Business context and reporting period
Restaurant Brands International Inc. (RBI) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. RBI franchises and operates Tim Hortons, Burger King and Popeyes; it had 27,403 restaurants in more than 100 countries, with approximately 100% of system-wide restaurants franchised.
Financial performance and position
Amounts are U.S. dollars. Q2 and first-half comparisons are against 2020; the prior-year periods were materially affected by COVID-19 closures and restrictions.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $1.438 billion | $1.048 billion | $2.698 billion | $2.273 billion |
| Operating income | $488 million | $243 million | $930 million | $632 million |
| Net income | $391 million | $164 million | $662 million | $388 million |
| Net income attributable to common shareholders | $259 million | $106 million | $438 million | $250 million |
| Diluted EPS | $0.84 | $0.35 | $1.42 | $0.83 |
| Adjusted EBITDA (non-GAAP) | $577 million | $358 million | $1.057 billion | $802 million |
Revenue increased 37% in Q2 and 19% for the first half. Operating margin, calculated from reported revenue and operating income, was 33.9% in Q2 versus 23.2%; first-half margin was 34.5% versus 27.8%. Adjusted EBITDA increased 61% in Q2 and 32% for the first half. Segment income (Adjusted EBITDA) for the first half was $460 million at Tim Hortons, $483 million at Burger King and $114 million at Popeyes.
Q2 consolidated system-wide sales growth was 31.9%; comparable sales were 27.6% at Tim Hortons, 18.2% at Burger King and negative 0.3% at Popeyes. First-half comparable sales were 11.8%, 8.9% and 0.6%, respectively. Management cautions that 2021 comparisons reflect the severe impact of the pandemic on 2020 results.
For the six months, operating cash flow was $745 million, versus $196 million; investing cash outflow was $36 million, versus $12 million; financing cash outflow was $516 million, versus $161 million. Cash and cash equivalents were $1.762 billion at June 30, up from $1.560 billion at year-end. Capital expenditures were $46 million. First-half dividends and partnership distributions totaled $484 million.
At June 30, total debt, net of financing costs, was $12.456 billion, including $12.375 billion of long-term debt; finance lease obligations were $326 million and operating lease liabilities were $1.217 billion. RBI had $998 million available under its revolving credit facility and reported working capital of $879 million. It was in compliance with applicable debt covenants. Management described RBI as highly leveraged, with significant debt-service requirements.
Material changes versus the prior comparable period
- Higher revenue and segment income reflected the recovery in system-wide sales, particularly at Tim Hortons and Burger King, as more restaurants were open and restrictions eased compared with Q2 2020. Q2 Adjusted EBITDA rose at Tim Hortons to $253 million from $147 million, Burger King to $266 million from $160 million, and Popeyes to $58 million from $51 million.
- First-half operating cash flow improved substantially, driven by higher segment income and lower cash use for working capital and interest, partly offset by higher income-tax payments.
- Q2 franchise and property expenses declined year over year, primarily reflecting bad-debt recoveries at Tim Hortons and Burger King versus expense in 2020. First-half other operating income included a $35 million foreign-exchange gain, compared with a $10 million loss in 2020.
- Reported tax results include material, period-specific items: Q2 2021 included an $89 million tax-reserve release, principally related to statutes of limitation expiring; Q2 2020 included a $64 million deferred-tax-asset benefit. These items reduce comparability of reported earnings.
Outlook, risks, contingencies and unusual items
- RBI expects COVID-19 to continue affecting 2021 results. Restaurant operating limits, capacity and hours remain dependent on local conditions; some jurisdictions reinstated restrictions during the first half. Management noted the growing importance of digital sales, including delivery.
- Management believes operating cash flows and revolving-credit availability will be sufficient to fund obligations, debt service and capital spending over the next 12 months. RBI planned to spend C$80 million during 2021 to support Tim Hortons advertising and digital initiatives, mostly in the second half, and reported it was on track to spend the full amount.
- After quarter-end, RBI issued $800 million of 3.875% secured notes and used the net proceeds to redeem $775 million of 4.25% notes on July 15, 2021, plus accrued interest, premiums, fees and expenses. RBI expects to record a loss on early extinguishment of debt in Q3 2021; the filing does not state its amount.
- After quarter-end, the board authorized up to $1 billion of common-share repurchases through August 10, 2023. A $0.53-per-share dividend was paid in July, and another $0.53 dividend was declared for payment in October, subject to debt-agreement restrictions and other considerations.
- Risks highlighted include substantial indebtedness and debt service, the pandemic and broader economic conditions, franchisee financial health, supply-chain and real-estate exposure, competition, foreign exchange and interest-rate movements, and the effectiveness of marketing and digital initiatives.
- RBI disclosed litigation involving alleged franchisee employee no-hire provisions, Tim Hortons app geolocation data and a securities offering. The company intends to defend the claims; it could not predict outcomes or estimate possible losses. A separate securities class action was voluntarily dismissed in April 2021.
Most important facts for investors to verify
- Whether sales, comparable-sales momentum and restaurant operations remain durable after unusually favorable COVID-19 comparisons, especially at Popeyes.
- Whether first-half operating cash flow is sustainable, given working-capital movements, taxes, dividends, planned investment and substantial debt service.
- The impact of the July debt refinancing, including the Q3 early-extinguishment loss, and RBI’s leverage, interest exposure and covenant headroom.
- How much reported earnings benefited from the $89 million tax-reserve release and foreign-exchange gains, and the outlook for the effective tax rate.
- Progress and returns from the C$80 million Tim Hortons investment and the newly authorized share-repurchase program, alongside continued dividend payments.
- Developments in the disclosed litigation and COVID-19 restrictions, neither of which had a clearly estimable financial outcome in the filing.