Burger King: Results Positive Comparable Sales and Net Restaurant Expansion Drive Strong Revenue Performance in Q1 2009

Miami, 31 October 2008

Highlights:

• Revenues up 12 percent to $674 million
• 19^th consecutive quarter of worldwide positive comparable sales; 3.6 percent
• 18^th consecutive quarter of United States and Canada positive comparable sales; 3.0 percent
• Trailing 12-month (TTM) average restaurant sales (ARS) up 8 percent, to $1.32 million – a new record high
• TTM net restaurant count increases by 342 – on target to meet annual guidance
• EPS and adjusted EPS results as outlined below:

Burger King Holdings, Inc. delivered robust revenue growth led by an increased number of company restaurants, positive worldwide comparable sales in all segments and significant worldwide net restaurant expansion.

Comparable sales were up 3.6 percent, marking the 19^th consecutive quarter of worldwide same-store-sales growth. In the United States and Canada, comparable sales were up 3.0 percent, the 18^th consecutive quarter of same-store-sales growth. Additionally, the system opened 67 net new restaurants, the highest number of first quarter net restaurant openings in seven years.

As a result, the company posted strong revenues for the first quarter of $674 million, up 12 percent from $602 million in the same quarter last year.

“The global strength of our business is evidenced by our solid top-line expansion,” said John Chidsey, chairman and chief executive officer. “We delivered strong revenues even with mounting economic and consumer uncertainties by successfully executing on our multiple growth strategies, including net restaurant growth, product innovation, marketing leadership, longer competitive hours and operational excellence.”

Comparable sales worldwide were fueled primarily by the implementation of strategic pricing as well as a strong mix of high demand indulgent and value product offerings and promotional tie-ins. Results were also aided by regionally based offerings such as the successful introduction of an innovative and healthy kids meal, which includes BK^TM Fresh Apple Fries and nutritionally fortified Kraft^® Macaroni and Cheese in the U.S. and Whopper® sandwich limited time offers in both Europe and Latin America. Also contributing to sales were family promotions used throughout many markets including Pokemon^TM, Crayola^TM and Neopets®.

“We significantly expanded our revenue as we leveraged our global footprint and broad-based consumer appeal. Our guests continue to seek our affordable pricing, elevated quality and convenience. We believe our brand is positioned to perform well in spite of the current economic slowdown as proven by our track record of continued sales increases,” Chidsey added.

Worldwide trailing 12-month ARS reached a record high – posting an 8 percent increase to $1.32 million compared to $1.22 million in the same period last year. Worldwide first quarter fiscal 2009 ARS increased 5 percent to $343,000 compared to $327,000 in the same quarter last year.

“We are very pleased with our top-line performance; however, we recognize company restaurant margins were significantly pressured by record high commodity costs, expenses related to our U.S. and Canada reimaging program and acquisition start-up costs,” Chidsey said.

The company’s earnings were also impacted by an incremental $9 million of expenses recorded in Other Income and Expense as compared to the same period last year. Five million (equaling $0.02 of EPS) of the increase consisted of primarily non-cash expenses resulting from volatility in foreign currencies and interest rate markets.

Chidsey continued: “Going forward, we expect earnings will benefit from already moderating food and energy costs, expected sales lifts from the newly reimaged company restaurants and the elimination of acquisition expenses.”

For the quarter, the company reported earnings per share of $0.36 compared to $0.35 in the same quarter last year. Adjusted earnings per share, excluding $3 million of adjustments, increased 9% percent to $0.38 compared to $0.35 in the year ago period. These adjustments consisted of expenses related to the previously announced acquisition of 72 franchise restaurants, specifically settlement charges and start-up costs.

Development

In the first quarter, the company increased its worldwide net restaurant count by 67, led by its international markets in Europe and the Middle East. During the last 12 months, the company opened a total of 342 net new restaurants.

“The momentum of our global development pipeline is confirmed by our solid quarterly and trailing 12-month net restaurant growth,” Chidsey said. “Given our strong development activity and our first quarter net restaurant growth, we expect to achieve our planned 350 to 400 net new restaurants in fiscal 2009 as we expand our brand in North America and around the world.”

Uses of Cash

During the first quarter, the company generated $52 million of cash flow from operations, which was used for key strategic purposes targeted at enhancing shareholder value. The company declared and paid a cash dividend totaling $8 million and opportunistically repurchased $18 million of its shares. The company also invested $4 million on its U.S. and Canada reimaging program which is expected to generate attractive returns.

“Even amidst the current economic slowdown, our ability to generate solid cash flow is a fundamental benefit of our highly franchised business model,” said Ben Wells, chief financial officer. “And our strong balance sheet uniquely positions us to invest in the brand, driving future growth.”

Future growth

The product and promotional calendar for the second quarter is structured to continue the company’s multi-year positive comparable sales trend. Scheduled marketing initiatives include a soon-to-be announced interactive gaming promotion. Other campaigns slated to increase SuperFamily sales include iDog^TM and The Simpsons^TM. In addition, the company will strategically focus on expanding the breakfast and late-night dayparts with competitive hours advertising and will continue to build upon its successful barbell menu strategy.

Chidsey concluded: “Our business fundamentals remain strong and we believe that our brand is well positioned to drive future profitability as we continue to execute on our proven strategies: expanding our global footprint; accelerating our company restaurant reimaging program; providing our guests with an exceptional dining experience; and maintaining our industry-leading marketing. Our strategies remain on course; therefore, we are reaffirming our full-year EPS forecast of $1.54 to $1.59 for 12 to 15 percent EPS growth based on our outlook for continued positive comparable sales, significant restaurant development and increased income from operations.”  

PERFORMANCE INDICATORS AND USE OF NON-GAAP FINANCIAL MEASURES

To supplement the Company’s condensed consolidated financial statements presented on a U.S. Generally Accepted Accounting Principles (GAAP) basis, the Company uses three key business measures as indicators of the Company’s operational performance: sales growth, comparable sales growth and average restaurant sales. These measures are important indicators of the overall direction, trends of sales and the effectiveness of the Company’s advertising, marketing and operating initiatives and the impact of these on the entire Burger King® system. System-wide data represent measures for both Company and franchise restaurants. Unless otherwise stated, sales growth, comparable sales growth and average restaurant sales are presented on a system-wide basis.

The Company also provides certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share.

EBITDA is defined as earnings (net income) before interest, taxes, depreciation and amortization, and is used by management to measure operating performance of the business. Management believes EBITDA is a useful measure as it reflects certain operating drivers of the Company’s business, such as sales growth, operating costs, selling, general and administrative expenses and other operating income and expense. EBITDA is also one of the measures used by the Company to calculate incentive compensation for management and corporate-level employees.

Adjusted EBITDA for the three months ended September 30, 2008 excludes $2 million of charges associated with the acquisition of franchise restaurants from a large franchisee in the U.S. and $1 million of start up charges associated with acquired restaurants. There were no adjustments to EBITDA for the three months ended September 30, 2007.

While EBITDA and adjusted EBITDA are not recognized measures under GAAP, management uses these financial measures to evaluate and forecast the Company’s business performance. These non-GAAP financial measures have certain material limitations, including:

• they do not include net interest expense. As the Company has borrowed money for general corporate purposes, interest expense is a necessary element of its costs and ability to generate profits and cash flows;
• they do not include depreciation and amortization expenses. As the Company uses capital assets, depreciation and amortization are necessary elements of its costs and ability to generate profits; and
• they do not include provision for taxes. The payment of taxes is a necessary element of the Company’s operations.

Management compensates for these limitations by using EBITDA and adjusted EBITDA as only two of several measures for evaluating the Company’s business performance. In addition, capital expenditures, which impact depreciation and amortization, interest expense and income tax expense, are reviewed separately by management. Management believes these non-GAAP measures provide both management and investors with a more complete understanding of the underlying operating results and trends and an enhanced overall understanding of the Company’s financial performance and prospects for the future. EBITDA and adjusted EBITDA are not intended to be measures of liquidity or cash flows from operations or measures comparable to net income as they do not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments.

Adjusted net income for the three months ended September 30, 2008 excludes the after tax effects of $2 million of charges associated with the acquisition of franchise restaurants from a large franchisee in the U.S. and $1 million of start up charges associated with acquired restaurants. Adjusted income tax expense for the three months ended September 30, 2008 is calculated by using the Company’s actual tax rate for all items with the exception of the adjustments described above to which a U.S. federal and state rate of 36.5% has been applied, resulting in an adjusted effective tax rate of 34.2%. Adjusted earnings per share is calculated using adjusted net income divided by weighted average shares outstanding. These non-GAAP measures allow management to measure performance on a more comparable basis. There were no adjustments to net income or earnings per share for the three months ended September 30, 2007.

SUPPLEMENTAL INFORMATION

The following supplemental information relates to Burger King Holdings, Inc.’s results for the three months ended September 30, 2008.

Our business operates in three reportable business segments: (1) the United States (U.S.) and Canada; (2) Europe, the Middle East, Africa and Asia Pacific, or EMEA/APAC; and (3) Latin America.

Seasonality

Restaurant sales are typically higher in the spring and summer months (our fourth and first fiscal quarters) when the weather is warmer than in the fall and winter months (our second and third fiscal quarters). Restaurant sales during the winter are typically highest in December, during the holiday shopping season. Our restaurant sales and Company restaurant margin are typically lowest during our third fiscal quarter, which occurs during the winter months and includes February, the shortest month of the year.

Revenues (Dollars in millions)

Revenues consist of Company restaurant revenues, franchise revenues and property revenues.

Total Revenues

Total revenues increased by $72 million, or 12%, to $674 million for the three months ended September 30, 2008, primarily as a result of increases in both Company restaurant revenues and franchise revenues. Company restaurant revenues increased by $56 million, or 13%, to $497 million during the three months ended September 30, 2008 compared to the same period in the prior year, primarily as a result of the addition of 145 Company restaurants (net of closures and sales of Company restaurants to franchisees, or “refranchisings”) during the twelve months ended September 30, 2008 and worldwide Company comparable sales growth of 1.9%. The net increase of 145 Company restaurants includes the net acquisition of 130 franchise restaurants, primarily in the U.S. and Canada. Revenues from the acquired restaurants totaled $42 million for the period. Approximately $9 million, or 16%, of the increase in Company restaurant revenues was generated by the favorable impact from the movement of currency exchange rates, primarily in EMEA.

Total franchise revenues increased by $15 million, or 11%, to $146 million during the three months ended September 30, 2008, compared to the same period in the prior year, driven by a net addition of 197 franchise restaurants during the twelve months ended September 30, 2008, worldwide franchise comparable sales growth of 3.9% for the period, higher effective royalty rates in the U.S. and approximately a $3 million favorable impact from the movement of currency exchange rates, primarily in EMEA. This increase was partially offset by a reduction in royalty payments due to the Company’s net acquisition of 130 franchise restaurants during the twelve months ended September 30, 2008.

Positive comparable sales of 3.6% for the period were driven by our strategic pricing initiatives, our barbell menu strategy of innovative indulgent products and value menu items, and the continued development of our breakfast and late night dayparts.

For the three months ended September 30, 2008, the favorable impact on revenues from the movement of currency exchange rates was substantially offset by the unfavorable impact of exchange rates on Company restaurant expenses and selling, general and administrative expenses, resulting in a net favorable impact on income from operations of $2 million.

U.S. and Canada

In the U.S. and Canada, Company restaurant revenues increased by $50 million, or 17%, to $340 million during the three months ended September 30, 2008 compared to the same period in the prior year, primarily as a result of a net increase of 155 Company restaurants during the twelve months ended September 30, 2008, including the net acquisition of 141 franchise restaurants, and Company comparable sales growth of 1.3% for the period in this segment. Revenues from the acquired restaurants totaled $42 million for the period.

In the U.S. and Canada, franchise revenues increased by $5 million, or 6%, to $84 million during the three months ended September 30, 2008, compared to the same period in the prior year, primarily as a result of franchise comparable sales growth of 3.2% in this segment and higher effective royalty rates in the U.S. This increase was partially offset by the elimination of royalties from 129 fewer franchise restaurants compared to the same period in the prior year due to the net acquisition of 141 franchise restaurants by the Company, offset by the net opening of 12 new franchise restaurants during the twelve months ended September 30, 2008.

Positive comparable sales in the U.S. and Canada of 3.0% for the period were driven primarily by our strategic pricing initiatives as well as successful product promotions, such as the Steakhouse Burger in the U.S., the introduction of the new BK™ Kids Meal (including Kraft® Macaroni and Cheese and BK™ Fresh Apple Fries) and the Spicy Chicken BK Wrapper™ offering on the BK® Value Menu. Promotional tie-ins with marketing properties, such as Pokemon™, Neopets® and Crayola™, also positively impacted comparable sales.

EMEA/APAC

In EMEA/APAC, Company restaurant revenues increased by $3 million, or 2%, to $138 million during the three months ended September 30, 2008, compared to the same period in the prior year, primarily as a result of Company comparable sales growth of 3.4% for the period in this segment and an $8 million favorable impact from the movement of currency exchange rates in EMEA. Partially offsetting these factors was a decrease in revenues from a net reduction of 18 Company restaurants during the twelve months ended September 30, 2008, due to the refranchising of 11 Company restaurants in Germany and the net closure of 7 Company restaurants in the U.K.

In EMEA/APAC, franchise revenues increased by $8 million, or 20%, to $49 million during the three months ended September 30, 2008, compared to the same period in the prior year, driven by a net increase of 232 franchise restaurants during the twelve months ended September 30, 2008, franchise comparable sales growth of 5.0% for the period in this segment and a $3 million favorable impact from the movement of currency exchange rates.

Positive comparable sales in the EMEA/APAC segment of 4.8% for the period were driven primarily by our strategic pricing initiatives as well as successful product promotions, such as Whopper® sandwich limited time offers throughout the region, BK Fusion™ Real Ice Cream and the Long Chicken sandwich limited time offer in Spain.

Latin America

In Latin America, Company restaurant revenues increased by $3 million, or 19%, to $19 million during the three months ended September 30, 2008, compared to the same period in the prior year, primarily as a result of a net increase of eight Company restaurants during the twelve months ended September 30, 2008, Company comparable sales growth of 2.3% for the period in this segment and a $1 million favorable impact from the movement of currency exchange rates.

Latin America franchise revenues increased by $2 million, or 18%, to $13 million during the three months ended September 30, 2008 compared to the same period in the prior year, as a result of the net addition of 94 franchise restaurants during the twelve months ended September 30, 2008 and franchise comparable sales growth of 5.4% for the period in this segment.

Positive comparable sales in this segment of 5.2% for the period reflect continued strength in Central and South America, as well as our Caribbean markets. This was driven by our barbell menu strategy featuring an everyday value platform such as our new 'Come Como Rey' (Eat Like A King) value menu in Mexico, plus indulgent products, such as our new Steakhouse burger rolled out in Central America and the Caribbean. Successful promotional tie-ins with movie properties, such as Indiana Jones™ and the Kingdom of the Crystal Skull™ with our Adventure Whopper® sandwich, and Batman™ the Dark Knight with our Hero BK Stacker™ combo meal also positively impacted comparable sales.

Additional information regarding the key performance measures discussed above is as follows:

Key Revenue Performance Measures