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May 3, 2022, 4:10 p.m. EDT

10-Q: RESTAURANT BRANDS INTERNATIONAL INC.

(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 "Financial Statements" of this report.

The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws as described in further detail under "Special Note Regarding Forward-Looking Statements" set forth below. Actual results may differ materially from the results discussed in the forward-looking statements. Please refer to the risks and further discussion in the "Special Note Regarding Forward-Looking Statements" below.

We prepare our financial statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP" or "GAAP"). However, this Management's Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors.

Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the fiscal year and our key business measures, as discussed below, may decrease for any future period. Unless the context otherwise requires, all references in this section to "RBI", the "Company", "we", "us" or "our" are to Restaurant Brands International Inc. and its subsidiaries, collectively.

Overview

We are one of the world's largest quick service restaurant ("QSR") companies with over $35 billion in annual system-wide sales and over 29,000 restaurants in more than 100 countries as of March 31, 2022. Our Tim Hortons(R), Burger King(R), Popeyes(R), and Firehouse Subs(R) brands have similar franchised business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices.

Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits(R), bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are quick service restaurants featuring a unique "Louisiana" style menu that includes fried chicken, fried shrimp, and other seafood, red beans and rice, and other regional items. Firehouse Subs restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties.

Commencing upon the acquisition of Firehouse Subs in December 2021, we have four operating and reportable segments: (1) Tim Hortons ("TH"); (2) Burger King ("BK"); (3) Popeyes Louisiana Kitchen ("PLK"); and (4) Firehouse Subs ("FHS"). Our business generates revenue from the following sources: (i) franchise and advertising revenues and other services, consisting primarily of royalties and advertising fund contributions based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us ("Company restaurants"). In addition, our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing, and distribution, as well as sales to retailers.

In September 2021, we announced targets to reduce greenhouse gas emissions by 50% by 2030, as approved by the Science Based Targets initiative, as well as a commitment to achieving net-zero emissions by 2050. While most of the impact is from scope 3 emissions that are not under our direct control, reaching these targets will require us to devote resources to support changes by suppliers and franchisees.

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COVID-19

The global crisis resulting from the spread of coronavirus ("COVID-19") impacted our global restaurant operations for the three months ended March 31, 2022 and 2021, though in 2022 the impact was more modest than in the prior year.

During the three months ended March 31, 2022 and 2021, substantially all restaurants remained open, some with limited operations, such as drive-thru, takeout and delivery (where applicable), reduced, if any, dine-in capacity, and/or restrictions on hours of operation. Certain markets periodically required temporary closures while implementing government mandated lockdown orders. For example, while most regions have eased restrictions, increases in cases and new variants at the beginning of 2022 caused certain markets to re-impose temporary restrictions as a result of government mandates. We expect local conditions to continue to dictate limitations on restaurant operations, capacity, and hours of operation.

During the three months ended March 31, 2022, COVID-19 contributed to labor challenges, which in some regions resulted in reduced operating hours and service modes at select restaurants as well as supply chain pressures.

With the pandemic affecting consumer behavior, the importance of digital sales, including delivery, has grown. We expect to continue to support enhancements of our digital and marketing capabilities.

War in Ukraine

Burger King entered Russia ten years ago through a joint venture, of which we own a 15% minority stake that we've recently announced intentions to dispose. Burger King is our only brand with restaurants in Russia, and in 2021, represented 2.0% of consolidated system-wide sales, 2.9% of consolidated restaurant count excluding Firehouse Subs, 4.5% of consolidated net restaurant growth, 0.6% of consolidated revenues, and 1.7% of consolidated Adjusted EBITDA. During the first quarter of 2022, we shared a number of actions that we have taken to date as a result of the tragic events related to Russia's military invasion of Ukraine. We have suspended all corporate support for the Russian market, including operations, marketing, and supply chain support in addition to refusing approvals for new investment and expansion. While we currently include Russia within reported key business metrics, we do not expect to recognize any profits in 2022.

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 restaurants and Company restaurants (referred to as system-wide sales) 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, BK and FHS and 17 months or longer for PLK. Additionally, if a restaurant is closed for a significant portion of a month, the restaurant is excluded from the monthly comparable sales calculation.

System-wide sales growth and comparable sales are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation ("FX Impact"). For system-wide sales growth and comparable sales, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates.

Unless otherwise stated, system-wide sales growth, system-wide sales and comparable sales are presented on a system-wide basis, which means they include franchise restaurants and Company restaurants. System-wide results are driven by our franchise restaurants, as approximately 100% of system-wide restaurants are franchised. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and advertising fund contributions are calculated based on a percentage of franchise sales.

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

These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of each brand's marketing, operations and growth initiatives.







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        Results of Operations for the Three Months Ended March 31, 2022 and 2021
        Tabular amounts in millions of U.S. dollars unless noted otherwise. Segment
        income may not calculate exactly due to rounding.
                                                                                                                                                        Variance
                                                                                      Three Months Ended                           FX Impact          Excluding FX
        Consolidated                                                                       March 31,              Variance            (a)                Impact
                                                                             2022      2021               Favorable / (Unfavorable)
        Revenues:
        Sales                                                                                   $  609          $     507          $   102          $            -          $ 102
        Franchise and property revenues                                                            615                548               67                      (8)            75
        Advertising revenues and other services                                                    227                205               22                       -             22
        Total revenues                                                                           1,451              1,260              191                      (8)           199
        Operating costs and expenses:
        Cost of sales                                                                              494                401              (93)                      -            (93)
        Franchise and property expenses                                                            130                116              (14)                      -            (14)
        Advertising expenses and other services                                                    247                237              (10)                      -            (10)
        General and administrative expenses                                                        133                104              (29)                      1            (30)
        (Income) loss from equity method investments                                                13                  2              (11)                      -            (11)
        Other operating expenses (income), net                                                     (16)               (42)             (26)                     (3)           (23)
        Total operating costs and expenses                                                       1,001                818             (183)                     (2)          (181)
        Income from operations                                                                     450                442                8                     (10)            18
        Interest expense, net                                                                      127                124               (3)                      -             (3)
        Income before income taxes                                                                 323                318                5                     (10)            15
        Income tax expense                                                                          53                 47               (6)                      1             (7)
        Net income                                                                              $  270          $     271          $    (1)         $           (9)         $   8
        


(a)We calculate the FX Impact by translating prior year results at current year monthly average exchange rates. We analyze these results on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements.







                                                                                                                                                           Variance
                                                                                     Three Months Ended                                                  Excluding FX
        TH Segment                                                                       March 31,              Variance           FX Impact (a)            Impact
                                                                            2022      2021                  Favorable / (Unfavorable)
        Revenues:
        Sales                                                                                  $ 566          $     473          $           93          $       -          $  93
        Franchise and property revenues                                                          206                190                      16                  -             16
        Advertising revenues and other services                                                   57                 47                      10                  -             10
        Total revenues                                                                           829                710                     119                  -            119
        Cost of sales                                                                            453                370                     (83)                 -            (83)
        Franchise and property expenses                                                           81                 81                       -                  -              -
        Advertising expenses and other services                                                   67                 62                      (5)                 -             (5)
        Segment G&A                                                                               29                 24                      (5)                 -             (5)
        Segment depreciation and amortization (b)                                                 29                 31                       2                  -              2
        Segment income (c)                                                                       231                207                      24                  -             24
        (b)Segment depreciation and amortization consists of depreciation and
        amortization included in cost of sales, franchise and property expenses and
        advertising expenses and other services.
        (c)TH segment income includes $3 million of cash distributions received from
        equity method investments for the three months ended March 31, 2022 and 2021.
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                                                                                                                                                         Variance
                                                                                       Three Months                                                    Excluding FX
        BK Segment                                                                    Ended March 31,         Variance           FX Impact (a)            Impact
                                                                            2022      2021                 Favorable / (Unfavorable)
        Revenues:
        Sales                                                                                  $ 16          $     16          $            -          $       -          $    -
        Franchise and property revenues                                                         318               289                      29                 (8)             37
        Advertising revenues and other services                                                 109               102                       7                  -               7
        Total revenues                                                                          443               407                      36                 (8)             44
        Cost of sales                                                                            17                16                      (1)                 -              (1)
        Franchise and property expenses                                                          45                33                     (12)                 -             (12)
        Advertising expenses and other services                                                 119               118                      (1)                 -              (1)
        Segment G&A                                                                              45                35                     (10)                 1             (11)
        Segment depreciation and amortization (b)                                                12                12                       -                  -               -
        Segment income                                                                          229               217                      12                 (7)             19
                                                                                                                                                         Variance
                                                                                       Three Months                                                    Excluding FX
        PLK Segment                                                                   Ended March 31,         Variance           FX Impact (a)            Impact
                                                                            2022      2021                 Favorable / (Unfavorable)
        Revenues:
        Sales                                                                                  $ 17          $     18          $           (1)         $       -          $  (1)
        Franchise and property revenues                                                          71                69                       2                  -              2
        Advertising revenues and other services                                                  60                56                       4                  -              4
        Total revenues                                                                          148               143                       5                  -              5
        Cost of sales                                                                            16                15                      (1)                 -             (1)
        Franchise and property expenses                                                           2                 2                       -                  -              -
        Advertising expenses and other services                                                  61                57                      (4)                 -             (4)
        Segment G&A                                                                              15                14                      (1)                 -             (1)
        Segment depreciation and amortization (b)                                                 2                 2                       -                  -              -
        Segment income                                                                           56                56                       -                  -              -
        FHS Segment                                Three Months Ended March 31, 2022
        Revenues:
        Sales                                     $                               10
        Franchise and property revenues                                           20
        Advertising revenues and other services                                    1
        Total revenues                                                            31
        Cost of sales                                                              8
        Franchise and property expenses                                            2
        Segment G&A                                                                8
        Segment income                                                            14
        


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                                                            Three Months Ended
                                                                March 31,
                       Key Business Metrics                                2022          2021
                       System-wide sales growth
                         TH                                                12.9  %       (4.9) %
                         BK                                                16.5  %        1.8  %
                         PLK                                                4.1  %        7.0  %
                         Consolidated (a)                                  13.7  %        1.4  %
                         FHS (b)                                            7.4  %       27.0  %
                       System-wide sales
                         TH                                             $ 1,556       $ 1,379
                         BK                                             $ 5,818       $ 5,173
                         PLK                                            $ 1,383       $ 1,344
                         FHS                                            $   272       $     -
                         Consolidated (a)                               $ 9,029       $ 7,896
                         FHS (b)                                        $     -       $   254
                       Comparable sales
                         TH                                                 8.4  %       (2.3) %
                         BK                                                10.3  %        0.7  %
                         PLK                                               (3.0) %        1.5  %
                         FHS (b)                                            4.2  %       24.2  %
                                                                            As of March 31,
                                                                           2022          2021
                       Net restaurant growth
                         TH                                                 6.7  %        1.3  %
                         BK                                                 3.1  %       (0.8) %
                         PLK                                                7.9  %        4.8  %
                         Consolidated (a)                                   4.4  %        0.2  %
                         FHS (b)                                            1.8  %        1.7  %
                       Restaurant count
                         TH                                               5,320         4,987
                         BK                                              19,266        18,691
                         PLK                                              3,771         3,495
                         FHS                                              1,219             -
                         Consolidated                                    29,576        27,173
                         FHS (b)                                              -         1,198
        


(a) Consolidated system-wide sales growth and consolidated net restaurant growth do not include the results of Firehouse Subs for all of the periods presented. Consolidated system-wide sales do not include the results of Firehouse Subs for 2021.

(b) 2021 Firehouse Subs figures are shown for informational purposes only, consistent with its fiscal calendar.

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Comparable Sales

For TH and BK, restaurant operations were less impacted by COVID-19 during the three months ended March 31, 2022 than in the same period in 2021, resulting in significant increases in system-wide sales growth and comparable sales during the three months ended March 31, 2022.

TH comparable sales were 8.4% during the three months ended March 31, 2022, including Canada comparable sales of 10.1%.

BK comparable sales were 10.3% during the three months ended March 31, 2022, including rest of the world comparable sales of 20.1% and relatively flat U.S. comparable sales.

PLK comparable sales were (3.0)% during the three months ended March 31, 2022, including U.S. comparable sales of (4.6)%.

FHS comparable sales were 4.2% during the three months ended March 31, 2022, including U.S. comparable sales of 4.5%.

Sales and Cost of Sales

Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to retailers. Sales from Company restaurants, including sales by our consolidated TH Restaurant VIEs, represent restaurant-level sales to our guests.

Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants, including our consolidated TH Restaurants VIEs.

During the three months ended March 31, 2022, the increase in sales was driven by an increase of $93 million in our TH segment and the inclusion of FHS of $10 million, partially offset by a decrease of $1 million in our PLK segment. The increase in our TH segment was driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices and an increase in sales to retailers.

During the three months ended March 31, 2022, the increase in cost of sales was driven by an increase of $83 million in our TH segment, the inclusion of FHS of $8 million, an increase of $1 million in our BK segment, and an increase of $1 million in our PLK segment. The increase in our TH segment was driven by an increase in supply chain sales as well as increases in commodity prices and an increase in sales to retailers.

Franchise and Property

Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries).

During the three months ended March 31, 2022, the increase in franchise and property revenues was driven by an increase of $37 million in our BK segment, the inclusion of FHS of $20 million, an increase of $16 million in our TH segment, and an increase of $2 million in our PLK segment, partially offset by an unfavorable FX Impact of $8 million. The increases were primarily driven by increases in royalties in our TH, BK and PLK segments, and increases in rent in our TH segment, as a result of increases in system-wide sales.

During the three months ended March 31, 2022, the increase in franchise and property expenses was driven by an increase of $12 million in our BK segment and . . .

May 03, 2022

COMTEX_406640640/2041/2022-05-03T16:09:33

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