Restaurant Brands International Limited: Restaurant Brands International Inc Reports First Quarter 2019 Results

The following excerpt is from the company's SEC filing.

BURGER KING® and POPEYES® deliver strong system-wide sales growth and continue expanding global restaurant footprint

TIM HORTONS® continues to deliver on Winning Together Plan, launches loyalty program with strong engagement

Toronto, Ontario –

April 29, 2019

– Restaurant Brands International Inc. (TSX/NYSE: QSR, TSX: QSP) today reported financial results for the first quarter ended

March 31, 2019

Jose Cil, Chief Executive Officer of Restaurant Brands International Inc. ("RBI") commented, "At BURGER KING® and POPEYES®, we saw strong system-wide sales growth driven by net restaurant growth, reflecting the strength of our brands and business model around the world. Underlying fundamentals at TIM HORTONS® remain strong and we are excited about our first three restaurants in China.  Overall, we are confident in the long-term growth prospects for each of our three iconic brands, and remain focused on providing a great guest experience while driving franchisee profitability."

Consolidated Operational Highlights

Three Months Ended March 31,

(Unaudited)

System-wide Sales Growth

    TH

    BK

    PLK

System-wide Sales (in US$ millions)

Net Restaurant Growth

System Restaurant Count at Period End

17,823

16,859

25,809

24,559

Comparable Sales

Note: System-wide sales growth and comparable sales are calculated on a constant currency basis and include sales at franchise restaurants and company-owned restaurants. System-wide sales are driven by sales at franchise restaurants, as approximately 100% of current restaurants are franchised. We do not record franchise sales as revenues; however, our franchise revenues include royalties based on a percentage of franchise sales.

Consolidated Financial Highlights

(in US$ millions, except per share data)

Total Revenues

Net Income Attributable to Common Shareholders and Noncontrolling Interests

Diluted Earnings per Share

TH Adjusted EBITDA

BK Adjusted EBITDA

PLK Adjusted EBITDA

Adjusted Net Income

Adjusted Diluted Earnings per Share

As of March 31,

LTM Free Cash Flow

Net Debt

11,364

11,415

Net Leverage

TH Adjusted EBITDA, BK Adjusted EBITDA and PLK Adjusted EBITDA are our measures of segment profitability.

Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted Earnings per Share, LTM Free Cash Flow, and Net Leverage are non-GAAP financial measures. Please refer to "Non-GAAP Financial Measures" for further detail.

Effective January 1, 2019, we adopted the new lease accounting standard ("New Standard"). Our consolidated financial statements for 2019 reflect the application of the New Standard, while our consolidated financial statements for 2018 were prepared under the guidance of the previously applicable lease accounting standard (“Previous Standard”).

The most significant changes of this adoption that affect comparability of our results of operations between 2019 and 2018 are summarized as follows:

Under the Previous Standard, we did not reflect reimbursements of property tax and maintenance costs from lessees and sublessees or related costs in our Consolidated Statement of Operations or segment results. Under the New Standard, property tax and maintenance costs and related reimbursements from lessees and sublessees are reported on a gross basis in our Consolidated Statement of Operations and segment results. Although there is no net impact to Net Income Attributable to Common Shareholders and Noncontrolling Interests or Adjusted EBITDA from this change, the presentation resulted in a total increase of

million in franchise and property revenues and franchise and property expenses.

Additionally, the New Standard requires the reclassification of favorable lease assets and unfavorable lease liabilities to the right-of-use asset recorded for the underlying lease.  As a result , the amortization period for certain lease assets and liabilities was reduced, resulting in a year-over-year increase of approximately $2 million in non-cash amortization in the three months ended March 31, and expect a full year increase of approximately $10 million in 2019 compared to 2018. Amortization of favorable and unfavorable leases is classified as depreciation and amortization and is excluded from segment income. This impact is expected to decrease significantly over the following few years as leases tied to the increased amortization are renewed or expire.  The estimated impact is based on our existing lease portfolio as of December 31, 2018.

The implementation of the New Standard also impacted our Consolidated Balance Sheets, the most significant of which was the recognition of approximately $1.1 billion of operating lease liabilities and related right-of-use assets on January 1, 2019. Additionally, “capital leases” have been renamed as “finance leases” under the New Standard, with no material changes in accounting.

The year-over-year change in Total Revenues on a GAAP basis was primarily driven by FX movements. On an organic basis, the year-over-year change in Total Revenues was primarily driven by system-wide sales growth.

The decrease in Net Income Attributable to Common Shareholders and Noncontrolling Interests for the first quarter was primarily driven by an increase in income tax expense resulting from a reduced tax benefit of equity based compensation as compared to the prior year.

The year-over year change in Adjusted EBITDA on an organic basis was primarily driven by system-wide sales growth, partially offset by timing of advertising revenues and expenses.

TH Segment Results

Franchise and Property Revenues

Cost of Sales

Franchise and Property Expenses

Segment SG&A

Segment Depreciation and Amortization

(1)(3)

TH Adjusted EBITDA includes

$3 million

of cash distributions received from equity method investments for the

three months ended March 31, 2019 and 2018

For the first quarter of 2019, system-wide sales growth was primarily driven by net restaurant growth of

. Comparable sales were

(0.6)%

, including Canada comparable sales of

(0.4)%

The year-over-year change in GAAP Total Revenues was primarily driven by FX movements. On an organic basis, the year-over-year change in Total Revenues was primarily driven by a decrease in company restaurant revenues (VIE deconsolidation and refranchisings), partially offset by system-wide sales growth.

The year-over-year change in Adjusted EBITDA was primarily driven by FX movements, however, on an organic basis Adjusted EBITDA was primarily driven by system-wide sales growth, partially offset by timing of advertising revenues and expenses.

BK Segment Results

(1)(4)

(4) BK Adjusted EBITDA includes

$1 million

For the first quarter of 2019, system-wide sales growth was driven by net restaurant growth of

as well as comparable sales of

, including US comparable sales of

The year-over-year change in Total Revenues on a GAAP and on an organic basis was primarily driven by system-wide sales growth. This is partially offset by FX movements on a GAAP basis.

The year-over-year change in Adjusted EBITDA and Adjusted EBITDA on an organic basis was primarily driven by system-wide sales growth.

PLK Segment Results

The year-over-year change in Total Revenues on a GAAP and on an organic basis was primarily driven by system-wide sales growth partially offset by a decrease in company restaurant revenue (related to refranchisings).

Cash and Liquidity

, total debt was

$12.3 billion

, net debt (total debt less cash and cash equivalents of

$0.9 billion

) was

$11.4 billion

, and net leverage was

. The RBI Board of Directors has declared a dividend of

per common share and partnership exchangeable unit of Restaurant Brands International Limited Partnership for the second quarter of 2019. The dividend will be payable on

July 3, 2019

to shareholders and unitholders of record at the close of business on

June 17, 2019

Investor Conference Call

We will host an investor conference call and webcast at 8:30 a.m. Eastern Time on Monday, April 29, 2019, to review financial results for the first quarter ended March 31, 2019. The earnings call will be broadcast live via our investor relations website at

http://investor.rbi.com

and a replay will be available for 30 days following the release. The dial-in number is (877) 317-6711 for U.S. callers, (866) 450-4696 for Canadian callers, and (412) 317-5475 for callers from other countries.

Contacts

Investors:

investor@rbi.com

media@rbi.com

About Restaurant Brands International Inc.

Restaurant Brands International Inc. ("RBI") is one of the world's largest quick service restaurant companies with more than $30 billion in system-wide sales and over 25,000 restaurants in more than 100 countries and U.S. territories. RBI owns three of the world's most prominent and iconic quick service restaurant brands – TIM HORTONS®, BURGER KING®, and POPEYES®. These independently operated brands have been serving their respective guests, franchisees and communities for over 45 years. To learn more about RBI, please visit the company's website at

www.rbi.com

Forward-Looking Statements

This press release contains certain forward-looking statements and information, which reflect management's current beliefs and expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. These forward-looking statements include statements about our expectations regarding our comparable sales performance; our expectations and belief regarding the long-term growth prospects for our brands; our expectations regarding our strategic initiatives, product pipeline, and the timing and geography of new product launches; our expectations regarding our restaurant pipeline and growth prospects in key markets; our estimates regarding the impact of changes in accounting and our transition to the New Standard; and our expectations regarding the timing of capital expenditures. The factors that could cause actual results to differ materially from RBI’s expectations are detailed in filings of RBI with the Securities and Exchange Commission and applicable Canadian securities regulatory authorities, such as its annual and quarterly reports and current reports on Form 8-K, and include the following: risks related to RBI’s ability to successfully implement its domestic and international growth strategy and risks related to its international operations; risks related to RBI’s ability to compete domestically and internationally in an intensely competitive industry; and changes in applicable tax laws or interpretations thereof. With respect to our comparable sales performance, our month to date results may not be indicative of our full quarter results based on factors within and outside of our control, including those factors set forth or referred to above. Other than as required under U.S. federal securities laws or Canadian securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, change in expectations or otherwise.

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In millions of U.S. dollars, except per share data)

Revenues:

Franchise and property revenues

Total revenues

Operating costs and expenses:

Cost of sales

Franchise and property expenses

Selling, general and administrative expenses

(Income) loss from equity method investments

Other operating expenses (income), net

Total operating costs and expenses

Income from operations

Interest expense, net

Income before income taxes

Income tax expense

Net income

Net income attributable to noncontrolling interests

Net income attributable to common shareholders

Earnings per common share

Weighted average shares outstanding

Cash dividends declared per common share

Condensed Consolidated Balance Sheets

(In millions of U.S. dollars, except share data)

December 31, 2018

ASSETS

Current assets:

Cash and cash equivalents

Accounts and notes receivable, net of allowance of $14 and $14, respectively

Inventories, net

Prepaids and other current assets

Total current assets

Property and equipment, net of accumulated depreciation and amortization of $645 and $704, respectively

Operating lease assets

Intangible assets, net

10,427

10,463

Goodwill

Net investment in property leased to franchisees

Other assets, net

Total assets

21,293

20,141

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts and drafts payable

Other accrued liabilities

Gift card liability

Current portion of long term debt and finance leases

Total current liabilities

Term debt, net of current portion

11,747

11,823

Finance leases, net of current portion

Operating lease liabilities, net of current portion

Other liabilities, net

Deferred income taxes, net

Total liabilities

17,520

16,523

Shareholders’ equity:

Common shares, no par value; unlimited shares authorized at March 31, 2019 and December 31, 2018; 253,828,112 shares issued and outstanding at March 31, 2019; 251,532,493 shares issued and outstanding at December 31, 2018

Retained earnings

Accumulated other comprehensive income (loss)

Total Restaurant Brands International Inc. shareholders’ equity

Noncontrolling interests

Total shareholders’ equity

Total liabilities and shareholders’ equity

Condensed Consolidated Statements of Cash Flows

(In millions of U.S. dollars)

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

Depreciation and amortization

Amortization of deferred financing costs and debt issuance discount

Loss (gain) on remeasurement of foreign denominated transactions

Net (gains) losses on derivatives

Share-based compensation expense

Changes in current assets and liabilities, excluding acquisitions and dispositions:

Inventories and prepaids and other current assets

Other accrued liabilities and gift card liability

Tenant inducements paid to franchisees

Other long-term assets and liabilities

Net cash provided by (used for) operating activities

Cash flows from investing activities:

Payments for property and equipment

Net proceeds from disposal of assets, restaurant closures, and refranchisings

Settlement/sale of derivatives, net

Other investing activities, net

Net cash provided by (used for) investing activities

Cash flows from financing activities:

Repayments of long-term debt and finance leases

Payment of dividends on common shares and distributions on Partnership exchangeable units

Payments in connection with redemption of preferred shares

Proceeds from stock option exercises

Other financing activities, net

Net cash (used for) provided by financing activities

Effect of exchange rates on cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental cash flow disclosures:

Interest paid

Income taxes paid

Key Operating Metrics

We evaluate our restaurants and assess our business based on the following operating metrics.

System-wide sales growth refers to the percentage change in sales at all franchise and company-owned restaurants in one period from the same period in the prior year. Comparable sales refers to the percentage change in restaurant sales in one period from the same prior year period for restaurants that have been open for 13 months or longer for TH and BK and 17 months or longer for PLK. System-wide sales growth and comparable sales are measured on a constant currency basis, which means that results exclude the effect of foreign currency translation and are calculated by translating prior year results at current year monthly average exchange rates. We analyze key operating metrics on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements.

System-wide sales represent sales at all franchise restaurants and company-owned restaurants. We do not record franchise sales as revenues; however, our franchise revenues include royalties based on a percentage of franchise sales.

Net restaurant growth refers to the net increase in restaurant count (openings, net of closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period.

KPIs by Market

TH - Canada

TH - Rest of World

TH - Global

BK - US

BK - Rest of World

BK - Global

PLK - US

PLK - Rest of World

PLK - Global

10,543

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES

Supplemental Disclosure

Selling, General and Administrative Expenses

Segment SG&A TH

Segment SG&A BK

Segment SG&A PLK

Share-based compensation and non-cash incentive compensation expense

PLK Transaction costs

Corporate restructuring and tax advisory fees

Office centralization and relocation costs

Segment SG&A includes segment selling expenses, including advertising fund expenses, and segment general and administrative expenses and excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, PLK transaction costs, corporate restructuring and tax advisory fees, and office centralization and relocation costs.

Segment depreciation and amortization reflects depreciation and amortization included in the respective segment cost of sales and the respective segment franchise and property expenses. Depreciation and amortization included in selling, general and administrative expenses reflects all other depreciation and amortization.

Other Operating Expenses (Income), net

Net losses (gains) on disposal of assets, restaurant closures, and refranchisings

Litigation settlements (gains) and reserves, net

Net losses (gains) on foreign exchange

Other, net

     Other operating expenses (income), net

Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods.

Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities.

Below, we define the non-GAAP financial measures, provide a reconciliation of each non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), and discuss the reasons why we believe this information is useful to management and may be useful to investors. These measures do not have standardized meanings under GAAP and may differ from similarly captioned measures of other companies in our industry.

Non-GAAP Measures

To supplement our condensed consolidated financial statements presented on a GAAP basis, RBI reports the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, LTM Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted Earnings per Share (“Adjusted Diluted EPS”), Organic revenue growth, Organic Adjusted EBITDA growth, Free Cash Flow and Net Leverage. We believe that these non-GAAP measures are useful to investors in assessing our operating performance or liquidity, as it provides them with the same tools that management uses to evaluate our performance and is responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented.

EBITDA is defined as earnings (net income or loss) before interest expense, net, (gain) loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding the non-cash impact of share-based compensation and non-cash incentive compensation expense and (income) loss from equity method investments, net of cash distributions received from equity method investments, as well as other operating expenses (income), net. Other specifically identified costs associated with non-recurring projects are also excluded from Adjusted EBITDA, including PLK transaction costs associated with the acquisition of Popeyes, corporate restructuring and tax advisory fees, and office centralization and relocation costs. Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of operating performance or the performance of an acquired business. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our three operating segments.

LTM Adjusted EBITDA is defined as Adjusted EBITDA for the last twelve month period to the date reported. LTM Adjusted EBITDA as of March 31, 2019 is the sum of the Adjusted EBITDA for the quarters ended March 31, 2019, December 31, 2018, September 30, 2018 and June 30, 2018, while LTM Adjusted EBITDA as of March 31, 2018 is the sum of the Adjusted EBITDA for the quarters ended March 31, 2018, December 31, 2017, September 30, 2017 and June 30, 2017.  A reconciliation of Adjusted EBITDA for each of those quarters were included in our press release attached as Exhibit 99 to our Form 8-Ks filed with the SEC on February 11, 2019, October 23, 2018, August 1, 2018, and April 24, 2018.

Adjusted Net Income is defined as net income excluding (i) franchise agreement amortization, which is a non-cash expense arising as a result of acquisition accounting that may hinder the comparability of our operating results to our industry peers, (ii) amortization of deferred financing costs and debt issuance discount, a non-cash component of interest expense, and (gains) losses on early extinguishment of debt, which are non-cash charges that vary by the timing, terms and size of debt financing transactions, (iii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iv) other operating expenses (income), net, and (v) other specifically identified costs associated with non-recurring projects.

Adjusted Diluted EPS is calculated by dividing Adjusted Net Income by the number of diluted shares of RBI during the reporting period. Adjusted Net Income and Adjusted Diluted EPS are used by management to evaluate the operating performance of the business, excluding certain non-cash and other specifically identified items that management believes are not relevant to management’s assessment of operating performance or the performance of an acquired business.

Net Leverage is defined as net debt (total debt less cash and cash equivalents) divided by Adjusted EBITDA. Net Leverage is a performance measure that we believe provides investors a more complete understanding of our leverage position and borrowing capacity after factoring in cash and cash equivalents that eventually could be used to repay outstanding debt.

Revenue growth and Adjusted EBITDA growth, on an organic basis, are non-GAAP measures that exclude the impact of FX movements. Management believes that organic growth is an important metric for measuring the operating performance of our business as it helps identify underlying business trends, without distortion from the effects of FX movements. We calculate the impact of FX movements by translating prior year results at current year monthly average exchange rates. Additionally, for comparability purposes, we are calculating organic growth under Previous Standards for both periods presented.

Free Cash Flow is the total of Cash Flow for Operations minus Payments for Property and Equipment. Free Cash Flow is a liquidity measure used by management as one factor in determining the amount of cash that is available for working capital needs or other uses of cash, however, it does not represent residual cash flows available for discretionary expenditures. Commencing in the first quarter of 2019, we changed our calculation of Free Cash Flow to be defined as Cash Flow for Operations minus Payments for Property and Equipment, as management believes that the other components of Cash Flow from Investing that were previously included in the definition (such as restaurant closures/refranchisings and settlement of derivatives) are not core to the business and are subject to significant quarterly fluctuations.

Organic Growth in Revenue and Adjusted EBITDA

Three Months Ended March 31, 2019

Impact of

Impact of FX

Actual

Q1 '19 vs. Q1 '18

Movements

Non-GAAP Financial Measures

Reconciliation of EBITDA and Adjusted EBITDA to Net Income

Segment income:

Impact of equity method investments

Reconciliation of Net Income to Adjusted Net Income and Adjusted Diluted EPS

Adjustments:

Franchise agreement amortization

Interest expense and loss on extinguished debt

Total adjustments

Adjusted income before income taxes

Adjusted income tax (benefit) expense

(6)(8)

Adjusted net income

Adjusted diluted earnings per share

Weighted average diluted shares outstanding

Reconciliation of Net Leverage and Free Cash Flow

(in US$ millions, except ratio)

March 31, 2018

11,788

Unamortized deferred financing costs and deferred issue discount

Total debt

12,266

12,267

Net debt

LTM adjusted EBITDA

Net leverage

Twelve Months Ended December 31,

Twelve Months Ended March 31,

Calculation:

A + D - B

B + E - C

Free cash flow

Footnotes to Reconciliation Tables

Represents share-based compensation expense associated with equity awards for the periods indicated; also includes the portion of annual non-cash incentive compensation expense that eligible employees elected to receive or are expected to elect to receive as common equity in lieu of their 2018 and 2019 cash bonus, respectively.

In connection with the acquisition of Popeyes Louisiana Kitchen, Inc., we incurred certain non-recurring selling, general and administrative expenses primarily consisting of professional fees and compensation related expenses.

Costs arising primarily from professional advisory and consulting services associated with corporate restructuring initiatives related to the interpretation and implementation of the Tax Cuts and Jobs Act, which was enacted on December 22, 2017, including Treasury regulations proposed in late 2018.

In connection with the centralization and relocation of our Canadian and U.S. restaurant support centers to new offices in Toronto, Ontario, and Miami, Florida, respectively, we incurred certain non-operational expenses consisting primarily of duplicate rent expense, moving costs, and relocation-driven compensation expenses.

Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments is included in segment income.

Our effective tax rate was reduced by

for the three months ended March 31, 2019 and 2018, respectively, and our adjusted effective tax rate was reduced by

for the three months ended March 31, 2019 and 2018, respectively, as a result of benefits from stock option exercises.

Represents non-cash interest expense related to losses reclassified from accumulated other comprehensive income (loss) into interest expense in connection with interest rate swaps settled in May 2015.

Adjusted income tax expense includes the tax impact of the non-GAAP adjustments and is calculated using our statutory tax rate in the jurisdiction in which the costs were incurred.

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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Other recent filings from the company include the following:

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