Restaurant Brands International Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. RBI franchises and operates Tim Hortons, Burger King and Popeyes, with approximately 100% of its 26,036 restaurants franchised.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1,400 | $1,343 | $2,666 | $2,597 |
| Operating income | $491 | $502 | $925 | $923 |
| Net income | $257 | $314 | $503 | $593 |
| Net income attributable to common shareholders | $142 | $167 | $277 | $315 |
| Diluted EPS | $0.55 | $0.66 | $1.07 | $1.25 |
| Adjusted EBITDA | $580 | $562 | $1,080 | $1,060 |
- Revenue rose 4.2% in Q2 and 2.7% for the first half. Franchise and property revenue growth more than offset lower first-half sales. On a constant-currency basis, revenue increased $92 million in Q2 and $149 million in the first half.
- Q2 operating margin was approximately 35.1% versus 37.4%; net margin was 18.4% versus 23.4%. First-half operating margin was approximately 34.7% versus 35.5%; net margin was 18.9% versus 22.8%.
- Adjusted EBITDA increased 3.2% in Q2 and 1.9% in the first half. Segment trends were mixed: BK and PLK segment income rose for the first half, while TH segment income declined.
- Comparable sales in Q2: TH +0.5%, BK +3.6%, PLK +3.0%. Consolidated system-wide sales grew 7.9%; net restaurant growth was 5.0% year over year.
- Operating cash flow was $475 million for the first half, up from $287 million; investing activities provided $23 million and financing activities used $395 million. Cash increased to $1,028 million from $913 million at year-end.
- At June 30, cash was $1,028 million, working capital $271 million, and revolving-credit availability $498 million. Term debt, net, was $11,737 million; total debt, net, was $11,802 million. The company also reported $311 million of finance-lease obligations and $1,177 million of operating-lease obligations. No revolving-facility borrowings were outstanding.
- Management stated that cash flow from operations and revolving-credit availability were expected to fund current obligations, debt service and capital spending for the next 12 months. RBI was highly leveraged and identified debt service as a significant liquidity requirement.
Changes, outlook and notable items
- Common-shareholder net income fell 15% in Q2 and 12% for the first half; diluted EPS declined in both periods. The main reported pressure was higher income tax expense, including a $37 million increase in the provision for unrecognized tax benefits related to a prior restructuring transaction. The filing says this item was not applicable to ongoing operations.
- First-half 2018 results included a $20 million non-cash dilution gain from an equity-method investee IPO; there was no comparable gain in 2019. Q2 2018 also benefited from a $33 million foreign-exchange gain within other operating income, which did not recur.
- RBI adopted ASC 842 lease accounting on January 1, 2019. It recognized operating lease assets and liabilities and began presenting certain property-tax and maintenance reimbursements and related expenses gross. This increased both revenue and expense by $33 million in Q2 and $67 million for the first half, with no net income effect from the gross presentation. Prior-period statements were not recast.
- Tax Act-related restructuring and advisory fees were $11 million in Q2 and $17 million in the first half. Management expected additional such fees in 2019. It did not expect further office centralization and relocation costs.
- The board declared a $0.50-per-share dividend payable October 3, 2019. RBI also renewed its normal-course issuer bid after quarter-end; no shares had been repurchased for cancellation under the prior bid during the preceding 12 months. No specific earnings or revenue guidance was provided.
- Risks highlighted include substantial indebtedness, franchisee performance and reliance on the franchised model, competition and consumer demand, interest-rate and currency volatility, international growth execution, counterparty performance and tax-law uncertainty.
- RBI reported settlement of two Canadian Tim Hortons class actions, including C$6 million for advertising-fund marketing over two years and C$6 million of legal and related expenses, accrued in 2018. New class actions alleging employee no-hire/no-solicitation clauses were pending against Burger King entities in the U.S. and TDL in British Columbia; RBI said it believed the claims lacked merit but could not predict outcomes or estimate possible losses.
Important facts for investors to verify
- Whether comparable-sales, system-wide-sales and restaurant-growth trends persist, particularly at Tim Hortons and Popeyes.
- How recurring operating performance compares with Adjusted EBITDA after considering excluded costs, tax items and unusual prior-period gains.
- Debt service capacity, interest-rate exposure, lease obligations and compliance with debt covenants; RBI reported covenant compliance at June 30, 2019.
- The eventual financial and legal outcomes of the franchise-agreement class actions and the tax provision for the prior restructuring.
- The cash-flow and balance-sheet effects of the ASC 842 transition and the continued dividend and share-repurchase plans.