Yum! Brands Reports Second-Quarter GAAP Operating Profit Growth of 32%; Delivered Core Operating Profit Growth of 7%; Raises Full-Year Core Operating Profit Growth Guidance to At Least 14%

Yum! Brands, Inc. (YUM) today reported results for the second quarter ended June 11, 2016, including GAAP EPS of $0.81 and EPS excluding Special Items of $0.75.

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

SECOND-QUARTER HIGHLIGHTS

• Opened 373 new restaurants worldwide; 72% of international development occurred in emerging markets.

• On track to finalize China separation with targeted completion date around October 31, 2016.

• Foreign currency translation negatively impacted operating profit by $16 million.

GREG CREED COMMENTS

Greg Creed, CEO, said "Yum! Brands delivered second-quarter core operating profit growth of 7% and EPS growth, excluding Special Items, of 9%. Given our strong first-half results and current trends in China, I’m pleased to raise our full-year core operating profit growth forecast to at least 14% from 12% previously. I’m particularly pleased with the continued sales momentum at KFC China, which delivered better-than-expected same-store sales growth of 3%. This represents our fourth-consecutive quarter of positive same-store sales growth at KFC China despite the second quarter being our most difficult of the year from a historical sales overlap standpoint. Importantly, our China Division is off to a good start in the third quarter for both KFC and Pizza Hut Casual Dining, including a return to positive same-store sales at Pizza Hut Casual Dining in recent weeks.

Outside of China, challenging industry conditions in the U.S. contributed to soft sales results. However, our three brand divisions in the aggregate delivered core operating profit growth largely in-line with our expectations and remain on track to deliver against their full-year core operating profit growth targets. We’re confident in our plans to drive second-half sales improvement led by a continued focus on innovation, value and our core products.

This is a transformational year for our company as we remain on track to finalize the separation of our China business with a targeted completion date around October 31, 2016, ultimately creating two powerful, independent, focused growth companies. Our capital structure is fully in place and we plan to return a significant amount of capital to shareholders both prior to and after the spin. I look forward to sharing additional details on the transformative initiatives we are undertaking as we become a more heavily franchised company at our New York investor conference on Tuesday, October 11th."

CHINA DIVISION

• China Division system sales increased 3%, excluding foreign currency translation. -- Same-store sales were even, with an increase of 3% at KFC, offset by a decline of 11% at Pizza Hut Casual Dining.

-- China Division opened 72 new units during the quarter.

• Operating profit was negatively impacted by an additional $14 million in closures and impairment expense versus prior year, as well as a $4 million expense related to our RGM convention. These expenses were partially offset by a benefit from recent value-added tax reform in China, which went into effect on May 1, 2016.

• Foreign currency translation negatively impacted operating profit by $7 million.

• Consistent with prior years, China Division’s second quarter includes March, April and May results.

KFC DIVISION

• KFC Division system sales increased 6%, excluding foreign currency translation.

• KFC Division opened 132 new international restaurants in 42 countries, including 90 units in emerging markets. 88% of new international units were opened by franchisees.

• Operating margin increased 0.5 percentage points driven by new-unit development.

• Foreign currency translation negatively impacted operating profit by $9 million, as approximately 90% of division profits are generated outside the U.S.

PIZZA HUT DIVISION

• Pizza Hut Division system sales increased 1%, excluding foreign currency translation.

• Pizza Hut Division opened 84 new international restaurants in 38 countries, including 45 units in emerging markets. 94% of new international units were opened by franchisees.

• Operating margin increased 3.3 percentage points, driven by reduced G&A.

• Foreign currency translation negatively impacted operating profit by less than $1 million.

TACO BELL DIVISION

• Taco Bell Division system sales increased 2%, driven by 3% unit growth and partially offset by a 1% decline in same-store sales.

• Taco Bell Division opened 48 new restaurants; 88% of these new units were opened by franchisees.

• Restaurant margin was 22.3%, a decrease of 0.6 percentage points driven by higher labor costs and store level investments. This was partially offset by favorable commodities pricing.

• Operating margin increased 0.6 percentage points driven by new-unit development and reduced G&A.

SPECIAL ITEMS / SHARE REPURCHASE / RECAPITALIZATION UPDATE

• 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 expanded menu offerings, improved assets and an enhanced customer experience. In connection with this agreement, we recognized a Special Items charge of $8 million during the quarter, primarily related to the funding of investments for new back-of-house equipment for franchisees.

• During the quarter, we incurred a Special Items charge of $10 million for costs related to the planned separation of our China business and the Yum! recapitalization.

• During the quarter, we refranchised 82 units outside of China, primarily related to Pizza Hut U.S., for proceeds of $83 million. We recorded refranchising gains of $53 million in Special Items.

• Year-to-date through July 12, 2016, we repurchased 31.4 million shares totaling $2.4 billion at an average price of $77. Since we announced our intention to separate the China business, we have repurchased approximately $3.3 billion of shares at an average price of $76, reducing our share count by 42.9 million shares. This is part of our previously announced plan to return $6.2 billion of capital to shareholders in connection to the separation of our China business.

• We have completed our recapitalization consisting of $6.9 billion of new debt in May and June 2016; $4.6 billion of this new debt was issued subsequent to the end of our second quarter.

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, July 14, 2016. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers, conference ID 34811599.

The call will be available for playback beginning at 12:30 p.m. Eastern Time Thursday, July 14, 2016 through midnight Wednesday, August 10, 2016. To access the playback, dial 855/859-2056 in the U.S. and 404/537-3406 internationally, conference ID 34811599.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands’ website, www.yum.com/investors and selecting "Q2 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 as well as the related borrowing required to fund such capital return, 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, as well as the corresponding costs of borrowing to fund such capital return as well as other costs; 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 nearly 43,000 restaurants in almost 140 countries and territories. Yum! 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.

See accompanying notes.

Percentages may not recompute due to rounding.

See accompanying notes.

Percentages may not recompute due to rounding.

See accompanying notes.

Percentages may not recompute due to rounding.

See accompanying notes.

Percentages may not recompute due to rounding.

See accompanying notes.

Percentages may not recompute due to rounding.

See accompanying notes.

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 and Operating profit on a basis before Special Items and foreign currency translation ("Core Operating Profit"). Included in Special Items are gains/(losses) associated with the costs associated with the planned spin-off of the China business and YUM recapitalization, costs associated with the KFC U.S. Acceleration Agreement, certain refranchising initiatives and the impact of redeeming the Little Sheep noncontrolling interest. These amounts are described in (c), (d), (e) and (f) 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 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 June 11, 2016 and June 13, 2015 that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

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.

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SOURCE: Yum! Brands, Inc.