Restaurant Brands International Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. RBI franchises and operates Tim Hortons, Burger King and Popeyes; approximately 100% of its 24,791 restaurants were franchised at quarter-end.
Financial performance and liquidity
- Q2 revenue: $1.343 billion, up 18.6% from $1.133 billion reported in Q2 2017. The increase largely reflects ASC 606 gross presentation of advertising fund contributions and expenses. On the filing’s prior-accounting-standard basis, Q2 revenue was $1.144 billion, up about 1.0%.
- Q2 earnings: Operating income was $502.7 million versus $414.4 million; net income was $314.2 million versus $243.5 million. Net income attributable to common shareholders was $167.6 million versus $89.5 million; diluted EPS was $0.66 versus $0.37.
- Q2 Adjusted EBITDA: $562.1 million, up 5.8% from $531.1 million. By segment, Adjusted EBITDA was $285.5 million for Tim Hortons, $236.4 million for Burger King and $40.2 million for Popeyes.
- First-half revenue and earnings: Reported revenue was $2.597 billion versus $2.133 billion. Under prior accounting standards, 2018 revenue was $2.216 billion, up about 3.9%. Net income was $593.0 million versus $410.1 million; diluted EPS was $1.25 versus $0.57. Adjusted EBITDA was $1.060 billion versus $974.4 million.
- Cash flow: First-half operating cash flow was $287.4 million, down from $490.0 million. Capital expenditures were $21.6 million. Cash declined by $109.9 million during the half to $987.5 million.
- Balance sheet and debt: At June 30, cash was $987.5 million, working capital was $312.5 million, and total debt, net, was approximately $11.8 billion. Revolver availability was $495.5 million, with no borrowings outstanding; RBI reported compliance with debt covenants.
- Dividends: Common dividends declared were $0.45 per share in Q2 and $0.90 per share for the first half. A further $0.45-per-share dividend was declared for payment October 1, 2018.
Changes versus the comparable period
- Reported revenue comparisons are significantly affected by adoption of ASC 606 on January 1, 2018. Advertising fund contributions and expenses are now presented gross; prior periods were not restated. ASC 606 reduced opening shareholders’ equity by $249.8 million.
- System-wide sales growth in Q2 was 2.2% for Tim Hortons, 8.4% for Burger King and 10.7% for Popeyes. Comparable sales were flat for Tim Hortons, up 1.8% for Burger King and up 2.9% for Popeyes. Popeyes’ first-half results also benefited from inclusion for six months in 2018 versus three months in 2017.
- Q2 sales declined to $586.2 million from $602.1 million, chiefly reflecting lower Tim Hortons supply-chain sales and conversion of company-operated Restaurant VIEs to franchised restaurants. Franchise and property revenue rose sharply, principally due to gross advertising-fund presentation.
- Q2 net income improvement included a favorable $76.2 million year-over-year change in other operating expenses (income), including foreign-exchange gains, and higher segment income. First-half operating cash flow fell, partly due to higher income-tax and interest payments.
Outlook, commentary and risks
- Management said operating cash flow, cash on hand and revolver availability were expected to fund current obligations, debt service and capital spending for the next 12 months. RBI emphasized that it is highly leveraged and has significant debt-service requirements.
- Management expected additional Tax Act advisory and restructuring costs during 2018. It also expected a material increase in reported assets and liabilities when the new lease standard takes effect in 2019, but did not expect a material impact on cash flows or liquidity.
- The filing identifies risks from substantial indebtedness, interest-rate and currency movements, franchisee relationships and franchisee performance, consumer demand, competition, international growth and tax-law changes.
- Tim Hortons franchisees had filed proposed class actions in Canada concerning advertising-fund use and alleged treatment of franchisees. A U.S. franchisee association filed a complaint in Florida on July 24, 2018. RBI said it considered the claims without merit, but could not predict outcomes or estimate possible losses.
- RBI reported effective disclosure controls as of June 30, 2018. It integrated Popeyes into its internal-control framework beginning January 1, 2018.
Important facts for investors to verify
- Compare revenue and expenses on a consistent basis, accounting for ASC 606’s gross advertising-fund presentation and deferred franchise-fee recognition.
- Track operating cash flow, tax and interest payments, and liquidity against approximately $11.8 billion of net debt and stated debt-service needs.
- Monitor brand-level comparable sales, particularly Tim Hortons’ flat Q2 comparable sales and the drivers of performance across the three brands.
- Assess the durability of earnings growth given foreign-exchange gains, tax benefits, the nonrecurrence of prior-year items and management’s exclusions from Adjusted EBITDA.
- Follow the outcome and potential financial effects of franchisee litigation, Tax Act accounting, and adoption of the lease standard.