Bill Ackman Comments on Restaurant Brands International

Restaurant Brands International Inc. (NYSE:QSR)

Restaurant Brands’ first quarter results showed continuing earnings growth as Burger King and Popeyes delivered strong results, partially offset by weaker results at Tim Hortons. QSR reported strong unit growth of 6% as Burger King and Popeyes net unit count increased 7%, and Tim Hortons net unit count increased 3%. Same-store sales grew 4% at Burger King as the concept continues to strike the right balance between value offerings and limited-time premium products. Popeyes’ same-store sales grew 3% as the company achieved its goal of introducing more value items on the menu. Tim Hortons’ same-store-sales were down slightly as sales growth in breakfast foods was more than offset by heightened competition in coffee.

To improve results at Tim Hortons, QSR unveiled a new initiative called “Winning Together,” which will focus on improving the restaurant experience, product excellence, and brand communications. As part of the plan, the company will partner with Tim Hortons’ franchisees to reimage a large portion of its store

base, increase its focus on digital technology, expand and improve its menu offerings, and launch more brand-enhancing marketing campaigns. QSR recently appointed a new President and Chief Marketing Officer at Tim Horton’s, who previously played important roles in reigniting Burger King’s U.S. sales growth.

QSR’s organic EBITDA grew 5% as Burger King EBITDA grew 12% reflecting strong same-store sales, net unit growth, and improved margins; Popeyes’ EBITDA grew 80% driven by substantial cost efficiencies, while Tim Hortons EBITDA declined 6%, principally from lapping the prior year’s sales of new equipment packages related to the launch of its espresso-based drinks platform. Overall, Restaurant Brands’ reported EBITDA grew 7%, including a 4% tailwind from the weaker US dollar that was offset by a 2% headwind from new accounting rules that reduced reported EBITDA, but which had no impact on cash flow.

Despite continued earnings growth this quarter, QSR’s share price has declined nearly 10% this year amidst concerns that the recent weakness in Tim Hortons’ same-store sales growth will persist. QSR currently trades at about 19 times our estimate of 2018 free cash flow, an inexpensive valuation on an absolute and relative basis, compared with its franchised restaurant peers which trade at more than 25 times free cash flow. We believe that the recent slowdown in same-store sales growth at Tim Hortons will ultimately prove temporary, and expect the new “Winning Together” plan and recent leadership changes to enable Tim Hortons to return to its historical rates of growth.

From Bill Ackman (Trades, Portfolio)’s first-quarter 2018 shareholder letter.