YUM
$102.92
Yum! Brands
($.26)
(.25%)
Earnings Details
4th Quarter December 2018
Thursday, February 07, 2019 7:00:00 AM
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Summary

Yum! Brands Misses

Yum! Brands (YUM) reported 4th Quarter December 2018 earnings of $0.40 per share on revenue of $1.6 billion. The consensus earnings estimate was $0.97 per share on revenue of $1.6 billion. The Earnings Whisper number was $1.03 per share. Revenue fell 1.2% compared to the same quarter a year ago.

The company said it expects 2019 earnings of at least $3.75 per share. The current consensus earnings estimate is $3.80 per share for the year ending December 31, 2019.

Yum Brands Inc through the three concepts of KFC, Pizza Hut and Taco Bell, develops, operates, franchises and licenses a system of restaurants which prepare, package and sell a menu of competitively priced food items.

Results
Reported Earnings
$0.40
Earnings Whisper
$1.03
Consensus Estimate
$0.97
Reported Revenue
$1.56 Bil
Revenue Estimate
$1.59 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Yum! Brands Reports Fourth-Quarter GAAP Operating Profit Decline of (39)%; Fourth-Quarter Core Operating Profit Growth of +5%; On Track with Strategic Transformation to Accelerate Growth

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Yum! Brands, Inc. (NYSE: YUM) today reported results for the fourth-quarter and year ended December 31, 2018. Fourth-quarter GAAP EPS was $1.04, a decrease of (17)%. Full-year GAAP EPS was $4.69, an increase of 24%. Fourth-quarter EPS excluding Special Items was $0.40, a decrease of (58)%. Full-year EPS excluding Special Items was $3.17, an increase of 7%.

This press release features multimedia. View the full release here:https://www.businesswire.com/news/home/20190207005274/en/

GREG CREED & DAVID GIBBS COMMENTS

Greg Creed, CEO, said, “I am very proud of what we have been able to accomplish in just two short years since we announced the transformation of Yum!. In 2018, our diverse portfolio of iconic brands generated over $49 billion in system sales and ended the year with over 48,000 restaurants. Focus on our four growth drivers, increased collaboration and a new mindset are fueling strong results. During 2018, system sales grew 5% with same store sales growth of 2%, and net unit growth of 4%, excluding the impact of Telepizza. Combined across our brands and led by over 2,000 world-class franchisees, we opened a record 8 gross new restaurants per day across the globe in 2018. As we move into 2019, we will continue to pursue even more growth, leverage our unprecedented scale, and maximize value for all Yum! stakeholders.”

David Gibbs, President, COO and CFO, continued, “Fourth-quarter results were a strong finish to a solid year, and serve as a healthy foundation for our 2019 guidance. I am also pleased that we made significant progress on our transformation commitments in 2018, having achieved our goal of becoming at least 98% franchised. Our commitment to being more focused, more franchised and more efficient is strengthening our enviable business model. Yum! is well positioned to leverage our massive scale and expand our capabilities in order to improve franchise unit economics and accelerate growth.”

SUMMARY FINANCIAL TABLE

  Fourth Quarter   Full Year
2018   2017   % Change   2018   2017   % Change
GAAP EPS $1.04   $1.26   (17)   $4.69   $3.77   +24
Special Items EPS1 $0.64   $0.30   NM   $1.52   $0.81   NM
EPS Excluding Special Items   $0.40   $0.96   (58)   $3.17   $2.96   +7

1See 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.
 

FOURTH-QUARTER HIGHLIGHTS

  Worldwide system sales excluding foreign currency translation grew 6%, with Taco Bell at 9%, KFC at 7% and Pizza Hut at 2%.

We opened 865 net new units and added 1,282 Telepizza units for 7% net unit growth.

We refranchised 331 restaurants, including 227 KFC and 104 Taco Bell units, for pre-tax proceeds of $380 million. We recorded net refranchising gains of $255 million in Special Items. As of quarter end, our global franchise ownership mix increased to 98%.

We repurchased 7.8 million shares totaling $696 million at an average price of $90.

We reflected the change in fair value of our investment in Grubhub by recording $171 million of pre-tax investment expense, resulting in a negative ($0.41) impact to EPS on the quarter.

Foreign currency translation unfavorably impacted divisional operating profit by $14 million.
 
% Change
System Sales   Same-Store     GAAP   Core
Ex F/X   Sales   Net New Units   Operating Profit   Operating Profit
KFC Division +7 +3 +5 (6) (1)
Pizza Hut Division1 +2 Even +10 Even +3
Taco Bell Division   +9   +6   +3   +7   +7
Worldwide1   +6   +3   +7   (39)   +5

1Pizza Hut Division and Worldwide net new units include Telepizza units.

 

FULL-YEAR HIGHLIGHTS

  Worldwide system sales excluding foreign currency translation grew 5%, with KFC at 6%, Taco Bell at 6% and Pizza Hut at 1%.

We opened 1,757 net new units and added 1,282 Telepizza units for 7% net unit growth.

We refranchised 660 restaurants, including 364 KFC, 97 Pizza Hut and 199 Taco Bell units, for pre-tax proceeds of $825 million, recording net refranchising gains of $540 million in Special Items.

We repurchased 28.2 million shares totaling $2.4 billion at an average price of $85.

We reflected the change in fair value of our investment in Grubhub by recording $14 million of pre-tax investment income, resulting in a positive $0.03 impact to EPS on the year.

Foreign currency translation favorably impacted divisional operating profit by $1 million.
 
% Change
System Sales   Same-Store     GAAP   Core
Ex F/X   Sales   Net New Units   Operating Profit   Operating Profit
KFC Division +6 +2 +5 (2) (2)
Pizza Hut Division +1 Even +10 +2 +2
Taco Bell Division   +6   +4   +3   +2   +2
Worldwide1   +5   +2   +7   (17)   Even

1Pizza Hut Division and Worldwide net new units include Telepizza units.

 

KFC DIVISION

   
Fourth Quarter Full Year
    %/ppts Change     %/ppts Change
2018   2017   Reported   Ex F/X   2018   2017   Reported   Ex F/X
Restaurants 22,621 21,487 +5   NA 22,621 21,487 +5   NA
System Sales ($MM) 7,049 6,827 +3 +7 26,239 24,515 +7 +6
Same-Store Sales Growth (%) +3 +3 NM NM +2 +3 NM NM
Franchise & Property Revenues ($MM) 357 351 +2 +6 1,294 1,182 +10 +9
Operating Profit ($MM) 255 271 (6) (1) 959 981 (2) (2)
Operating Margin (%)   37.2   33.4   3.8   3.6   36.3   31.6   4.7   4.6
 
   
Fourth Quarter (% Change)   Year-to-Date (% Change)
    International   U.S.   International   U.S.
System Sales Growth Ex F/X +8   +2 +8   Even
Same-Store Sales Growth   +4   +1   +3   +1
 
 

KFC Division opened 650 new international restaurants during the quarter.

?

For the year, KFC Division opened 1,558 new international restaurants in 87 countries.

Operating margin increased 3.8 percentage points for the quarter and 4.7 percentage points for the year driven by refranchising and same-store sales growth, partially offset by the gross up of advertising and other franchise service revenues.

Foreign currency translation unfavorably impacted operating profit by $12 million for the quarter and had no impact for the year.
 
   
KFC Markets1

Percent of KFC

System Sales2

System Sales Growth Ex F/X
    Fourth Quarter

(% Change)

  Year-to-Date
(% Change)
China 27% +9   +7
United States 17% +2 Even
Asia 12% +4 +5
Russia & Eastern Europe 8% +16 +20
Australia 7% +6 +5
United Kingdom 6% +1 (2)
Latin America 5% +13 +12
Western Europe 5% +11 +11
Africa 4% +10 +8
Middle East / Turkey / North Africa 4% +11 +12
Canada 2% +1 +2
Thailand 2% +11 +9
India   1%   +17   +20
 

(1) Refer to www.yum.com/investors/financial-information/financial-reports for a list of the countries within each of the markets.

(2) Reflects full year 2018.

 

PIZZA HUT DIVISION

   
Fourth Quarter   Full Year
    %/ppts Change     %/ppts Change
2018   2017   Reported   Ex F/X   2018   2017   Reported   Ex F/X
Restaurants 18,431 16,748 +10   NA 18,431 16,748 +10   NA
System Sales ($MM) 3,357 3,369 Even +2 12,212 12,034 +1 +1
Same-Store Sales Growth (%) Even +1 NM NM Even Even NM NM
Franchise & Property Revenues ($MM) 166 175 (5) (3) 598 608 (2) (2)
Operating Profit ($MM) 91 91 Even +3 348 341 +2 +2
Operating Margin (%)   33.1   38.8   (5.7)   (5.4)   35.3   38.2   (2.9)   (2.9)
 
   
Fourth Quarter (% Change)   Year-to-Date (% Change)
    International   U.S.   International   U.S.
System Sales Growth Ex F/X +3   +1 +2   Even
Same-Store Sales Growth   Even   +1   (2)   +2
 
 

Pizza Hut Division opened 352 new international restaurants during the quarter.
? For the year, Pizza Hut Division opened 860 new international restaurants in 76 countries.

Pizza Hut Division added 1,282 Telepizza units during the quarter.

Operating margin decreased 5.7 percentage points for the quarter and 2.9 percentage points for the year driven by the gross up of advertising and other franchise service revenues partially offset by refranchising.

Foreign currency translation unfavorably impacted operating profit by $2 million for the quarter and favorably impacted operating profit by $1 million for the year.
 
Pizza Hut Markets1  

Percent of Pizza Hut

System Sales2

  System Sales Growth Ex F/X
    Fourth Quarter
(% Change)
  Year-to-Date
(% Change)
United States 46% +1   Even
China 17% (2) (1)
Asia 13% +3 +4
Europe 10% +6 +2
Latin America 6% +5 +2
Middle East / Turkey / North Africa 4% +4 +3
Canada 2% +3 +2
India 1% +14 +19
Africa   <1%   +60   +44

(1) Refer to http://www.yum.com/investors/financial-information/financial-reports for a list of the countries within each of the markets.

(2) Reflects full year 2018 and does not include any impact from Telepizza.

 

TACO BELL DIVISION

   
Fourth Quarter   Full Year
    %/ppts Change     %/ppts Change
2018   2017   Reported   Ex F/X   2018   2017   Reported   Ex F/X
Restaurants 7,072 6,849 +3   NA 7,072 6,849 +3   NA
System Sales ($MM) 3,346 3,087 +8 +9 10,786 10,145 +6 +6
Same-Store Sales Growth (%) +6 +2 NM NM +4 +4 NM NM
Franchise & Property Revenues ($MM) 186 163 +14 +14 590 521 +13 +13
Operating Profit ($MM) 191 179 +7 +7 633 619 +2 +2
Operating Margin (%)   31.9   33.6   (1.7)   (1.7)   30.8   32.9   (2.1)   (2.1)
 
 

Taco Bell Division opened 151 new restaurants during the quarter.
? For the year, Taco Bell Division opened 309 new restaurants, including 94 international new restaurants.

Operating margin decreased 1.7 percentage points for the quarter and 2.1 percentage points for the year driven by the gross up of advertising and other franchise service revenues 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. As a result of the new standard, core operating profit growth was negatively impacted by six percentage points during the fourth quarter and two percentage points on a full-year basis.

Disclosures pertaining to outstanding debt in our Restricted Group capital structure will be provided at the time of the filing of the 2018 Form 10-K.

Our Effective Tax Rate and Effective Tax Rate Before Special Items were negatively impacted due to a reserve of approximately $20 million we recorded in the quarter ended December 31, 2018. The reserve related to a dispute concerning the income tax rate to be applied to our 2018 income in a foreign market.

During the fourth quarter of 2018 a subsidiary of Taco Bell Corp. issued $1.45 billion of Securitization Notes. Proceeds were used to repay $0.8 billion of existing securitization notes issued in 2016, repay the then $0.3 billion outstanding balance on the Revolving Facility and for general corporate purposes including capital return to shareholders.
 

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 Thursday, February 7, 2019. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers, conference ID 6587363.

The call will be available for playback beginning at 11:15 a.m. Eastern Time Thursday, February 7, 2019 through Thursday, April 11, 2019. To access the playback, dial 855/859-2056 in the U.S. and 404/537-3406 internationally, conference ID 6587363.

The webcast and playback can be accessed via the internet by visiting Yum! Brands' website, www.yum.com/investors/events-presentations and selecting “Q4 2018 Earnings Conference Call.”

ADDITIONAL INFORMATION ONLINE

Quarter end dates for each division, restaurant count details, definitions of terms and Restricted Group financial information are available at www.yum.com/investors. Reconciliation of non-GAAP financial measures to the most directly comparable GAAP results 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 48,000 restaurants in more than 140 countries. 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 eight new restaurants per day on average, making it a leader in global retail development. In 2018, 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. In 2019, Yum! Brands was named to the Bloomberg Gender-Equality Index for the second consecutive year.

       
YUM! Brands, Inc.
Consolidated Summary of Results
(amounts in millions, except per share amounts)
(unaudited)
 
Quarter ended % Change

B/(W)

Year ended % Change

B/(W)

12/31/18   12/31/17 12/31/18   12/31/17
Revenues
Company sales $ 477 $ 890 (46) $ 2,000 $ 3,572 (44)
Franchise and property revenues 709 687 3 2,482 2,306 8
Franchise contributions for advertising and other services 372     N/A 1,206     N/A
Total revenues 1,558   1,577   (1) 5,688   5,878   (3)
 
Costs and Expenses, Net
Company restaurant expenses 376 731 49 1,634 2,954 45
General and administrative expenses 264 300 12 895 999 10
Franchise and property expenses 61 76 20 188 237 21
Franchise advertising and other services expense 374 N/A 1,208 N/A
Refranchising (gain) loss (255 ) (752 ) (66) (540 ) (1,083 ) (50)
Other (income) expense (3 ) 7   NM 7   10   NM
Total costs and expenses, net 817   362   NM 3,392   3,117   (9)
 
Operating Profit 741 1,215 (39) 2,296 2,761 (17)
Investment (income) expense, net 176 (2 ) NM (9 ) (5 ) 88
Other pension (income) expense 4 5 22 14 47 70
Interest expense, net 122   120   (2) 452   445   (1)
Income before income taxes 439 1,092 (60) 1,839 2,274 (19)
Income tax provision 105   656   84 297   934   68
Net income 334   436   (23) 1,542   1,340   15
 
Effective tax rate 24.0 % 60.1 % 36.1 ppts. 16.2 % 41.1 % 24.9 ppts.
 

Basic EPS

EPS $ 1.07   $ 1.29   (17) $ 4.80   $ 3.86   24
Average shares outstanding 313   337   7 322   347   7

 

Diluted EPS

EPS $ 1.04   $ 1.26   (17) $ 4.69   $ 3.77   24
Average shares outstanding 320   345   7 329   355   7
 
 
Dividends declared per common share $ 0.36   $ 0.30   $ 1.44   $ 0.90  
 
See accompanying notes.
 

Percentages may not recompute due to rounding.

 
       
YUM! Brands, Inc.
KFC DIVISION Operating Results
(amounts in millions)
(unaudited)
 
Quarter ended % Change

B/(W)

Year ended % Change

B/(W)

12/31/18   12/31/17 12/31/18   12/31/17
 
Company sales $ 187 $ 463 (60) $ 894 $ 1,928 (54)
Franchise and property revenues 357 351 2 1,294 1,182 10
Franchise contributions for advertising and other services 142     N/A 456     N/A
Total revenues 686   814   (16) 2,644   3,110   (15)
 
Company restaurant expenses 158 395 60 775 1,639 53
General and administrative expenses 103 111 7 350 370 5
Franchise and property expenses 29 37 19 107 117 8
Franchise advertising and other services expenses 140 N/A 452 N/A
Other (income) expense 1     NM 1   3   NM
Total costs and expenses, net 431   543   21 1,685   2,129   21
Operating Profit $ 255   $ 271   (6) $ 959   $ 981   (2)
 
Restaurant margin 15.6 % 14.6 % 1.0 ppts. 13.3 % 15.0 % (1.7) ppts.
 
Operating margin 37.2 % 33.4 % 3.8 ppts. 36.3 % 31.6 % 4.7 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

B/(W)

Year ended % Change

B/(W)

12/31/18   12/31/17 12/31/18   12/31/17
 
Company sales $ 14 $ 59 (76) $ 69 $ 285 (76)
Franchise and property revenues 166 175 (5) 598 608 (2)
Franchise contributions for advertising and other services 95     N/A 321     N/A
Total revenues 275   234   18 988   893   11
 
Company restaurant expenses 13 59 77 69 271 74
General and administrative expenses 56 60 8 197 211 7
Franchise and property expenses 17 24 32 45 68 35
Franchise advertising and other services expenses 99 N/A 328 N/A
Other (income) expense (1 )   NM 1   2   NM
Total costs and expenses, net 184   143   (29) 640   552   (16)
Operating Profit $ 91   $ 91   Even $ 348   $ 341   2
 
Restaurant margin 4.7 % 2.4 % 2.3 ppts. (0.1 )% 5.3 % (5.4) ppts.
 
Operating margin 33.1 % 38.8 % (5.7) ppts. 35.3 % 38.2 % (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

B/(W)

Year ended % Change

B/(W)

12/31/18   12/31/17 12/31/18   12/31/17
 
Company sales $ 276 $ 368 (25) $ 1,037 $ 1,359 (24)
Franchise and property revenues 186 163 14 590 521 13
Franchise contributions for advertising and other services 135     N/A 429     N/A
Total revenues 597   531   12 2,056   1,880   9
 
Company restaurant expenses 206 282 27 793 1,054 25
General and administrative expenses 56 66 14 177 188 6
Franchise and property expenses 11 6 (87) 28 22 (31)
Franchise advertising and other services expenses 135 N/A 428 N/A
Other (income) expense (2 ) (2 ) NM (3 ) (3 ) NM
Total costs and expenses, net 406   352   (15) 1,423   1,261   (13)
Operating Profit $ 191   $ 179   7 $ 633   $ 619   2
 
Restaurant margin 25.2 % 23.1 % 2.1 ppts. 23.5 % 22.4 % 1.1 ppts.
 
Operating margin 31.9 % 33.6 % (1.7) ppts. 30.8 % 32.9 % (2.1) ppts.
 
See accompanying notes.
 
Percentages may not recompute due to rounding.
 
 
YUM! Brands, Inc.
Consolidated Balance Sheets
(amounts in millions)
(unaudited)
   
12/31/2018 12/31/2017
ASSETS
Current Assets
Cash and cash equivalents $ 292 $ 1,522
Accounts and notes receivable, less allowance: $31 in 2018 and $19 in 2017 561 400
Prepaid expenses and other current assets 354 384
Advertising cooperative assets, restricted   201  
Total Current Assets 1,207 2,507
 

Property, plant and equipment, net of accumulated depreciation and amortization of $1,116 in 2018 and $1,342 in 2017

1,237 1,594
Goodwill 525 512
Intangible assets, net 242 214
Other assets 724 345
Deferred income taxes 195   139  
Total Assets $ 4,130   $ 5,311  
 
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and other current liabilities $ 911 $ 813
Income taxes payable 69 123
Short-term borrowings 321 375
Advertising cooperative liabilities   201  
Total Current Liabilities 1,301 1,512
 
Long-term debt 9,751 9,429
Other liabilities and deferred credits 1,004   704  
Total Liabilities 12,056   11,645  
 
Shareholders' Deficit
Common stock, no par value, 750 shares authorized; 306 shares and 332 shares issued in 2018 and 2017, respectively
Accumulated deficit (7,592 ) (6,063 )
Accumulated other comprehensive loss (334 ) (271 )
Total Shareholders' Deficit (7,926 ) (6,334 )
Total Liabilities and Shareholders' Deficit $ 4,130   $ 5,311  
 

See accompanying notes.

 
 
YUM! Brands, Inc.
Consolidated Statements of Cash Flows
(amounts in millions)
(unaudited)
 
Year ended
12/31/18   12/31/17
Cash Flows - Operating Activities
Net income $ 1,542 $ 1,340
Depreciation and amortization 137 253
Refranchising (gain) loss (540 ) (1,083 )
Investment (income) expense, net (9 ) (5 )
Contributions to defined benefit pension plans (16 ) (55 )
Deferred income taxes (11 ) 634
Share-based compensation expense 50 65
Changes in accounts and notes receivable (66 ) (19 )
Changes in prepaid expenses and other current assets (10 )
Changes in accounts payable and other current liabilities (68 ) (173 )
Changes in income taxes payable 65 (55 )
Other, net

92

  138  
Net Cash Provided by Operating Activities

1,176

  1,030  
 
Cash Flows - Investing Activities
Capital spending (234 ) (318 )

QuikOrder acquisition, net of cash acquired

(66

)
Investment in Grubhub Inc. common stock (200 )
Proceeds from refranchising of restaurants 825 1,773
Other, net (12 ) 17  
Net Cash Provided by Investing Activities

313

  1,472  
 
Cash Flows - Financing Activities
Proceeds from long-term debt 1,556 1,088
Repayments of long-term debt (1,264 ) (385 )
Revolving credit facilities, three months or less, net
Short-term borrowings, by original maturity
More than three months - proceeds 59
More than three months - payments (59 )
Three months or less, net
Repurchase shares of Common Stock (2,390 ) (1,960 )
Dividends paid on Common Stock (462 ) (416 )
Debt issuance costs (13 ) (32 )
Other, net (47 ) (90 )
Net Cash Used in Financing Activities (2,620 ) (1,795 )
Effect of Exchange Rate on Cash and Cash Equivalents (63 ) 61  
Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents (1,194 ) 768
 
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 $ 474   $ 1,599  
 

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 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 ("EPS") 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 ended
12/31/18   12/31/17 12/31/18   12/31/17
Detail of Special Items
Refranchising gain (loss)(b) $ 255 $ 752 $ 540 $ 1,083
YUM's Strategic Transformation initiatives(c) (6 ) (8 ) (8 ) (23 )
Costs associated with Pizza Hut U.S. Transformation Agreement(d) (3 ) (11 ) (6 ) (31 )
Costs associated with KFC U.S. Acceleration Agreement(e) (5 ) (2 ) (17 )
Non-cash credits (charges) associated with share-based compensation(f) 3 (18 )
Other Special Items Income 2   4   3   7  
Special Items Income - Operating Profit 248 732 530 1,001
Special Items - Other Pension Income (Expense)(g)       (23 )
Special Items Income before Income Taxes 248 732 530 978
Tax Benefit (Expense) on Special Items(h) (47 ) (192 ) (96 ) (256 )
Tax Benefit (Expense) - U.S. Tax Act(i) 4   (434 ) 66   (434 )
Special Items Income, net of tax $ 205   $ 106   $ 500   $ 288  
Average diluted shares outstanding 320   345   329   355  
Special Items diluted EPS $ 0.64   $ 0.30   $ 1.52   $ 0.81  
 
Reconciliation of GAAP Operating Profit to Core Operating Profit

Consolidated

GAAP Operating Profit $ 741 $ 1,215 $ 2,296 $ 2,761
Special Items Income 248 732 530 1,001
Foreign Currency Impact on Divisional Operating Profit (14 ) N/A 1   N/A
Core Operating Profit $ 507   $ 483   $ 1,765   $ 1,760  
 
 
Quarter ended Year ended
12/31/18 12/31/17 12/31/18 12/31/17

KFC Division

GAAP Operating Profit $ 255 $ 271 $ 959 $ 981
Foreign Currency Impact on Divisional Operating Profit (12 ) N/A   N/A
Core Operating Profit $ 267   $ 271   $ 959   $ 981  
 

Pizza Hut Division

GAAP Operating Profit $ 91 $ 91 $ 348 $ 341
Foreign Currency Impact on Divisional Operating Profit (2 ) N/A 1   N/A
Core Operating Profit $ 93   $ 91   $ 347   $ 341  
 

Taco Bell Division

GAAP Operating Profit $ 191 $ 179 $ 633 $ 619
Foreign Currency Impact on Divisional Operating Profit   N/A   N/A
Core Operating Profit $ 191   $ 179   $ 633   $ 619  
 
Reconciliation of Diluted EPS to Diluted EPS excluding Special Items
Diluted EPS $ 1.04 $ 1.26 $ 4.69 $ 3.77
Special Items Diluted EPS 0.64   0.30   1.52   0.81  
Diluted EPS excluding Special Items $ 0.40   $ 0.96   $ 3.17   $ 2.96  
 
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items
GAAP Effective Tax Rate 24.0 % 60.1 % 16.2 % 41.1 %
Impact on Tax Rate as a result of Special Items (8.5 )% 51.8 % (4.2 )% 22.3 %
Effective Tax Rate excluding Special Items 32.5 % 8.3 % 20.4 % 18.8 %
 
Reconciliation of Company sales to System sales

Consolidated

GAAP Company sales $ 477 $ 890 $ 2,000 $ 3,572
Franchise sales 13,275   12,393   47,237   43,122  
System sales 13,752 13,283 49,237 46,694
Foreign Currency Impact on System sales (340 ) N/A 186   N/A
System sales, excluding FX $ 14,092   $ 13,283   $ 49,051   $ 46,694  
 

KFC Division

GAAP Company sales $ 187 $ 463 $ 894 $ 1,928
Franchise sales 6,862   6,364   25,345   22,587  
System sales 7,049 6,827 26,239 24,515
Foreign Currency Impact on System sales (266 ) N/A 142   N/A
System sales, excluding FX $ 7,315   $ 6,827   $ 26,097   $ 24,515  
 
 
Quarter ended Year ended
12/31/18 12/31/17 12/31/18 12/31/17

Pizza Hut Division

GAAP Company sales $ 14 $ 59 $ 69 $ 285
Franchise sales 3,343   3,310   12,143   11,749  
System sales 3,357 3,369 12,212 12,034
Foreign Currency Impact on System sales (69 ) N/A 47   N/A
System sales, excluding FX $ 3,426   $ 3,369   $ 12,165   $ 12,034  
 

Taco Bell Division

GAAP Company sales $ 276 $ 368 $ 1,037 $ 1,359
Franchise sales 3,070   2,719   9,749   8,786  
System sales 3,346 3,087 10,786 10,145
Foreign Currency Impact on System sales (5 ) N/A (3 ) N/A
System sales, excluding FX $ 3,351   $ 3,087   $ 10,789   $ 10,145  
 

2019 EPS GUIDANCE

We have also provided certain forward-looking guidance using non-GAAP measurements. Specifically, in connection with the announcement of our strategic transformation initiatives in 2016, we announced a 2019 Diluted EPS target of at least $3.75 (“2019 Adjusted EPS Target”). This 2019 Adjusted EPS Target was intended to exclude:

  • Any impact from changes in FX rates (i.e. FX rates were assumed not to change from those in place when we determined the 2019 Adjusted EPS Target in 2016)
  • Any Special Items; and
  • The impact of the 53rd week in 2019 for our U.S. businesses and certain international subsidiaries that report on a period calendar;

Additionally, we acquired an interest in Grubhub common stock subsequent to our original determination of the 2019 Adjusted EPS Target and thus are excluding any resulting mark-to-market adjustment for that investment from the 2019 Adjusted EPS target.

At this time, we are unable to forecast any Special Items or Grubhub mark-to-market adjustments for 2019, and therefore cannot provide an estimate of 2019 EPS on a GAAP basis. The forecasted impacts of FX and the 53rd week on our 2019 Adjusted EPS Target are shown below. This impact of FX has been determined as the difference in translating our current local currency forecasts for 2019 at current FX forward rates and FX rates at the time the 2019 Adjusted EPS target was determined in 2016.

 
Reconciliation of Non-GAAP Amounts - 2019 Adjusted EPS Target    
2019 Diluted EPS with no forecasted impact of Special Items or Grubhub mark-to-market At least $3.77
Foreign Currency Impact 0.04
Impact of 53rd Week (0.06 )
2019 Adjusted EPS Target At least $3.75
 
         
YUM! Brands, Inc.
Segment Results
(amounts in millions)
(unaudited)
 
Corporate and
Quarter Ended 12/31/18 KFC Pizza Hut Taco Bell Unallocated Consolidated
Total revenues $ 686   $ 275   $ 597   $   $ 1,558  
 
Company restaurant expenses 158 13 206 (1 ) 376
General and administrative expenses 103 56 56 49 264
Franchise and property expenses 29 17 11 4 61
Franchise advertising and other services expense 140 99 135 374
Refranchising (gain) loss (255 ) (255 )
Other (income) expense 1   (1 ) (2 ) (1 ) (3 )
Total costs and expenses, net 431   184   406   (204 ) 817  
Operating Profit (loss) $ 255   $ 91   $ 191   $ 204   $ 741  
 
 
Corporate and
Quarter Ended 12/31/17 KFC Pizza Hut Taco Bell Unallocated Consolidated
Total revenues $ 814   $ 234   $ 531   $ (2 ) $ 1,577  
 
Company restaurant expenses 395 59 282 (5 ) 731
General and administrative expenses 111 60 66 63 300
Franchise and property expenses 37 24 6 9 76
Refranchising (gain) loss (752 ) (752 )
Other (income) expense     (2 ) 9   7  
Total costs and expenses, net 543   143   352   (676 ) 362  
Operating Profit (loss) $ 271   $ 91   $ 179   $ 674   $ 1,215  
 
 
The above tables reconcile segment information, which is based on management responsibility, with our 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)
 
Corporate and
Year Ended 12/31/18 KFC Pizza Hut Taco Bell Unallocated Consolidated
Total revenues $ 2,644   $ 988   $ 2,056   $   $ 5,688  
 
Company restaurant expenses 775 69 793 (3 ) 1,634
General and administrative expenses 350 197 177 171 895
Franchise and property expenses 107 45 28 8 188
Franchise advertising and other services expense 452 328 428 1,208
Refranchising (gain) loss (540 ) (540 )
Other (income) expense 1   1   (3 ) 8   7  
Total costs and expenses, net 1,685   640   1,423   (356 ) 3,392  
Operating Profit (loss) $ 959   $ 348   $ 633   $ 356   $ 2,296  
 
 
Corporate and
Year Ended 12/31/17 KFC Pizza Hut Taco Bell Unallocated Consolidated
Total revenues $ 3,110   $ 893   $ 1,880   $ (5 ) $ 5,878  
 
Company restaurant expenses 1,639 271 1,054 (10 ) 2,954
General and administrative expenses 370 211 188 230 999
Franchise and property expenses 117 68 22 30 237
Refranchising (gain) loss (1,083 ) (1,083 )
Other (income) expense 3   2   (3 ) 8   10  
Total costs and expenses, net 2,129   552   1,261   (825 ) 3,117  
Operating Profit (loss) $ 981   $ 341   $ 619   $ 820   $ 2,761  
 
 
The above tables reconcile segment information, which is based on management responsibility, with our 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 Consolidated Summary of Results, Consolidated Balance Sheets

and Consolidated Statements of Cash Flows

(amounts in millions)

(unaudited)

 
(a) Amounts presented as of and for the quarters and years ended December 31, 2018 and December 31, 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 December 31, 2018 and 2017 of $255 million and $752 million, respectively, that have been reflected as Special Items. During the years ended December 31, 2018 and 2017, we recorded net refranchising gains of $540 million and $1.1 billion, respectively, that have been reflected as Special Items.
 
The fourth quarter 2018 net refranchising gains related primarily to refranchising Taco Bell restaurants in the U.S. and KFC restaurants in Russia. The fourth quarter 2017 net refranchising gains related primarily to refranchising KFC restaurants in Thailand, Australia and the UK, and the refranchising of Taco Bell, KFC and Pizza Hut restaurants in the U.S.
 
(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 December 31, 2018 and 2017, we recognized Special Item charges of $6 million and $8 million, respectively, related to these initiatives. During the years ended December 31, 2018 and 2017, we recognized Special Item charges of $8 million and $23 million, respectively. In the fourth quarters of 2018 and 2017, these costs related primarily to contract termination costs that were recorded within G&A. During the remainder of 2018 and 2017, these costs related primarily to severance and relocation costs that were recorded within G&A.
 
(d) On May 1, 2017, we reached an agreement with our 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. In connection with this agreement, we recognized Special Item charges of $3 million and $11 million for the quarters ended December 31, 2018 and December 31, 2017. During the years ended December 31, 2018 and December 31, 2017, we recognized Special Item charges of $6 million and $31 million, respectively. 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 less than $1 million and $5 million for the quarters ended December 31, 2018 and December 31, 2017. During the years ended December 31, 2018 and December 31, 2017, we recognized Special Item charges of $2 million and $17 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. Through October 31, 2018, these Yum China awards could be settled in cash, as opposed to stock, which requires recognition of the fair value of these awards within G&A in our Consolidated Income Statement. During both the quarters ended December 31, 2018 and 2017, we recorded a non-cash Special Item change of less than $1 million related to these awards. During the years ended December 31, 2018 and 2017, we recorded a non-cash Special Item credit of $3 million and a non-cash Special Item charge of $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. Additionally, during the fourth quarter of 2016 the Company allowed certain former employees with deferred vested balances in the YUM Retirement Plan an opportunity to voluntarily elect an early payout of their pension benefits. In connection with this program we incurred an additional Special Items settlement charge of $1 million during the third quarter of 2017. These charges are 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 second quarter of 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 ended December 31, 2018, we recorded $4 million and $66 million decreases, respectively, related to our provisional 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. These amounts included tax benefit in the quarter and year ended December 31, 2018 related to current year U.S. foreign tax credits that became realizable directly as a result of the impact of deemed repatriation tax expense associated with the Tax Act.
 

Analysts:
Keith Siegner, Vice President, Investor Relations, Corporate Strategy and Treasurer, at 888/298-6986

Kelly Knybel, Director, Investor Relations, at 888/298-6986

Media:
Virginia Ferguson, Director, Public Relations, at 502/874-8200

Source: Yum! Brands, Inc.