announced remodel programs at Tim Hortons and Burger King as well as the expansion of our Tim Hortons supply chain network in Canada.

Based on the timing of our remodel pipelines and construction projects, we anticipate our spend will be most heavily concentrated in the fourth quarter of the year as we complete more Tim Hortons and Burger King renovations and advance the buildout of our Canadian distribution centers, which we expect will continue into 2020 and be completed midway through the year.

As of September 30, 2019, our total debt outstanding was $12.8 billion. Our net debt, calculated as total debt less cash and cash equivalents of $1.7 billion, was $11 billion. And our net debt to adjusted EBITDA leverage ratio was 4.9x. In September, we took advantage of favorable market conditions to refinance our $1.25 billion first lien notes due 2022 with $750 million of new first lien notes due 2028 and a $750 million term loan A due 2024. Through this transaction, we're able to generate significant interest savings through a meaningful reduction of our cost of capital combined with a $235 million reduction in our term loan B.

Our original 2022 notes carried an annual cost of 4.625% and were significantly more expensive than both our new term loan A and new first lien notes. Our new term loan A has a current rate of LIBOR plus 125 basis points or approximately 2.7% on a fixed basis and a leverage-based grid that allows for a decline to as low as LIBOR plus 75 basis points. And our new first lien notes were issued with an extended maturity of 2028 and an interest rate of 3.875%, which we've been told is among one of the lowest-priced callable bonds ever placed in the U.S. high yield market. In addition, we were able to further enhance our term loan A interest savings by increasing the size of our euro cross-currency swap by $500 million, which reduces our interest-carrying cost by an additional 2.1%. And in order to remove the risk around future increases and floating rates, we added $500 million of floating-to-fixed interest rate hedges, which allows us to lock in the cost on this portion of our term loan A. The net result of these transactions is expected annual interest savings of approximately $25 million, which could increase over time if we continue to delever and reduce the spread on our term loan A. On top of these expected savings, we also extended our revolving credit facility by 2 years and doubled our available capacity from $500 million to $1 billion. Concurrent with our refinancing process, we are pleased to report that we received upgrades on our corporate rating from both S&P and Moody's to BB and Ba3 respectively on account of continued improvement in our business, leverage profile and free cash flow generation.

It is important to note that various components of the refinancing took place between September and October. And as a result, our balance sheet at quarter-end reflected only the receipt of $750 million in cash proceeds from the new 2028 notes and the paydown of $235 million of our term loan B. We completed the other elements of the refinancing that I described in October, and they will be fully reflected in our balance sheet for Q4. This morning, we also announced that the RBI Board of Directors declared a dividend of $0.50 per common share and partnership exchangeable unit of RBI LP, payable on January 3, 2020, which is consistent with our previously announced target of $2 per share in total dividends to be declared in 2019 and reflects our strategic priority of maintaining a balanced approach to capital allocation. Thank you, everyone, for joining us on the call this morning and for your continued support.

I'd now like to open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question comes from Jeffrey Bernstein of Barclays.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [2]

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Just a question on Tim Hortons. José, I know you acknowledged another challenging quarter. A couple of things. I'm just wondering, maybe what are you looking for? Or what milestone will you maybe question the confidence of the Winning Together plan? And I know you mentioned being excited about the long-term growth prospects in Canada in the release. Just wondering at what point we talk more about North America and rest of the world or whether you think this is primarily to be focused just specifically on Canada? Any color on that as well as any feedback from franchisees in terms of concerns at the convention, will be great.

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José E. Cil, Restaurant Brands International Inc. - CEO [3]

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Yes, thanks a lot for the question. We were -- as I mentioned in my opening remarks, we remain extremely confident in the Winning Together plan. I think we're creating a strong foundation to drive sales growth over the long run through the improvements in image, technology, product quality, the drive-through and overall customer experience. These things are not things that happen from one day to the next or quarter-over-quarter, it takes time and the focus areas, as I mentioned in my remarks, are leadership in coffee. And we're doing quite a few things that are structural. We're making some innovative changes to how we prepare and serve coffee, which are changes that -- or changes in our technology for brewing that has been in place for about 40 years. So important -- really, really structural important initiatives. Food quality and innovation is a big part of our plan.

I touched on innovation café being a hub for really creative innovative thinking, which is going to help us over the long haul in Canada and in the U.S. and international markets. Guest experience both physically and digitally is going to be critical for us, the Welcome renovations, the double drive-throughs, outdoor digital menu boards with artificial intelligence and decision technology to drive personalization and, of course, our Tims Rewards program. And then -- and ultimately, the brand messaging program that we put together, highlighting community connection. All these things are things that we believe are going to make a big impact on the business, both in terms of the perception of the brand, the continued strong perception of the brand and continue to help us maintain and grow market share in the country.

So we feel really good about that. I think beyond -- to your question on Tims beyond Canada, we feel very good about what's happening internationally with the brand. We didn't touch on that in the prepared remarks but our continued excitement -- the excitement continues in international markets as we open more restaurants in China. We're opening more restaurants in the U.K. in Spain as well, Mexico, and the Middle East, which has been a big stall work for Tim Hortons for many years. Our beverage platform is doing really well there. And our food offering, as I've mentioned in the past, is evolving and growing quite a bit. Baked goods and breakfast are strong in the international markets, and we see a big opportunity for growth over the long haul. And in the U.S., we continue to work with our franchise partners there, the restaurant owners, on fine-tuning and evolving the model to be able to accelerate growth over time. We feel confident that the U.S. will be a strong market for Tim Hortons for the long haul, and we're excited about the work we're doing there and internationally.

And as I mentioned in my -- on the third question or the third subpart of your question, the franchise and owner reaction to our convention last week was positive. We continue to work well with them. Our team in Canada has a strong relationship with the advisory board and other franchise owners in the country. And we're spending time working through the details of our Winning Together plan and executing that plan long term. So we're confident and excited about the long term for Tim Hortons in Canada, in the U.S. and internationally and look forward to keeping you posted on our progress. Thanks for the question.

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Operator [4]

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Our next question today comes from Dennis Geiger of UBS.

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Dennis Geiger, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants [5]

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José, thanks for all the color on the factors impacting Hortons in the quarter as well as the key growth pillars looking forward. Just wondering if you could talk though a bit more about the impact perhaps of loyalty on sales in the quarter, recognizing that some of the benefits are likely to build over time.

And then at the risk of being a little repetitive, just thinking about the drivers of the 4 key areas of focus that you outlined, seems like a mix of, kind of, compelling near- and longer-term sales contributors. But just your thoughts on those go-forward initiatives relative to, kind of, what has been launched over the last 12 months and just, kind of, the differences there and why that can strengthen the brand going forward?

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José E. Cil, Restaurant Brands International Inc. - CEO [6]

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Great, thanks, Dennis. On loyalty, as I've mentioned, many times, we're super excited about the Tims Rewards program. With our existing dominant market share in Canada, we saw -- over the last 2 years as we started to work on this program, we saw an opportunity to reward our guests for their years of loyalty through personalized offers that are meaningful to them and that help us drive incremental traffic and ticket growth for our restaurant owners. Now we're playing both offense and defense here. Most of our competitors have -- they have loyalty programs that have already been deployed and with our existing traffic and loyalty we see an opportunity to drive, as I've mentioned, incremental traffic and tickets. So step one of the program was to attract as many existing guests as possible to join the loyalty program.

And step 2 in our plan was always to make meaningful personalized offers to all those guests to better influence their behaviors through frequency or check growth including add-ons, mix shift and those sorts of things. Our retail and QSR benchmarks indicated that it would take something like 12, 18 months or even multiple years as was the case for some of the competitors that we benchmark against to build a meaningful guest adoption of our loyalty program and this would be a period of time that -- it was going to require some investment and ongoing investment on our part. But as you all know, and we've mentioned many times, it took us just a few months before we had a substantial number of guests join and start using the Tims Rewards program.

During this time, we saw incremental traffic, which offset the planned discounting in the program. So we saw we had an initial, kind of, neutral impact on sales but after the expected initial increase in traffic, which we saw at the beginning of the program, the discounting is slightly more than offsetting the traffic levels, which is causing a little bit of softness in sales. Now with the advanced adoption of the loyalty program, we're pulling forward our implementation of step 2 and have begun to test personalized offers based on guest purchasing history. We're also advancing our efforts to convert guest onto the digital loyalty program where we can best deliver these personalized offers.

And in the coming months, I'm going to share -- we'll share more with you, and you'll see continued progress on our end to convert these guests from analog to digital and we're going to continue to test offers that are going to be valuable to our guests and they're going to be incremental to us and to our owners. Now during this period, we may feel a little pressure on comps but we're confident long-term that this is going to be a driver of traffic and profitable sales. And ultimately, we believe strongly that our long term loyal guests, our dominant market position and our best-in-class digital loyalty program, all of these things set us up well to continue to drive incremental sales and maintain the loyalty of our guests.

Now coming to your second question, which is on the Winning Together plan, a lot of the initiatives that we touched on last year, these are initiatives that are around guest experience, around food quality and improving the consistency of our coffee experience, technology. All the initiatives we've touched on, these are initiatives that take time to work on and to implement and deploy in our restaurants. And so we feel very good about the pillars of the plan, the details of each pillar of the plan, the work we're doing with our franchise and restaurant owners, and we feel confident that over time, these are going to have a big impact on the performance of the business in Canada and beyond. Thanks for the question.

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Operator [7]

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Our next question today comes from John Glass of Morgan Stanley.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [8]

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I'm going to ask another one on Tims, 2 parts. One is, just if you look at the last 3 years, comps have been slack in Canada. So this isn't a recent phenomenon. And sometimes, it's just like a change in the market that's occurring, and we sort of lose it in the quarter-to-quarter cadence. When you look at the business over the last few years, do you think it's more that the category is just slower in Canada? Or do you view this as more of a competitive issue? How do you frame why sales are not as strong given you're doing a lot of things, you have been doing a lot of things over the last year or 2 in that brand.

And secondly, specifically this quarter, I think you'd launched or had the plant-based products in breakfast as well as the lunch. But I think you pulled them out or at least decided to pause. Why didn't they drive sales? I think in Canada, you'd seen other brands had seen successes in that -- those products. Why didn't they work? If your assessment is they didn't work for Tims, why didn't they?

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José E. Cil, Restaurant Brands International Inc. - CEO [9]

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Thanks, John. I appreciate the question. I think in terms of overall market in Canada, it continues to be a great QSR market. We feel very good about the long-term prospects. Obviously, over the last 4 or 5 years and even longer, new competitors have come into the market. There's always competition in the quick-service restaurant business, especially when you include the informal market. So we feel very good about our market position. It's a dominant position. We have more than 7 out of 10 cups of coffee are had at a Tim Hortons. So we feel very good about where we are. But the plan is to continue to grow that market share and so the work we're doing is not short-term marketing campaigns that are to drive check or traffic, it's really long-term structural initiatives that are going to help us continue to drive significant traffic and volume into our business and dominate and continue to dominate from a market share standpoint. So we feel good about where we are and where we're headed over the long term in Canada.

I think as it relates to plant-based, we've kept the breakfast sausage product, Beyond Meat product in many of our markets. It's actually in more than 60% of our restaurants. We -- it was a nice driver of check in our business. We launched other products, plant-based products that were more limited-time offers to see if there was an opportunity there for growth. And we felt ultimately that it was only going to be a short-term limited-time offer, which is how it performed and how we dealt with it but we feel good about the plant-based breakfast patty working well in many of our restaurants in Ontario and beyond, and we'll continue to evolve our breakfast offering to continue to wow our guests in Canada. Thanks for the question.

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Operator [10]

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Our next question comes from Nicole Miller of Piper Jaffray.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [11]

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I wanted to switch gears to Popeyes for a minute. So when you gave the BK Impossible Whopper information, you did talk about how that helped potentially draw in a new customer to also not -- not just a customer for that product necessarily, so the question is around the Popeye's chicken sandwich launch, how did that strengthen its daypart or other dayparts, other products around food or beverage platforms?

And then just a second comment broadly if you could, how did it perform across markets? And clearly, it's very successful. So what part of it was different in terms of results versus the tests?

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José E. Cil, Restaurant Brands International Inc. - CEO [12]

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I think as I mentioned in the prepared remarks or the opening remarks, what was exciting about the Popeye's sandwich launch in the U.S. and the performance in the quarter is that it lifted all other parts of the business. So we saw a lift in our bone-in chicken business. We saw a lift in tenders, we saw a lift in ancillaries. We saw a lift in beverages, quite a lift as well in deserts. So there was a lot -- a strong performance for the business and from a mix standpoint, across the entire business.

We've brought in -- and we're still working through the data but we're -- we saw a lift in frequency from existing guests and customers and fans or super fans that know the Popeyes brand quite well, and we also saw new folks come in to try it, a lot of it driven by the buzz online around the so-called chicken wars. People wanted to test and validate that, in fact, we had come up with the greatest chicken sandwich of all time. So that's for people to decide or our guests to decide, but there was a lot of folks coming to the restaurants specifically for the chicken sandwich but a lot of those transactions included other products in the menu, which is one of the things that's most important about Popeyes is that the overwhelming majority -- still about 65% of the U.S. hasn't tried Popeyes.

And we know when guests try the product, or when consumers try the product, it's preferred over any other chicken QSR or most other chicken QSR players in the market. So our goal through a bunch of different initiatives including delivery, including rapid expansion of our footprint as well as the expansion of our menu offering to make sure we can be enticing to a broad base of consumers, our goal is to have people try the product. When they try the product, they come back for more, and that's what we're seeing and that's what we're excited about. Thanks a lot for the question.

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Operator [13]

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Our next question today comes from Sara Senatore of Bernstein.

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Sara Harkavy Senatore, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [14]

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I wanted to go back to Tims because you talked about, I think, some of the disappointment in the LTOs. But when I compare what I've heard from you versus some of your competitors, cold has been doing very well for some competitors. Likewise, I don't think I recall seeing quite as much check pressure for example from loyalty launches for an extended period of time. So just as I compare on an execution perspective, do you need to make more fundamental changes there with respect to whether it's your pledge to royalty, maybe broadening the team or who you have in place running the brand? I am just trying to understand why there has been -- seems to be such a distinction between some of the initiatives at Tims versus what we've seen elsewhere?

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José E. Cil, Restaurant Brands International Inc. - CEO [15]

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As it relates to Tims, I think I've provided quite a bit of color on the rewards program. So our focus there is to evolve from step 1 or phase 1 of attracting guests into the program into step 2, which is, kind of, evolving, getting more folks on the digital platform and then personalizing the offers so that it becomes an incremental visit and/or add-on, and it drives incremental growth for our franchise owners and for the business. So that's going to be the focus, and it's not so much structural as it is, kind of, an evolution -- a planned evolution of the program as I've mentioned earlier.

On cold beverages, we continue to see growth of the platform year-over-year but I think and the team thinks that this is a huge opportunity for us to make it an even a bigger part of our business in Canada. We have a strong, kind of, dominant and, kind of, legacy built heritage on hot coffee and brewed coffee. We're evolving to make it a more modern, kind of, broad-based offering including cold beverages and the launch of a lot of the LTOs and, kind of, platforms that we included in Q2 and Q3, saw progress, Creamy Chills being one of them. And we'll continue to innovate there and drive improved growth in that platform, which we think is important, and I feel really good about the team that we have in Canada. We're always looking for -- one of the hallmarks of our company and our culture is constantly looking for great talent to continue to build our amazing teams to drive the business forward. So we're excited about the team that we have, excited about the progress we're making and look forward to keeping you guys updated on our progress. Thanks for the question.

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Operator [16]

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Our next question today comes from David Palmer of Evercore ISI.

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David Sterling Palmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [17]

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Great discussion on Tims so thank you for this. A question on the digital elements of loyalty and the personalized marketing upside you talk about going forward. It's my understanding, correct me if I'm wrong, most of the loyalty occasions are swipe cards and not in-app at this moment. Could you talk about the connectivity and how you can improve engagement to that personalized consumer level that you're talking about? And where you are sort of technology-wise versus maybe program-wise in that goal?

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Joshua Kobza, Restaurant Brands International Limited Partnership - COO of Restaurant Brands International Inc [18]

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Dave, it's Josh and thanks for the question. You're right that the majority of the program today is based on swipe cards as opposed to being an in-app program. Though there is a large part of the program that's in the app. And you're also right in, I think kind of, thinking forward that where we'll likely go with the program is having a more digitally focused program, which will allow us to be more connected with our consumers and have a closer 1-on-1 interaction with those consumers. So it's something we're still working on, but I think likely as we look forward over the next 6 to 12 months that is -- will be a prominent part of the direction of the Tims Rewards program.

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Operator [19]

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Our next question today comes from David Tarantino of Baird.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [20]

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A question on Burger King U.S. comps. I know you mentioned Impossible Whopper is likely one of the bigger drivers of the acceleration you've seen. So just wondering if you could elaborate on what you've seen as the -- as that program has moved on. I know you probably got a lot of trial upfront but is that sustaining as you see it in the longer week for the program? And I guess talk about the dynamics that maybe you saw when you launched that system-wide versus what you saw in tests as well.

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José E. Cil, Restaurant Brands International Inc. - CEO [21]

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David, thanks for the question. We -- on Impossible, we saw really good performance on the national launch. We were essentially in line with what we expected. We expected to see incremental traffic coming from existing guests and new guests and as I mentioned in my opening remarks, there was a lot of traffic and trial that came in from new guests and even in my own experiences in the restaurants visiting during the quarter, had a chance to speak to many customers and new -- essentially new BK guests that were coming in specifically for that product, and the feedback was really positive. I think the -- both in terms of innovation and bringing to the table and across the country, a product that is -- that's innovative, it's different, and it tastes great, which is what's most important about the Impossible Whopper. Over the -- we don't discuss specific performance and details of the product over the quarter or beyond, but we continue to see good performance of the product, of the Impossible Whopper, and we're excited about it being a long-term platform for the business. We're going to continue to invest behind it. We're going to continue to work closely with our franchise partners and the folks from Impossible to continue to drive great-tasting innovation in that platform over time.

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Operator [22]

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Our next question today comes from Will Slabaugh of Stephens Inc.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [23]

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I had a question on Popeye's and curious what this did from a franchisee profitability standpoint as you look at the success of the chicken sandwich and what I'm assuming was generally a higher check. So how those guys are feeling and feedback you've gotten from the franchisees. And then can you speak a little bit more to the U.S. franchise unit expansion interest, and I'm assuming this quarter didn't do much to hurt that interest?

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José E. Cil, Restaurant Brands International Inc. - CEO [24]

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Will, thanks for the question. We don't really disclose or share too much from quarter-to-quarter on franchise profitability because it tends to bounce around at times. Over the long haul, we've seen growth in the Popeyes 4-wall margins and EBITDA in the U.S. and the performance of the chicken sandwich and the strong performance in the quarter as you say -- as you rightly say, it didn't hurt. So we saw a lot of positive momentum and the performance for the quarter was really good. Our franchisees, we just finished our convention late last week here in Miami, and we had over 1,000, almost 1,500 owners and others that are close to the Popeyes system here in Miami and there was a lot of excitement about the Popeyes chicken sandwich launch and the relaunch that was -- that we announced earlier this morning.

And we feel over time, a continued expansion of our menu, making the chicken sandwich available full time across 2,500 restaurants in the U.S. and growing, I think, will have a really positive impact in terms of the guest experience. That's going to drive trial and growth in check and ultimately, we know that, that's a key driver -- seeing top line growth is going to be a key driver of 4-wall EBITDA for the long haul. So we're really positive about that. And as it relates to the restaurant expansion in the U.S., there's a lot of excitement from existing franchisees as well as new franchisees that are looking to expand and partner with us to expand the brand in different parts of the country where we have quite a bit of white space and opportunity for growth for the Popeyes brand. So we're looking forward to continuing to partner with great operators, great investors with great management teams that are excited about building really good-looking restaurants and building the Popeyes brand in the U.S. for the long time to come.

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Operator [25]

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And our final question today comes from Eric Gonzalez of KeyBanc Capital Markets.

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Eric Andrew Gonzalez, KeyBanc Capital Markets Inc., Research Division - Restaurants Analyst [26]

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On Burger King U.S., I think on your Analyst Day, there was some discussion on your efforts to drive the morning business. If you could tell us what percentage of sales and what percentage of franchisee profit that breakfast represents today? And then how do you think about the impact on the industry as another large competitor plans to enter the marketplace?

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José E. Cil, Restaurant Brands International Inc. - CEO [27]

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Eric, thanks for the question. Breakfast, as we mentioned in May, is a big part of our plan long-term for BK in the U.S. It's one of the fastest-growing dayparts in the U.S. It's also one of the most profitable dayparts as well given very healthy margins in that business. We continue to invest behind it both in terms of product quality innovation, beverage innovation, and we're investing in media over time. We're excited about the long-term plans there. We have already a pretty healthy and strong business in breakfast, right around 14%, 15% on average for the U.S. with some parts of the country well north -- are north of 20%. And we're excited about our position. We've already invested over decades behind the platform. We have the people already working the daypart. We've already got customer or guest behaviors in place to come to Burger King. They love the CROISSAN'WICH. They love some of our anchor products at BK for breakfast, and we aim to continue to expand and innovate in the area to be able to drive more growth over time. Thanks for the question.

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Operator [28]

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

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José E. Cil, Restaurant Brands International Inc. - CEO [29]

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Thanks, everyone. Overall, we had a strong quarter with about 9% system-wide sales growth, which led to adjusted EBITDA growth of 7%, the strongest we've seen since 2017. We're excited to continue to show the progress of each of our amazing brands over the next quarters and look forward to keeping you posted. Thanks again to everyone for joining us this morning, and thank you, again, for your support. Have a great day.

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Operator [30]

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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.