Restaurant Brands International Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020. RBI franchises and operates Tim Hortons (TH), Burger King (BK) and Popeyes (PLK); approximately 100% of its 27,109 restaurants were franchised at quarter-end. Results were materially affected by the COVID-19 pandemic, which restricted restaurant operations and sales.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $1.225 billion | $1.266 billion | Down $41 million, or 3.2% |
| Operating income | $389 million | $434 million | Down 10.4%; operating margin was 31.8% versus 34.3% |
| Net income | $224 million | $246 million | Down 8.9% |
| Net income attributable to common shareholders | $144 million | $135 million | Up, while basic and diluted EPS declined to $0.48 from $0.53, reflecting a higher weighted-average basic share count |
| Adjusted EBITDA | $444 million | $500 million | Down 11.2%; adjusted EBITDA margin was 36.2% versus 39.5% |
| Operating cash flow | $136 million | $154 million | Down $18 million |
| Capital expenditures | $19 million | $5 million | Cash used in investing activities was $3 million |
| Cash and cash equivalents | $2.498 billion | $1.533 billion at Dec. 31, 2019 | Increase primarily funded by debt proceeds |
| Total debt, net | $12.898 billion | $11.833 billion at Dec. 31, 2019 | Includes $995 million drawn on revolving facility and C$125 million drawn under TH Facility |
| Working capital | $1.587 billion | Not stated here | Revolving facility borrowing availability was only $3 million at quarter-end |
Revenue by brand was TH $699 million (down from $749 million), BK $388 million (down from $411 million), and PLK $138 million (up from $106 million). Adjusted EBITDA was TH $189 million (down $48 million), BK $200 million (down $22 million), and PLK $55 million (up $14 million). Consolidated system-wide sales growth was flat; comparable sales were TH -10.3%, BK -3.7%, and PLK +26.2%.
Material changes, outlook and risks
- COVID-19 and outlook: Closures and restricted operations, including limits to drive-thru, takeout and delivery in some markets, reduced sales and franchisee liquidity. Management expected the pandemic to affect system-wide sales, revenue, earnings and cash flow more significantly in Q2 2020 than in Q1; duration and financial impact were not estimable.
- Franchisee support: RBI introduced rent relief for eligible TH franchisees in Canada and BK franchisees in the U.S. and Canada, deferred some rent payments, and began providing eligible BK franchisees loans and certain TH franchisees cash advances in April. Franchisee renovation and development commitments were temporarily deferred. These actions were expected to weigh on RBI cash flow and financial results.
- Debt and liquidity: RBI drew $995 million on its revolving credit facility and the remaining C$125 million under the TH Facility during Q1. On April 2, the company amended its credit agreement to allow, for a specified period, a $1 billion minimum liquidity covenant in lieu of the 6.50:1.00 net first-lien leverage covenant. On April 7, subsidiaries issued $500 million of 5.75% first-lien notes due 2025 for general corporate purposes; proceeds were not included in March 31 cash. Management stated current cash and expected operating cash flow should fund obligations, debt service and capital spending over the next 12 months.
- Dividends: The board declared a $0.52 per-share dividend payable June 30, 2020. The filing notes dividend capacity is subject to debt covenants and other considerations.
- Other risks and contingencies: The company is highly leveraged and depends substantially on franchisee sales, profitability and financial stability. Risks include prolonged pandemic disruption, supply-chain and staffing interruptions, foreign-exchange and interest-rate exposure, and potential impairment of receivables, brands or goodwill. RBI reported no impairment of identified equity-method investments at March 31. The filing describes U.S. and Canadian class actions alleging franchise-agreement employee no-hire clauses; RBI said it could not predict outcomes or estimate possible losses.
Important facts for investors to verify
- Whether Q2 and subsequent results confirm the expected deeper COVID-19 impact, and how restaurant reopenings and comparable sales recover across brands and markets.
- Actual costs and cash-flow effects of rent concessions, deferred payments, franchisee loans and advances, and delayed franchisee investment.
- Post-quarter liquidity after the $500 million notes issuance, available borrowing capacity, covenant compliance and debt-service requirements.
- Whether franchisee distress leads to slower royalty or rent collections, closures, lease-guarantee exposure, or impairment charges.
- Developments in the franchisee class actions and any material change in the company’s assessment of potential loss.