The cost-cutting prowess of Tim Hortons' new Brazilian owner is starting to pay off, helping the coffee-and-doughnut chain generate some strong second-quarter results.
3G Capital Partners LP of Brazil, known for its bare-bones operations at companies such as H.J. Heinz and Burger King, is bringing its cost discipline to recent acquisition Tim Hortons Inc., with more of the same expected in the future.
"We've been able to implement a mindset of ownership that's going to allow us to become a very lean and aggressive organization that is going to allow us to grow much more quickly all around the world," said Joshua Kobza, chief financial officer of 3G Capital's Restaurant Brands International Inc., the new parent of Tim Hortons and Burger King, on Monday.
From shaving the head-office staff count to minimalist budgets, Restaurant Brands is quickly bringing its no-nonsense management style to Tim Hortons as it prepares for big international expansion. The approach is benefiting the company's bottom line while creating big culture shifts at the café chain.
In its second quarter, Tim Hortons' adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose to $234.3-million (U.S.) from $215.2-million a year earlier. Excluding the effects of a weaker Canadian dollar, total revenue rose 7.9 per cent, reflecting the addition of new menu items and higher prices. (Including the exchange impact, revenues fell 4.3 per cent to $763.2-million.)
Selling, general and administrative expenses tumbled to $23.1-million from $41.6-million a year earlier.
David Palmer, an analyst at RBC Dominion Securities Inc., said he expects "dramatic" year-over-year cost reductions for the remainder of the year.
The combination of Tim Hortons' lower expenses, streamlined logistics and international expansion could enable Restaurant Brands to pursue even more acquisitions – potentially reshaping the global fast-food landscape, Mr. Palmer said in a note. 3G has followed a similar path with its takeovers of Heinz and Kraft.
Tim Hortons has been snipping away at its corporate work force, axing 350 jobs or about 15 per cent of its 2,600 employees at headquarters and regional offices about a month after its acquisition in December.
In the spring, it closed its U.S. head office without saying how many jobs were affected. It recently offered voluntary buyouts to almost 15 per cent of its staff, and about 3 per cent took up the offer, spokesman Patrick McGrade said in mid-July.
Mr. McGrade said at the time the company was continuing to analyze "non-core aspects of our business to look for efficiencies and service enhancements for our franchise owners" and customers. "As such, some non-restaurant-facing roles within our business are being reviewed for possible outsourcing," he said.
An area such as information technology, "if outsourced, would affect less than 1.5 per cent of our employee base," he said. He did not provide an update on Monday.
In order to get federal approval for the takeover, Tim Hortons agreed not to cut more than 20 per cent of its corporate employees and no franchise staff for five years. Jake Enwright, spokesman for Industry Minister James Moore, said on Monday that "to the best of my understanding, yes, they are in compliance."
The coffee chain has made other trims, including doing away with its corporate jet.
It has also introduced zero-based budgeting, as 3G has done at its other companies. It entails managers planning each year's budget as if beginning from scratch, forcing them to analyze expenses annually and shifting spending to higher-performing initiatives.
"The implementation of zero-based budgeting at Tim's and our general ownership approach to costs enabled us to more efficiently manage our overhead expenses year over year while accelerating the pace of top-line growth," Mr. Kobza told an analyst conference call.
Besides cost-cutting and heightened efficiencies, Tim Hortons has been adding new items to its menu such as crispy chicken sandwiches and grilled paninis to bolster its lunch business. And heavy demand for new drinks such as a creamy chocolate chill beverage and dark roast coffee also helped same-store sales – an important retail measure at outlets open a year or more. They picked up by 5.5 per cent, almost twice the rate of a year ago.
On the expansion front, Restaurant Brands is working with U.S. partners to open more Tim Hortons outlets in the United States, chief executive officer Daniel Schwartz said. It recently rolled out its first one in the new market of St. Louis, Mo. He said a recent trip to the Middle East raised his optimism about that market, where the coffee chain already has about 50 locations.
For Tim Hortons, the company is following the same strategy it did with Burger King in its global expansion, teaming up with local franchise partners. As with Burger King, "it will take some time," Mr. Schwartz said. "It doesn't happen overnight."
Investors seem pleased with the results, pushing Restaurant Brands shares up 3.85 per cent or $2.10 to $54.21 (Canadian) on the Toronto Stock Exchange Monday.
Restaurant Brands reported a second-quarter net profit compared with a first-quarter loss. On an adjusted basis, it earned 30 cents per share, beating analysts' average estimate of 25 cents, according to Thomson Reuters I/B/E/S. Revenue rose nearly 12 per cent to $1.04-billion, ahead of analysts' expectations of $1.01-billion.