Yum! brands reports second-quarter gaap operating profit growth of
7%; second-quarter core operating profit decline of (6)%; maintains
full-year guidance
Louisville, ky.--(business wire)--yum! brands, inc. (nyse: yum) today reported results for the second quarter ended june 30, 2018. second-quarter gaap eps was $0.97, an increase of 68%. second-quarter eps excluding special items was $0.82, an increase of 20%. greg creed comments 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 • • • • • • system salesex f/x same-storesales net new units gaapoperating profit coreoperating profit 1 see 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. kfc division • • • percent of kfcsystem sales2 second quarter(% change) year-to-date(% change) refer to investors.yum.com/financial-reports for a list of the countries within each of the markets. pizza hut division • • • percent of pizza hut system sales2 second quarter(% change) year-to-date(% change) refer 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 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. • 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 august 2, 2018. the number is 877/815-2029 for u.s. callers and 706/645-9271 for international callers, conference id 6389106. the call will be available for playback beginning at 11:00 a.m. eastern time august 2, 2018 through september 13, 2018. to access the playback, dial 855/859-2056 in the u.s. and 404/537-3406 internationally, conference id 6389106. the webcast and the playback can be accessed via the internet by visiting yum! brands' website, investors.yum.com/events-and-presentations and selecting “q2 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)6/30/18 12/31/17 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) 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 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. 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. (18 (37 40 34 reconciliation of non-gaap measurements to gaap results (continued) (amounts in millions, except per share amounts) (unaudited) pizza hut division taco bell division n/a consolidated kfc division pizza hut division taco bell division yum! brands, inc. segment results (amounts in millions) (unaudited) corporateandunallocated corporateandunallocated 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) corporateandunallocated corporateandunallocated 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 sheetsand condensed consolidated statements of cash flows(amounts in millions)(unaudited) 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 june 30, 2018 and 2017 of $29 million and $19 million, respectively, that have been reflected as special items. during the years to dated ended june 30, 2018 and 2017, we recorded net refranchising gains of $185 million and $130 million, respectively, that have been reflected as special items. the second quarter 2018 net refranchising gains relate primarily to refranchising kfc restaurants in the uk. the second quarter 2017 net refranchising gains relate primarily to refranchising taco bell restaurants in the u.s., partially offset by charges associated with the refranchising of certain international markets. 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 june 30, 2018, we recorded special item credits of $2 million and $1 million, respectively, due to depreciation in the market price of yum china's stock. during the quarter and year to date ended june 30, 2017, we recorded special item charges of $16 million and $18 million, respectively, related to these awards. 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 quarter ended june 30, 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.
