Business context and reporting period
Restaurant Brands International Inc. (RBI) filed its annual report for the fiscal year ended December 31, 2020. RBI franchises Tim Hortons, Burger King and Popeyes, with approximately 27,025 restaurants in more than 100 countries; approximately 100% of system-wide restaurants were franchised. All amounts below are U.S. dollars unless stated otherwise.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $4.968 billion | $5.603 billion |
| Operating income | $1.422 billion | $2.007 billion |
| Net income | $750 million | $1.111 billion |
| Net income attributable to common shareholders | $486 million | $643 million |
| Diluted EPS | $1.60 | $2.37 |
| Operating cash flow | $921 million | $1.476 billion |
| Adjusted EBITDA, non-GAAP | $1.864 billion | $2.304 billion |
Revenue declined 11.3% and net income declined 32.5% year over year. Operating margin was approximately 28.6%, versus 35.8% in 2019. Results included a $98 million loss on early extinguishment of debt and $100 million of foreign-exchange losses within other operating expenses. The 2020 effective tax rate was 8.0%, including a $105 million deferred-tax benefit related to tax guidance and Swiss tax reform.
System-wide sales were $30.669 billion, down 8.6%. Comparable sales were down 15.7% at Tim Hortons and 7.9% at Burger King, while Popeyes rose 13.8%. Adjusted EBITDA by segment was $823 million for Tim Hortons, $823 million for Burger King and $218 million for Popeyes.
At December 31, cash and cash equivalents were $1.560 billion, working capital was $663 million and revolving-credit availability was $998 million. Long-term debt was $12.476 billion net of financing costs; total debt and finance-lease obligations were $12.823 billion. The company reported $12.631 billion of aggregate debt principal and $1.397 billion of operating lease liabilities. Operating activities provided $921 million; investing activities used $79 million and financing activities used $821 million. Dividends declared were $2.08 per common share for 2020.
Material changes versus the prior comparable period
- COVID-19 materially reduced sales and affected restaurant operations, with temporary closures and restrictions on dine-in service. At year-end, more than 96% of restaurants were open worldwide, often with limited operations.
- System-wide sales fell across Tim Hortons and Burger King, while Popeyes grew. Consolidated net restaurant growth was negative 0.2%, compared with 5.2% in 2019.
- Operating cash flow fell $555 million. Management cited lower Tim Hortons and Burger King segment income, working-capital use and higher income-tax payments.
- Franchise and property revenue declined to $2.955 billion from $3.241 billion, reflecting lower system sales, rent relief and currency impacts, partly offset by Popeyes growth. COVID-related bad-debt expense was $33 million, compared with insignificant expense in 2019.
- RBI issued and refinanced debt during 2020, including $500 million of 5.75% first-lien notes, $2.9 billion of 4.00% second-lien notes and $750 million of 3.50% first-lien notes. It redeemed older notes, recorded a $98 million extinguishment loss and ended the year with higher total debt and finance-lease obligations than in 2019.
Fourth-quarter revenue was $1.358 billion versus $1.479 billion in the prior-year quarter; net income was $139 million versus $257 million, and diluted EPS was $0.30 versus $0.54.
Outlook, management commentary and risks
- Management expected COVID-19 to continue affecting results in 2021, with the extent and duration uncertain. The filing does not provide full-year revenue or earnings guidance.
- RBI said cash from operations and revolving-credit availability should fund obligations, debt service and capital spending over the following 12 months. It targeted $2.12 in declared dividends per common share for 2021; the target is not assured and is subject to board discretion and debt restrictions.
- Franchisee support included loans to eligible U.S. Burger King franchisees, cash advances to eligible Canadian Tim Hortons franchisees, rent relief and deferred investment commitments. The Tim Hortons rent-relief program was extended through the end of 2021; management said support actions could weigh on cash flow and results at least through 2021.
- Key risks include franchisee financial distress, substantial leverage and debt-service needs, competition and changing consumer behavior, food and supply-chain disruptions, foreign-exchange and interest-rate exposure, and the effects of the pandemic. The company also disclosed Canadian privacy investigations and class actions related to mobile-app geolocation data, as well as other franchise and securities litigation; outcomes and potential losses were not estimable.
- Other notable items: the company was in compliance with applicable debt covenants at year-end; approximately $620 million of gross unrecognized tax-benefit liabilities was excluded from the contractual-obligations table because settlement timing could not be reliably estimated. The auditor issued unqualified opinions on the financial statements and internal controls, and identified gross unrecognized tax benefits as a critical audit matter.
Most important facts an investor should verify
- Whether comparable sales, franchisee liquidity and restaurant-level profitability recover, especially at Tim Hortons and Burger King.
- Cash flow available after dividends, debt service, lease commitments and continued franchisee assistance; also confirm covenant headroom and refinancing needs.
- Whether the $105 million tax benefit and other tax positions are recurring or subject to audit adjustments; review the $497 million of gross unrecognized tax benefits and related interest and penalties.
- Developments in mobile-app privacy investigations and litigation, franchise-related cases and securities lawsuits, including any eventual financial exposure.
- Progress on Popeyes growth and the durability of its positive comparable sales, alongside the company’s ability to resume restaurant development and investment.