Yum! Brands Reports First-quarter Gaap Operating Profit Growth Of 14%

Yum! Brands
Published: May 2nd, 2018

Flat First-quarter Core Operating Profit Growth; Maintains All Aspects Of Full-year Guidance

LOUISVILLE, Ky. - (BUSINESS WIRE) - May 2, 2018 - Yum! Brands, Inc. (NYSE: YUM) today reported results for the first quarter ended March 31, 2018. First-quarter GAAP EPS was $1.27, an increase of 66%. First-quarter EPS excluding Special Items was $0.90, an increase of 38%.

Greg Creed Comments

Greg Creed, CEO, said “As we begin the second full year of our transformation journey, I’m pleased with our progress towards becoming a more focused, more franchised and more efficient company. As a result of the timing mismatch between refranchising and associated G&A savings and the new revenue recognition accounting standard, core operating profit growth was flat, which is consistent with our expectations. We’re maintaining all aspects of our full-year 2018 guidance and remain confident that this transformation is building a strong foundation for long-term growth and will deliver increased returns for our stakeholders.”

First-Quarter Highlights

• Worldwide system sales excluding foreign currency translation grew 4%, with KFC at 6%, Taco Bell at 4% and Pizza Hut at 2%.
• We opened 239 net new units for 3% net new unit growth.
• We refranchised 144 restaurants, including 52 KFC, 43 Pizza Hut and 49 Taco Bell units, for pre-tax proceeds of $205 million. We recorded net refranchising gains of $156 million in Special Items. As of quarter end, our global franchise ownership mix was 97%.
• We repurchased 6.5 million shares totaling $528 million at an average price of $81.
• We reflected the change in fair value of our investment in Grubhub by recording $66 million of pre-tax investment income, resulting in $0.16 in EPS.
• Foreign currency translation favorably impacted divisional operating profit by $16 million.

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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

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• KFC Division opened 262 new international restaurants in 42 countries.
• Operating margin increased 5.3 percentage points driven by refranchising and same-store sales growth, partially offset by the gross up of advertising fund revenues and offsetting expenses required by the revenue recognition accounting standard.
• Foreign currency translation favorably impacted operating profit by $13 million.

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PIZZA HUT DIVISION

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• Pizza Hut Division opened 148 new international restaurants in 39 countries.
• Operating margin decreased 0.6 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.
• Foreign currency translation favorably impacted operating profit by $3 million.

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TACO BELL DIVISION

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• Taco Bell Division opened 56 new restaurants, including 11 new international restaurants.
• Operating margin decreased 2.7 percentage points driven by the gross up of advertising fund revenues and offsetting expenses required by the revenue recognition accounting standard and higher restaurant-level costs, partially offset by refranchising and same-store sales growth.

Other Items

• Effective January 1, 2018, we adopted a new accounting standard on revenue recognition. As a result, we are now recognizing upfront fees, such as initial and renewal fees we receive from franchisees, as revenue over the term of the related franchise agreement. We are also now recording 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 the 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, have been 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. Core Operating Profit growth was negatively impacted by less than one percentage point for the quarter ended March 31, 2018 as a result of the new standard. The lower first quarter 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 first-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 Wednesday, May 2, 2018. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers, conference ID 6087438.

The call will be available for playback beginning at 11:00 a.m. Eastern Time Wednesday, May 2, 2018 through Wednesday, June 13, 2018. To access the playback, dial 855/859-2056 in the U.S. and 404/537-3406 internationally, conference ID 6087438.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands’ website, investors.yum.com/events-and-presentations and selecting “Q1 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 135 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. In 2017, Yum! Brands was named to the Dow Jones Sustainability North America Index and ranked among the top 100 Best Corporate Citizens by Corporate Responsibility Magazine. The company’s restaurant brands - KFC, Pizza Hut and Taco Bell - are 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.

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Contacts:

Keith Siegner
YUM! Brands, Inc.
Analysts:Vice President, Investor Relations
Corporate Strategy and Treasurer
888-298-6986

Kelly Knybel
YUM! Brands, Inc.
Director
Investor Relations
888-298-6986

Virginia Ferguson
YUM! Brands, Inc.
Media Relations
Director, Public Relations
502-874-8200

SOURCE YUM! Brands, Inc.