Restaurant Brands International Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. RBI operates Tim Hortons, Burger King and Popeyes; it reported 25,066 restaurants across more than 100 countries and territories, approximately 100% franchised.
Financial performance
| Metric (US$ millions except per-share data) | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | 1,375.3 | 1,208.6 | 3,972.5 | 3,341.9 |
| Operating income | 477.2 | 479.3 | 1,400.5 | 1,229.9 |
| Net income | 249.8 | 246.8 | 842.8 | 656.9 |
| Net income attributable to common shareholders | 133.6 | 91.4 | 449.0 | 231.1 |
| Diluted EPS | $0.53 | $0.37 | $1.78 | $0.95 |
| Adjusted EBITDA (non-GAAP) | 571.4 | 565.1 | 1,631.3 | 1,539.5 |
Reported revenue rose 13.8% in Q3 and 18.9% for the nine-month period. These comparisons are substantially affected by adoption of ASC 606: 2018 includes advertising fund contributions and expenses gross, whereas prior periods did not. On a prior-accounting-standard basis, revenue was $1,182.0 million in Q3 and $3,398.1 million for nine months. The comparable prior-standard revenue growth was approximately 3.5% and 1.7%, respectively. ASC 606 also changed franchise-fee timing and gift-card breakage recognition.
Operating income margin was approximately 34.7% in Q3 2018 versus 39.6% in Q3 2017; this comparison is distorted by the gross advertising-fund presentation. Adjusted EBITDA increased 1.1% in Q3 and 6.0% year to date. Q3 net income increased slightly, while common-shareholder income and diluted EPS benefited from the absence of preferred dividends recorded in 2017. Nine-month net income increased 28.3%, also reflecting the non-recurrence of 2017 debt-extinguishment losses and higher segment income.
Comparable sales in Q3 were Tim Hortons 0.6%, Burger King 1.0%, and Popeyes 0.5%. System-wide sales growth was 2.8%, 7.8%, and 7.9%, respectively. Management cited weaker U.S. Tim Hortons coffee and baked-goods sales, less compelling Burger King U.S. value offers, and Popeyes’ shift in U.S. media spending away from value offers.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $673.1 million, down from $844.1 million. Management attributed the decline to higher income-tax and interest payments, working-capital use and lower Tim Hortons segment income, partly offset by improved Burger King and Popeyes results.
- Investing cash outflow was $27.7 million, versus $851.9 million in 2017, when the Popeyes acquisition drove significant spending. Financing cash outflow was $588.9 million, compared with $2,162.4 million of inflow in 2017, which included debt issuance.
- Cash and cash equivalents were $1,143.5 million; working capital was $445.1 million. Revolver availability was $495.4 million, with no borrowings outstanding and $4.6 million of letters of credit.
- Term debt, net of current portion, was $11,766.8 million; total debt, net, was $11,823.8 million. The company described itself as highly leveraged. It reported compliance with debt covenants and stated liquidity should cover current obligations, debt service and capital spending for the next 12 months.
- Common dividends declared were $0.45 per share in Q3 and $1.35 per share for the first nine months. A further $0.45 quarterly dividend was declared for payment in January 2019.
Outlook, risks and notable items
- No specific revenue, earnings or comparable-sales guidance is provided. Management expects sufficient near-term liquidity from operating cash flow, cash on hand and revolver availability.
- Management expects additional Tax Act-related restructuring and advisory costs. The accounting for the Tax Act remained incomplete within the permitted measurement period.
- ASC 606 adoption reduced opening 2018 shareholders’ equity by $249.8 million. The company expects the 2019 lease-accounting standard to materially increase reported assets and liabilities, but does not expect a material effect on cash flows or liquidity.
- Interest expense was $404.8 million for nine months, up from $375.4 million; 2018 included a $39.4 million benefit from revised hedge accounting. The company expects that benefit to continue during 2018.
- Risks highlighted include substantial indebtedness, interest-rate and foreign-exchange movements, franchisee relationships and performance, consumer demand, competition, marketing effectiveness, international growth, and tax-law changes.
- Tim Hortons franchisee advertising-fund and association litigation, a Florida franchisee complaint, and new Burger King class-action complaints over employee no-hire clauses were disclosed. RBI says it believes the claims are without merit, but cannot predict outcomes or estimate possible losses.
Key facts for investors to verify
- Separate underlying operating growth from ASC 606’s gross advertising-fund presentation and other timing changes.
- Track comparable sales, system-wide sales, and segment Adjusted EBITDA—particularly Tim Hortons’ modest comparable-sales growth and Burger King’s softer U.S. trends.
- Assess debt service, variable-rate exposure, dividend and exchangeable-unit cash requirements, and continued covenant compliance.
- Monitor Tax Act accounting and expenses, lease-standard implementation, franchisee litigation, and the effects of franchisee relations on brand performance.