Business context and reporting period
Restaurant Brands International Inc. (RBI) filed this unaudited Form 10-Q for the three months ended March 31, 2023. RBI franchises and operates Tim Hortons, Burger King, Popeyes and Firehouse Subs; approximately 100% of its roughly 30,000 restaurants were franchised. Unless noted, amounts are U.S. dollars in millions.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $1,590 | $1,451 |
| Operating income | $447 | $450 |
| Net income | $277 | $270 |
| Net income attributable to common shareholders | $189 | $183 |
| Basic and diluted EPS | $0.61 | $0.59 |
| Adjusted EBITDA (non-GAAP) | $588 | $530 |
| Cash provided by operating activities | $95 | $234 |
Revenue rose 9.6% reported, or 13.4% excluding foreign-exchange impact. Operating margin was approximately 28.1%, versus 31.0%; net margin was approximately 17.4%, versus 18.6%. Adjusted EBITDA margin was approximately 37.0%, versus 36.5%. Adjusted EBITDA is a non-GAAP measure; RBI’s reconciliation excludes, among other items, share-based compensation and specified transaction and restructuring costs.
At March 31, cash and cash equivalents were $1,033, total current assets $1,893 and total current liabilities $1,882. Debt was approximately $12.9 billion; the company also reported $998 of available revolving-credit capacity and no revolver borrowings. Cash declined $145 during the quarter. Operating cash flow fell year over year, which management attributed primarily to higher interest and tax payments and increased working-capital use. Cash dividends and partnership distributions totaled $243 in financing cash flows.
Material changes and operating trends
- System-wide sales increased 14.7% overall, excluding Firehouse Subs from the comparable 2022 consolidated measure. Comparable sales grew 10.3%; net restaurant growth was 4.2%.
- Comparable sales were up 13.8% at Tim Hortons, 10.8% at Burger King, 5.6% at Popeyes and 6.1% at Firehouse Subs. Adjusted EBITDA increased in all four segments: Tim Hortons $251, Burger King $256, Popeyes $66 and Firehouse Subs $15.
- Higher costs and operating expenses, particularly cost of sales, general and administrative expense, and other operating expenses, offset revenue growth. General and administrative expense increased 32% to $175, including $19 of Firehouse acquisition-related costs and $5 of corporate restructuring and tax advisory fees.
- Net interest expense increased to $142 from $127; the weighted-average interest rate on long-term debt rose to 4.9% from 4.0%. The effective tax rate declined to 9.1% from 16.6%, benefiting from structural changes, income mix and equity-award tax benefits.
Outlook, risks and unusual items
- RBI gave no specific consolidated earnings or revenue guidance. Management said cash from operations and available revolver capacity were expected to fund obligations, debt service and capital spending for the next 12 months. Estimated next-12-month debt service included approximately $422 of term-loan interest and $85 of principal, partly offset by expected interest-rate-swap receipts; senior-note interest was estimated at $264.
- Burger King’s “Reclaim the Flame” plan provides for $400 of investment over its life: $150 in advertising and digital initiatives and $250 in remodels, relocations, technology and equipment. By March 31, RBI had funded $20 and $25, respectively. No additional Firehouse acquisition transaction costs were expected for the remainder of 2023; further restructuring and tax advisory fees were expected.
- Management cited inflation in commodity, labor and energy costs, rising interest rates, foreign-exchange volatility, consumer demand and franchisee financial health as risks. RBI is highly leveraged and depends substantially on franchisees; it was in compliance with applicable debt covenants at quarter-end.
- RBI reported that the Burger King employee no-solicitation/no-hire class action had been remanded for further proceedings; the company said it believed the claims lacked merit but could not estimate a possible loss. A separate securities class action was dismissed after the New York Court of Appeals denied leave to appeal.
- The board declared a $0.55-per-share dividend for payment in July 2023. RBI made no common-share repurchases in Q1; $123 remained under its authorization at quarter-end. Management also noted that RBI did not expect to generate new profits from Russian restaurants in 2023; reported key business metrics exclude Russia for all periods presented.
Important facts for investors to verify
- Whether comparable-sales and system-wide sales momentum continues, and how growth translates into franchisee profitability and RBI cash generation.
- Debt-service burden, floating-rate exposure, hedge settlements and access to the revolving facility; reported next-12-month estimates depend on rates and other assumptions.
- Whether working-capital outflows and lower operating cash flow normalize, while dividends and the Burger King investment plan continue.
- Progress and remaining costs under “Reclaim the Flame” and corporate restructuring initiatives, alongside inflation and other macroeconomic pressures.
- Developments in the Burger King franchisee litigation and other contingencies; the filing provides no clear estimate of possible loss for that case.