Restaurant Brands International Inc. — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019; U.S. dollars unless noted. RBI operates Tim Hortons (TH), Burger King (BK) and Popeyes (PLK). It reported 25,809 restaurants in more than 100 countries and territories, with approximately 100% of system restaurants franchised.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Total revenue | $1,266m | $1,254m | Up $12m reported; up $57m excluding currency effects. ASC 842 added $34m to both franchise/property revenue and expense presentation, with no net operating income effect. |
| Operating income | $434m | $421m | Up 3.1%; operating margin about 34.3% versus 33.6%. |
| Adjusted EBITDA | $500m | $498m | Up 0.5%; non-GAAP measure. |
| Net income | $246m | $279m | Down $33m (11.8%); net income attributable to common shareholders was $135m versus $148m. |
| Basic / diluted EPS | $0.53 / $0.53 | $0.60 / $0.59 | Lower year over year. |
| Cash from operations | $154m | Cash used $111m | Improved primarily with lower tax payments and lower working-capital cash use. |
| Cash and cash equivalents | $902m | $913m at Dec. 31, 2018 | Quarter-end balance. |
Income tax expense increased to $56m from $2m; the effective tax rate was 18.7% versus 0.6%. The prior-year rate benefited substantially from stock-option exercises and tax audit reserve releases. Interest expense, net declined to $132m from $140m, while the weighted-average debt interest rate increased to 5.0% from 4.7%.
Segments and operating metrics
- Segment revenue: TH $749m (down from $763m), BK $411m (up from $390m), and PLK $106m (up from $101m). Segment Adjusted EBITDA: TH $237m (down $8m), BK $222m (up $8m), and PLK $41m (up $2m).
- System-wide sales were $7.791bn, up 6.4% on a constant-currency basis, versus 9.2% growth a year earlier. Growth by brand was TH 0.5%, BK 8.2% and PLK 6.8%.
- Comparable sales were TH -0.6%, BK +2.2% and PLK +0.6%, all below prior-year comparisons. Net restaurant growth was 5.1%, versus 6.1% a year earlier.
Liquidity, debt and cash flows
- Term debt, net of financing costs, was $11.815bn, with $68m of current maturities; finance lease liabilities totaled $381m. The company also recorded $1.046bn of noncurrent operating lease liabilities and $119m current operating lease liabilities following adoption of ASC 842.
- Cash was $902m; working capital was $134m. The revolving credit facility had $498m available and no borrowings outstanding (with $2m of letters of credit). RBI said cash from operations and revolver availability should fund current obligations, debt service and capital spending over the next 12 months.
- Management described RBI as highly leveraged. Estimated next-12-month debt service included approximately $304m interest and $65m principal on the term loan, about $262m interest on senior notes, and approximately $9m in net settlements on a $3.5bn interest-rate swap. RBI reported compliance with debt covenants.
- Investing cash flow was $11m; financing cash flow was negative $182m, including $207m of common-share dividends and Partnership-unit distributions. Cash declined $11m during the quarter.
Changes, outlook and notable items
- RBI adopted ASC 842 on January 1, 2019. The transition added operating lease assets and liabilities to the balance sheet and increased reported franchise/property revenues and expenses by $34m in Q1 through gross presentation of reimbursed costs. It also caused a $2m net increase in noncash amortization; management expected up to $10m additional amortization for 2019 compared with 2018.
- Management expected 2019 capital expenditures to increase, primarily due to a C$100m investment to expand Canadian supply-chain and distribution capacity, with most spending expected in 2019. It also expected further 2019 Tax Act advisory and office-relocation costs. No specific full-year revenue or earnings guidance is provided in the filing text.
- Q1 results included $4m of office centralization and relocation costs and $6m of corporate restructuring and tax advisory fees. Other operating income was $17m, including a $15m foreign-exchange gain; the prior-year period included a $20m noncash dilution gain from an equity-method investee IPO.
- In March, TDL settled two Ontario class actions, agreeing to contribute C$10m to the Canadian Tim Hortons Advertising Fund over two years and pay C$2m of legal and administrative expenses. The amounts had been accrued in 2018; court approval followed on April 29, 2019.
- The board declared a $0.50-per-share dividend payable July 3, 2019. Forward-looking risks highlighted include substantial indebtedness, consumer and competitive conditions, franchisee performance, interest and currency movements, international growth, and tax-law uncertainty.
Key facts for investors to verify
- Whether slowing comparable-sales and system-wide-sales growth persists, particularly at TH, and whether restaurant expansion translates into durable franchise royalties.
- How much underlying revenue and expense growth is obscured by currency movements and the ASC 842 gross-presentation change.
- Whether operating cash generation remains sufficient alongside debt service, dividends and the planned Canadian supply-chain investment.
- Debt refinancing, interest-rate exposure, hedge settlements and the effect of lease obligations on total fixed commitments.
- Tax-rate volatility, expected restructuring and relocation spending, and completion of the Tim Hortons litigation settlement obligations.