Yum! Brands: Reports Second-Quarter 2018 Results

Louisville / KY. (yb) Yum! Brands Inc. reported results for the second quarter ended June 30, 2018. Second-quarter GAAP EPS was USD 0.97, an increase of 68 percent. Second-quarter EPS excluding Special Items was USD 0.82, an increase of 20 percent.

Chief Executive’s Comment

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 percent, with KFC at 6 percent, Taco Bell at 5 percent and Pizza Hut flat.
• We opened 243 net new units for 4 percent net new unit growth.
• We refranchised 51 restaurants, including 28 KFC and 23 Pizza Hut units, for pre-tax proceeds of USD 47 million. We recorded net refranchising gains of USD 29 million in Special Items. As of quarter end, our global franchise ownership mix was 97 percent.
• We repurchased 7.6 million shares totaling USD 643 million at an average price of USD 84.
• We reflected the change in fair value of our investment in Grubhub by recording USD 25 million of pre-tax investment income, resulting in USD 0.06 in EPS.
• Foreign currency translation favorably impacted divisional operating profit by USD 8 million.

Percent 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)

.

	Q2/2018	Q2/2017	%Change	YTD-2018	YTD-2017	%Change
GAAP EPS	USD 0.97	USD 0.58	+68	USD 2.25	USD 1.34	+67
Special Items EPS1	USD 0.15	USD (0.10)	NM	USD 0.54	USD 0.01	NM
EPS Excluding Special Items	USD 0.82	USD 0.68	+20	USD 1.71	USD 1.33	+29

.
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.

Pizza Hut Division

The complete news release including the Kentucky Fried Chicken and Taco Bell divisions is available on the group’s website.

percent/ppts Change	Q2/2018	Q2/2017	Reported	Ex F/X	YTD-2018	YTD-2017	Reported	Ex F/X
Restaurants	16,823	16,452	+2	N/A	16,823	16,452	+2	N/A
System Sales (USD MM)	2,894	2,827	+2	Even	5,926	5,699	+4	+1
Same-Store Sales Growth ( percent)	(1)	(1)	NM	NM	Even	(2)	NM	NM
Franchise and Property Revenues (USD MM)	140	141	(1)	(3)	289	285	+1	(1)
Operating Profit (USD MM)	81	85	(5)	(6)	169	168	+1	(2)
Operating Margin ( percent)	34.6	38.1	(3.5)	(3.8)	34.8	36.8	(2.0)	(2.4)

.

%Change	Q2/2018 International	Q2/2018 U.S.	YTD International	YTD 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 USD 1 million.

Pizza Hut Markets1	Percent of Pizza Hut System Sales2	System Sales Growth Ex F/X
		Q2/2018 ( %Change)	YTD ( %Change)
United States	46 percent	(1)	+1
China	18 percent	(1)	(1)
Asia	13 percent	+4	+5
Europe	10 percent	(1)	+1
Latin America	6 percent	(1)	even
Middle East / Türkiye / North Africa	4 percent	+3	+2
Canada	2 percent	+1	+1
India	1 percent	+22	+22
Africa	more than 1 percent	+43	+35

.

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.