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Operator: Good morning, and welcome to the Restaurant Brands International Fourth Quarter 2022 Earnings Conference Call. . Please note, this event is being recorded. I would now like to turn the conference over to Kendall Peck RBI’s Head of Investor Relations. Please go ahead.

Kendall Peck: Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International’s Earnings Call for the Fourth Quarter and Year ended December 31, 2022. As a reminder, a live broadcast of this call may be accessed on the Investor Relations web page at rbi.com/investor and a recording will be available for replay. Joining me on the call today are Restaurant Brands International’s Executive Chairman, Patrick Doyle; CEO, Jose Cil; COO, Josh Kobza; and CFO, Matt Dunnigan. Today’s earnings call contains forward-looking statements, which are subject to various risks set forward 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. During portions of the call today, we will be referencing franchisee profitability measures that are preliminary internal estimates based on unaudited self-reported franchisee results. We will also be referencing 3-year comparisons for system-wide sales growth and comparable sales, which are calculated on a geometric stats basis, by using the 2020, 2021 and 2022 disclosed growth metrics. In addition, the consolidated growth metrics discussed during the prepared remarks, including consolidated system-wide sales growth net restaurant growth and organic adjusted EBITDA growth exclude the results from Firehouse Subs, which we acquired on December 15, 2021, to reflect comparable year-over-year growth figures.

And now I’ll turn the call over to Patrick.

Patrick Doyle: Good morning, everyone. We’re excited to be part of my first earnings call at RBI. It’s been about 90 days since I joined the company, and I’ve been so impressed by the teams I’ve met and the franchisees who’ve welcomed me into their restaurants in Miami, Toronto, Jacksonville, Zurich and Madrid. I know you’ve all seen our press release this morning announcing Josh Kobza as our new CEO as of March 1. Both Josh and Jose are here with me on the call today, along with Matt, as we get into the details of the quarter. Jose, on behalf of the entire Board of Directors and literally thousands of employees and franchisees who you’ve worked with over more than 20 years, I want to thank you for your tireless hard work, enthusiasm for our brands and huge contributions.

We’re a stronger company today because of the many roles that you’ve led over the years, and I can’t thank you enough. Jose has agreed to stay with us for the next year as an adviser, and he’s committed to helping me and Josh in every way he can. I’d like to now hand the call over to Jose to say a few words.

Jose Cil: Thanks, Patrick, and good morning, everyone. First off, I want to congratulate my friend and partner, Josh, on this exciting new opportunity. Josh has been an enviable adviser to me over a number of years. He has the talent, the experience and all the right instincts to continue to drive great results for our brand and our company. I’m very proud of the team we’ve built here at RBI. I’ll put this team up against any other in the business, any day. Our team has been delivering great results, and this quarter is just another example that their hard work and that of our owners and franchisees is paying off. I want to thank our owners and franchisees in Canada, the U.S. and around the world for investing their capital, for investing their passion and commitment and for investing their trust in our amazing iconic brands.

And I want to thank our Board of Directors for their continued support and valuable advice over the years. When they ask them to stay on as an adviser over the next year, it was an easy yes. I love this company, the people, our food and beverages, and the excitement of working together with our teams and franchise owners to create great experiences for our guests. I’m looking forward to working with Patrick and supporting Josh as we accelerate our business further. And with that, I’ll turn it back to Patrick.

Patrick Doyle: Thanks, Jose. Throughout my career, I’ve discovered the value of full transparency. And whenever there is a leadership transition in a company, people speculate what is driving that. And I believe it’s just easier to tell you. So here’s the answer. We have great leaders in place. We’re making good progress, and we have the whole team, including Jose to thank for that. This is a business that’s already moving in the right direction. This is about setting ourselves up for an accelerated pace of growth for the next 5 to 10 years. The Board of Directors has been disciplined about succession planning. We have an exceptional leader with all the relevant experience we need here in Josh, and he’s ready to drive what we believe will be a new area of growth for the company.

I know he’s going to do a terrific job. I have an enviable opportunity at this point in my career to be an adviser to Josh, as he takes on his new role. My own mandate here at RBI is to rapidly accelerate the growth of the company by identifying areas that can deliver outsized results as we lean into them even more. Aside from my mandate, the growth opportunity we have in our brands is also why I invested $3 million of my own money on my way in the door and locked it up for 5 years. So I’m all in. We’ve built ambitious plans that we believe in. We have talented teams. The job now is to accelerate the speed and quality of execution, focusing on some big bets and deliver exceptional results. One of the themes you’ll hear a lot from us going forward is the importance of franchisee success at the heart of everything we do.

And more specifically, that means strong and growing franchisee profitability. When restaurant level profitability is strong and growing, it means our franchisees increasingly have more money to invest in their restaurants, in modern digital menu boards, refreshing kitchen equipment, opening new locations and feeling the pride of creating exceptional guest experiences and providing meaningful employment to hundreds of thousands of their team members. Previously, in my career, I saw the powerful change that’s possible within a corporate culture when we put franchisee profitability at the center of everything we do. Already, nearly 80% of our brand teams have a portion of their personal compensation tied to improving restaurant-level profitability.

As a publicly traded company, we can elevate our accountability to our franchisees even further by publicly reporting on our progress, and that’s exactly what we’ll do on an annual basis starting today. For Tim Hortons, Burger King and Popeyes home markets, profitability is down from what we last disclosed in our 2019 Investor Day. The reasons are well known to most of you, recovering traffic post pandemic, all-time high commodity cost increases, generationally high inflation and so on. Those aren’t excuses. And what matters in my opinion is our baseline today and how we grow from here. Tim Hortons in Canada remains one of the industry’s most loved restaurant concepts with roughly CAD 220,000 of average 4-wall EBITDA in 2022. There’s an opportunity in Canada to improve profitability across all formats and regions as we continue implementing the plan the team has already delivered so much success on.

We’ve now reported 7 quarters of strong sales growth at Tims, and we’ve seen good momentum continue into 2023. Burger King U.S. average 4-wall EBITDA in 2022 was approximately $140,000. We’re seeing early positive impacts from our investments behind Reclaim the Flame plan, as reflected in our results. We previously announced that we have signed a new spending agreement with 96% of our U.S. franchisees that says if we’re at a minimum of $175,000 of average 4-wall EBITDA by the end of 2024 that our franchisees will invest an incremental 50 basis points into the advertising fund for ’25 and 2026. So obviously, the team is focused and motivated to achieve this target at a minimum, and we believe there is a lot more upside there in the coming years.

At Popeyes U.S., average 4-wall EBITDA in 2022 was roughly $210,000 with pressure versus prior years related to commodity and labor costs. A big focus of the team this year is working with our franchisees to streamline their kitchens and improve restaurant operations, which we believe will contribute to growing restaurant profitability over time. And at Firehouse, we’re working to fully integrate the different systems and will include their profitability as part of our annual disclosure in the future. As you hear us talk about the big areas for growth in the company, this is a good baseline to measure our progress against over the next 5-plus years. Our long-term growth as a company is tied to the growth of franchisee profitability. You’ll see us do our part in menu innovation, marketing, restaurant design, technology and digital, and we’ll work closely with franchisees who need to do their own part to improve their profitability, particularly delivering excellent and consistent execution and a positive team member and guest environment in their restaurants.

We are all in with franchisees who share our ambition for the growth we know we are capable of delivering. And along the way, it’s likely that a few people will leave the system and transition their restaurants to franchisees who share our long-term mindset for success and growth. I believe the franchisees who are all in working in their restaurants and leading their teams are going to be excited by and rewarded for their confidence in the team we have here at RBI. We are fully committed to those franchisees’ success. I’m looking forward to speaking with you all in more detail on February 22, answering your questions and sharing some more on why I’m so excited to return to the restaurant industry and especially RBI. What I will say today is that after my first 90 days here, I have even more conviction in the opportunities we have across all 4 brands to accelerate our growth.

Now Josh will take us through the results of the quarter, and then Matt will make some comments before we open things up for your questions. Josh?

Joshua Kobza: Good morning, everybody. Thank you very much, Patrick, for all your support so far. And I’d like to thank Jose, who’s been a great leader and a friend to me for my entire time so far at RBI. It’s still early days for me in thinking through priorities in my new role, and I plan to spend the next few months listening to our teams, our franchisees and you all and making sure that our plans for the future incorporates all of your perspectives on how we can be the most successful together in the coming years. That said, I do have some initial reflections. One is that we have an amazing business, fantastic people and a lot of tailwinds. I think this is really a question of how we can make our business move faster and operate even better.

And one of the most straightforward ways to allow our teams to move faster is to give them more autonomy and ownership within our global company structure. I’m looking forward to sharing more of my thoughts on these and other topics in the coming months and quarters. I feel very fortunate to have the support of Jose, who’s been in this role for the last 4 years. And I’m also very fortunate and thankful to have Patrick as a leader and a mentor to learn from and work with as we take our next step towards this phase of growth. Well, let’s be efficient and get into the results that we’re here to talk about this morning. We closed out the year with momentum, having made great progress across a number of important initiatives, including driving strong sales growth at Tim Hortons Canada, launching our Reclaim the Flame plan at Burger King U.S., increasing our net new restaurants year-over-year, improving operations and enhancing the digital guest experience.

We also continue to make strides in our ESG journey, including being named to the Dow Jones Sustainability Index for the first time. We finished the year on a strong note, growing fourth quarter consolidated comparable sales 8% year-over-year and net restaurants over 4%, which led to system-wide sales growth of 11% year-over-year, excluding Firehouse Subs in Russia. Our comparable sales included double-digit growth at Tim Hortons Canada and in our Burger King international business as well as sequential improvements in Burger King, Popeyes and Firehouse Subs home markets. These results were aided by continued growth in our digital channels, with global digital sales up 24% year-over-year to over $3.5 billion in the fourth quarter, representing over 1/3 of consolidated system-wide sales.

For the full year, we grew digital sales 31% to $13 billion. We also closed out 2022 with some improved momentum in development, delivering 754 net new restaurants in the quarter and 1,266 net new openings for the year. We saw the benefits of having broad-based development opportunities, with Popeyes contributing 30% of our total net restaurant growth in 2022 and Tim Hortons driving nearly 25%. Tim Hortons added close to 200 net new units during the quarter and surpassed the 1,700 store mark outside of Canada, including China, which crossed the 600 store mark. Popeyes had a solid development here in North America, while also ramping up internationally, including opening its first stores in fast-growing chicken QSR markets like South Korea and Indonesia.

Meanwhile, Firehouse Subs kicked off its development journey as a member of the RBI family, signing new agreements to expand in Western Canada. In total, we saw over 700 net restaurants opened in international markets in Q4 and still have an opportunity to bring Burger King International back towards prepandemic levels. We see plenty of opportunity to bring our brands to new markets around the world and combined with our existing growth markets, places like Burger King India, Brazil, France and Spain, I think this dynamic sets us up well to continue accelerating our net unit growth in 2023. Before turning to our brand results, I’d like to acknowledge the devastating earthquakes that impacted Turkey and Syria last week. We have a large business in Turkey with nearly 700 Burger King restaurants and more than 250 Popeyes restaurants.

Our team has been working closely with our dedicated master franchise partners and the UN refugee agency to provide real-time updates on the situation. Our thoughts are with all of our team members, their families and the people of Turkey, who have been impacted by this unfortunate tragedy. Now turning to brand performance for the quarter. We’ll start with Tim Hortons Canada. Axel and his team at Tim Hortons Canada closed out a great year with our highest level of annual comparable sales since acquiring the brand in 2014. The team drove double-digit comparable sales of 11%, even while lapping a strong prior year period, which included our Timbiebs promotion. During the quarter, we grew comparable sales nearly 9% versus 2019, including sequential improvements across all dayparts, formats or vanities and regions, with super urban locations notably up 2% versus 2019, the first positive quarter of results in this format since the pandemic.

Our results were driven by thoughtful calendar initiatives, targeting high-growth PM food dayparts and the cold beverage product category as well as momentum from our core offerings and digital platforms, all of which were aided by mobility improvements and strategic pricing. Our efforts to strengthen our PM food dayparts like lunch and afternoon snack continue to benefit from our loaded platform, plus the addition of anytime snackers, a savory baked good option. Our loaded bowls and wraps and anytime snackers contributed to an increase in traffic while also attracting younger guests. We’re excited to continue to build on these platforms, including with the recent launch of our new Chipotle stake bowls and wraps. Although we’re still in the early phases of our journey, we grew sales in our PM food dayparts nearly 30% versus 2019 and expanded our total PM food sales mix to approximately 24% in 2022 versus 22% in the prior year.

This represents about 8% market share for the year, meaning we have plenty of room to grow further, as we aim to increase our share of the $10 billion PM food market in Canada. Over the past 2 years, we’ve also focused on extending our position as a leader in hot rod company in Canada to leadership across the broader beverage category. As part of this journey, we’ve introduced new cold beverage platforms that complement our food offerings, including our cold brew and winters. The cold beverage category is one that’s been growing quickly for us. This quarter, whole beverage sales grew 11%, comprising 23% of total beverage sales, up from 17% in 2019. In 2022, we held nearly 25% of the CAD 4 billion cold beverage market, and we see a clear path to build on our recent innovations to capture even more share.

Digital, which represented over 1/3 of systemwide sales in 2022, also remains a core long-term growth engine for Tims in Canada. We know that digital guests visit more often and have a higher check on average, resulting in 5x more spend over the course of the year versus nondigital guests. In October, we rolled out our new Scan & Pay feature, which allows our 4 million monthly active Tims reward members to use just 1 scan to pay for orders, earn loyalty points and redeem rewards. Looking ahead, we see opportunities to enhance the Tim’s digital experience even more by improving the look and feel of our app and adding more rewards options and reasons to engage with our platform every day. Our teams and restaurant owners have also been focused on operational improvements.

We saw the benefits of hospitality and speed of service workshops, enhanced field team visits and trainings, all translating into restaurant-level operational improvements this quarter, including a 12% sequential improvement in guest satisfaction and shaving a second off speed of service. I’d like to thank our restaurant owners and their team members for remaining focused on driving operational excellence and delivering a great experience in the communities they serve, helping to solidify Tim Hortons place as the most loved and trusted restaurant brand in Canada. Turning now to Burger King U.S. In our first quarter of the new Reclaim the Flame plan, the team delivered a sequential improvement in comparable sales to 5% year-over-year. Tom and his team’s focus on operations, menu innovation and enhancing our digital capabilities were further aided by reclaiming a stronger share of voice with our fuel to plan marketing investment.

You’ve heard us highlight again and again the correlation between operational excellence and sales and profitability. Since sharpening our focus on operations in mid-2021, Burger King has achieved an over 40% improvement in guest satisfaction, with 6 consecutive quarters of progress. We have accomplished this by supporting franchisees through several initiatives, including expanding our field team, implementing our new franchise success system, to provide consistent data and key metrics and holding targeted gold standard service and Whopper training sessions across the system in the fourth quarter. We kicked off 2023 with Royal roundtables, which are bringing together more than 8,000 Burger King restaurant general managers in over 40 cities across the country.

Our goal is to rally the system behind Reclaim the Flame, providing them with hands-on education and instilling a sense of pride for the valuable work they’re doing to deliver an exceptional guest experience in our restaurants. I had a chance to attend the Miami session last week and the enthusiasm from our restaurant general managers is truly inspiring and rewarding. During the fourth quarter, we kicked off our Royal reset program, spending approximately $17 million of the $250 million program. This included allocating an initial $50 million to Royal refresh for new point-of-sale terminals, kitchen display screens and indoor digital menu boards, which we’ll start deploying this month. These investments are matched dollar for dollar by participating franchisees who have chosen to invest in kitchen equipment like fryers and broilers as well as property enhancements, like improved lighting and signage.

Given strong interest from our franchisees and to better capitalize on the momentum we’re seeing in the business, we’ve decided to accelerate our timeline and now expect to deploy the majority of our announced $50 million Royal refresh spend in 2023. We also continued working through applications for our Royal reset remodel program, which provides up to $200 million of funding for high-quality remodels, prioritizing restaurants, operators and remodel scopes that offer the greatest potential to deliver the highest returns for our franchisees. We’ve mentioned before that quality over quantity is a key priority for this program, and I’m pleased to see franchisees also embracing this mindset. Nearly 1/4 of the remodel applications are for scrape and rebuilds.

While these scrapes are the most intensive — capital-intensive project type, they also see the highest sales uplifts and position the brand for success in their markets for decades to come. The Royal reset program, team member training and Royal roundtables help to ensure our restaurants are ready to welcome guests as we drive traffic to the system with our $150 million fuel to flame in marketing and digital investments, which also began in Q4. I’m really proud of our team’s new campaign, highlighting the Whopper. I won’t attempt to sing the jingle here, and you all probably have it stuck in your heads by now anyways, but this is a truly iconic campaign, highlighting one of our strongest brand equities. We’ve already seen early indications of success from this campaign including sequential improvements in brand health metrics like top preference during the fourth quarter.

Now to move on to our results. Our 5% increase in comparable sales was driven by our focus on the Whopper, sustained momentum in Royal Crispy Chicken platform and thoughtful value positioning. Our calendar initiatives were further enhanced by $13 million of spending against our fuel to flame program, including $9 million on marketing investment. — which included brand communications to reintroduce our guests to our core equities like the Whopper and HAVE IT YOUR WAY. In addition, our ongoing efforts to improve our digital capabilities helped drive fourth quarter digital sales growth of 36% year-over-year reaching approximately 11% of system-wide sales. Before I shift to Burger King International, I want to touch on the health of our franchisee base.

We know this is a key focus for investors, especially given the recent insolvency in the system. We have hundreds of franchisees across the country, many of whom are experienced local operators. We have families who have been in the business for decades and are important contributors to their local economies and communities. That said, it’s also clear that we have operators who are struggling, and we’re actively working to help them improve or transition their portfolios to more engaged operationally strong franchisees, all with the goal of positioning the system for long-term success. As Patrick discussed, we know that one of the best ways to improve the financial health of our franchisees is to drive traffic and top line sales while thoughtfully implementing initiatives to improve the bottom line.

We also know that strong operations are highly correlated with franchisee profitability. That’s why Tom has been so focused on operations, as we work to drive traffic back into the system. We are seeing this translate into improvements in franchisee profitability, with Q4 profitability up about 40% year-on-year, a good first step towards surpassing our $175,000 average 4-wall EBITDA target by 2024. That said, we’re pleased to see early indications that our dedicated operations improvements, efforts and reclaim the land plan are driving results. We’ll keep you updated on our progress in the year ahead. Now shifting to the Burger King international business, which is an important growth engine for the brand. David and his team delivered comparable sales growth of 11% year-over-year, and system-wide sales were up over 16% for the fourth quarter.

These results were driven by strength in 5 of our largest markets: France, Spain, Australia, Brazil and the U.K., which all saw double-digit comparable sales versus 2019 and helped to offset continued COVID-related pressures in China. France, our leading international Burger King market, saw over 25% system-wide sales growth year-over-year reaching $1.6 billion in system-wide sales in 2022, and Spain reached $1.3 billion in system-wide sales. For the fourth quarter, digital sales in Burger Kings international markets comprised over 60% of system-wide sales and grew approximately 27% year-over-year, driven by kiosks and delivery. China and South Korea generated over 90% of sales through digital channels with France, Spain and Italy reaching over 80%; Brazil at over 50% and the U.K., Saudi Arabia and UAE generating over 30% of sales digitally this quarter.

We’re very excited about the potential of our international business and look forward to extending this momentum into 2023 and beyond. Turning now to Popeyes. Our development momentum resulted in net restaurant growth of 10% and coupled with comparable sales of nearly 4%, including 1.5% comparable sales in the U.S., led to system-wide sales growth of over 11% for the quarter. Throughout 2022, we’ve been commenting on the strides the team has been making to bring the brands unique Louisiana flavors to more and more guests around the world. We were recently named the #2 best franchise in Entrepreneurs Franchise 500, and we believe the strong value proposition of this brand is becoming more and more recognized in the broader franchisee community.

Our emphasis on entering into long-term agreements with high-quality partners who the ambitions and values are aligned to their own, coupled with the business transformation we’ve experienced over the past few years, are major contributors to this development journey. We ended the year just shy of 4,100 restaurants globally, up from roughly 2,700 when we first acquired Popeyes in 2017. This year, we saw over 200 restaurant openings in North America alone, featuring the greatest number of new franchisees and highest percentage of freestanding single or double drive-through locations in the past 5 years. We also started to see the brand’s global development pipeline take hold. In 2022, we opened over 180 net new stores outside of North America.

That’s a nearly 7x increase versus 2017 levels. With growth coming from existing markets like Turkey, Spain, Brazil and the U.K. as well as exciting new market entries like South Korea, India and Indonesia. In the U.S., the launch of our Black & Chicken Sandwich in November proved to be a great extension of our chicken sandwich platform, offering guests another delicious, high-quality product well positioned for more everyday consumption without sacrificing the flavor of the classic chicken sandwich. This addition resonated well with guests and helped drive a healthy rebound in overall chicken sandwich performance. As I mentioned, and his team have also been focused on enhancing operations at Popeyes in the U.S. In this quarter, we saw a continued improvement in guest satisfaction levels.

We know that top operators are those who score the highest on key metrics like guest satisfaction, speed of service and brand standards execution, generated over 30% higher 4-wall EBITDA in 2022 than the system average, which is why improving operations is such an important aspect of our long-term strategy. We were also pleased to drive approximately 20% of our sales through digital channels at Popeyes U.S. this quarter, up over 30% year-over-year, driven by strength in delivery and Mobile Order & Pay. As we look into 2023, we’re focused on delivering another strong development year, innovating around key menu items and enhancing the guest experience through improved digital capabilities and operations, including making our restaurants easier to run for our team members.

And finally, moving to Firehouse Subs. We rounded out Firehouse Subs first full year as part of the RBI family, making meaningful progress positioning the brand for future growth. Throughout 2022, we worked on integrating Firehouse and continued to transition from an area representative model to a more traditional corporate and franchisee-led development model, like our other brands, all to position Firehouse for higher unit growth in the future. In addition, we’ve identified areas of opportunity to enhance the brand’s digital capabilities, including around our mobile app and loyalty program, and we’ll have more to share on our digital path in 2023. Firehouse Subs ended the year with average unit volumes of nearly $925,000 on a trailing 12-month basis.

That’s up about 25% versus 2020 levels. During the fourth quarter, Firehouse Subs saw a net unit growth of 2.4% and relatively flat comparable sales, resulting in a 3.9% year-over-year increase in system-wide sales. Successful digital initiatives, including Name of the Day, helped drive 1/3 of sales through digital channels for the quarter. The Firehouse Subs Public Safety Foundation also remained active this quarter and surpassed $73 million of grants awarded since inception. The brand’s commitment to this foundation is a key driver of its resonance with guests and strong brand health metrics, including #1 in support communities and has value similar to my own. We look forward to ensuring Firehouse Subs remains an important fixture in its communities for many years to come.

Now I’ll turn it over to Matt, who will discuss our financial results for the quarter. Matt?

Matthew Dunnigan: Thanks, Josh. Good morning, everyone. For the fourth quarter, excluding Firehouse in Russia, our global system-wide sales grew 11%, and our adjusted EBITDA grew approximately 6% organically. Our Fuel to Flame investment in Burger King U.S. was a $13 million headwind to our adjusted EBITDA, reducing our year-over-year growth rate by approximately 2%. Our growth rate was also reduced by another 4% related to a few additional drivers, including a $9 million decrease in cash distributions received from various joint ventures, a $7 million year-over-year increase in bad debt at Burger King, largely related to the recent BK U.S. franchisee insolvency Josh mentioned, and a $5 million increase in segment G&A, excluding Firehouse.

As we’ve discussed, over the past few years, we’ve been making proactive investments across key areas of the business that we believe will help accelerate our plans to enhance the guest experience and drive long-term profitable growth for us and our franchisees. We feel confident we have the resources we need to drive our plans forward. And as we look to 2023, we currently expect to see a significant moderation in the year-over-year growth of our core segment G&A. During the quarter, as a result of depreciation in both the Canadian dollar and the euro versus the U.S. dollar, we saw our adjusted EBITDA FX headwind increase versus third quarter levels to $31 million year-over-year. As a reminder, on average, for every 100 basis point change in the Canadian dollar versus the U.S. dollar, we see a roughly $3 million quarterly EBITDA impact.

And for every 100 basis point change in the euro, we see a roughly $1 million EBITDA impact per quarter. Before turning to EPS, I’d like to briefly discuss our sales minus cost of sales margin within our Tim Hortons segment. As Patrick mentioned, our industry has experienced significant levels of inflation. And as a result of our pass-through approach to commodity price increases, our percentage margin decreased in the fourth quarter. As a reminder, the way we manage our business is designed to provide visibility and stability to our restaurant owners, including adjusting prices at designated times during the year. As an example, we typically buy coffee 9 to 12 months out, and as a result, in Q4, we were working through inventory that was purchased at more elevated price levels.

Given these timing dynamics, we believe looking at our sales minus cost of sales margin on a full year basis is a better indicator of the business. Now shifting to EPS. Our fourth quarter adjusted earnings per share was $0.72 and grew approximately 5% organically year-over-year, excluding an FX headwind of $0.05 per share. Our adjusted EPS also included a $0.01 per share net benefit related to discrete noncash tax items, which was offset by a negative $0.06 per share headwind from the combined impact of our Burger King U.S. Fuel the Flame investment, removal of Russia from our earnings base and the decrease in cash distributions received from joint ventures. Taken together, these items had a total net negative impact of $0.05 per share resulting in a negative 7% headwind to our Q4 organic growth of 5%.

Our EPS growth rate in the quarter was also impacted by an additional negative 5% due to our higher average debt balance related to our acquisition of Firehouse Subs as well as rising U.S. benchmark rates, which flow through to the cost of our floating rate debt. As a reminder, our proactive refinancing and interest rate hedging has allowed us to effectively lock in fixed rates on approximately 80% of our debt over the next 6 years. However, we do still have exposure to rising rates on approximately 20% of our outstanding debt. Finally, during the quarter, our equity-based compensation increased year-over-year to $43 million, in part driven by the changes to our incentive compensation framework in 2021 toward market standard 3- and 4-year vesting from 5-year cliff vesting.

We expect this shift as well as the addition of recent equity awards will result in continued elevated levels of equity-based compensation in Q1 and 2023. Turning to our cash flow and capital allocation priorities. During the quarter, we generated $375 million in free cash flow, reaching nearly $1.4 billion for the year. Our strong free cash flow conversion allowed us to continue executing on key aspects of our capital allocation strategy, including commencing our Reclaim the Flame plan at Burger King U.S. and returning roughly $240 million of capital to shareholders through our industry-leading dividend, which we declared for Q1 at $0.55 per common share unit with a full year target of $2.20 per share in 2023, marking the tenth annual year-over-year increase in our dividend.

As part of Reclaim the Flame, we also deployed $17 million of capital toward our Royal Reset program this quarter and $13 million toward our Fuel the Flame advertising and digital investments. We ended the year with a liquidity position of approximately $2.2 billion, including nearly $1.2 billion of cash and saw our net leverage sequentially decline to 5.1x, keeping us on track to reach our target net leverage ratio of the mid-4x area over the next 2 to 3 years. Going forward, our capital allocation priorities remain unchanged. We are committed to executing our strategic brand investments, including our $400 million Reclaim the Flame program and aim to grow our dividend on a dollar per share basis over time as we grow the business. While we do have a share repurchase authorization in place, in the near term, we intend to prioritize delevering and believe a 4x — a mid-4x net leverage ratio will provide us with plenty of flexibility to execute on both organic and strategic opportunities in the future with the added benefit of reducing our cost of debt over time.

With that, I’d like to thank everyone again for your support and for joining us this morning, and we’ll now open the line for questions. Operator?

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Operator: . Our first question today comes from David Palmer from Evercore.

David Palmer: Congrats, Patrick and Josh. And thank you and all the best to you, Jose, after this transition year. Patrick, obviously, your priority, as you said, is going to be around maximizing long-term growth, what are some of the biggest opportunities you see to make this happen? And I would guess it’s going to be under the big 2 buckets or at least the investment community would think about the big 2 areas as sort of the North America brand turnarounds. And do you see the plans, investments in people there in those big 2 brands as sort of underway? Or do you think there’s changes that need to happen in investments or other? And then on the international front, do you see opportunities, obviously, unit growth over the long term is going to be a big deal? Do you see regions or brands where you have the greatest unit growth acceleration opportunity?

Patrick Doyle: Sure. Thanks, David. So look, I think in terms of the first question around the teams and the investments that we’re making, I think we’re in a very good place. So we certainly may be shifting some things around as we find areas where we think we can invest that are going to generate a great return. But we’ve got great teams in place, and we are certainly investing into those businesses to get things moving. The reclaim the flame initiative, you can already see is starting to move us in the right direction. I think we are nicely on the path in terms of improving the profitability of the stores and the — and that’s ultimately what’s going to lead to growth in that business. Tim’s is doing great. We’re returning back to levels and have now passed levels from pre-pandemic feeling very good about the momentum in that business, the leadership we’ve got in the business there.

Matt talked about the supply chain margin in fourth quarter, which honestly was kind of more an issue of cost of coffee going up and our flattening out pricing for our franchisees to kind of help remove some volatility for them in their earnings, which is certainly going to help them feel great about their investment of time and resources into Tim’s. So those 2 big home markets — in the Tim’s case, I think, is in very good shape, really moving strongly in the right direction. BK, we’ve still got work to do, clearly, but we are absolutely on the right path. I think we mentioned the fourth quarter profits for the franchisees up very meaningfully. So that really gets to the international side. And I was over with David and his team last week in Switzerland and then Spain, I am really impressed with that team.

I think we’ve got the team and the resources we need there. We’ve done a really good job of choosing strong franchisees around the world. The pandemic certainly slowed some things down, most notably, I think, with BK in China, and we’ve got to figure out a way to get that growing again. But overall, when you look at the scale and scope of the BK business outside of the U.S., we’ve got a big base of business that is going to continue to grow. At the same time, we’ve now got 3 great brands that we’re going to be able to move through that international network that is going to generate new store growth for a very, very long time. And I should add on the whole, very strong unit economics in our international businesses, which ultimately, if you combine great franchisees, who’re well capitalized with strong unit economics, that’s what’s going to drive your net new store growth.

And — so most of the store growth is going to come ultimately from outside of the U.S., Popeyes is doing a great job in the U.S. with store growth. But the international business is going to be the engine on stores for decades to come, and I feel really good about the state of that business, the investments we’ve made there, the team that’s in place and how that’s going to generate store growth going forward.

Operator: Our next question today comes from Brian Bittner from Oppenheimer & Company.

Brian Bittner: Congratulations to Josh and Jose, and welcome back, Patrick, good to hear from you. As it relates to improving franchise profitability, which is obviously a huge part of your mandate, the company’s mandate, franchisee profitability, as obviously, is down a lot from when it was last disclosed in 2018. I believe at that time, Tim Hortons was at $320,000, it’s now $220,000. Burger King was at, I think, $180,000, it’s now at $140,000. So outside of improving sales and improving comps, what do you believe are the other more controllable opportunities, again, outside of sales leverage as it relates to executing against this mandate to improve franchisee profitability? Joshua Kobza, Restaurant Brands International Limited Partnership – COO of Restaurant Brands International Inc Yes.

Good morning, Brain, thanks so much for the question. I think a few different thoughts on this one. And I think it’s been a great initiative from Patrick to bring franchise profitability kind of even more to the forefront here, it’s something we focus on for a long time, but now we’ll be talking about with you all as well and a bunch internally. I think to the points you made, first of all, sales and traffic are the start of this equation. So we do need to focus there. And I think the good news on that front is that we have quite a bit of momentum in some of our core markets. We had a great quarter at Tim’s, and we’re starting to see some of the results in BK U.S. from our Reclaim the Flame plan. So I think we’ve got some good momentum on the sales side, and that will help us a lot.

I think on the stuff below sales, we did see a tremendous amount of inflation, especially across the COGS lines over the last couple of years. And I think there’s a little bit of better news coming on that front. We are seeing some moderation in COGS inflation, and I think that really helps. If we can put together the combination of driving some sales and traffics back into the restaurant, plus have some moderation in some of those cost lines, I think that’s the formula that we’ll be focused on going forward, and I think can drive some meaningful improvement in franchise profitability this year.

Operator: Our next question comes from Dennis Geiger from UBS.

Dennis Geiger: Great. Patrick and Josh, congratulations. And Jose, best of luck on the transition. I appreciate all the detail and the commentary on the franchisee profitability and the strategic focus here. Just specific to the Burger King U.S. and perhaps Tim’s Canada. The focus clearly on improving 4-wall profitability, but wondering if there’s any thoughts to add with respect to what closures could look like relative to historical levels? Does that need to change at all, as we get the system in an even better place or is it really the focus on the profitability and then that number doesn’t need to need to change at all? Joshua Kobza, Restaurant Brands International Limited Partnership – COO of Restaurant Brands International Inc Yes.

Good morning, Dennis, thank you so much for the question. I’d say on — particularly on BK U.S., that’s been the most focus on this front. Like I said, we — I think what’s really encouraging that we’re seeing some good momentum on the sales side. Reclaim the Flame looks like it’s working, some of the new advertising and focus on the Whoppers is working and that’s helped both sales and as I mentioned, profitability, which was up about 40% in the fourth quarter. So we’re hoping to build on that momentum. That said, as I also mentioned, there are some franchisees who are going through some difficulties, whether it’s operational or capital structures, and we solve one of those situations with an insolvency that happened here recently. And I think our goal, as we look through those situations, will be to make sure that we’re thoughtful about all the different stakeholders and make sure we get to the right outcomes through those processes to make sure that all of those businesses are set up to be operationally and financially successful for the long run.

Part of that may be closures, and we’ll work through each of those individually and make sure we get to the right outcomes for the long run, and we’ll keep you updated on any of those outcomes as we go in the coming quarters.

Operator: Our next question is from Chris Carril from RBC Capital Markets.

Chris Carril: Patrick, great to hear from you again, and congrats to Josh, and I would also like to say thank you and best wishes Jose as well. So encouraging results out of BK U.S. and it seems like there are positive early results from an reception to Reclaim the Flame. So Patrick, you highlighted the opportunity to expand 4-wall EBITDA over the next couple of years. And Josh, we heard you highlight the acceleration of some of the investment spend in the plan. But given early results you’re seeing and given your new roles, Patrick and Josh, it would be great to hear any additional thoughts on the plan here going forward and whether you see opportunity to kind of rethink investment levels just given the early momentum you’re seeing?

Patrick Doyle: So I’ll start. Look, we are excited by the momentum in the business. I think we’re getting a lot of things right. We’ve got real progress that we need to make to continue to drive that success in the BK system. Very different situation, and I’ll loop back to the previous question a little bit, then with Tim’s, which you’ve got a lot of franchisees in Canada, debt levels are low, the general health of the franchisee base is good overall. There are certainly exceptions. But the level of profitability in Canada overall is strong. We want to get it back to the highs where it was and even higher than that and making great progress on that. But in the U.S. system, BK, I think the highest level of profits in the history of the brand was something like $184,000 in EBITDA.

The $175,000 million gets us close to that. But we’ve really got to get it higher than that. So we’ve got to generate ongoing growth in the top line and in the bottom line for that business. We’ve got to work through some situations, as you talked about, with some of the franchisees. But ultimately, if we’ve got the averages move in the right direction, the health of the system is continuing to get better. It certainly makes it easier to work through with some that have got capital structures that are not what you want them to be and kind of work through those situations. But from a level of investment, the Reclaim the Flame, I think what it did for us is give us an opportunity to prove that investing in this business is going to generate good returns for the franchisees and for the company in growing the overall health of the business and the guest experience, and you can see that it is working.

And so if you’ve proven a good return on investment, then it’s most directly linked with the marketing, which we already have an agreement from the franchisees once we’ve gotten to the $175,000 million in 2024, then they commit for an extra 50 basis points in the following 2 years. And that’s — we will have, at that point, proven that increased investment in marketing and is a good generator of return for them, and then they take over the investment there. So we feel good about where we are about the progress we’re making, more to be done on the BK U.S. business, but early results are certainly very good.

Joshua Kobza: If I can just add there, Chris. I think I feel really good about where we’re going. There’s definitely a lot of work left to do. I think we have a tremendous leadership team there under Tom. And I think their plan is a really good and a very thoughtful one. I think they have initiatives that they can kind of action in the near term, which is what we already started to do with some of the new advertising. And we’re going to do with some of our refresh where we’re getting a lot of investments into the restaurants quickly with equipment and some of our technology. And then over time, we transition to doing some more of the heavy lifting of some of the big asset upgrades. So I think the consumers of the plan are right.

It’s great to see the initial success. You may see us tweak little things around the edges, like we mentioned today on accelerating that early investment all into 2023. But I think by and large, I think it’s a very thoughtful plan, and I’m really pleased to see some of the initial progress under Tom and the team.

Operator: Our next question comes from Brian Harbour from Morgan Stanley.

Brian Harbour: Yes. Congratulations, again, to all of you. I’ll just ask about the BK U.S. side as well. We can see the sales performance kind of picking up there, and you noted better profitability in the fourth quarter. Is there anything else you can provide in terms of metrics on customer satisfaction, maybe in terms of market share? What else are we kind of seeing that’s showing the traction in that business and helping to drive some of that profitability improvement?

Joshua Kobza: Yes. Brian, thanks for the question. I think you hit on some of the main things that are giving us confidence. There are things like the sales and the profitability moving in the right direction. But we’re also seeing a few other things. We’re seeing in some of our brand metrics, we’re seeing some improvement, I mentioned that in Q4. So I think that to me is a sign that some of the advertising and really focusing on some of those core equities like the Whopper and Have It Your Way, that’s working and resonating with our customer bases. I think we are also seeing improvements in customer satisfaction — our guest satisfaction metrics have been improving, and that’s not new that it’s actually — it’s been pretty consistent over the last 1.5 years-or-so.

So I think that’s certainly a positive sign. And it’s no accident. It’s an outcome of some pretty deliberate efforts we made to make investments back in the field team to make sure that we had a really clear system that the franchisees believed in how we would create performance and manage that performance. So I think that’s really encouraging. And the other stats we keep an eye on. We’re keeping an eye on both our kind of our sales performance versus the industry and increasingly our traffic performance versus the industry. So I think we’ve seen some encouraging progress there over the last year or two, and we’ll keep a close eye on those things as well.

Matthew Dunnigan: Yes. Just to maybe add 1 other quick one to everything Josh said there, Brian. I think the other one that’s critical for us is the focus on operations. And so related to what Josh mentioned about the improvement in guest satisfaction, we see that pretty clearly linked to all the efforts Tom and the team have been making across the system to improve the guest experience, improve operations at the restaurant level. And we know that our top operators in BK and our other brands as well drive much stronger profitability as a result of those efforts and actually grew profitability year-over-year despite the macro headwinds.

Patrick Doyle: I think guest satisfaction was up something like 20% from Q3 to Q4. So I mean we are moving in the right direction.

Operator: Our next question comes from Sara Senatore from Bank of America.

Sara Senatore:

Patrick Doyle: Sara, we’re not quite getting you.

Sara Senatore: Is this better?

Patrick Doyle: There you go.

Sara Senatore: Sorry. Okay. Sorry about that. Just a quick question on the outlook for G&A and also on Tim’s. So I think I just wanted to clarify on G&A that the expectation is that growth will be slower than it was in 2022. I don’t know if you have any more color you can give? And then on Tim’s in Canada, I think Matt mentioned that the margin was compressed. Just could you talk about how you think about pricing in Canada? Presumably, the franchisees are under similar pressures you talked about with inflation. I think in the U.S., we’ve seen pricing be relatively elevated across the industry. Is — are you looking at it the same way in Canada or is the idea you take share by keeping pricing relatively low versus inflation?

Matthew Dunnigan: Sara, thanks for the question. It’s Matt here. Just on the first part of your question related to G&A. Yes, I think the message was, and as Patrick described earlier, we’ve invested a lot over the past couple of years. We’ve built some really amazing teams, world-class teams here across the company. And we think we have all the assets that we need to really drive forward the initiatives that are most important to the business and growing from here. So we do expect the rate of growth in our G&A to moderate significantly in 2023 versus the rate that you saw in 2021-’22. And then I’ll pass it over to Josh for the second part of the question.

Joshua Kobza: Yes, good morning, Sara, and thank you for the question. I’ll touch on Tim’s pricing. I would just say that I think and the rest of the team, they are very thoughtful and very mindful of pricing that we take. We know that it’s core to kind of our purpose and our proposition to our customers to provide great taste and great value every day. And so we want to make sure that we’re upholding that promise for all of our guests, and we’re pretty thoughtful about that. But of course, we have seen cost pressures, and I’d say we keep an eye — a careful eye on what’s happening with inflation in the broader market, what’s happening in grocery and restaurants, what’s happening with our competitors, and we try to put all of those things together to get the right balance of pricing and value in our business over time.

Operator: Our next question comes from Gregory Francfort from Guggenheim.

Gregory Francfort: My question is just around development. And I mean there’s been a lot of talk about interest rates and capital availability potentially impacting franchisee appetite. Can you talk about this maybe from a U.S. perspective, but also from an international perspective where leverage might be lower? And then as you look out to the pipeline for store development this year, do you think you have a chance of accelerating overall store growth despite those headwinds?

Joshua Kobza: Yes. Thanks, Greg. I appreciate the question. And I think my perspective on this. I think at the end of the day, development always comes back to ROI. We need to have a good — a really strong set of unit economics across our concepts, and that’s what will cause franchisees to want to invest. So that’s what we’re really focused on. And I think our — some of the discussion of franchisee profitability today really highlights how much of that’s going to be a focus for us. Of course, kind of through the cycle, you’re going to see movements in interest rates and that will impact the cost of financing that people need to pay back. So that’s certainly an influence in some of our discussions. But I would say, overall, we feel pretty good about where we’re going.

We’ve got a lot of amazing partners around the world, and we have very strong unit economics in a lot of those markets. And that’s why I mentioned a little bit earlier in my prepared remarks that we’re excited about the year ahead and feel like we’re on a good path to try and improve the pace of growth around the world.

Operator: Our next question comes from Mark Petrie from CICB.

Mark Petrie: So I just wanted to follow up actually on — specifically on the Tim’s supply chain operations. And are there any other pieces of noise that you will be cycling through with regards to sort of higher-priced commodities in the upcoming quarters? And then my question on pricing was already asked, but perhaps when you look back on 2022, anything you can provide with regards to how you might have compared to the industry or to CPI?

Matthew Dunnigan: Yes. Thanks, Mark, for the question. I’ll jump in on the first part there related to supply chain. Yes, look, I think as we talked about, there’s — given all the volatility and elevated commodity prices, that has created — certainly created volatility in our quarterly results in terms of the percentage margin, and we’ve talked about that a bit over the past few quarters. And also, as I mentioned, we did see a continued elevated commodity costs continue into this year. And we have, as we mentioned, higher cost inventory that we were working through in the fourth quarter and a bit into this year. So there is a bit of noise there. But overall, we think the most fundamental kind of goal for us is to continue to drive the strong and healthy sales growth across the Tim’s Canada system.

And as we do that over time, I think our business will be healthier, both on the franchising side and the supply chain side. And yes, so I think that’s what we’re focused on. And if we’re thinking about volatility, again, I think it’s helpful to look at the margin on a full year basis to sort of normalize for some of that quarter-to-quarter volatility that we called out.

Joshua Kobza: Yes. And Mark, I’ll take the one on pricing. As I said, like a couple of questions ago, we certainly keep an eye on both of those things. We do look at competitive pricing and we’re keeping on CPI. And for 2022, we were in that ballpark, maybe not exactly on each one of those, but we weren’t super far off, we were kind of in the same range as those 2 metrics.

Operator: Our final question today comes from Lauren Silberman from Crédit Suisse.

Lauren Silberman: I wanted to just follow up on the accelerating growth. As we frame the priorities, is the near-term focus more about accelerating comps and franchisee profitability and then that will ultimately unlock accelerated growth over the medium to long term? Or can this be done in tandem? So you have franchisee profitability more in the home market and also accelerating international unit growth in tandem?

Patrick Doyle: Yes, I’ll handle that one. All of the unit growth we’re getting today is a function of strong unit economics. And so it’s kind of a — it is certainly — the answer is both, and it depends on the market. But where we’re getting good growth in units, it’s because we’ve got really strong unit economics and we’ve got the right franchisee partners who are well capitalized, et cetera. There are other areas where we can accelerate the growth, either by introducing new brands into new markets in international or by working on franchisee 4-wall EBITDA to improve it so that it is going to generate a good return for them. So it really comes down to a function of which market and where they are in the pace of development of that market, but both. So where we’re getting it, it’s because economics are good and where we’re going to accelerate it, it’s going to be by improving the economics and getting capital into those markets to build more units.

Joshua Kobza: Yes, I totally agree, Patrick. I would just say, I think one of the greatest gifts that Jose has left me with is exactly what he said. I think we have incredibly talented teams across all of our business units around the world, and they’re working on all of those things. We have amazing teams in our home markets. We’re working on driving same-store sales and franchise profitability and the growth of those markets. And we also have an amazing team in international who is working on developing our footprint around the world. I think there’s a lot of exciting stuff. And as I said at the beginning, a lot of tailwinds for us, and we’ll be working hard on all those things throughout the coming year.

Kendall Peck: Great. Well, thank you all very much for your time this morning. We really appreciate it. Appreciate all the questions as well. We’ll see everybody next week in New York at our upcoming Investor Day. Thank you for the time today, and have a great day.

Operator: That concludes today’s Restaurant Brands International, Inc. Q4 2022 Earnings Call. You may now disconnect your line.