Restaurant Brands International Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are U.S. dollars unless noted. RBI franchises and operates Tim Hortons (TH), Burger King (BK) and Popeyes (PLK); about 100% of its 27,059 restaurants were franchised.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $1.048bn | $1.400bn | $2.273bn | $2.666bn |
| Operating income | $243m | $491m | $632m | $925m |
| Net income | $164m | $257m | $388m | $503m |
| Net income attributable to common shareholders | $106m | $142m | $250m | $277m |
| Diluted EPS | $0.35 | $0.55 | $0.83 | $1.07 |
| Adjusted EBITDA | $358m | $580m | $802m | $1.080bn |
- Q2 revenue fell 25% year over year; six-month revenue fell 15%. Q2 operating margin was approximately 23.2%, versus 35.1% a year earlier; net margin was approximately 15.6%, versus 18.4%.
- Q2 comparable sales declined 29.3% at TH and 13.4% at BK, while rising 24.8% at PLK. Consolidated system-wide sales growth was negative 20.9%. PLK was the only segment with higher revenue and adjusted EBITDA: Q2 revenue increased to $134m from $111m and adjusted EBITDA to $51m from $41m.
- TH and BK drove the decline in adjusted EBITDA: Q2 TH segment income fell 49% to $147m and BK fell 37% to $160m. Six-month adjusted EBITDA decreased 26%.
- Q2 net income included a $64m deferred-tax benefit associated with guidance on the U.S. Tax Act. The reported effective tax rate was negative 42.3% for Q2 and negative 0.9% for the six-month period.
- Six-month operating cash flow was $196m, down from $475m. Capital expenditures were $39m; investing cash outflow was $12m. Financing cash outflow was $161m, including $716m of common-share dividends and Partnership distributions. Cash increased $7m to $1.540bn.
Balance sheet, debt and liquidity
- At June 30, cash was $1.540bn, current assets $2.227bn and current liabilities $1.284bn; management reported working capital of $943m.
- Total debt, net of financing costs, was $12.388bn, including $78m current maturities; long-term debt was $12.310bn. Debt increased from $11.833bn at year-end 2019. Long-term debt and finance leases were additional obligations.
- RBI had no revolving-credit borrowings outstanding and $998m of revolver availability. It drew $995m on the revolver in March and repaid it in June. The company issued $500m of 5.75% first-lien notes due 2025 and drew the remaining C$125m under the TH Facility.
- RBI reported compliance with applicable debt covenants. An amendment allowed the borrowers, for specified periods, to elect a $1bn minimum-liquidity covenant instead of the 6.50:1.00 leverage covenant. Management said available cash, operating cash flow and revolver capacity were expected to cover obligations, debt service and capital spending for the next 12 months.
Outlook, risks and unusual items
- COVID-19 materially reduced sales and disrupted restaurant operations. North American restaurants largely remained open with restricted service; international reopening varied. Management expected negative effects to continue into Q3 2020 and said the duration and financial impact could not be estimated.
- RBI provided rent relief, extended payment terms, loans to eligible U.S. BK franchisees and cash advances to eligible Canadian TH franchisees; it also deferred franchisee renovation and development commitments. These measures support franchisee liquidity but reduce RBI revenue or cash flow. Bad-debt expense was $24m in Q2 and $28m for the first half, versus $4m and $5m in the comparable 2019 periods.
- Risks include franchisee financial distress and delayed payments, lower royalties and rents, potential restaurant closures, supply-chain or staffing disruptions, and possible impairment of receivables, goodwill or other assets. RBI is highly leveraged and exposed to interest-rate and foreign-exchange movements.
- Subsequent to quarter-end, the board declared a $0.52-per-share dividend, payable October 2, 2020. Management noted dividends may be constrained by debt agreements.
- Disclosed litigation includes class actions concerning hiring restrictions in franchise agreements and Canadian claims regarding geolocation data collected through the Tim Hortons app. RBI said it intended to defend the claims; outcomes and possible losses were not estimable.
Key facts for investors to verify
- Whether restaurant reopenings and comparable-sales trends improved after July, especially at TH and BK, and whether PLK’s strong growth persisted.
- Franchisee liquidity, collection experience, bad-debt assumptions, and the effects of rent relief and deferred payments on revenue and cash flow.
- Debt service, covenant compliance and liquidity under the amended credit terms, including the cost and cash settlements of interest-rate swaps.
- Whether the $64m tax benefit is nonrecurring and how future effective tax rates may vary.
- Potential outcomes or financial exposure from the disclosed class actions and any future impairment assessments.