Restaurant Brands International Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. All financial amounts below are U.S. dollars unless noted. RBI operated or franchised 29,968 restaurants across Tim Hortons, Burger King, Popeyes and Firehouse Subs in more than 100 countries; approximately 100% of system restaurants were franchised.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1,726m | $1,495m | $4,816m | $4,193m |
| Income from operations | $561m | $533m | $1,552m | $1,463m |
| Net income | $530m | $329m | $1,146m | $991m |
| Net income attributable to common shareholders | $360m | $221m | $779m | $659m |
| Diluted earnings per share | $1.17 | $0.70 | $2.51 | $2.12 |
| Adjusted EBITDA | $642m | $607m | $1,790m | $1,664m |
| Operating margin | 32.5% | 35.7% | 32.2% | 34.9% |
Revenue increased 15.5% in Q3 and 14.9% in the first nine months. Management attributed growth principally to higher system-wide sales and royalties, Tim Hortons supply-chain sales and the addition of Firehouse Subs. Adjusted EBITDA rose 5.8% in Q3 and 7.6% year to date; reported increases included unfavorable foreign-exchange effects of $26m and $54m, respectively. Adjusted EBITDA is a non-GAAP measure.
Q3 comparable sales were up 9.8% at Tim Hortons, 10.3% at Burger King and 3.1% at Popeyes; Firehouse Subs was flat. Nine-month comparable sales were up 10.2%, 10.2%, 0.5% and 0.8%, respectively. Consolidated Q3 comparable sales growth was 9.1% (8.6% excluding Russia).
Q3 net income benefited materially from a $102m income-tax benefit, versus $65m tax expense a year earlier. RBI recorded a $171m net decrease in tax reserves, primarily due to expiring statutes of limitations; management said this reduced the Q3 effective tax rate by 39.9 percentage points. The Q3 net-income increase therefore does not solely reflect operating improvement.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $1,067m, down from $1,255m, reflecting greater working-capital use and interest payments. Investing cash outflow was $66m; financing cash outflow was $1,111m.
- Cash declined to $946m at September 30, 2022 from $1,087m at year-end 2021. Capital expenditures were $52m. Dividends and partnership distributions used $728m, and share repurchases used $326m.
- Total debt, net of financing costs, was $12,939m, including $12,853m long-term debt net of current maturities. RBI had no revolver borrowings and $998m of availability; cash plus reported revolver availability was approximately $1,944m.
- Net interest expense was $133m in Q3 and $389m for nine months, compared with $128m and $378m. The weighted average rate on long-term debt was 4.5% in Q3 versus 4.2% a year earlier. Management expected interest rates to continue rising through the remainder of 2022 and into 2023.
- RBI reported compliance with applicable debt covenants and said cash from operations and revolver availability were expected to cover obligations, debt service and capital spending for the next 12 months. Management described the company as highly leveraged.
Changes, outlook and material items
- Firehouse Subs, acquired in December 2021 for total consideration of $1,016m, contributed $38m of Q3 revenue and $13m of Q3 segment income. Purchase-price allocation remained preliminary.
- Burger King announced its “Reclaim the Flame” plan: a planned $400m investment over two years, including $150m for advertising and digital initiatives and $250m for restaurant technology, equipment, renovations and relocations.
- RBI declared a $0.54-per-share dividend payable January 4, 2023. It repurchased 6.1m shares for $326m in the first nine months; $123m remained under the reported authorization at September 30.
- RBI suspended corporate support for Burger King’s Russian market, including operations, marketing and supply-chain support, and said it did not expect profits from Russia in 2022. Russian restaurants remained included in reported metrics.
- Management cited inflation in commodities, labor and energy, supply-chain pressures, labor challenges, rising interest rates, currency movements and possible renewed COVID-related restrictions as risks. It warned that pricing may not fully offset cost inflation without affecting demand. No specific consolidated revenue or earnings guidance is provided in the filing text.
- RBI paid approximately $100m in connection with disputes involving Burger King and Popeyes master franchise agreements in China; $72m had been recorded in 2021. The resolution addressed the disputes and enabled a move forward with a new Popeyes master franchisee.
- Material legal matters include a Burger King franchise no-poach class action remanded for further proceedings, a shareholder securities lawsuit whose dismissal appeal was pending, and a refiled Florida PFAS-packaging case. RBI said it could not predict outcomes or estimate possible losses. Tim Hortons mobile-app privacy claims were subject to a settlement, with court steps still pending for effectiveness of certain portions.
- Other notable items: foreign-currency translation was a significant drag on comprehensive income; the filing reported a $1,015m translation loss for the first nine months. RBI also expects additional Firehouse transaction and corporate restructuring/tax advisory costs through 2022 and 2023.
Most important facts for investors to verify
- How much of earnings growth is recurring operating performance versus the $171m tax-reserve release and other non-recurring items.
- Whether the higher sales and comparable-sales trends can be sustained, particularly at U.S. Burger King and Popeyes.
- Debt-service capacity if interest rates, inflation or foreign-exchange pressures worsen; confirm future cash flow, covenant headroom and refinancing needs.
- Execution, funding and franchisee impact of the $400m Burger King plan, alongside dividends and share repurchases.
- Developments in Russia, China and the disclosed litigation, including any future financial exposure or operating restrictions.