June 26, 2015 - 9:48am EST by
2015 2016
Price: 38.17 EPS .95 1.18
Shares Out. (in M): 467 P/E 40 32
Market Cap (in $M): 17,714 P/FCF 32 25
Net Debt (in $M): 11,200 EBIT 1,331 1,503
TEV ($): 28,950 TEV/EBIT 21.7 19.25

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  • Quick Service Restaurant (QSR)
  • Rollup
  • Highly Leveraged
  • Franchised Restauarants
  • Refranchising


QSR (Restaurant Brands International) was formed as a combination of THI and BKW completed in the
end of 2014, and presents a compelling, evolving, long-term opportunity. It is the third largest
restaurant company by sales and operates in over 100 countries through two separate brands. Burger
King is the world’s second largest fast food hamburger restaurant chain (14,372 locations, 99.6%
franchised) . Tim Hortons is the leading Canadian quick service restaurant, known for coffee and baked
goods (4,671 locations 99.7% franchised)
Admittedly, the single most important variable in this combination is 3G. The 51% owners of the
combined entity, 3G Capital have built a solid record of imposing new efficient structures on top of
existing brands, with multiple success stories (most recently at BKW itself) of cost cutting, capex
management, capital allocation, and international expansion.
Since the merger closed in Dec 2014 the stock peaked at $45 only to roll back to $38, where it started
the year. Still not cheap compared to its peers, but with the initial excitement out of the stock we find
this level to be a very reasonable entry point, given what we expect to become another successful 3G
story. This view is particularly reinforced by the very confident performance in the most recent quarter.
As the new name and ticker suggest, the company is intended to become another one of 3G’s platform
businesses (like Kraft/Heinz and Inbev) designed to apply proven blueprints to multiple brands. It is
therefore crucial for the new entity to demonstrate the ability to support Tim Horton and Burger King
brands in the near term, before adding any new businesses to this international master franchise
The market currently values QSR at ~16.7x consensus ‘16 EBITDA, which is only marginally richer than
the other all-franchised peers (DNKN 16x, DPZ 15.5x). Given the 3G track record, the new company’s
vast scale and platform status, we feel the stock deserves a higher multiple, but holding the multiple at
current levels for now, upside to the stock price will need to be driven by improved profitability and
growth. Both are areas of expertise for management. Let’s see what 3G has done at BKW in the first 3
years of ownership.
1. Aggressive overhead cost cuts. Between its Zero Based Budget approach (where each year’s
budget is built from scratch rather than updating the previous year’s blueprint) and
refranchising they were able to shrink G&A by $178m (45%) in 3 years. This is where over 80% of
ebitda growth came from.
2. Less relevant for the QSR story, but just to illustrate management’s effectiveness, further margin
expansion was driven by refranchising 1,300 of company low-margin stores and shifting to an
asset-lite model. Lowering the capex requirement also dramatically improved FCF.
3. With the use of the master franchise agreements 3G accelerated international unit growth from
168 units (+3.7% y/y) to 710 (+12.9% y/y). Unit growth ramped up quickly starting with Brazil as
early as 2011, followed by 3 deals in ’12 (China, Russia, S Africa), and 3 more in ’13 (France,
India, Mexico) with more to come. The impact of these agreements is still being realized.
 What can we expect from the new company? The management is not very forthcoming with projections
or specifics of its strategies, but after just 3 months of post-merger operations, the Q1 results reported
in the end of April provide us with some clues as to where the company is headed.
Same store sales came in higher than expected for both brands in every region, beating pretty much
every sell-side estimate. Burger King reported same store sales of +4.6% globally, and +6.9%
US/Canada. The Tim Horton comps were +5.3% globally with US at +8.9%. These were both brands best
numbers in several years. Clearly something is working right. Before the merger the market would have
been thrilled with 2-3% growth observed in 2014. These numbers look particularly surprising compared
to the disappointing results reported by some of the other operators in the space (CMG, DNKN, etc). For
what they’re worth, the upper ends of the sell side’s price target ranges for QSR ($48-50) are predicated
on much more modest SSS numbers (2-3% globally and 5-7% in the US).
G&A fell by $20m y/y, again surprising most analysts, with most savings coming from TH. Per
management commentary, its Zero-Based budgeting began to kick in with a 15% workforce reduction,
closure of its US headquarters and putting its Gulfstream 100 jet for sale. At the same time we were told
ZBB was only introduced in March, so we should see more savings going forward.
We also speculate that the company is somewhat restrained in its ability to brag about workforce
related cost saving, given the Canadian government’s and public’s vocal concerns in this area prior to
the merger approval last year.
Similarly, in light of last year’s political backlash against tax-inversion motivated deals, it appears the
company continues to downplay the tax optimization component of its strategy. Nonetheless, the nicely
improved rate of 22% effective tax vs. last year’s 27.5% shouldn’t be ignored
Finally the company raised its dividend from 9c to 10c.
These results look like a sign of management’s very serious commitment. Setting the bar this high
indicates the team’s confidence in its plan, and we should expect similar pace of progress in the future
quarters. There were questions regarding TH’s distribution business, which had been speculated to be
the next area of optimization. While no specific plans were revealed, management indicated that
nothing is off the table. It seems that the manufacturing and physical distribution (trucks/warehousing)
parts of the distribution business (as opposed to the supply chain management piece) could garner
some attention.
Beyond cost cutting, we should also start hearing more on unit development at BK, the weakest point of
the Q1 report. With only 15 units opened so far in 2015 we expect a ramp up towards the 2nd half,
similar to the pattern observed last year. Unit openings drive more EBITDA leverage in a franchise
framework (as compared to the same store sales growth), and hence a healthy pace of expansion is key.
To this end, TH’s international expansion is the more exciting value creation avenue for the company in
the medium/long term. While the timing is not clear, and most analysts assume a cautious stance on
this, using BKW as the blueprint again, its first contracts began shaping up in just 8 months of 3G
ownership, so it’s not unreasonable to expect a similar time line this time around.
To be fair, there are still many unanswered questions about receptiveness of the international markets
to TH’s product. But DNKN's 3,000+ international stores indicate there’s substantial international
interest in coffee/baked goods offering. And to further counter skeptics managements recalled in recent
comments its successful experience with introducing BK to France and India. That effort was met with
justifiable initial skepticism regarding demand for burgers and fries among the French and Indian
consumers. By teaming up with thoughtfully chosen local partners and developing creative product
alternatives, the BK team was able to prove the skeptics wrong.
Again, the timing of TH’s international expansion is tough to predict, but in the meantime we expect to
hear something soon regarding TH’s more attainable US development.
To summarize we are witnessing a very confident start to what should be a series of further successful
steps on multiple fronts. Given our confidence in QSR’s management, backed by its track record and
already implemented strong initial steps, we are comfortable expecting a repeat success in Q2,
potentially to be rewarded by multiple expansion.
And for the really long term we go back to the platform business thesis. We don’t expect any new
acquisitions until the model proves itself. But looking for the next brand to be added to the platform,
Dairy Queen, owned by Berkshire Hathaway (a large holder of QSR common and preferred stock) has
been suggested. 99% franchised with some international presence DQ looks like a great fit with the QSR
Valuation vs. peers, while no longer at its March 2015 highs, still makes QSR relatively rich, and the stock
is likely to get hurt in case of any potential Q2 missteps.
Such missteps can include SSS not sustained and dropping below 2-3%, slowing pace of G&A cost cuts
and prolonged lack of any JV / franchise agreement announcements.
TH’s foreign strategy may get slowed down with typical problems facing any internationally expanding
US business (problems with supply chain, operations, limited brand awareness, etc.). While a reasonable
concern, we expect BK’s playbook to be very helpful in anticipating these issues.
With the multiple avenues of growth, an efficiency driven platform model, management’s track record,
and a very healthy start, we find QSR to be a compelling medium-to-long-term story with reasonable
near and mid-term risks.
As the market is still trying to size up the new company two quarters after the merger, the price declines
over the past couple of months present attractive entry point.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.
This investment may change at any time.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Continued SSS strength and pace of cost cuts in q2

Announcements of international master franchise agreements for THI.

Additional BKW JV announcements.


New efficiency measures for the TH’s distribution business

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