Restaurant Brands International Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. U.S. dollars. RBI franchises and operates Tim Hortons, Burger King and, following its March 27 acquisition, Popeyes; approximately 100% of system restaurants were franchised.
Key financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $1,132.7M | $1,040.2M | $2,133.3M | $1,958.7M |
| Operating income | $414.4M | $424.0M | $750.6M | $754.6M |
| Net income | $243.5M | $247.6M | $410.1M | $415.9M |
| Net income attributable to common shareholders | $89.5M | $90.9M | $139.7M | $140.9M |
| Diluted EPS | $0.37 | $0.38 | $0.57 | $0.59 |
| Adjusted EBITDA (non-GAAP) | $531.1M | $479.1M | $974.4M | $886.9M |
- Q2 revenue grew 8.9%; management’s constant-currency comparison showed growth of $124.8M. First-half revenue grew 8.9%, or $185.7M excluding currency effects.
- Q2 operating margin was approximately 36.6%, versus 40.8% a year earlier; net margin was approximately 21.5%, versus 23.8%. Adjusted EBITDA margin was approximately 46.9%, versus 46.1%.
- First-half operating cash flow was $481.0M, compared with $505.3M. Capital expenditure was $11.7M. Investing cash outflow was $857.9M, including $1,635.9M net cash paid for Popeyes, partly offset by derivative settlement proceeds. Financing cash inflow was $2,338.7M.
- Cash and equivalents were $3,435.5M at June 30, up from $1,460.4M at year-end. Working capital was $2,908.8M. Revolver availability was $498.4M, with no revolver borrowings.
- Term debt, net of current portion, was $11,252.9M; total debt, net of current maturities, was $11,309.3M. The company reported $231.2M of noncurrent capital leases. Debt increased substantially with the acquisition financing and 2017 notes issuance.
Changes and operating performance
- Popeyes was acquired for total consideration of $1,654.7M. RBI included Popeyes results from March 28 through June 30: revenue of $66.7M and segment income of $33.2M. Purchase-price allocations remain preliminary, including $867.8M of goodwill and a $1,319.0M indefinite-lived brand asset.
- Comparable sales were mixed: Q2 Tim Hortons declined 0.8%, Burger King grew 3.9%, and Popeyes declined 2.7%. System-wide sales growth was 2.6%, 10.6%, and 3.3%, respectively. Popeyes comparisons cover an acquisition-period window and are not fully comparable.
- Q2 net income fell $4.1M despite higher Adjusted EBITDA. Higher foreign-exchange losses, interest expense and $8.5M of Popeyes transaction costs offset acquired Popeyes income and improved Tim Hortons and Burger King segment income. First-half results also included $42.9M of Popeyes transaction costs and a $20.4M debt-extinguishment loss.
- Q2 other operating expenses were $46.8M, compared with net income of $11.3M in the prior-year quarter; the swing primarily reflected foreign-exchange losses. First-half foreign-exchange losses in other operating expenses were $47.2M.
Liquidity, outlook and risks
- Management stated that cash, operating cash flow and available revolver capacity should fund obligations, dividends, debt service and capital spending over the next 12 months. It expected to use a significant portion of cash to redeem all or part of the preferred shares, which become redeemable at RBI’s option beginning December 12, 2017. The filing does not provide a specific redemption amount or timing.
- RBI issued $1.5B of 4.25% first-lien senior notes due 2024 and borrowed additional term loans, including $1.3B to help fund the Popeyes acquisition. The term loan facility was extended to 2024 and its applicable margin reduced. The company reported compliance with debt covenants.
- Preferred shares carry a 9% cumulative dividend; quarterly dividends totaled $67.5M. Common dividends declared rose to $0.20 per share for the next payment, from $0.19 paid in July.
- Management expected additional Popeyes transaction costs during the remainder of 2017. No formal earnings or sales guidance was provided.
- Risks highlighted include substantial leverage and debt service, franchisee and consumer demand, competition, interest-rate and currency movements, international growth, hedging counterparties, and tax changes. A proposed Canadian class action alleges misuse of Tim Hortons advertising-fund contributions; RBI said it would defend the claims but could not predict outcome or potential loss.
- RBI expects the new lease standard, effective in 2019, to materially increase reported assets and liabilities due to operating leases; it did not expect a material effect on cash flows or liquidity. Revenue-recognition changes effective in 2018 may defer initial franchise fees, change advertising-fund presentation and alter gift-card breakage timing.
Important facts for investors to verify
- How Popeyes integration, preliminary purchase accounting and expected remaining transaction costs affect subsequent-period earnings and cash flow.
- Whether Tim Hortons and Popeyes comparable-sales weakness persists, and whether Burger King’s reported growth continues.
- Planned preferred-share redemption, resulting cash usage, and the effect of the 9% preferred dividend on common-shareholder returns.
- Debt-service burden, variable-rate exposure and liquidity after acquisition-related borrowing; confirm current covenant compliance and available revolver capacity.
- Developments in the Tim Hortons advertising-fund litigation and any resulting financial exposure.
- Underlying operating trends versus the non-GAAP Adjusted EBITDA measure and significant foreign-exchange, transaction and refinancing items.