Yum! brands reports third-quarter gaap operating profit decline of
(14)%; delivers third-quarter core operating profit growth of 2%; system
sales growth of 5%
Louisville, ky.--(business wire)--yum! brands, inc. (nyse: yum) today reported results for the third quarter ended september 30, 2018. third-quarter gaap eps was $1.40, an increase of 18%. third-quarter eps excluding special items was $1.04, an increase of 52%. greg creed comments greg creed, ceo, said, “we are pleased to deliver third-quarter system sales growth of 5%, consisting of same store sales growth of 2% and net new unit growth of 4%. core operating profit growth of 2% was consistent with our expectations. we are now two years into our three year transformation and remain firmly on-track to becoming more focused, more franchised and more efficient. the collective power of our three iconic brands, anchored by our four key growth drivers, is helping us deliver long-term sustainable growth and higher returns for our stakeholders." third-quarter highlights • • • • • • system salesex f/x same-storesales gaapoperating profit coreoperating profit kfc division • • • percent of kfcsystem sales2 third quarter(% change) year-to-date(% change) 1refer to investors.yum.com/financial-reports for a list of the countries within each of the markets. pizza hut division • • • percent of pizzahut system sales2 third quarter(% change) year-to-date(% change) 1refer to investors.yum.com/financial-reports for a list of the countries within each of the markets. taco bell division • • other items • 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 one percentage point during the third quarter and one percentage point year-to-date through september 30, 2018. a significant portion of our new unit development for which we receive upfront fees, which will now be spread versus recognized upfront, is expected to occur in the fourth quarter. • 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 october 31, 2018. the number is 877/815-2029 for u.s. callers and 706/645-9271 for international callers, conference id 4690947. the call will be available for playback beginning at 11:00 a.m. eastern time october 31, 2018 through december 12, 2018. to access the playback, dial 855/859-2056 in the u.s. and 404/537-3406 internationally, conference id 4690947. the webcast and the playback can be accessed via the internet by visiting yum! brands' website, investors.yum.com/events-and-presentations and selecting “q3 2018 yum! brands, inc. earnings call.” additional information online quarter end dates for each division, restaurant count details, definitions of terms and restricted group financial information are available at investors.yum.com. reconciliation of non-gaap financial measures to the most directly comparable gaap measures are included within this release. forward-looking statements this announcement may contain “forward-looking statements” within the meaning of section 27a of the securities act of 1933 and section 21e of the securities exchange act of 1934. we intend all forward-looking statements to be covered by the safe harbor provisions of the private securities litigation reform act of 1995. forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as “expect,” “expectation,” “believe,” “anticipate,” “may,” “could,” “intend,” “belief,” “plan,” “estimate,” “target,” “predict,” “likely,” “seek,” “project,” “model,” “ongoing,” “will,” “should,” “forecast,” “outlook” or similar terminology. these statements are based on and reflect our current expectations, estimates, assumptions and/ or projections, our perception of historical trends and current conditions, as well as other factors that we believe are appropriate and reasonable under the circumstances. forward-looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results to differ materially from those indicated by those statements. there can be no assurance that our expectations, estimates, assumptions and/or projections, including with respect to the future earnings and performance or capital structure of yum! brands, will prove to be correct or that any of our expectations, estimates or projections will be achieved. numerous factors could cause our actual results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: food safety and food borne-illness issues; health concerns arising from outbreaks of viruses or other diseases; the success of our franchisees and licensees, and the success of our transformation initiatives, including our refranchising strategy; our significant exposure to the chinese market; changes in economic and political conditions in countries and territories outside of the u.s. where we operate; our ability to protect the integrity and security of individually identifiable data of our customers and employees; our increasing dependence on digital commerce platforms and information technology systems; the impact of social media; our ability to secure and maintain distribution and adequate supply to our restaurants; the success of our development strategy in emerging markets; changes in commodity, labor and other operating costs; pending or future litigation and legal claims or proceedings; changes in or noncompliance with government regulations, including labor standards and anti-bribery or anti-corruption laws; recent tax legislation (defined below) and other tax matters, including disagreements with taxing authorities; consumer preferences and perceptions of our brands; changes in consumer discretionary spending and general economic conditions; competition within the retail food industry; and risks relating to our significant amount of indebtedness. in addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. information regarding the impact of the tax cuts and jobs act of 2017 (“tax legislation”) consists of preliminary estimates which are forward-looking statements and are subject to change. information regarding the impact of tax legislation is based on our current calculations, as well our current interpretations, assumptions and expectations relating to tax legislation, which are subject to further ongoing change. the forward-looking statements included in this announcement are only made as of the date of this announcement and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances. you should consult our filings with the securities and exchange commission (including the information set forth under the captions “risk factors” and “forward-looking statements” in our most recently filed annual report on form 10-k and quarterly report on form 10-q) for additional detail about factors that could affect our financial and other results. yum! brands, inc., based in louisville, kentucky, has over 45,000 restaurants in more than 140 countries and territories and is one of the aon hewitt top companies for leaders in north america. in 2018, yum! brands was recognized as part of the inaugural bloomberg gender-equality index and ranked among the top 100 best corporate citizens by corporate responsibility magazine. in 2017, yum! brands was named to the dow jones sustainability north america index. 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 seven 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) basic eps diluted eps see accompanying notes. percentages may not recompute due to rounding. yum! brands, inc. kfc division operating results (amounts in millions) (unaudited) see accompanying notes. percentages may not recompute due to rounding. yum! brands, inc. pizza hut division operating results (amounts in millions) (unaudited) see accompanying notes. percentages may not recompute due to rounding. yum! brands, inc. taco bell division operating results (amounts in millions) (unaudited) see accompanying notes. percentages may not recompute due to rounding. yum! brands, inc. condensed consolidated balance sheets (amounts in millions) (unaudited)9/30/18 property, plant and equipment, net of accumulated depreciation and amortization of $1,291 in 2018 and $1,480 in 2017 see accompanying notes. yum! brands, inc. condensed consolidated statements of cash flows (amounts in millions) (unaudited) see accompanying notes. reconciliation of non-gaap measurements to gaap results (amounts in millions, except per share amounts) (unaudited) • 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 condensed 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 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. consolidated kfc division reconciliation of non-gaap measurements to gaap results (continued) (amounts in millions, except per share amounts) (unaudited) pizza hut division taco bell division consolidated kfc division pizza hut division taco bell division yum! brands, inc. segment results (amounts in millions) (unaudited) corporateandunallocated corporateandunallocated yum! brands, inc. segment results (amounts in millions) (unaudited) corporateandunallocated corporateandunallocated 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 quarters and years to date ended september 30, 2018 and 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 september 30, 2018 and 2017 of $100 million and $201 million, respectively, that have been reflected as special items. during the years to dated ended september 30, 2018 and 2017, we recorded net refranchising gains of $285 million and $331 million, respectively, that have been reflected as special items. (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 september 30, 2018 and 2017, we recognized special item charges of $1 million and $4 million, respectively, related to these initiatives. during the years to date ended september 30, 2018 and 2017, we recognized special item charges of $2 million and $15 million, respectively, related to these initiatives. these costs primarily related to severance and relocation costs that were recorded within g&a. (d) on may 1, 2017, we reached an agreement with 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. during the quarters ended september 30, 2018 and 2017, we recorded special item charges of $1 million and $8 million, respectively, for these investments. during the years to date ended september 30, 2018 and 2017, we recorded special item charges of $3 million and $20 million, respectively, for these investments. 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 $4 million for the quarters ended september 30, 2018 and 2017, respectively. during the years to date ended september 30, 2018 and 2017, we recognized special item charges of $2 million and $12 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. these yum china awards may now be settled in cash, as opposed to stock, which requires recognition of the fair value of these awards each quarter within g&a in our consolidated statements of income. during the quarter and year to date ended september 30, 2018, we recorded special item credits of $2 million and $3 million, respectively, due to depreciation in the market price of yum china's stock. during the quarter and year to date ended september 30, 2017, we recorded special item charges of less than $1 million and $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 quarter ended september 30, 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 to date ended september 30, 2018 we recorded $16 million and $32 million decreases, respectively, related to our provisional deemed repatriation 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. we also recorded benefit in the quarter and year to date ended september 30, 2018 related to current year u.s. foreign tax credits that became realizable directly as a result of the impact of the deemed repatriation.
