YUM Yum Brands Inc

Yum! Brands, Inc. (NYSE: YUM) today reported results for the third quarter ended September 3, 2016, including GAAP EPS of $1.56 and EPS excluding Special Items of $1.09.

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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.

THIRD-QUARTER HIGHLIGHTS

• KFC Division same-store sales increased 4%, with U.S. same-store sales growing 6%; system sales increased 7%.
• Taco Bell Division same-store sales increased 3% and system sales increased 5%, while achieving a 21.7% restaurant margin.
• Worldwide core operating profit grew 11%, with the brand divisions excluding China delivering 11% core operating profit growth in aggregate, ahead of expectations.
• China core operating profit grew 14%.
• Opened 475 new restaurants worldwide; 78% of international development occurred in emerging markets.
• On track to finalize China separation with Yum China Holdings, Inc. expected to begin trading on November 1, 2016 on the NYSE under the ticker symbol “YUMC.”
• Foreign currency translation negatively impacted operating profit by $34 million.

                          % Change     System Sales    

Same-StoreSales

    Net New Units    

GAAPOperating Profit

   

CoreOperating Profit

  China Division   +3     (1)     +7     +7     +14 KFC Division +7 +4 +3 +11 +19 Pizza Hut Division Even (1) +1 (6) (5)   Taco Bell Division     +5     +3     +3     +9     +9     Worldwide         +4     +1     +3     +8     +11                              

Third Quarter

   

Year-to-Date

   

2016

   

2015

   

% Change

2016

   

2015

   

% Change

EPS Excluding Special Items $1.09 $1.00 9% $2.79 $2.50 12% Special Items Gain/(Loss)1

$0.47

$(0.05)

NM

$0.49

$(0.21)

NM

  EPS     $1.56     $0.95     64%     $3.28     $2.29     43%      

1 See Reconciliation of Non-GAAP Measurements to GAAP Results for further detail of Special Items. Special Items in 2016 are primarily related to a U.S. tax benefit related to previously recognized Little Sheep impairment losses, gains associated with Pizza Hut and Taco Bell U.S. refranchising and costs associated with the planned separation of our China business, U.S. voluntary retirement packages and the agreement reached in 2015 with KFC U.S. franchisees. Special Items in 2015 are primarily related to a non-cash charge associated with refranchising our Mexico business and costs associated with the agreement reached in 2015 with KFC U.S. franchisees, partially offset by U.S. refranchising gains.

Note: All comparisons are versus the same period a year ago. Effective January 2016, the Company’s India business integrated its three restaurant brands into our global KFC, Pizza Hut and Taco Bell Divisions. Prior year figures have been restated to present comparable results.

Full-year GAAP operating profit growth guidance is not provided due to our inability to forecast when gains and losses related to refranchising transactions classified as Special Items will occur, as the timing of these transactions is often outside our control, and the resulting gains and losses are dependent upon future market conditions. 2016 core operating profit growth guidance assumes the China business remains part of the Company through the end of 2016.

GREG CREED COMMENTS

Greg Creed, CEO, said “Yum! Brands delivered third-quarter core operating profit growth of 11% and EPS growth, excluding Special Items, of 9%. For the full year, we are raising our core operating profit growth guidance from at least 14% to at least 15%.

In the third quarter, I was pleased with both KFC’s and Taco Bell’s performance, each of which returned to a focus on core menu items, but in ways that were distinctive, disruptive and relevant. Both brands had accelerating same-store sales growth, despite sluggish QSR industry trends, especially in the U.S. Excluding China, our brand divisions in aggregate delivered core operating profit growth of 11%, which was ahead of our expectations. System sales for the brand divisions excluding China grew 5% in constant currency, driven by KFC where system sales grew 7% with international emerging markets up an impressive 12%. We are excited about the momentum we are seeing in our base business as we embark on the next chapter of growth at our company.

Sales were off to a good start in the first six weeks of the quarter in the China Division. However, anticipated tougher laps in the second half of the third quarter were compounded by an international court ruling on claims regarding the South China Sea, which triggered a series of regional protests and negative sentiment against a few international companies with well-known Western brands. If not for this event, we believe the China Division would have delivered its fifth consecutive quarter of positive same-store sales growth. The good news is the incident was short-lived and the sales impact continued to dissipate through August and September. Despite the protests, Pizza Hut Casual Dining continued its trend of quarterly sequential improvement.

2016 marks the beginning of a massive transformation for Yum! Brands. Step one is the formal separation of our China business, which will become one of China’s largest publicly-traded retail companies with meaningful growth opportunities supported by U.S. governance. New Yum! Brands will become a unique and focused world-class franchisor with consistent, stable cash flow generation and an efficient cost structure that encourages growth. We look forward to sharing the details of our strategic plans for both companies at our New York investor conference on Tuesday, October 11.”

New Global Yum! Core Operating Profit Growth

After the spin-off of our China business, we will reclassify China Division’s historical results and related tax expense, including the first ten months of 2016, to Discontinued Operations within our Income Statement. The China Division’s results presented in Discontinued Operations will include an incremental license fee expense similar to what will be paid by China to Yum! going forward. Likewise, Yum!’s historical results for our KFC and Pizza Hut Divisions, including the first ten months of 2016, will include incremental license fee income from our China business such that recast total net income, including Discontinued Operations, is the same as previously reported results. While we expect to spin-off our China business on October 31, 2016, our operating profit growth targets assume China will remain part of Yum! through the end of 2016.

CHINA DIVISION

                       

Third Quarter

   

Year-to-Date

    %/ppts Change         %/ppts Change

2016

   

2015

Reported

   

Ex F/X

2016

2015

Reported

   

Ex F/X

System Sales Growth (3) +3 Even +5 Same-Store Sales Growth (%) (1) +2 NM NM +1 (6) NM NM Franchise & License Fees ($MM) 35 34 +2 +9 90 83 +8 +14 Restaurant Margin (%) 22.2 19.6 2.6 2.6 20.1 17.7 2.4 2.4 Operating Profit ($MM) 348 327 +7 +14 751 661 +14 +20   Operating Margin (%)     18.5     16.6     1.9     2.0     15.7     13.6     2.1     2.2  

• China Division system sales increased 3%, excluding foreign currency translation.
  • Same-store sales decreased 1%, with declines of 1% at KFC and 4% at Pizza Hut Casual Dining.
• China Division opened 133 new units during the quarter.

                            China Units         Q3 2016        

% Change2

    Restaurants1     7,330     +7 KFC 5,087 +4 Pizza Hut Casual Dining 1,643 +16   Home Service         350         +23  

1 Total includes East Dawning and Little Sheep units.

2 Represents year-over-year change.

 

• Operating profit increased as a result of recent value-added tax reform in China and new-unit development, partially offset by higher labor costs, increased G&A and sales deleverage.
• Foreign currency translation negatively impacted operating profit by $23 million.
• Consistent with prior years, China Division’s third quarter includes June, July and August results.

KFC DIVISION

                       

Third Quarter

   

Year-to-Date

        %/ppts Change         %/ppts Change

2016

2015

Reported

   

Ex F/X

2016

2015

Reported

   

Ex F/X

Restaurants 15,065 14,694 +3 N/A 15,065 14,694 +3 N/A System Sales Growth +3 +7 +1 +6 Same-Store Sales Growth (%) +4 +3 NM NM +2 +3 NM NM Franchise & License Fees ($MM) 202 195 +4 +8 591 584 +1 +6 Restaurant Margin (%) 14.5 12.9 1.6 1.6 14.6 13.9 0.7 0.6 Operating Profit ($MM) 160 144 +11 +19 469 459 +2 +9   Operating Margin (%)     22.2     20.0     2.2     2.3     22.8     21.8     1.0     1.0  

• KFC Division system sales increased 7%, excluding foreign currency translation.

                          Third Quarter (% Change)          

Int’l Emerging Markets

       

Int’l Developed Markets

        U.S.   System Sales Growth (Ex F/X)   +12     +4     +4   Same-Store Sales Growth         +5         +1         +6  

• KFC Division opened 138 new international restaurants in 42 countries, including 96 units in emerging markets.
• Operating margin increased 2.2 percentage points driven by same-store sales growth.
• Foreign currency translation negatively impacted operating profit by $11 million, as approximately 90% of division profits are generated outside the U.S.

                      KFC MARKETS1    

Percent of KFCSystem Sales 2

      SYSTEM Sales Growth Ex F/X     Third Quarter (%)     Year-to-Date (%) Emerging Markets Asia (e.g. Malaysia, Indonesia, Philippines) 7% +7 +9 Africa 6% +11 +9 Latin America (e.g. Mexico, Peru) 6% +10 +7 Middle East / North Africa 6% +5 +4 Russia 5% +35 +33 Thailand 3% +12 +8 Continental Europe (e.g. Poland) 3% +16 +17 India 1% +13 +4   Developed Markets U.S. 24% +4 +1 Australia 10% +4 +4 Asia (e.g. Japan, Korea, Taiwan) 9% (1) +4 U.K. 9% +5 +2 Continental Europe (e.g. France, Germany) 7% +9 +9 Canada 3% +4 +5   Latin America (e.g. Puerto Rico)     1%       +5     (1)  

1 See website www.yum.com/investors for a list of the countries within each of the markets.

2 Reflects Full Year 2015.

 

PIZZA HUT DIVISION

                       

Third Quarter

   

Year-to-Date

        %/ppts Change         %/ppts Change

2016

2015

Reported

   

Ex F/X

2016

2015

Reported

   

Ex F/X

Restaurants 14,179 14,042 +1 N/A 14,179 14,042 +1 N/A System Sales Growth (2) Even Even +2 Same-Store Sales Growth (%) (1) +1 NM NM +1 Even NM NM Franchise & License Fees ($MM) 124 123 +1 +3 378 372 +2 +4 Restaurant Margin (%) 3.1 7.8 (4.7) (4.8) 8.2 9.8 (1.6) (1.9) Operating Profit ($MM) 61 65 (6) (5) 212 206 +3 +4   Operating Margin (%)     26.7     24.7     2.0     1.8     28.6     25.7     2.9     2.6  

• Pizza Hut Division system sales were even, excluding foreign currency translation.

                          Third Quarter (% Change)          

Int’l Emerging Markets

       

Int’l Developed Markets

        U.S.   System Sales Growth (Ex F/X)   +4     +2     (3)   Same-Store Sales Growth         (1)         +1         (2)  

• Pizza Hut Division opened 105 new international restaurants in 40 countries, including 71 units in emerging markets.
• Restaurant margin was 3.1%, a decrease of 4.7 percentage points, driven by refranchising and higher property and casualty insurance costs.
• Foreign currency translation negatively impacted operating profit by less than $1 million.

                      PIZZA HUT MARKETS1    

Percent of Pizza HutSystem Sales2

      SYSTEM Sales Growth Ex F/X     Third Quarter (%)     Year-to-Date (%) Emerging Markets Latin America (e.g. Mexico, Peru) 7% +5 +7 Asia (e.g. Malaysia, Indonesia, Philippines) 5% +6 +4 Middle East / North Africa 5% (3) (1) Continental Europe (e.g. Poland) 1% +11 +11 India 1% +6 (2)   Developed Markets U.S. 55% (3) +1 Asia (e.g. Japan, Korea, Taiwan) 8% (3) (6) U.K. 7% +2 +4 Continental Europe (e.g. France, Germany) 5% +8 +8 Canada 3% +6 +9 Australia 2% +3 (4)   Latin America (e.g. Puerto Rico)     1%       +5     Even  

1 See website www.yum.com/investors for a list of the countries within each of the markets.

2 Reflects Full Year 2015.

 

TACO BELL DIVISION

                       

Third Quarter

   

Year-to-Date

        %/ppts Change         %/ppts Change

2016

2015

Reported

   

Ex F/X

2016

2015

Reported

   

Ex F/X

Restaurants 6,511 6,321 +3 N/A 6,511 6,321 +3 N/A System Sales Growth +5 +5 +4 +4 Same-Store Sales Growth (%) +3 +4 NM NM +1 +5 NM NM Franchise & License Fees ($MM) 115 107 +8 +8 326 309 +6 +6 Restaurant Margin (%) 21.7 22.1 (0.4) (0.4) 21.6 21.6 - - Operating Profit ($MM) 143 132 +9 +9 401 386 +4 +4   Operating Margin (%)     29.8     27.8     2.0     2.0     29.3     27.9     1.4     1.4  

• Taco Bell Division system sales increased 5%, excluding foreign currency translation.
• Taco Bell Division opened 63 new restaurants.
• Restaurant margin was 21.7%, a decrease of 0.4 percentage points, driven by higher labor costs, partially offset by same-store sales growth and lower commodity costs.
• Operating margin increased 2.0 percentage points driven by same-store sales growth.

SPECIAL ITEMS / SHARE REPURCHASE / RECAPITALIZATION UPDATE

• During the quarter, we recorded a tax benefit of $198 million in Special Items due to our ability to now realize tax benefits associated with previous impairment losses related to Little Sheep that were recognized as Special Items in 2013 and 2014.
• During the quarter, we incurred a Special Items charge of $20 million for restructuring costs related to U.S. voluntary retirement packages.
• During the quarter, we incurred a Special Items charge of $10 million for costs related to the planned separation of our China business.
• During the quarter, we refranchised 94 units outside of China, more than half of which were Pizza Hut units, for proceeds of $61 million. We recorded refranchising gains of $21 million in Special Items.
• To complete our recapitalization strategy, $4.6 billion of new debt was issued in the third quarter.
• Year-to-date through October 4, 2016, we repurchased 54.5 million shares totaling $4.5 billion at an average price of $82. Since we announced our intention to separate the China business, we have repurchased approximately $5.3 billion in shares at an average price of $81, reducing our share count by approximately 15%. We expect to repurchase an additional $0.9 billion in shares before the end of 2016 to achieve our previously announced plan to return $6.2 billion of capital to shareholders (excluding dividends) in connection with the separation of our China business.

CONFERENCE CALL

Yum! Brands, Inc. will host a conference call to review the Company’s financial performance and strategies at 9:15 a.m. Eastern Time Thursday, October 6, 2016. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers, conference ID 69624826.

The call will be available for playback beginning at 12:30 p.m. Eastern Time Thursday, October 6, 2016 through midnight Wednesday, November 2, 2016. To access the playback, dial 855/859-2056 in the U.S. and 404/537-3406 internationally, conference ID 69624826.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands’ website, www.yum.com/investors and selecting “Q3 2016 Earnings Conference Call” under “Events & Presentations.”

ADDITIONAL INFORMATION ONLINE

Quarter end dates for each division, restaurant-count details and definitions of terms are available online at www.yum.com/investors.

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,” “will,” “should,” “forecast,” “outlook” or similar terminology. These statements are based on current estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable under the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. Forward-looking statements reflect our current expectations, estimates or projections concerning future results or events, including, without limitation, statements regarding the intended capital return to shareholders, the planned separation of the Yum! Brands and Yum China businesses, the timing of any such separation, the future earnings and performance as well as capital structure of Yum! Brands, Inc. or any of its businesses, including the Yum! Brands and Yum China businesses on a standalone basis if the separation is completed. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or projections will be achieved. 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. Numerous factors could cause our actual results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: whether we are able to return capital to shareholders at the times and in the amounts currently anticipated, if at all; whether the separation of the Yum! Brands and Yum China businesses is completed, as expected or at all, and the timing of any such separation; whether the operational and strategic benefits of the separation can be achieved; whether the costs and expenses of the separation can be controlled within expectations, including potential tax costs; as well as other risks. 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. 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 Annual Report or Form 10-K) for additional detail about factors that could affect our financial and other results. Reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures are included on our website at www.yum.com/investors.

Yum! Brands, Inc., based in Louisville, Kentucky, has more than 43,000 restaurants in almost 140 countries and territories. Yum! Brands is ranked #218 on the Fortune 500 List with revenues of over $13 billion in 2015 and is one of the Aon Hewitt Top Companies for Leaders in North America. 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 six 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 9/3/16     9/5/15 B/(W) 9/3/16     9/5/15 B/(W)   Company sales $ 2,841 $ 2,968 (4) $ 7,560 $ 7,806 (3) Franchise and license fees and income 475   459   4 1,383   1,348   3 Total revenues 3,316   3,427   (3) 8,943   9,154   (2)   Company restaurant expenses Food and paper 817 933 12 2,230 2,462 9 Payroll and employee benefits 638 625 (2) 1,727 1,720 — Occupancy and other operating expenses 816   871   6 2,192   2,292   4 Company restaurant expenses 2,271 2,429 6 6,149 6,474 5   General and administrative expenses 377 328 (15) 1,028 976 (5) Franchise and license expenses 47 65 27 145 146 1 Closures and impairment (income) expenses 7 3 (99) 47 30 (58) Refranchising (gain) loss (25 ) 2 NM (85 ) 60 NM Other (income) expense (15 ) (3 ) NM (50 ) (12 ) NM Total costs and expenses, net 2,662   2,824   6 7,234   7,674   6   Operating Profit 654 603 8 1,709 1,480 15 Interest expense, net 87   32   NM 164   99   (67) Income before income taxes 567 571 (1) 1,545 1,381 12 Income tax (benefit) provision (65 ) 145   NM 183   358   49 Net income - including noncontrolling interests 632 426 48 1,362 1,023 33 Net income (loss) - noncontrolling interests 10   5   (81) 10   5   (81) Net income - YUM! Brands, Inc. $ 622   $ 421   48 $ 1,352   $ 1,018   33  

Effective tax rate

(11.6 )% 25.3 % 36.9 ppts. 11.8 % 25.9 % 14.1 ppts.  

Basic EPS Data

EPS $ 1.59   $ 0.97   64 $ 3.33   $ 2.33   43 Average shares outstanding 392   436   10 406   437   7  

Diluted EPS Data

EPS $ 1.56   $ 0.95   64 $ 3.28   $ 2.29   43 Average shares outstanding 398   444   10 412   445   7   Dividends declared per common share $ —   $ —   $ 0.92   $ 0.82     See accompanying notes.  

Percentages may not recompute due to rounding.

                 

YUM! Brands, Inc.

CHINA DIVISION Operating Results

(amounts in millions)

(unaudited)

  Quarter ended % Change Year to date % Change 9/3/16     9/5/15 B/(W) 9/3/16     9/5/15 B/(W)   Company sales $ 1,848 $ 1,935 (4) $ 4,684 $ 4,778 (2) Franchise and license fees and income 35   34   2 90   83   8 Total revenues 1,883   1,969   (4) 4,774   4,861   (2)   Company restaurant expenses Food and paper 514 611 16 1,361 1,518 10 Payroll and employee benefits 376 356 (6) 963 933 (3) Occupancy and other operating expenses 547   589   7 1,420   1,481   4 Company restaurant expenses 1,437 1,556 8 3,744 3,932 5 General and administrative expenses 102 90 (14) 270 258 (5) Franchise and license expenses 6 6 (5) 15 15 — Closures and impairment (income) expenses 5 3 (42) 36 22 (65) Other (income) expense (15 ) (13 ) 33 (42 ) (27 ) 61 Total costs and expenses, net 1,535   1,642   7 4,023   4,200   4 Operating Profit $ 348   $ 327   7 $ 751   $ 661   14   Company sales 100.0 % 100.0 % 100.0 % 100.0 % Food and paper 27.8 31.6 3.8 ppts. 29.1 31.8 2.7 ppts. Payroll and employee benefits 20.4 18.4 (2.0 ppts.) 20.5 19.5 (1.0 ppts.) Occupancy and other operating expenses 29.6   30.4   0.8 ppts. 30.3   31.0   0.7 ppts. Restaurant margin 22.2 % 19.6 % 2.6 ppts. 20.1 % 17.7 % 2.4 ppts.   Operating margin 18.5 % 16.6 % 1.9 ppts. 15.7 % 13.6 % 2.1 ppts.     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 9/3/16     9/5/15 B/(W) 9/3/16     9/5/15 B/(W)   Company sales $ 521 $ 526 (1) $ 1,469 $ 1,525 (4) Franchise and license fees and income 202   195   4 591   584   1 Total revenues 723   721   — 2,060   2,109   (2)   Company restaurant expenses Food and paper 178 182 2 499 526 5 Payroll and employee benefits 121 124 2 346 354 2 Occupancy and other operating expenses 146   152   4 409   432   5 Company restaurant expenses 445 458 3 1,254 1,312 4 General and administrative expenses 89 96 7 259 275 6 Franchise and license expenses 27 23 (17) 71 61 (16) Closures and impairment (income) expenses 2 — NM 7 3 NM Other (income) expense —   —   24 —   (1 ) (97) Total costs and expenses, net 563   577   2 1,591   1,650   4 Operating Profit $ 160   $ 144   11 $ 469   $ 459   2   Company sales 100.0 % 100.0 % 100.0 % 100.0 % Food and paper 34.2 34.5 0.3 ppts. 34.0 34.5 0.5 ppts. Payroll and employee benefits 23.4 23.6 0.2 ppts. 23.6 23.2 (0.4 ppts.) Occupancy and other operating expenses 27.9   29.0   1.1 ppts. 27.8   28.4   0.6 ppts. Restaurant margin 14.5 % 12.9 % 1.6 ppts. 14.6 % 13.9 % 0.7 ppts.   Operating margin 22.2 % 20.0 % 2.2 ppts. 22.8 % 21.8 % 1.0 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 9/3/16     9/5/15 B/(W) 9/3/16     9/5/15 B/(W)   Company sales $ 106 $ 141 (25) $ 363 $ 430 (16) Franchise and license fees and income 124   123   1 378   372   2 Total revenues 230   264   (13) 741   802   (8)   Company restaurant expenses Food and paper 29 40 25 100 120 16 Payroll and employee benefits 36 44 21 116 133 13 Occupancy and other operating expenses 37   46   19 117   135   13 Company restaurant expenses 102 130 21 333 388 14 General and administrative expenses 57 60 7 163 180 10 Franchise and license expenses 12 10 (15) 32 28 (14) Closures and impairment (income) expenses — (1 ) NM 3 2 (51) Other (income) expense (2 ) —   NM (2 ) (2 ) (20) Total costs and expenses, net 169   199   15 529   596   11 Operating Profit $ 61   $ 65   (6) $ 212   $ 206   3   Company sales 100.0 % 100.0 % 100.0 % 100.0 % Food and paper 28.0 28.0 — 27.6 27.8 0.2 ppts. Payroll and employee benefits 33.2 31.4 (1.8 ppts.) 31.8 31.0 (0.8 ppts.) Occupancy and other operating expenses 35.7   32.8   (2.9 ppts.) 32.4   31.4   (1.0 ppts.) Restaurant margin 3.1 % 7.8 % (4.7 ppts.) 8.2 % 9.8 % (1.6 ppts.)   Operating margin 26.7 % 24.7 % 2.0 ppts. 28.6 % 25.7 % 2.9 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 9/3/16     9/5/15 B/(W) 9/3/16     9/5/15 B/(W)   Company sales $ 366 $ 366 — $ 1,044 $ 1,073 (3) Franchise and license fees and income 115   107   8 326   309   6 Total revenues 481   473   2 1,370   1,382   (1)   Company restaurant expenses Food and paper 96 100 5 270 298 9 Payroll and employee benefits 105 101 (4) 302 300 (1) Occupancy and other operating expenses 86   84   (1) 246   244   (1) Company restaurant expenses 287 285 — 818 842 3 General and administrative expenses 49 50 4 140 141 1 Franchise and license expenses 3 5 42 12 11 (6) Closures and impairment (income) expenses — 1 56 1 3 60 Other (income) expense (1 ) —   NM (2 ) (1 ) 53 Total costs and expenses, net 338   341   1 969   996   3 Operating Profit $ 143   $ 132   9 $ 401   $ 386   4   Company sales 100.0 % 100.0 % 100.0 % 100.0 % Food and paper 26.1 27.3 1.2 ppts. 25.9 27.8 1.9 ppts. Payroll and employee benefits 28.6 27.5 (1.1 ppts.) 28.9 27.9 (1.0 ppts.) Occupancy and other operating expenses 23.6   23.1   (0.5 ppts.) 23.6   22.7   (0.9 ppts.) Restaurant margin 21.7 % 22.1 % (0.4 ppts.) 21.6 % 21.6 % —   Operating margin 29.8 % 27.8 % 2.0 ppts. 29.3 % 27.9 % 1.4 ppts.   See accompanying notes.   Percentages may not recompute due to rounding.          

 

YUM! Brands, Inc.

Condensed Consolidated Balance Sheets

(amounts in millions)

  (unaudited) 9/3/16 12/26/15 ASSETS Current Assets Cash and cash equivalents $ 2,885 $ 737 Accounts and notes receivable, less allowance: $20 in 2016 and $16 in 2015 440 377 Inventories 255 229 Prepaid expenses and other current assets 287 241 Advertising cooperative assets, restricted 136   103   Total Current Assets 4,003 1,687  

Property, plant and equipment, net of accumulated depreciation and amortization of $3,698 in 2016 and $3,643 in 2015

4,010 4,189 Goodwill 635 656 Intangible assets, net 258 271 Investments in unconsolidated affiliates 64 61 Other assets 562 521 Deferred income taxes 900   676   Total Assets $ 10,432   $ 8,061    

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current Liabilities Accounts payable and other current liabilities $ 2,058 $ 1,985 Income taxes payable 57 77 Short-term borrowings 48 922 Advertising cooperative liabilities 136   103   Total Current Liabilities 2,299 3,087   Long-term debt 9,119 3,041 Other liabilities and deferred credits 844   958   Total Liabilities 12,262   7,086     Redeemable noncontrolling interest —   6    

Shareholders’ Equity (Deficit)

Common stock, no par value, 750 shares authorized; 376 shares and 420 shares issued in 2016 and 2015, respectively

— —

Retained earnings (accumulated deficit)

(1,572 ) 1,150 Accumulated other comprehensive income (loss) (324 ) (239 )

Total Shareholders’ Equity (Deficit) - YUM! Brands, Inc.

(1,896 ) 911 Noncontrolling interests 66   58  

Total Shareholders’ Equity (Deficit)

(1,830 ) 969  

Total Liabilities, Redeemable Noncontrolling Interest and Shareholders’ Equity (Deficit)

$ 10,432   $ 8,061    

 See accompanying notes.

     

 

YUM! Brands, Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

(unaudited)

  Year to date 9/3/16     9/5/15 Cash Flows - Operating Activities Net income - including noncontrolling interests $ 1,362 $ 1,023 Depreciation and amortization 489 505 Closures and impairment (income) expenses 47 30 Refranchising (gain) loss (85 ) 60 Contributions to defined benefit pension plans (4 ) (83 ) Deferred income taxes (215 ) (42 ) Equity income from investments in unconsolidated affiliates (44 ) (31 ) Distributions of income received from unconsolidated affiliates 18 9 Excess tax benefit from share-based compensation (66 ) (46 ) Share-based compensation expense 41 40 Changes in accounts and notes receivable (31 ) (15 ) Changes in inventories (32 ) 62 Changes in prepaid expenses and other current assets 5 (27 ) Changes in accounts payable and other current liabilities 146 201 Changes in income taxes payable 41 111 Changes in restricted cash (82 ) (4 ) Other, net (48 ) 24   Net Cash Provided by Operating Activities 1,542   1,817     Cash Flows - Investing Activities Capital spending (546 ) (642 ) Proceeds from refranchising of restaurants 165 72 Other, net 35   48   Net Cash Used in Investing Activities (346 ) (522 )   Cash Flows - Financing Activities Proceeds from long-term debt 6,900 — Repayments of long-term debt (308 ) (10 ) Short-term borrowings by original maturity More than three months - proceeds 1,400 — More than three months - payments (2,000 ) — Three months or less, net — — Revolving credit facilities, three months or less, net (701 ) (116 ) Repurchase shares of Common Stock (3,652 ) (370 ) Excess tax benefit from share-based compensation 66 46 Dividends paid on Common Stock (559 ) (532 ) Debt establishment costs (86 ) — Other, net (77 ) (37 ) Net Cash Provided by (Used in) Financing Activities 983   (1,019 ) Effect of Exchange Rate on Cash and Cash Equivalents (31 ) 7   Net Increase in Cash and Cash Equivalents 2,148 283 Cash and Cash Equivalents - Beginning of Period 737   578   Cash and Cash Equivalents - End of Period $ 2,885   $ 861    

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 U.S. Generally Accepted Accounting Principles (“GAAP”) throughout this document, the Company has provided non-GAAP measurements which present earnings before Special Items, our effective tax rate before Special Items, and Operating profit on a basis before Special Items and foreign currency translation (“Core Operating Profit”). Included in Special Items are costs associated with the planned spin-off of the China business and YUM recapitalization, costs associated with a voluntary retirement program offered to U.S. employees, costs associated with the KFC U.S. Acceleration Agreement, certain refranchising initiatives, a U.S. tax benefit related to previous impairments of our Little Sheep investment, and the impact of the redemption of the Little Sheep noncontrolling interest. These amounts are described in (c), (d), (e), (f), (g) and (h) in the accompanying notes.

The Company excludes Special Items and foreign currency translation impacts for the purposes of evaluating performance internally. Special Items are not included in any of our externally reported segment results. Additionally, we believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations, which is quantified by translating current year results at prior year average exchange rates. 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 earnings before Special Items, our effective tax rate before Special Items, and Core Operating Profit provide additional information to investors to facilitate the comparison of past and present operations, excluding items in the quarters and years to date ended September 3, 2016 and September 5, 2015 that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

        Quarter ended Year to date 9/3/16     9/5/15 9/3/16     9/5/15 Detail of Special Items Costs associated with the planned spin-off of the China business and YUM recapitalization(c) $   (10 ) $ — $ (29 ) $ — Voluntary Retirement Program costs(d) (20 ) — (20 ) — Costs associated with KFC U.S. Acceleration Agreement(e) — (21 ) (17 ) (31 ) Refranchising initiatives(f) 21 (4 ) 77 (69 ) Other Special Items Income (Expense) (5 ) (1 ) (11 ) 1   Special Items Income (Expense) - Operating Profit (14 ) (26 ) — (99 ) Tax Benefit (Expense) on Special Items(g) 202   4   193   5   Special Items Income (Expense), net of tax - including noncontrolling interests 188 (22 ) 193 (94 ) Special Items Income (Expense), net of tax - noncontrolling interests(h) —   —   (8 ) —   Special Items Income (Expense), net of tax - Yum! Brands, Inc. $   188   $ (22 ) $ 201   $ (94 ) Average diluted shares outstanding 398   444   412   445   Special Items diluted EPS $   0.47   $ (0.05 ) $ 0.49   $ (0.21 )   Reconciliation of Core Operating Profit to GAAP Operating Profit Core Operating Profit $ 702 $ 629 $ 1,787 $ 1,579 Special Items Income (Expense) (14 ) (26 ) — (99 ) Foreign Currency Impact on Reported Operating Profit (34 ) N/A   (78 ) N/A   GAAP Operating Profit $   654   $ 603   $ 1,709   $ 1,480     Reconciliation of EPS Before Special Items to GAAP EPS Diluted EPS Before Special Items $ 1.09 $ 1.00 $ 2.79 $ 2.50 Special Items EPS 0.47   (0.05 ) 0.49   (0.21 ) GAAP EPS $   1.56   $ 0.95   $ 3.28   $ 2.29     Reconciliation of Effective Tax Rate Before Special Items to GAAP Effective Tax Rate Effective Tax Rate Before Special Items 23.5 % 24.8 % 24.3 % 24.6 % Impact on Tax Rate as a result of Special Items (35.1 )% 0.5 % (12.5 )% 1.3 % GAAP Effective Tax Rate (11.6 )% 25.3 % 11.8 % 25.9 %                          

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

  Quarter Ended 9/3/16 China KFC

Pizza

Hut

Taco

Bell

Corporate

and

Unallocated

Consolidated Total revenues $ 1,883   $ 723   $ 230   $ 481   $ (1 ) $ 3,316     Company restaurant expenses 1,437 445 102 287 — 2,271 General and administrative expenses 102 89 57 49 80 377 Franchise and license expenses 6 27 12 3 (1 ) 47 Closures and impairment (income) expenses 5 2 — — — 7 Refranchising (gain) loss — — — — (25 ) (25 ) Other (income) expense (15 ) —   (2 ) (1 ) 3   (15 ) 1,535   563   169   338   57   2,662   Operating Profit (loss) $ 348   $ 160   $ 61   $ 143   $ (58 ) $ 654       Quarter Ended 9/5/15 China KFC

Pizza

Hut

Taco

Bell

Corporate

and

Unallocated

Consolidated Total revenues $ 1,969   $ 721   $ 264   $ 473   $ —   $ 3,427     Company restaurant expenses 1,556 458 130 285 — 2,429 General and administrative expenses 90 96 60 50 32 328 Franchise and license expenses 6 23 10 5 21 65 Closures and impairment (income) expenses 3 — (1 ) 1 — 3 Refranchising (gain) loss — — — — 2 2 Other (income) expense (13 ) —   —   —   10   (3 ) 1,642   577   199   341   65   2,824   Operating Profit (loss) $ 327   $ 144   $ 65   $ 132   $ (65 ) $ 603    

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 9/3/16 China KFC

Pizza

Hut

Taco

Bell

Corporate

and

Unallocated

Consolidated Total revenues $ 4,774   $ 2,060   $ 741   $ 1,370   $ (2 ) $ 8,943     Company restaurant expenses 3,744 1,254 333 818 — 6,149 General and administrative expenses 270 259 163 140 196 1,028 Franchise and license expenses 15 71 32 12 15 145 Closures and impairment (income) expenses 36 7 3 1 — 47 Refranchising (gain) loss — — — — (85 ) (85 ) Other (income) expense (42 ) —   (2 ) (2 ) (4 ) (50 ) 4,023   1,591   529   969   122   7,234   Operating Profit (loss) $ 751   $ 469   $ 212   $ 401   $ (124 ) $ 1,709       Year to Date 9/5/15 China KFC

Pizza

Hut

Taco

Bell

Corporate

and

Unallocated

Consolidated Total revenues $ 4,861   $ 2,109   $ 802   $ 1,382   $ —   $ 9,154     Company restaurant expenses 3,932 1,312 388 842 — 6,474 General and administrative expenses 258 275 180 141 122 976 Franchise and license expenses 15 61 28 11 31 146 Closures and impairment (income) expenses 22 3 2 3 — 30 Refranchising (gain) loss — — — — 60 60 Other (income) expense (27 ) (1 ) (2 ) (1 ) 19   (12 ) 4,200   1,650   596   996   232   7,674   Operating Profit (loss) $ 661   $ 459   $ 206   $ 386   $ (232 ) $ 1,480    

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 quarter and year to date ended September 3, 2016 are preliminary.   (b) Other (income) expense for the China Division primarily consists of equity (income) loss from investments in unconsolidated affiliates.   (c)

In connection with our planned separation of the YUM China business into an independent, publicly-traded company and the related recapitalization of YUM, we incurred $10 million and $29 million of costs in the quarter and year to date ended September 3, 2016, respectively, which were recorded in General and administrative (“G&A”) expenses.

  (d) During the quarter ended September 3, 2016, YUM offered a voluntary retirement program to certain U.S. employees. This program will provide separation pay and benefits to employees who elected to voluntarily separate from YUM. Based on the employees electing to terminate their employment, we recorded a Special Items charge of $20 million in G&A during the quarter ended September 3, 2016.   (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 $21 million for the quarter ended September 5, 2015. During the years to date ended September 3, 2016 and September 5, 2015, we recognized Special Item charges of $17 million and $31 million, respectively. The majority of these costs were recorded in Franchise and license expense. These charges primarily related to the funding of investments for new back-of-house equipment for franchisees.   (f) We have historically recorded refranchising gains and losses in the U.S. as Special Items due to the scope of our U.S. refranchising program and the volatility in associated gains and losses. Beginning in 2016, we are also including all international refranchising gains and losses, excluding China, in Special Items. The inclusion in Special Items of these additional international refranchising gains and losses is the result of the anticipated size and volatility of refranchising initiatives outside the U.S. that will take place in connection with our previously announced plans to have 96% franchise ownership by the end of 2017. During the quarters ended September 3, 2016 and September 5, 2015 we recorded net refranchising gains of $21 million and net refranchising losses of $4 million, respectively, that have been reflected as Special Items. During the years to date ended September 3, 2016 and September 5, 2015 we recorded net refranchising gains of $77 million and net refranchising losses of $69 million, respectively, that have been reflected as Special Items.  

The third quarter and year to date 2016 net refranchising gains relate primarily to refranchising Pizza Hut and Taco Bell restaurants in the U.S.

 

In 2010 we refranchised our then remaining Company-operated restaurants in Mexico. To the extent we owned it, we did not sell the real estate related to certain of these restaurants, instead leasing it to the franchisee. During the quarter ended June 13, 2015 we initiated plans to sell this real estate and determined it was held for sale in accordance with GAAP. On September 28, 2015, subsequent to our quarter ended September 5, 2015, we sold the real estate for approximately $58 million. While these proceeds exceeded the book value of the real estate, the sale represented a substantial liquidation of our Mexican operations under U.S. GAAP. Accordingly, we were required to include accumulated translation losses associated with our Mexican business within our carrying value when performing impairment evaluations in the quarters subsequent to determining that the real estate was held for sale. We recorded charges of $12 million and $80 million in the quarter and year to date ended September 5, 2015, respectively, representing the excess of the sum of the book value of the real estate and other related assets and our accumulated translation losses over the then expected sales price. Consistent with the classification of the original market refranchising transaction, these charges were classified as Refranchising Loss within Special Items. We did not record any additional charges as a result of the consummation of the sale.

  Additionally, during the quarter and year to date ended September 5, 2015 we recognized Special Items charges of $8 million and $13 million, respectively, within Refranchising (gain) loss associated with the decision to offer to refranchise our Pizza Hut Korea restaurants.   (g) During the quarter ended September 3, 2016, we recorded a tax benefit of $198 million in Special Items due to our ability to now realize tax benefits associated with previous impairment losses related to Little Sheep that were recognized as Special Items in 2013 and 2014.   (h) During the quarter ended June 11, 2016, the Little Sheep founding shareholders exercised their redemption rights and sold their remaining 7% Little Sheep ownership interest to YUM. The difference between the purchase price and the carrying value of this redeemable noncontrolling interest was recorded as an $8 million loss attributable to noncontrolling interest, which was reflected as a Special Item consistent with the 2012 Little Sheep acquisition gain and subsequent impairments.

View source version on businesswire.com: http://www.businesswire.com/news/home/20161005006367/en/

Yum! Brands, Inc.Analysts are invited to contact:Keith Siegner, 888-298-6986Vice President, Investor Relations & Corporate StrategyorElizabeth Grenfell, 888-298-6986Director, Investor RelationsorMembers of the media are invited to contact:Virginia Ferguson, 502-874-8200Director, Public Relations