Restaurant Brands International Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars unless noted. RBI operates Tim Hortons, Burger King, Popeyes and Firehouse Subs; it reported 30,375 restaurants in more than 100 countries, with approximately 100% of system-wide restaurants franchised.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1.837B | $1.726B | $5.202B | $4.816B |
| Income from operations | $582M | $561M | $1.583B | $1.552B |
| Net income | $364M | $530M | $992M | $1.146B |
| Net income attributable to common shareholders | $252M | $360M | $682M | $779M |
| Diluted EPS | $0.79 | $1.17 | $2.16 | $2.51 |
| Adjusted EBITDA (non-GAAP) | $698M | $642M | $1.951B | $1.790B |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $920M | $1.067B |
Q3 revenue increased 6.4%; operating income increased 4%, while net income fell 31%. Approximate operating margin was 31.7%, versus 32.5% a year earlier. For the nine months, revenue increased 8.0%, operating income increased 2%, and net income declined 13%; approximate operating margin was 30.4%, versus 32.2%. Adjusted EBITDA rose 9% in both periods. Company-reported system-wide sales grew 10.9% in Q3 and 13.1% year to date; comparable sales increased 7.0% and 8.9%, respectively.
Q3 segment income (Adjusted EBITDA) was $311M for Tim Hortons, $298M for Burger King, $75M for Popeyes and $14M for Firehouse Subs. Year-over-year gains were strongest in Burger King and Popeyes.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $1.310B; current assets were $2.383B and current liabilities $2.071B.
- Long-term debt, net of current portion, was $12.862B; total debt, net of financing costs, was $12.917B. Finance lease liabilities were $305M long term and $32M current. The filing does not provide a net-debt-to-EBITDA ratio.
- Cash from operations of $920M was down from $1.067B, primarily due to higher interest payments and working-capital use. Cash used in investing was $11M; cash used in financing was $774M. Cash increased $132M from year-end 2022.
- Cash interest paid for the nine months was $544M, compared with $318M in 2022. Reported net interest expense was $430M, up from $389M.
- RBI had $1.248B of availability on its $1.25B revolving facility, with no borrowings outstanding and $2M of letters of credit. Management said cash, operating cash flow and revolver availability should be sufficient for obligations, debt service and capital spending over the next 12 months.
Material changes and notable items
- The September credit amendment extended the revolving facility and Term Loan A maturities to 2028 and Term Loan B to 2030, increased facility capacity and adjusted Term Loan B pricing to SOFR plus 2.25%. RBI recorded a $16M loss on early extinguishment of debt and capitalized approximately $44M of debt issuance costs.
- Q3 earnings were affected by a $59M income tax expense, compared with a $102M tax benefit in Q3 2022. The prior-year tax result included a $171M reserve reduction related primarily to expiring statutes of limitations.
- Other operating expense was $10M in Q3, versus $27M of other operating income in Q3 2022. The 2023 quarter included $30M of disposal, closure and refranchising losses, including write-offs related to discontinuing an internally developed software project, partly offset by foreign-exchange gains.
- RBI repurchased shares for $142M during the first nine months under a new $1B authorization. After quarter-end through October 31, it repurchased a further $358M, leaving $500M under the authorization.
- Quarterly dividends were $0.55 per common share. A further $0.55 dividend was declared for payment January 4, 2024.
Outlook, risks and contingencies
No specific consolidated revenue, earnings or comparable-sales guidance is provided in the filing. Management describes continued investment in Burger King’s $400M “Reclaim the Flame” plan; through September 30, $33M had been funded for advertising and digital initiatives and $45M for remodels, technology and related investments. Management expects additional corporate restructuring and advisory fees during the remainder of 2023, but no further Firehouse acquisition transaction costs.
Management cites inflation in commodity, labor and energy costs, rising interest rates, foreign-exchange volatility, and the Russia-Ukraine and Middle East conflicts as potential pressures on RBI and franchisees. Its ability and that of franchisees to offset costs through pricing without weakening demand is a key uncertainty. Other disclosed risks include substantial indebtedness, franchisee financial health, supply-chain disruption, competition, international operations, regulation, tax changes, and the effectiveness of marketing and hedging. RBI reported compliance with applicable debt covenants and effective disclosure controls.
RBI is defending a Burger King franchise-agreement class action alleging employee no-solicitation and no-hiring provisions violated antitrust law; it considers the claims without merit but cannot predict the outcome or estimate possible loss. A separate securities class action was dismissed, with no further proceedings anticipated.
Important facts for investors to verify
- Whether revenue and system-wide sales growth translate into sustained operating-margin and per-share earnings improvement, given lower reported net income and EPS.
- How higher interest rates affect debt service and cash generation; review variable-rate exposure, hedges and the stated next-12-month debt-service estimates.
- Whether franchisee profitability and consumer demand withstand food, labor and energy inflation and pricing actions.
- Progress and returns from Burger King’s “Reclaim the Flame” investments, alongside share repurchases and dividends.
- Potential cash or operating impacts from the antitrust litigation and other disclosed legal, tax, foreign-exchange and geopolitical risks.