Restaurant Brands International Inc. quarterly report, Q2 FY2023

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Business context and reporting period

Restaurant Brands International Inc. (RBI) filed this unaudited Form 10-Q for the quarter ended June 30, 2023. RBI franchises and operates Tim Hortons, Burger King, Popeyes and Firehouse Subs. It had 30,125 restaurants in more than 100 countries; approximately 100% of system-wide restaurants were franchised.

Financial and operating performance

Unless noted otherwise, amounts are U.S. dollars. Financial results below compare the three and six months ended June 30, 2023 with the same 2022 periods.

MetricQ2 2023Q2 2022Six months 2023Six months 2022
Revenue$1.775B$1.639B$3.365B$3.090B
Income from operations$554M$541M$1.001B$991M
Net income$351M$346M$628M$616M
Net income attributable to common shareholders$241M$236M$430M$419M
Diluted EPS$0.77$0.76$1.37$1.35
Adjusted EBITDA (non-GAAP)$665M$618M$1.253B$1.148B
  • Q2 revenue rose 8.3%; six-month revenue rose 8.9%. Q2 operating margin was approximately 31.2%, versus 33.0% a year earlier; net margin was approximately 19.8%, versus 21.1%.
  • Q2 Adjusted EBITDA increased 8% and six-month Adjusted EBITDA increased 9%. RBI cautions that this non-GAAP measure may not be comparable with similarly named measures at other companies.
  • Q2 system-wide sales growth was 14.0%, with comparable sales growth of 9.6%. By brand, Q2 comparable sales growth was Tim Hortons 11.4%, Burger King 10.2%, Popeyes 6.3% and Firehouse Subs 2.1%. Consolidated 2022 comparisons exclude Firehouse Subs.
  • At June 30, cash and equivalents were $1.213B; total debt, net of financing costs, was $12.901B. The revolving credit facility had $998M available and no borrowings outstanding. RBI reported compliance with applicable debt covenants.
  • Six-month operating cash flow was $487M, down from $669M. Investing activities used $8M; financing activities used $448M. Capital expenditures were $48M. Cash increased $35M from year-end 2022.
  • Six-month dividends and Partnership-unit distributions totaled $492M. A $0.55-per-share dividend was paid in July, and a further $0.55 dividend was declared for payment in October.

Material changes versus the prior comparable period

  • Higher system-wide sales and comparable sales supported revenue and segment-income growth across all four brands. Q2 system-wide sales growth ranged from 5.1% at Firehouse Subs to 15.0% at Tim Hortons and Popeyes.
  • Despite higher operating income, Q2 net income increased only $5M: higher interest expense, share-based compensation and other operating results offset part of the operating gains. Six-month net income increased $12M.
  • Net interest expense increased to $145M in Q2 from $129M, and to $287M for the six months from $256M. RBI cited higher rates affecting variable-rate debt; the weighted-average interest rate on long-term debt was 4.9% for both 2023 periods, compared with 4.2% and 4.1%, respectively, in 2022.
  • Operating cash flow fell $182M for the six months, primarily due to higher interest and tax payments and greater working-capital use. Financing cash use declined year over year, mainly because RBI did not repurchase shares in the 2023 period.

Outlook, risks and unusual items

  • The filing gives no specific full-year revenue, earnings or comparable-sales guidance. Management said cash on hand, operating cash flow and revolving-credit availability should be sufficient for current obligations, debt service and capital spending over the next 12 months.
  • Burger King’s “Reclaim the Flame” plan calls for $400M of investment over its life: $150M for advertising and digital initiatives and $250M for remodels, relocations, technology, equipment and building enhancements. By June 30, RBI had funded $32M and $35M, respectively.
  • Management identified inflation in commodities, labor and energy, rising interest rates, foreign-exchange volatility and possible pressure on consumer demand as risks. Substantial indebtedness, franchisee financial health, supply-chain performance and execution of growth and marketing plans are also cited risks.
  • RBI expects additional corporate restructuring and advisory fees in the remainder of 2023, but does not expect additional Firehouse Subs acquisition transaction costs. Its share-repurchase authorizations were not renewed and were due to expire in August 2023.
  • RBI said it did not expect to generate new profits from Russian Burger King restaurants in 2023; reported operating metrics exclude Russia for all periods presented.
  • Two material legal matters are described: a Burger King franchise agreement class action alleging antitrust violations, for which RBI says it cannot predict the outcome or estimate possible loss; and a securities class action that was dismissed after appellate proceedings, with no further proceedings anticipated.

Important facts for investors to verify

  1. Whether strong comparable-sales and system-wide-sales growth persists and translates into franchisee profitability and durable revenue growth.
  2. How variable-rate borrowing costs, debt service and working-capital demands affect cash generation, liquidity and dividend capacity.
  3. The timing and returns of Burger King’s Reclaim the Flame spending and any additional restructuring or advisory costs.
  4. The effects of inflation, consumer demand, foreign-exchange movements and franchisee financial health on results.
  5. The eventual outcome of the pending Burger King antitrust litigation and any related financial exposure.