Market Overview

Yum! Brands Reports Second-Quarter GAAP Operating Profit Growth of 7%; Second-Quarter Core Operating Profit Decline of (6)%; Maintains Full-Year Guidance

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Yum! Brands, Inc. (NYSE:YUM) today reported results for the second
quarter ended June 30, 2018. Second-quarter GAAP EPS was $0.97, an
increase of 68%. Second-quarter EPS excluding Special Items was $0.82,
an increase of 20%.

This press release features multimedia. View the full release here:
https://www.businesswire.com/news/home/20180802005127/en/

GREG CREED COMMENTS

Greg Creed, CEO, said, "We continue to execute against our multi-year
transformation strategy and remain on track with our full-year 2018
guidance. Second quarter core operating profit was consistent with our
expectations and we are seeing good progress against our plans as we
start the second half of the year. Importantly, I remain confident our
actions to become more focused, more franchised and more efficient are
establishing the foundation required for sustainable, long-term growth
that will translate to strong returns for all Yum! Brands stakeholders."

SECOND-QUARTER HIGHLIGHTS

     

  Worldwide system sales excluding foreign currency translation grew
4%, with KFC at 6%, Taco Bell at 5% and Pizza Hut flat.

We opened 243 net new units for 4% net new unit growth.

We refranchised 51 restaurants, including 28 KFC and 23 Pizza Hut
units, for pre-tax proceeds of $47 million. We recorded net
refranchising gains of $29 million in Special Items. As of quarter
end, our global franchise ownership mix was 97%.

We repurchased 7.6 million shares totaling $643 million at an
average price of $84.

We reflected the change in fair value of our investment in Grubhub
by recording $25 million of pre-tax investment income, resulting in
$0.06 in EPS.

Foreign currency translation favorably impacted divisional operating
profit by $8 million.
 
       
    % Change

System Sales
Ex F/X

   

Same-Store
Sales

   

Net New Units

   

GAAP
Operating Profit

   

Core
Operating Profit

KFC Division +6     +2     +5     (3)     (6)
Pizza Hut Division Even (1) +2 (5) (6)
Taco Bell Division     +5     +2     +3     (2)     (2)
Worldwide     +4     +1     +4     +7     (6)
 
             
    Second Quarter     Year-to-Date
2018     2017     % Change     2018     2017     % Change
GAAP EPS $0.97     $0.58     +68     $2.25     $1.34     +67
Special Items EPS1 $0.15     $(0.10)     NM     $0.54     $0.01     NM
EPS Excluding Special Items     $0.82     $0.68     +20     $1.71     $1.33     +29

1

 

See Reconciliation of Non-GAAP Measurements to GAAP Results within
this release for further detail of Special Items.

 

All comparisons are versus the same period a year ago. As required, we
adopted a new accounting standard on revenue recognition effective
January 1, 2018. Prior year results have not been restated for this
change. See the Other Items section of this release for further details.

System sales growth figures exclude foreign currency translation ("F/X")
and core operating profit growth figures exclude F/X and Special Items.
Special Items are not allocated to any segment and therefore only impact
worldwide GAAP results. See reconciliation of Non-GAAP Measurements to
GAAP Results within this release for further details.

KFC DIVISION

             
    Second Quarter     Year-to-Date
        %/ppts Change             %/ppts Change
2018     2017     Reported     Ex F/X     2018     2017     Reported     Ex F/X
Restaurants 21,838 20,854 +5     N/A 21,838 20,854 +5     N/A
System Sales ($MM) 6,306 5,771 +9 +6 12,635 11,406 +11 +6
Same-Store Sales Growth (%) +2 +3 NM NM +2 +3 NM NM
Franchise and Property Revenues ($MM) 310 278 +11 +8 617 535 +15 +10
Operating Profit ($MM) 235 243 (3) (6) 456 450 +1 (3)
Operating Margin (%)     36.1     31.5     4.6     3.9     34.8     29.9     4.9     4.4
 
             
    Second Quarter (% Change)     Year-to-Date (% Change)
      International     U.S.     International     U.S.
System Sales Growth Ex F/X +7     Even     +7     (1)
Same-Store Sales Growth     +2     +1     +2     Even
 
       

KFC Division opened 301 gross new international restaurants in 52
countries.

Operating margin increased 4.6 percentage points driven by
refranchising, partially offset by the gross up of advertising fund
revenues and offsetting expenses required by the revenue recognition
accounting standard and lapping higher renewal and transfer fees.

Foreign currency translation favorably impacted operating profit by
$7 million.
 
             
KFC Markets1    

Percent of KFC
System Sales2

    System Sales Growth Ex F/X
       

Second Quarter
(% Change)

   

Year-to-Date
(% Change)

China 27% +5     +7
United States 18% Even (1)
Asia 12% +6 +4
Australia 7% +6 +5
Russia & Eastern Europe 7% +23 +21
United Kingdom 6% (6) (8)
Latin America 5% +11 +13
Western Europe 5% +10 +12
Africa 4% +5 +5
Middle East / Turkey / North Africa 4% +15 +11
Canada 2% +2 +4
Thailand 2% +7 +6
India     1%     +20     +19
1  

Refer to investors.yum.com/financial-reports
for a list of the countries within each of the markets.

2 Reflects Full Year 2017.
 

PIZZA HUT DIVISION

             
    Second Quarter     Year-to-Date
        %/ppts Change             %/ppts Change
2018     2017     Reported     Ex F/X     2018     2017     Reported     Ex F/X
Restaurants 16,823 16,452 +2     N/A 16,823 16,452 +2     N/A
System Sales ($MM) 2,894 2,827 +2 Even 5,926 5,699 +4 +1
Same-Store Sales Growth (%) (1) (1) NM NM Even (2) NM NM
Franchise and Property Revenues ($MM) 140 141 (1) (3) 289 285 +1 (1)
Operating Profit ($MM) 81 85 (5) (6) 169 168 +1 (2)
Operating Margin (%)     34.6     38.1     (3.5)     (3.8)     34.8     36.8     (2.0)     (2.4)
 
             
    Second Quarter (% Change)     Year-to-Date (% Change)
      International     U.S.     International     U.S.
System Sales Growth Ex F/X +1     (1)     +2     +1
Same-Store Sales Growth     (2)     Even     (2)     +2
 
       

Pizza Hut Division opened 176 gross new international restaurants in
47 countries.

Operating margin decreased 3.5 percentage points driven by the gross
up of advertising fund revenues and offsetting expenses required by
the revenue recognition accounting standard, partially offset by
refranchising and lower G&A related to litigation costs.

Foreign currency translation favorably impacted operating profit by
$1 million.
 
             
Pizza Hut Markets1    

Percent of Pizza Hut System Sales2

    System Sales Growth Ex F/X
       

Second Quarter
(% Change)

   

Year-to-Date
(% Change)

United States 46% (1)     +1
China 18% (1) (1)
Asia 13% +4 +5
Europe 10% (1) +1
Latin America 6% (1) Even
Middle East / Turkey / North Africa 4% +3 +2
Canada 2% +1 +1
India 1% +22 +22
Africa     <1%     +43     +35
1  

Refer to investors.yum.com/financial-reports
for a list of the countries within each of the markets.

2 Reflects Full Year 2017.
 

TACO BELL DIVISION

             
    Second Quarter     Year-to-Date
        %/ppts Change             %/ppts Change
2018     2017     Reported     Ex F/X     2018     2017     Reported     Ex F/X
Restaurants 6,905 6,686 +3     N/A 6,905 6,686 +3     N/A
System Sales ($MM) 2,489 2,373 +5 +5 4,836 4,635 +4 +4
Same-Store Sales Growth (%) +2 +4 NM NM +1 +6 NM NM
Franchise and Property Revenues ($MM) 134 120 +12 +12 262 234 +12 +12
Operating Profit ($MM) 149 152 (2) (2) 281 293 (4) (4)
Operating Margin (%)     30.8     33.4     (2.6)     (2.6)     29.7     32.3     (2.6)     (2.6)
 
     

  Taco Bell Division opened 43 gross new restaurants, including 9 new
international restaurants.

Operating margin decreased 2.6 percentage points driven by the gross
up of advertising fund revenues and offsetting expenses required by
the revenue recognition accounting standard, higher restaurant-level
costs and lapping lower litigation costs, partially offset by
refranchising and same-store sales growth.

OTHER ITEMS

     

  Effective January 1, 2018, we adopted the new accounting standard on
revenue recognition. As a result, we are now required to recognize
upfront fees, such as initial and renewal fees we receive from
franchisees, as revenue over the term of the related franchise
agreement. We also record incentive payments we may make to
franchisees (e.g., equipment funding provided under the KFC U.S.
Acceleration Agreement) as a reduction of revenue over the period of
expected cash flows from the franchise agreements to which the
payment relates. Under our historical accounting, we recognized
upfront fees from franchisees in full upon commencement of the
related franchise agreements and incentive payments made to
franchisees when we were obligated to make the payment.

 

Additionally, the new accounting standard requires us to begin
recording other revenues we receive from franchisees and the
related expenses on a gross basis within our Income Statement.
Previously, these revenues and expenses, the largest of which
relate to franchisee contributions to and subsequent expenditures
from advertising cooperatives we consolidate, were reported on a
net basis within our Income Statement. We have reported these
revenues and expenses in our Income Statement on the two new line
items of Franchise contributions for advertising and other
services and Franchise advertising and other services expense.

 

Prior results have not been restated for the impact of this
accounting change and therefore remain reported as they have been
historically. However, the adoption was done on a modified
retrospective basis resulting in the current year impact being
reported as if the now-required accounting had been in place since
the inception of currently active franchise agreements or when
franchise incentive payments were originally made. On a full-year
basis we anticipate that the non-cash impacts of adopting the new
revenue recognition standard will negatively impact core operating
profit growth by 2 to 3 percentage points. As a result of the new
standard, core operating profit growth was negatively impacted by
two percentage points during the second quarter and one percentage
point year-to-date through June 30, 2018. The lower first half
impact was expected as the majority of our new unit development
for which we receive upfront fees, which will now be spread versus
recognized upfront, is expected to occur later in the year.

Disclosures pertaining to outstanding debt in our Restricted Group
capital structure will be provided at the time of the filing of the
second-quarter Form 10-Q.
 

CONFERENCE CALL

Yum! Brands, Inc. will host a conference call to review the company's
financial performance and strategies at 8:15 a.m. Eastern Time August 2,
2018. The number is 877/815-2029 for U.S. callers and 706/645-9271 for
international callers, conference ID 6389106.

The call will be available for playback beginning at 11:00 a.m. Eastern
Time August 2, 2018 through September 13, 2018. To access the playback,
dial 855/859-2056 in the U.S. and 404/537-3406 internationally,
conference ID 6389106.

The webcast and the playback can be accessed via the internet by
visiting Yum! Brands' website, investors.yum.com/events-and-presentations
and selecting "Q2 2018 Yum! Brands, Inc. Earnings Call."

ADDITIONAL INFORMATION ONLINE

Quarter end dates for each division, restaurant count details,
definitions of terms and Restricted Group financial information are
available at investors.yum.com. Reconciliation of non-GAAP
financial measures to the most directly comparable GAAP measures are
included within this release.

FORWARD-LOOKING STATEMENTS

This announcement may contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. We intend all forward-looking
statements to be covered by the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
generally can be identified by the fact that they do not relate strictly
to historical or current facts and by the use of forward-looking words
such as "expect," "expectation," "believe," "anticipate," "may,"
"could," "intend," "belief," "plan," "estimate," "target," "predict,"
"likely," "seek," "project," "model," "ongoing," "will," "should,"
"forecast," "outlook" or similar terminology. These statements are based
on and reflect our current expectations, estimates, assumptions and/ or
projections, our perception of historical trends and current conditions,
as well as other factors that we believe are appropriate and reasonable
under the circumstances. Forward-looking statements are neither
predictions nor guarantees of future events, circumstances or
performance and are inherently subject to known and unknown risks,
uncertainties and assumptions that could cause our actual results to
differ materially from those indicated by those statements. There can be
no assurance that our expectations, estimates, assumptions and/or
projections, including with respect to the future earnings and
performance or capital structure of Yum! Brands, will prove to be
correct or that any of our expectations, estimates or projections will
be achieved.

Numerous factors could cause our actual results and events to differ
materially from those expressed or implied by forward-looking
statements, including, without limitation: food safety and food
borne-illness issues; health concerns arising from outbreaks of viruses
or other diseases; the success of our franchisees and licensees, and the
success of our transformation initiatives, including our refranchising
strategy; our significant exposure to the Chinese market; changes in
economic and political conditions in countries and territories outside
of the U.S. where we operate; our ability to protect the integrity and
security of individually identifiable data of our customers and
employees; our increasing dependence on digital commerce platforms and
information technology systems; the impact of social media; our ability
to secure and maintain distribution and adequate supply to our
restaurants; the success of our development strategy in emerging
markets; changes in commodity, labor and other operating costs; pending
or future litigation and legal claims or proceedings; changes in or
noncompliance with government regulations, including labor standards and
anti-bribery or anti-corruption laws; recent Tax Legislation (defined
below) and other tax matters, including disagreements with taxing
authorities; consumer preferences and perceptions of our brands; changes
in consumer discretionary spending and general economic conditions;
competition within the retail food industry; and risks relating to our
significant amount of indebtedness. In addition, other risks and
uncertainties not presently known to us or that we currently believe to
be immaterial could affect the accuracy of any such forward-looking
statements. All forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.

Information regarding the impact of the Tax Cuts and Jobs Act of 2017
("Tax Legislation") consists of preliminary estimates which are
forward-looking statements and are subject to change. Information
regarding the impact of Tax Legislation is based on our current
calculations, as well our current interpretations, assumptions and
expectations relating to Tax Legislation, which are subject to further
ongoing change.

The forward-looking statements included in this announcement are only
made as of the date of this announcement and we disclaim any obligation
to publicly update any forward-looking statement to reflect subsequent
events or circumstances. You should consult our filings with the
Securities and Exchange Commission (including the information set forth
under the captions "Risk Factors" and "Forward-Looking Statements" in
our most recently filed Annual Report on Form 10-K and Quarterly Report
on Form 10-Q) for additional detail about factors that could affect our
financial and other results.

Yum! Brands, Inc., based in Louisville, Kentucky, has over 45,000
restaurants in more than 140 countries and territories and is one of the
Aon Hewitt Top Companies for Leaders in North America. In 2018, Yum!
Brands was recognized as part of the inaugural Bloomberg Gender-Equality
Index and ranked among the top 100 Best Corporate Citizens by Corporate
Responsibility Magazine.
In 2017, Yum! Brands was named to the Dow
Jones Sustainability North America Index. The company's restaurant
brands – KFC, Pizza Hut and Taco Bell – are the global leaders of the
chicken, pizza and Mexican-style food categories. Worldwide, the Yum!
Brands system opens over seven new restaurants per day on average,
making it a leader in global retail development.

               

YUM! Brands, Inc.

Condensed Consolidated Summary of Results

(amounts in millions, except per share amounts)

(unaudited)

 
Quarter ended % Change Year to date % Change
6/30/18     6/30/17 B/(W) 6/30/18     6/30/17 B/(W)
Revenues
Company sales $ 512 $ 909 (44) $ 1,024 $ 1,811 (43)
Franchise and property revenues 584 539 8 1,168 1,054 11
Franchise contributions for advertising and other services 272     N/A 547     N/A
Total revenues 1,368   1,448   (6) 2,739   2,865   (4)
 
Costs and Expenses, Net
Company restaurant expenses 421 748 44 859 1,506 43
General and administrative expenses 208 247 15 427 484 12
Franchise and property expenses 40 54 24 87 100 13
Franchise advertising and other services expense 274 N/A 546 N/A
Refranchising (gain) loss (29 ) (19 ) 58 (185 ) (130 ) 42
Other (income) expense 5   (1 ) NM 3   2   (82)
Total costs and expenses, net 919   1,029   11 1,737   1,962   11
 
Operating Profit 449 419 7 1,002 903 11
Investment (income) expense, net (23 ) (1 ) NM (89 ) (2 ) NM
Other pension (income) expense 3 4 30 6 32 81
Interest expense, net 112   105   (8) 219   215   (2)
Income before income taxes 357 311 15 866 658 32
Income tax provision 36   105   67 112   172   35
Net Income $ 321   $ 206   56 $ 754   $ 486   55
 
Effective tax rate 9.9 % 33.8 % 23.9 ppts. 12.9 % 26.2 % 13.3 ppts.
 

Basic EPS

EPS $ 0.99   $ 0.59   69 $ 2.30   $ 1.37   67
Average shares outstanding 324   350   8 328   354   7
 

Diluted EPS

EPS $ 0.97   $ 0.58   68 $ 2.25   $ 1.34   67
Average shares outstanding 331   358   7 336   361   7
 
Dividends declared per common share $ 0.36   $ 0.30   $ 0.72   $ 0.60  
 
 

See accompanying notes.

Percentages may not recompute due to rounding.

 
               

YUM! Brands, Inc.

KFC DIVISION Operating Results

(amounts in millions)

(unaudited)

 
Quarter ended % Change Year to date % Change
6/30/18     6/30/17 B/(W) 6/30/18     6/30/17 B/(W)
 
Company sales $ 241 $ 492 (51) $ 486 $ 967 (50)
Franchise and property revenues 310 278 11 617 535 15
Franchise contributions for advertising and other services 100     N/A 206     N/A
Total revenues 651   770   (16) 1,309   1,502   (13)
 
Company restaurant expenses 210 415 49 430 825 48
General and administrative expenses 81 85 5 166 174 5
Franchise and property expenses 25 26 6 54 51 (4)
Franchise advertising and other services expense 101 N/A 205 N/A
Other (income) expense (1 ) 1   NM (2 ) 2   NM
Total costs and expenses, net 416   527   21 853   1,052   19
Operating Profit $ 235   $ 243   (3) $ 456   $ 450   1
 
Restaurant margin 12.5 % 15.7 % (3.2) ppts. 11.5 % 14.7 % (3.2) ppts.
 
Operating margin 36.1 % 31.5 % 4.6 ppts. 34.8 % 29.9 % 4.9 ppts.
 
 

See accompanying notes.

Percentages may not recompute due to rounding.

 
               

YUM! Brands, Inc.

PIZZA HUT DIVISION Operating Results

(amounts in millions)

(unaudited)

 
Quarter ended % Change Year to date % Change
6/30/18     6/30/17 B/(W) 6/30/18     6/30/17 B/(W)
 
Company sales $ 18 $ 81 (78) $ 42 $ 171 (75)
Franchise and property revenues 140 141 (1) 289 285 1
Franchise contributions for advertising and other services 75     N/A 153     N/A
Total revenues 233   222   5 484   456   6
 
Company restaurant expenses 19 73 75 43 158 73
General and administrative expenses 46 54 14 96 107 10
Franchise and property expenses 8 10 12 19 23 16
Franchise advertising and other services expense 77 N/A 155 N/A
Other (income) expense 2     NM 2     NM
Total costs and expenses, net 152   137   (11) 315   288   (10)
Operating Profit $ 81   $ 85   (5) $ 169   $ 168   1
 
Restaurant margin (2.4 )% 8.5 % (10.9) ppts. (1.0 )% 7.4 % (8.4) ppts.
 
Operating margin 34.6 % 38.1 % (3.5) ppts. 34.8 % 36.8 % (2.0) ppts.
 
 

See accompanying notes.

Percentages may not recompute due to rounding.

 
               

YUM! Brands, Inc.

TACO BELL DIVISION Operating Results

(amounts in millions)

(unaudited)

 
Quarter ended % Change Year to date % Change
6/30/18     6/30/17 B/(W) 6/30/18     6/30/17 B/(W)
 
Company sales $ 253 $ 336 (25) $ 496 $ 673 (26)
Franchise and property revenues 134 120 12 262 234 12
Franchise contributions for advertising and other services 97     N/A 188     N/A
Total revenues 484   456   6 946   907   4
 
Company restaurant expenses 193 260 26 387 523 26
General and administrative expenses 41 39 (6) 81 81
Franchise and property expenses 6 5 (25) 12 10 (22)
Franchise advertising and other services expense 96 N/A 186 N/A
Other (income) expense (1 )   NM (1 )   NM
Total costs and expenses, net 335   304   (11) 665   614   (8)
Operating Profit $ 149   $ 152   (2) $ 281   $ 293   (4)
 
Restaurant margin 24.1 % 22.8 % 1.3 ppts. 21.9 % 22.3 % (0.4) ppts.
 
Operating margin 30.8 % 33.4 % (2.6) ppts. 29.7 % 32.3 % (2.6) ppts.
 
 

See accompanying notes.

Percentages may not recompute due to rounding.

 
       

YUM! Brands, Inc.

Condensed Consolidated Balance Sheets

(amounts in millions)

 

(unaudited)
6/30/18

12/31/17

ASSETS
Current Assets
Cash and cash equivalents $ 313 $ 1,522
Accounts and notes receivable, less allowance: $30 in 2018 and $19
in 2017
527 400
Prepaid expenses and other current assets 363 384
Advertising cooperative assets, restricted   201  
Total Current Assets 1,203 2,507
 
Property, plant and equipment, net of accumulated depreciation and
amortization of $1,418 in
2018 and $1,480 in 2017 1,533 1,697
Goodwill 502 512
Intangible assets, net 90 110
Other assets 787 346
Deferred income taxes 211   139  
Total Assets $ 4,326   $ 5,311  
 
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and other current liabilities $ 822 $ 813
Income taxes payable 48 123
Short-term borrowings 54 375
Advertising cooperative liabilities   201  
Total Current Liabilities 924 1,512
 
Long-term debt 9,612 9,429
Other liabilities and deferred credits 1,037   704  
Total Liabilities 11,573   11,645  
 
Shareholders' Deficit
Common stock, no par value, 750 shares authorized; 319 shares and
332 shares issued in 2018 and 2017, respectively
Accumulated deficit (6,965 ) (6,063 )
Accumulated other comprehensive loss (282 ) (271 )
Total Shareholders' Deficit (7,247 ) (6,334 )
Total Liabilities and Shareholders' Deficit $ 4,326   $ 5,311  
 

See accompanying notes.

 
   

YUM! Brands, Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

(unaudited)

 
Year to date
6/30/18     6/30/17
Cash Flows - Operating Activities
Net Income $ 754 $ 486
Depreciation and amortization 71 135
Refranchising (gain) loss (185 ) (130 )
Investment (income) expense, net (89 ) (2 )
Contributions to defined benefit pension plans (5 ) (12 )
Deferred income taxes (23 ) 10
Share-based compensation expense 27 43
Changes in accounts and notes receivable (15 ) 30
Changes in prepaid expenses and other current assets 4 3
Changes in accounts payable and other current liabilities (160 ) (137 )
Changes in income taxes payable (15 ) (83 )
Other, net 17   96  
Net Cash Provided by Operating Activities 381   439  
 
Cash Flows - Investing Activities
Capital spending (85 ) (150 )
Investment in Grubhub Inc. Common Stock (200 )
Proceeds from refranchising of restaurants 252 321
Other, net (9 ) 2  
Net Cash Provided by (Used in) Investing Activities (42 ) 173  
 
Cash Flows - Financing Activities
Proceeds from long-term debt 106 1,088
Repayments of long-term debt (449 ) (360 )
Revolving credit facilities, three months or less, net 202
Short-term borrowings by original maturity
More than three months - proceeds 51
More than three months - payments (43 )
Three months or less, net
Repurchase shares of Common Stock (1,168 ) (856 )
Dividends paid on Common Stock (236 ) (211 )
Debt issuance costs (32 )
Other, net (42 ) (39 )
Net Cash Used in Financing Activities (1,579 ) (410 )
Effect of Exchange Rate on Cash and Cash Equivalents (19 ) 23  
Net Increase (Decrease) in Cash and Cash Equivalents, Restricted
Cash and Restricted Cash Equivalents
(1,259 ) 225
Cash, Cash Equivalents, Restricted Cash and Restricted Cash
Equivalents - Beginning of Period
1,668   831  
Cash, Cash Equivalents, Restricted Cash and Restricted Cash
Equivalents - End of Period
$ 409   $ 1,056  
 

See accompanying notes.

 

Reconciliation of Non-GAAP Measurements to GAAP Results
(amounts
in millions, except per share amounts)

(unaudited)

In addition to the results provided in accordance with Generally
Accepted Accounting Principles in the United States of America ("GAAP"),
the Company provides the following non-GAAP measurements.

  • System sales and System sales excluding the impacts of foreign
    currency translation ("FX"). System sales include the results of all
    restaurants regardless of ownership, including Company-owned and
    franchise restaurants that operate our Concepts. Sales of franchise
    restaurants typically generate ongoing franchise and license fees for
    the Company at a rate of 3% to 6% of sales. Franchise restaurant sales
    are not included in Company sales on the Condensed Consolidated
    Statements of Income; however, the franchise and license fees are
    included in the Company's revenues. We believe System sales growth is
    useful to investors as a significant indicator of the overall strength
    of our business as it incorporates our primary revenue drivers,
    Company and franchise same-store sales as well as net unit growth.
  • Diluted Earnings Per Share excluding Special Items (as defined below);
  • Effective Tax Rate excluding Special Items;
  • Core Operating Profit. Core Operating Profit excludes Special Items
    and FX and we use Core Operating Profit for the purposes of evaluating
    performance internally.

These non-GAAP measurements are not intended to replace the presentation
of our financial results in accordance with GAAP. Rather, the Company
believes that the presentation of these non-GAAP measurements provide
additional information to investors to facilitate the comparison of past
and present operations.

Special Items are not included in any of our Division segment results as
the Company does not believe they are indicative of our ongoing
operations due to their size and/or nature. Our chief operating decision
maker does not consider the impact of Special Items when assessing
segment performance. The Special Items are described in (b), (c), (d),
(e), (f), (g), (h) and (i) in the accompanying notes.

Certain non-GAAP measurements are presented excluding the impact of FX.
These amounts are derived by translating current year results at prior
year average exchange rates. We believe the elimination of the FX impact
provides better year-to-year comparability without the distortion of
foreign currency fluctuations.

       
Quarter ended Year to date
6/30/18     6/30/17 6/30/18     6/30/17
Detail of Special Items
Refranchising gain (loss)(b) $ 29 $ 19 $ 185 $ 130
YUM's Strategic Transformation Initiatives(c) (4 ) (1 ) (11 )
Costs associated with Pizza Hut U.S. Transformation Agreement(d) (1 ) (12 ) (2 ) (12 )
Costs associated with KFC U.S. Acceleration Agreement(e) (2 ) (5 ) (2 ) (8 )
Non-cash credits (charges) associated with share-based compensation(f) 2 (16 ) 1 (18 )
Other Special Items Income (Expense) 1   (2 ) 1   (2 )
Special Items Income (Expense) - Operating Profit 29 (20 ) 182 79
Special Items - Other Pension Income (Expense)(g)       (22 )
Special Items Income (Expense) before Income Taxes 29 (20 ) 182 57
Tax Benefit (Expense) on Special Items(h)

(18

) (17 )

(37

) (51 )
Tax Benefit (Expense) - U.S. Tax Act(i)

40

   

34

   
Special Items Income (Expense), net of tax 51 (37 ) 179 6
Average diluted shares outstanding 331   358   336   361  
Special Items diluted EPS $ 0.15   $ (0.10 ) $ 0.54   $ 0.01  
 
Reconciliation of GAAP Operating Profit to Core Operating Profit
 
Consolidated
GAAP Operating Profit $ 449 $ 419 $ 1,002 $ 903
Special Items Income (Expense) 29 (20 ) 182 79
Foreign Currency Impact on Divisional Operating Profit 8   N/A   24   N/A  
Core Operating Profit $ 412   $ 439   $ 796   $ 824  
 
KFC Division
GAAP Operating Profit $ 235 $ 243 $ 456 $ 450
Foreign Currency Impact on Divisional Operating Profit 7   N/A   20   N/A  
Core Operating Profit $ 228   $ 243   $ 436   $ 450  
 
       

Reconciliation of Non-GAAP Measurements to GAAP Results
(Continued)

(amounts in millions, except per share amounts)

(unaudited)

 
Quarter ended Year to date
6/30/18     6/30/17 6/30/18     6/30/17

Pizza Hut Division

GAAP Operating Profit $ 81 $ 85 $ 169 $ 168
Foreign Currency Impact on Divisional Operating Profit 1   N/A   4   N/A  
Core Operating Profit $ 80   $ 85   $ 165   $ 168  
 

Taco Bell Division

GAAP Operating Profit $ 149 $ 152 $ 281 $ 293
Foreign Currency Impact on Divisional Operating Profit   N/A    

N/A

 
Core Operating Profit $ 149   $ 152   $ 281   $ 293  
 
Reconciliation of Diluted EPS to Diluted EPS excluding Special
Items
Diluted EPS $ 0.97 $ 0.58 $ 2.25 $ 1.34
Special Items Diluted EPS 0.15   (0.10 ) 0.54   0.01  
Diluted EPS excluding Special Items $ 0.82   $ 0.68   $ 1.71   $ 1.33  
 
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate
excluding Special Items
GAAP Effective Tax Rate 9.9 % 33.8 % 12.9 % 26.2 %
Impact on Tax Rate as a result of Special Items (7.5 )% 7.5 % (2.9 )% 6.1 %
Effective Tax Rate excluding Special Items 17.4 % 26.3 % 15.8 % 20.1 %
 
Reconciliation of Company sales to System sales
 

Consolidated

GAAP Company sales $ 512 $ 909 $ 1,024 $ 1,811
Franchise sales 11,177   10,062   22,373   19,929  
System sales 11,689 10,971 23,397 21,740
Foreign Currency Impact on System sales 263   N/A   729   N/A  
System sales, excluding FX $ 11,426   $ 10,971   $ 22,668   $ 21,740  
 

KFC Division

GAAP Company sales $ 241 $ 492 $ 486 $ 967
Franchise sales 6,065   5,279   12,149   10,439  
System sales 6,306 5,771 12,635 11,406
Foreign Currency Impact on System sales 203   N/A   566   N/A  
System sales, excluding FX $ 6,103   $ 5,771   $ 12,069   $ 11,406  
 

Pizza Hut Division

GAAP Company sales $ 18 $ 81 $ 42 $ 171
Franchise sales 2,876   2,746   5,884   5,528  
System sales 2,894 2,827 5,926 5,699
Foreign Currency Impact on System sales 59   N/A   159   N/A  
System sales, excluding FX $ 2,835   $ 2,827   $ 5,767   $ 5,699  
 

Taco Bell Division

GAAP Company sales $ 253 $ 336 $ 496 $ 673
Franchise sales 2,236   2,037   4,340   3,962  
System sales 2,489 2,373 4,836 4,635
Foreign Currency Impact on System sales 1   N/A   4   N/A  
System sales, excluding FX $ 2,488   $ 2,373   $ 4,832   $ 4,635  
 
                   

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

 
Quarter Ended 6/30/18 KFC Pizza Hut Taco Bell

Corporate
and
Unallocated

Consolidated
Total revenues $ 651   $ 233   $ 484   $   $ 1,368  
 
Company restaurant expenses 210 19 193 (1 ) 421
General and administrative expenses 81 46 41 40 208
Franchise and property expenses 25 8 6 1 40
Franchise advertising and other services expense 101 77 96 274
Refranchising (gain) loss (29 ) (29 )
Other (income) expense (1 ) 2   (1 ) 5   5  
Total costs and expenses, net 416   152   335   16   919  
Operating Profit $ 235   $ 81   $ 149   $ (16 ) $ 449  
 
 
 
Quarter Ended 6/30/17 KFC Pizza Hut Taco Bell

Corporate
and
Unallocated

Consolidated
Total revenues $ 770   $ 222   $ 456   $   $ 1,448  
 
Company restaurant expenses 415 73 260 748
General and administrative expenses 85 54 39 69 247
Franchise and property expenses 26 10 5 13 54
Refranchising (gain) loss (19 ) (19 )
Other (income) expense 1       (2 ) (1 )
Total costs and expenses, net 527   137   304   61   1,029  
Operating Profit $ 243   $ 85   $ 152   $ (61 ) $ 419  
 

The above tables reconcile segment information, which is based on
management responsibility, with our Condensed Consolidated Summary of
Results. Corporate and unallocated expenses comprise items that are not
allocated to segments for performance reporting purposes.

The Corporate and Unallocated column in the above tables includes, among
other amounts, all amounts that we have deemed Special Items. See
Reconciliation of Non-GAAP Measurements to GAAP Results.

                   

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

 
Year to Date 6/30/18 KFC Pizza Hut Taco Bell

Corporate
and
Unallocated

Consolidated
Total revenues $ 1,309   $ 484   $ 946   $   $ 2,739  
 
Company restaurant expenses 430 43 387 (1 ) 859
General and administrative expenses 166 96 81 84 427
Franchise and property expenses 54 19 12 2 87
Franchise advertising and other services expense 205 155 186 546
Refranchising (gain) loss (185 ) (185 )
Other (income) expense (2 ) 2   (1 ) 4   3  
Total costs and expenses, net 853   315   665   (96 ) 1,737  
Operating Profit $ 456   $ 169   $ 281   $ 96   $ 1,002  
 
 
 
Year to Date 6/30/17 KFC Pizza Hut Taco Bell

Corporate
and
Unallocated

Consolidated
Total revenues $ 1,502   $ 456   $ 907   $   $ 2,865  
 
Company restaurant expenses 825 158 523 1,506
General and administrative expenses 174 107 81 122 484
Franchise and property expenses 51 23 10 16 100
Refranchising (gain) loss (130 ) (130 )
Other (income) expense 2         2  
Total costs and expenses, net 1,052   288   614   8   1,962  
Operating Profit $ 450   $ 168   $ 293   $ (8 ) $ 903  
 

The above tables reconcile segment information, which is based on
management responsibility, with our Condensed Consolidated Summary of
Results. Corporate and unallocated expenses comprise items that are not
allocated to segments for performance reporting purposes.

The Corporate and Unallocated column in the above tables includes, among
other amounts, all amounts that we have deemed Special Items. See
Reconciliation of Non-GAAP Measurements to GAAP Results.

 

Notes to the Condensed Consolidated Summary of Results,
Condensed Consolidated Balance Sheets

and Condensed
Consolidated Statements of Cash Flows

(amounts in
millions)

(unaudited)

 
(a) Amounts presented as of and for the quarters and years to date ended
June 30, 2018 and 2017 are preliminary.
 
(b)

In connection with our previously announced plans to have at least
98% franchise restaurant ownership by the end of 2018, we recorded
net refranchising gains during the quarters ended June 30, 2018
and 2017 of $29 million and $19 million, respectively, that have
been reflected as Special Items. During the years to dated ended
June 30, 2018 and 2017, we recorded net refranchising gains of
$185 million and $130 million, respectively, that have been
reflected as Special Items.

The second quarter 2018 net refranchising gains relate primarily
to refranchising KFC restaurants in the UK. The second quarter
2017 net refranchising gains relate primarily to refranchising
Taco Bell restaurants in the U.S., partially offset by charges
associated with the refranchising of certain international markets.

 
(c) In the fourth quarter of 2016, we announced our plan to transform
our business. Major features of the Company's strategic
transformation plans involve being more focused on development of
our three brands, increasing our franchise ownership and creating a
leaner, more efficient cost structure ("YUM's Strategic
Transformation Initiatives"). During the quarters ended June 30,
2018 and 2017, we recognized Special Item charges of less than $1
million and $4 million, respectively, related to these initiatives.
During the years to date ended June 30, 2018 and 2017, we recognized
Special Item charges of $1 million and $11 million, respectively,
related to these initiatives. These costs primarily related to
severance and relocation costs that were recorded within G&A.
 
(d) On May 1, 2017, we reached an agreement with Pizza Hut U.S.
franchisees that will improve brand marketing alignment, accelerate
enhancements in operations and technology and includes a permanent
commitment to incremental advertising contributions by franchisees
beginning in 2018. During the quarters ended June 30, 2018 and 2017,
we recorded Special Item charges of $1 million and $12 million,
respectively, for these investments. During the years to date ended
June 30, 2018 and 2017, we recorded Special Item charges of $2
million and $12 million, respectively, for these investments. The
majority of these costs were recorded within Franchise and property
expenses.
 
(e) During the first quarter of 2015, we reached an agreement with our
KFC U.S. franchisees that gave us brand marketing control as well as
an accelerated path to improved assets and customer experience. In
connection with this agreement, we recognized Special Item charges
of $2 million and $5 million for the quarters ended June 30, 2018
and 2017, respectively. During the years to date ended June 30, 2018
and 2017, we recognized Special Item charges of $2 million and $8
million, respectively. The majority of these costs were recorded
within Franchise and property expenses.
 
(f)

In connection with the separation of Yum China, we modified
certain share-based compensation awards held as part of our
Executive Income Deferral Plan in YUM stock to provide one Yum
China share-based award for each outstanding YUM share-based
award. These Yum China awards may now be settled in cash, as
opposed to stock, which requires recognition of the fair value of
these awards each quarter within G&A in our Consolidated
Statements of Income. During the quarter and year to date ended
June 30, 2018, we recorded Special Item credits of $2 million and
$1 million, respectively, due to depreciation in the market price
of Yum China's stock. During the quarter and year to date ended
June 30, 2017, we recorded Special Item charges of $16 million and
$18 million, respectively, related to these awards.

 
(g) We recorded a non-cash charge of $22 million related to the
adjustment of certain historical deferred vested liability balances
in our qualified U.S. plan during the first quarter of 2017. This
charge was recorded in Other pension (income) expense.
 
(h)

Tax Benefit (Expense) on Special Items was determined based upon
the impact of the nature, as well as the jurisdiction of the
respective individual components within Special Items.
Additionally, during the quarter ended June 30, 2018, we recorded
a $19 million increase to our Income tax provision for the
correction of an error associated with the tax recorded on a prior
year divestiture, the effects of which were previously recorded as
a Special Item.

 
(i) During the quarter and year to date ended June 30, 2018 we recorded
$32 million and $16 million decreases, respectively, related to our
provisional deemed repatriation tax expense recorded in the fourth
quarter of 2017 associated with the Tax Cuts and Jobs Act of 2017
("Tax Act") that was reported as a Special Item. We also recorded
benefit in the quarter and year to date ended June 30, 2018 related
to current year U.S. foreign tax credits that became realizable
directly as a result of the impact of the deemed repatriation.
 

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