YUM BRANDS INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction and Overview The following Management's Discussion and Analysis (“MD&A”), should be read in conjunction with the unaudited Condensed Consolidated Financial Statements (“Financial Statements”), the Forward-Looking Statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, (“2021 Form 10-K”). All Note references herein refer to the Notes to the Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding. Yum! Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchise or operate a system of over 54,000 restaurants in more than 155 countries and territories, primarily under the concepts of KFC, Taco Bell, Pizza Hut and The Habit Burger Grill (collectively, the “Concepts”). The Company’s KFC, Taco Bell and Pizza Hut brands are global leaders of the chicken, Mexican-style and pizza food categories, respectively. The Habit Burger Grill, is a fast-casual restaurant concept specializing in made-to-order chargrilled burgers, sandwiches and more. Of the over 54,000 restaurants, 98% are operated by franchisees. YUM currently consists of four operating segments: • The KFC Division which includes our worldwide operations of the KFC concept • The Taco Bell Division which includes our worldwide operations of the Taco Bell concept • The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept • The Habit Burger Grill Division which includes our worldwide operations of the Habit Burger Grill concept Through our Recipe for Growth and Good we intend to unlock the growth potential of our Concepts and YUM, drive increased collaboration across our Concepts and geographies and consistently deliver better customer experiences, improved unit economics and higher rates of growth. Key enablers include accelerated use of technology and better leverage of our systemwide scale. Our Recipe for Growth is based on four key drivers: • Unrivaled Culture and Talent: Leverage our culture and people capability to fuel brand performance and franchise success • Unmatched Operating Capability: Recruit and equip the best restaurant operators in the world to deliver great customer experiences • Relevant, Easy and Distinctive Brands: Innovate and elevate iconic restaurant brands people trust and champion • Bold Restaurant Development: Drive market and franchise expansion with strong economics and value Our global citizenship and sustainability strategy, called the Recipe for Good, reflects our priorities for socially responsible growth, risk management and sustainable stewardship of our people, food and planet. We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including performance metrics that management uses to assess the Company's performance. Throughout this MD&A, we commonly discuss the following performance metrics: • Same-store sales growth is the estimated percentage change in system sales of all restaurants that have been open and in the YUM system for one year or more, including those temporarily closed. From time-to-time restaurants may be temporarily closed due to remodeling or image enhancement, rebuilding, natural disasters, health epidemic or pandemic, landlord disputes or other issues. The system sales of restaurants we deem temporarily closed remain in our base for purposes of determining same-store sales growth and the restaurants remain in our unit count (see below). Throughout 2021 we had a significant number of restaurants that were temporarily closed including restaurants closed due to government and landlord restrictions as a result of COVID-19. Additionally, due to our decision in the quarter ended March 31, 2022, to suspend the operations of our 70 company-owned KFC stores in Russia, such restaurants are considered temporarily closed at March 31, 2022 for purposes of our same-store sales growth calculation and unit count presentation. We believe same-store sales growth is useful to investors because our results are heavily dependent on the results of our Concepts' existing store base. Additionally, same-store sales growth is reflective of the strength of our Brands, the effectiveness of our operational and advertising initiatives and local economic and consumer trends. • Gross unit openings reflects new openings by us and our franchisees. Net new unit growth reflects gross unit openings offset by permanent store closures, by us and our franchisees. To determine whether a restaurant meets the definition of a 20 unit we consider whether the restaurant has operations that are ongoing and independent from another YUM unit, serves the primary product of one of our Concepts, operates under a separate franchise agreement (if operated by a franchisee) and has substantial and sustainable sales. We believe gross unit openings and net new unit growth are useful to investors because we depend on new units for a significant portion of our growth. Additionally, gross unit openings and net new unit growth are generally reflective of the economic returns to us and our franchisees from opening and operating our Concept restaurants. • System sales and System sales excluding the impacts of foreign currency translation (“FX”) reflect the results of all restaurants regardless of ownership, including Company-owned and franchise restaurants . Sales at franchise restaurants typically generate ongoing franchise and license fees for the Company at a rate of 3% to 6% of sales. Increasingly, customers are paying a fee to a third party to deliver or facilitate the ordering of our Concepts' products. We also include in System sales any portion of the amount customers pay these third parties for which the third party is obligated to pay us a license fee as a percentage of such amount. Franchise restaurant sales and fees paid by customers to third parties to deliver or facilitate the ordering of our Concepts' products are not included in Company sales on the Condensed Consolidated Statements of Income; however, any resulting franchise and license fees we receive 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. 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: • 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; • Company restaurant profit and Company restaurant margin as a percentage of sales (as defined below). 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. Company restaurant profit is defined as Company sales less Company restaurant expenses, both of which appear on the face of our Condensed Consolidated Statements of Income. Company restaurant expenses include those expenses incurred directly by our Company-owned restaurants in generating Company sales, including cost of food and paper, cost of restaurant-level labor, rent, depreciation and amortization of restaurant-level assets and advertising expenses incurred by and on behalf of that Company restaurant. Company restaurant margin as a percentage of sales (“Company restaurant margin %”) is defined as Company restaurant profit divided by Company sales. We use Company restaurant profit for the purposes of internally evaluating the performance of our Company-owned restaurants and we believe Company restaurant profit provides useful information to investors as to the profitability of our Company-owned restaurants. In calculating Company restaurant profit, the Company excludes revenues and expenses directly associated with our franchise operations as well as non-restaurant-level costs included in General and administrative expenses, some of which may support Company-owned restaurant operations. The Company also excludes restaurant-level asset impairment and closures expenses, which have historically not been significant, from the determination of Company restaurant profit as such expenses are not believed to be indicative of ongoing operations. Company restaurant profit and Company restaurant margin % as presented may not be comparable to other similarly titled measures of other companies in the industry. Certain performance metrics and 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. 21 Results of Operations Summary All comparisons within this summary are versus the same period a year ago. For the quarter ended March 31, 2022, GAAP diluted EPS was $1.36 per share, an increase from $1.07 per share in the quarter ended March 31, 2021, and diluted EPS, excluding Special Items, was $1.05 per share, a decrease from $1.07 per share in the quarter ended March 31, 2021. Quarterly Financial highlights: % Change System Sales, ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit KFC Division +9 +3 +8 (3) +1 Taco Bell Division +8 +5 +5 +4 +4 Pizza Hut Division +3 Even +5 Even +2 Worldwide +8 +3 +6 (6) (5) Additionally: • During the quarter, 997 gross units were opened contributing to the addition of 628 net new units. • During the quarter, we repurchased 3.4 million shares totaling $407 million at an average price of $121. • Foreign currency translation unfavorably impacted Divisional Operating Profit for the quarter by $14 million. 22 Worldwide GAAP Results Quarter ended 2022 2021 % B/(W) Company sales $ 470 $ 476 (1) Franchise and property revenues 714 658 9 Franchise contributions for advertising and other services 363 352 3 Total revenues 1,547 1,486 4 Company restaurant expenses 402 392 (3) G&A expenses 253 206 (23) Franchise and property expenses 32 23 (42) Franchise advertising and other services expense 361 343 (5) Refranchising (gain) loss (4) (15) (76) Other (income) expense (6) (6) NM Total costs and expenses, net 1,038 943 (10) Operating Profit 509 543 (6) Investment (income) expense, net (7) — NM Other pension (income) expense — 3 83 Interest expense, net 118 131 11 Income before income taxes 398 409 (3) Income tax (benefit) provision (1) 83 101 Net Income $ 399 $ 326 22 Diluted EPS (a) $ 1.36 $ 1.07 27 Effective tax rate (0.2) % 20.2 % 20.4 ppts. (a) See Note 2 for the number of shares used in this calculation. Performance Metrics Unit Count 3/31/2022 3/31/2021 % Increase (Decrease) Franchise 52,990 49,714 7 Company-owned 1,062 1,074 (1) Total 54,052 50,788 6 Quarter ended 2022 2021 Same-store Sales Growth (Decline) % 3 9 System Sales Growth (Decline) %, reported 6 14 System Sales Growth (Decline) %, excluding FX 8 11 23 Our system sales breakdown by Company and franchise sales was as follows: Quarter ended 2022 2021 Consolidated Company sales (a) $ 470 $ 476 Franchise sales 13,676 12,909 System sales 14,146 13,385 Foreign Currency Impact on System sales (b) (275) N/A System sales, excluding FX $ 14,421 $ 13,385 KFC Division Company sales (a) $ 126 $ 133 Franchise sales 7,607 7,140 System sales 7,733 7,273 Foreign Currency Impact on System sales (b) (229) N/A System sales, excluding FX $ 7,962 $ 7,273 Taco Bell Division Company sales (a) $ 214 $ 208 Franchise sales 2,894 2,672 System sales 3,108 2,880 Foreign Currency Impact on System sales (b) (5) N/A System sales, excluding FX $ 3,113 $ 2,880 Pizza Hut Division Company sales (a) $ 5 $ 14 Franchise sales 3,155 3,082 System sales 3,160 3,096 Foreign Currency Impact on System sales (b) (41) N/A System sales, excluding FX $ 3,201 $ 3,096 Habit Burger Grill Division Company sales (a) $ 125 $ 121 Franchise sales 20 15 System sales 145 136 Foreign Currency Impact on System sales (b) — N/A System sales, excluding FX $ 145 $ 136 (a) Company sales represents sales from our Company-operated stores as presented on our Condensed Consolidated Statements of Income. (b) The foreign currency impact on System sales is presented in relation only to the immediately preceding year presented. When determining applicable System sales growth percentages, the System sales excluding FX for the current year should be compared to the prior year System sales. Non-GAAP Items Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, as presented below. Quarter ended 2022 2021 Core Operating Profit Growth (Decline) % (5) 33 Diluted EPS Growth (Decline) %, excluding Special Items (1) 67 Effective Tax Rate excluding Special Items 20.3 % 20.2 % 24 Quarter ended 2022 2021 Company restaurant profit $ 68 $ 84 Company restaurant margin % 14.5 % 17.6 % Quarter ended Detail of Special Items 2022 2021 Refranchising gain (loss) (a) $ 4 $ 2 Profits from operations in Russia (b) 7 — Other Special Items Income (Expense) (1) — Special Items Income (Expense) - Operating Profit 10 2 Tax (Expense) Benefit on Special Items (c) (2) (1) Tax Benefit - Newly issued U.S. foreign tax credit regulations (d) 82 — Special Items Income (Expense), net of tax $ 90 $ 1 Average diluted shares outstanding 294 305 Special Items diluted EPS $ 0.31 $ — (a) Due to their size and volatility, we have reflected as Special Items those refranchising gains and losses that were recorded in connection with our previously announced plans to have at least 98% franchise restaurant ownership by the end of 2018. As such, refranchising gains and losses recorded during 2022 and 2021 as Special Items are directly associated with restaurants that were refranchised prior to the end of 2018. During the quarters ended March 31, 2022 and 2021, we recorded net refranchising gains of $4 million and $2 million, respectively, that have been reflected as a Special Item. Additionally, we recorded net refranchising gains of less than $1 million and $13 million during the quarters ended March 31, 2022 and 2021, respectively, that have not been reflected as Special Items. These net gains relate to refranchising of restaurants in 2022 and 2021 that were not part of our aforementioned plans to achieve 98% franchise ownership and that we believe are now more indicative of our expected ongoing refranchising activity. (b) Our operating results for the quarter ended March 31, 2022, continue to reflect revenues and expenses related to Russia within their historical financial statement line items and operating segments. However, we have reclassed net Operating Profit attributable to Russia subsequent to the date of our pledge to direct any future net profits from operations in Russia to humanitarian efforts that had not yet been directed to humanitarian efforts as of March 31, 2022, from the Division segment results in which they were earned to Corporate and unallocated. Such Operating Profit has been reflected within Other (income) expense and reflected as a Special Item. See further discussion of the situation in Russia within this Management's Discussion and Analysis. (c) Tax (Expense) Benefit 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. (d) In January 2022, the U.S. Treasury published new regulations impacting foreign tax credit utilization beginning in the Company’s 2022 tax year. These regulations make foreign taxes paid to certain countries no longer creditable in the U.S. As a result, we reversed a valuation allowance associated with existing foreign tax credit carryforwards that we now believe will be used to offset these now non-creditable taxes in 2022 and future years. This valuation allowance reversal resulted in a one-time tax benefit of $82 million that was reflected as a Special Item. 25 Reconciliation of GAAP Operating Profit to Core Operating Profit Quarter ended 2022 2021 Consolidated GAAP Operating Profit $ 509 $ 543 Special Items Income (Expense) 10 2 Foreign Currency Impact on Divisional Operating Profit (a) (14) N/A Core Operating Profit $ 513 $ 541 KFC Division GAAP Operating Profit $ 291 $ 300 Foreign Currency Impact on Divisional Operating Profit (a) (12) N/A Core Operating Profit $ 303 $ 300 Taco Bell Division GAAP Operating Profit $ 185 $ 178 Foreign Currency Impact on Divisional Operating Profit (a) — N/A Core Operating Profit $ 185 $ 178 Pizza Hut Division GAAP Operating Profit $ 102 $ 102 Foreign Currency Impact on Divisional Operating Profit (a) (2) N/A Core Operating Profit $ 104 $ 102 Habit Burger Grill Division GAAP Operating Profit (Loss) $ (8) $ — Foreign Currency Impact on Divisional Operating Profit (a) — N/A Core Operating Profit (Loss) $ (8) $ — Reconciliation of Diluted EPS to Diluted EPS excluding Special Items Diluted EPS $ 1.36 $ 1.07 Special Items Diluted EPS 0.31 — Diluted EPS excluding Special Items $ 1.05 $ 1.07 Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items GAAP Effective Tax Rate (0.2) % 20.2 % Impact on Tax Rate as a result of Special Items (20.5) % — % Effective Tax Rate excluding Special Items 20.3 % 20.2 % (a) The foreign currency impact on reported Operating Profit is presented in relation only to the immediately preceding year presented. When determining applicable Core Operating Profit growth percentages, the Core Operating Profit for the current year should be compared to the prior year GAAP Operating Profit adjusted only for any prior year Special Items Income (Expense). 26 Reconciliation of GAAP Operating Profit to Company Restaurant Profit Quarter ended 3/31/2022 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated GAAP Operating Profit (Loss) $ 291 $ 185 $ 102 $ (8) $ (61) $ 509 Less: Franchise and property revenues 383 179 151 1 — 714 Franchise contributions for advertising and other services 151 124 88 — — 363 Add: General and administrative expenses 84 36 50 12 71 253 Franchise and property expenses 24 6 2 — — 32 Franchise advertising and other services expense 151 123 87 — — 361 Refranchising (gain) loss — — — — (4) (4) Other (income) expense 2 — (2) — (6) (6) Company restaurant profit $ 18 $ 47 $ — $ 3 $ — $ 68 Company sales $ 126 $ 214 $ 5 $ 125 $ — $ 470 Company restaurant margin % 14.1 % 21.9 % (0.7) % 3.0 % N/A 14.5 % Quarter ended 3/31/2021 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated GAAP Operating Profit (Loss) $ 300 $ 178 $ 102 $ — $ (37) $ 543 Less: Franchise and property revenues 354 162 141 1 — 658 Franchise contributions for advertising and other services 138 118 96 — — 352 Add: General and administrative expenses 73 31 40 12 50 206 Franchise and property expenses 14 7 2 — — 23 Franchise advertising and other services expense 133 116 94 — — 343 Refranchising (gain) loss — — — — (15) (15) Other (income) expense (6) (2) — — 2 (6) Company restaurant profit $ 22 $ 50 $ 1 $ 11 $ — $ 84 Company sales $ 133 $ 208 $ 14 $ 121 $ — $ 476 Company restaurant margin % 16.6 % 24.1 % 6.7 % 8.8 % N/A 17.6 % Items Impacting Reported Results and Reasonably Likely to Impact Future Results The following items impacted reported results in 2022 and/or 2021 and/or reasonably likely to impact future results. See also the Detail of Special Items section of this MD&A for other items similarly impacting results. Russia Invasion of Ukraine Given the Russian invasion of Ukraine, during the quarter ended March 31, 2022 we announced the suspension of all investment and restaurant development efforts in Russia as well as the operations of our 70 company-owned KFC restaurants in Russia and that we are finalizing an agreement with our Pizza Hut master franchisee to suspend all Pizza Hut restaurant 27 operations. Further, we pledged to direct any future net profits from operations in Russia subsequent to the invasion to humanitarian efforts. In addition to these actions, we have begun a process aimed at transferring ownership to local operators. Our business in Russia consists of the aforementioned company-owned KFC restaurants, approximately 1,100 franchisee-owned KFC restaurants and 50 Pizza Hut restaurants that are operated under a master franchise agreement. Historically, our Russian business has constituted approximately 3% of our total operating profit and 2% of our total system sales. During the quarter ended March 31, 2022, our Core Operating Profits in Russia declined versus the first quarter of last year, negatively impacting consolidated YUM and KFC Division Core Operating Profit growth by one and two percentage points, respectively. On a full year basis, we expect that the year-over-year decline in Core Operating Profits in Russia will negatively impact YUM Core Operating Profit growth by three percentage points. See Note 1 for a discussion regarding our net asset base in Russia. COVID-19 In late 2019, a novel strain of coronavirus, COVID-19, was first detected and in March 2020, the World Health Organization declared COVID-19 a global pandemic. As a result of COVID-19, governmental authorities around the world implemented measures to reduce the spread of COVID-19, some of which remain in place today. These measures have included and in some instances continue to include restrictions on travel outside the home and other limitations on business and other activities as well as encouraging social distancing. As a result of COVID-19, we and our franchisees have experienced store closures and instances of reduced store-level operations, including reduced operating hours and dining-room closures. The impact on our sales in each of our markets has been dependent on the timing, severity and duration of the outbreak, measures implemented by government authorities to reduce the spread of COVID-19, as well as our reliance on dine-in sales in the market. As we ended the first quarter of 2022, COVID-19 outbreaks and resulting government restrictions limiting mobility continued to impact sales in a few key markets, primarily in China. Excluding China, our YUM consolidated same-store sales growth was 6%, our KFC Division same-store sales growth was 10% and our Pizza Hut Division same-store sales growth was 2% for the quarter ended March 31, 2022. The COVID-19 situation is ongoing, and its dynamic nature makes it difficult to forecast any impacts on the Company's results for the balance of 2022. Investment in Devyani In 2020, we received an approximate 5% minority interest in Devyani International Limited (“Devyani”), an entity that operates KFC and Pizza Hut franchised units in India. The minority interest was received in lieu of cash proceeds upon the refranchising of approximately 60 KFC restaurants in India. At the time of the refranchisings, the fair value of this minority interest was estimated to be approximately $31 million. On August 16, 2021, Devyani executed an initial public offering and subsequently the fair value of this investment became readily determinable. As a result, concurrent with the initial public offering we began recording changes in fair value in Investment (income) expense, net in our Condensed Consolidated Statements of Income and recognized pre-tax investment income of $7 million, in the quarter ended March 31, 2022. KFC Division The KFC Division has 27,372 units, 86% of which are located outside the U.S. Additionally, 99% of the KFC Division units were operated by franchisees as of March 31, 2022. 28 Quarter ended % B/(W) 2022 2021 Reported Ex FX System Sales $ 7,733 $ 7,273 6 9 Same-Store Sales Growth (Decline) % 3 8 N/A N/A Company sales $ 126 $ 133 (5) — Franchise and property revenues 383 354 8 12 Franchise contributions for advertising and other services 151 138 10 16 Total revenues $ 660 $ 625 6 11 Company restaurant profit $ 18 $ 22 (19) (15) Company restaurant margin % 14.1 % 16.6 % (2.5) ppts. (2.4) ppts. G&A expenses $ 84 $ 73 (15) (18) Franchise and property expenses 24 14 (71) (85) Franchise advertising and other services expense 151 133 (14) (20) Operating Profit $ 291 $ 300 (3) 1 % Increase (Decrease) Unit Count 3/31/2022 3/31/2021 Franchise 27,081 25,002 8 Company-owned 291 290 — Total 27,372 25,292 8 Company sales and Company restaurant margin % Company sales, excluding the impacts of foreign currency translation, were flat including the impact of a company same-store sales decline of 1%. The quarterly decrease in Company restaurant margin percentage was driven by commodity and wage inflation. Franchise and property revenues The quarterly increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by franchise same-store sales growth of 4% and unit growth. G&A The quarterly increase in G&A, excluding the impact of foreign currency translation, was driven by higher headcount and salaries and higher professional fees. Operating Profit The quarterly increase in Operating Profit, excluding the impact of foreign currency translation, was driven by same-store sales growth and unit growth, partially offset by current year bad debt expense lapping prior year net bad debt recoveries for past due franchise receivables and higher G&A. Taco Bell Division The Taco Bell Division has 7,831 units, 90% of which are in the U.S. The Company owned 7% of the Taco Bell units in the U.S. as of March 31, 2022. 29 Quarter ended % B/(W) 2022 2021 Reported Ex FX System Sales $ 3,108 $ 2,880 8 8 Same-Store Sales Growth % 5 9 N/A N/A Company sales $ 214 $ 208 3 3 Franchise and property revenues 179 162 10 10 Franchise contributions for advertising and other services 124 118 5 5 Total revenues $ 517 $ 488 6 6 Company restaurant profit $ 47 $ 50 (6) (6) Company restaurant margin % 21.9 % 24.1 % (2.2) ppts. (2.2) ppts. G&A expenses $ 36 $ 31 (17) (17) Franchise and property expenses 6 7 10 11 Franchise advertising and other services expense 123 116 (6) (6) Operating Profit $ 185 $ 178 4 4 % Increase (Decrease) Unit Count 3/31/2022 3/31/2021 Franchise 7,367 7,019 5 Company-owned 464 474 (2) Total 7,831 7,493 5 Company sales and Company restaurant margin % The quarterly increase in Company sales was driven by company same-store sales growth of 5% and unit growth partially offset by refranchising. The quarterly decrease in Company restaurant margin percentage was driven by commodity and wage inflation and partially offset by same-store sales growth. Franchise and property revenues The quarterly increases in Franchise and property revenues was driven by franchise same-store sales growth of 5% and unit growth. G&A The quarterly increase in G&A was driven by higher headcount and salaries and higher professional fees. Operating Profit The quarterly increase in Operating Profit was driven by same-store sales growth and unit growth partially offset by higher restaurant operating costs and higher G&A. 30 Pizza Hut Division The Pizza Hut Division has 18,518 units, 65% of which are located outside the U.S. The Pizza Hut Division uses multiple distribution channels including delivery, dine-in and express (e.g. airports) and includes units operating under both the Pizza Hut and Telepizza brands. Additionally, over 99% of the Pizza Hut Division units were operated by franchisees as of March 31, 2022. Quarter ended % B/(W) 2022 2021 Reported Ex FX System Sales $ 3,160 $ 3,096 2 3 Same-Store Sales Growth (Decline) % Even 12 N/A N/A Company sales $ 5 $ 14 (66) (66) Franchise and property revenues 151 141 7 8 Franchise contributions for advertising and other services 88 96 (8) (8) Total revenues $ 244 $ 251 (3) (2) Company restaurant profit $ — $ 1 NM NM Company restaurant margin % (0.7) % 6.7 % (7.4) ppts. (7.4) ppts. G&A expenses $ 50 $ 40 (22) (22) Franchise and property expenses 2 2 3 2 Franchise advertising and other services expense 87 94 7 7 Operating Profit $ 102 $ 102 Even 2 % Increase (Decrease) Unit Count 3/31/2022 3/31/2021 Franchise 18,496 17,657 5 Company-owned 22 53 (58) Total 18,518 17,710 5 Company sales The quarterly decrease in Company sales, excluding the impacts of foreign currency translation, was driven by the refranchising of stores in the United Kingdom. Franchise and property revenues The quarterly increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by the recognition of franchise fees related to unexercised development rights arising from a master franchise agreement and unit growth. G&A The quarterly increase in G&A, excluding the impacts of foreign currency translation, was driven by higher headcount and salaries and higher professional fees. 31 Operating Profit The quarterly increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by the recognition of franchise fees related to unexercised development rights arising from a master franchise agreement and unit growth, partially offset by higher G&A. Habit Burger Grill Division The Habit Burger Grill Division has 331 units, the vast majority of which are in the U.S. The Company owned 90% of the Habit Burger Grill units in the U.S. as of March 31, 2022. Quarter ended % B/(W) 2022 2021 Reported Ex FX System Sales $ 145 $ 136 6 6 Same-Store Sales Growth % (a) 3 13 N/A N/A Total revenues $ 126 $ 122 3 3 Operating Profit (Loss) $ (8) $ — NM NM (a) Beginning with the quarter ended March 31, 2022, our Habit Burger Grill Division adopted a reporting calendar change as discussed in Note 1. The impact of this change in reporting calendar was not significant, and accordingly, prior year amounts in these Condensed Consolidated Financial Statements and accompanying Management's Discussion and Analysis have not been restated. System sales growth, excluding the impact of the reporting calendar change, was 17% for the quarter ended March 31, 2022. Unit Count 3/31/2022 3/31/2021 % Increase (Decrease) Franchise 46 36 28 Company-owned 285 257 11 Total 331 293 13 Corporate & Unallocated Quarter ended (Expense) / Income 2022 2021 % B/(W) Corporate and unallocated G&A $ ( 71 ) $ ( 50 ) (42) Unallocated Company restaurant expenses — — NM Unallocated Refranchising gain (loss) 4 15 (76) Unallocated Other income (expense) 6 ( 2 ) NM Investment income (expense), net (See Note 8) 7 — NM Other pension income (expense) (See Note 9) — ( 3 ) 83 Interest expense, net ( 118 ) ( 131 ) 11 Income tax benefit (provision) (See Note 6) 1 (83) 101 Effective tax rate (See Note 6) ( 0.2 ) % 20.2 % 20.4 ppts. Corporate and unallocated G&A The quarterly increase in Corporate and unallocated G&A expense was driven by higher headcount and salaries including personnel associated with our 2021 investments in digital and technology companies, higher meeting costs and higher professional fees. Interest expense, net The quarterly decrease in Interest expense, net was primarily driven by $12 million of previously unamortized debt issuance costs written off during the quarter ended March 31, 2021 due to the refinancing of our Credit Agreement. 32 Consolidated Cash Flows Net cash provided by operating activities was $253 million in 2022 versus $324 million in 2021. The decrease was largely driven by an increase in incentive compensation payments and a decrease in Operating profit before Special Items. Net cash used in investing activities was $29 million in 2022 versus net cash provided by investing activities of $14 million in 2021. The change was primarily driven by the lapping of our prior year sale of certain mutual fund investments. Net cash used in financing activities was $377 million in 2022 versus $563 million in 2021. The change was primarily driven by higher net borrowings in 2022, partially offset by higher share repurchases. Liquidity and Capital Resources We have historically generated substantial cash flows from our extensive franchise operations, which require a limited YUM investment, and from the operations of our Company-owned stores. Our annual operating cash flows have been in excess of $1.3 billion in each of the past three years and we expect that to continue to be the case in 2022. It is our intent to use these operating cash flows to continue to invest in growing our business and pay a competitive dividend, with any remaining excess then returned to shareholders through share repurchases. To the extent operating cash flows plus other sources of cash do not cover our anticipated cash needs, we maintain a $1.25 billion Revolving Facility under our Credit Agreement (see Note 10), of which $174 million was drawn as of March 31, 2022. We believe that our ongoing cash from operations, cash on hand, which was approximately $350 million at March 31, 2022, and availability under our Revolving Facility will be sufficient to fund our cash requirements over the next twelve months. There have been no material changes to the disclosures made in Item 7 of the Company's 2021 Form 10-K regarding our material cash requirements. Due to the ongoing significance of our debt obligations, we are providing the update below. Debt Instruments As of March 31, 2022, approximately 92%, including the impact of interest rate swaps, of our $11.4 billion of total debt outstanding, excluding finance leases, is fixed with an effective overall interest rate of approximately 4.3%. We are managing a capital structure which reflects consolidated leverage, net of available cash, in-line with our target of ~5.0x EBITDA, and which we believe provides an attractive balance between optimized interest rates, duration and flexibility with diversified sources of liquidity and maturities spread over multiple years. We have credit ratings of BB+ (Standard & Poor's)/Ba2 (Moody's) with a balance sheet consistent with highly-levered peer restaurant franchise companies. The following table summarizes the future maturities of our outstanding long-term debt, excluding finance leases and debt issuance costs and discounts, as of March 31, 2022. 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2037 2043 Total Securitization Notes $ 30 $ 39 $ 39 $ 39 $ 944 $ 875 $ 582 $ 565 $ 7 $ 682 $ 3,802 Credit Agreement 25 34 48 53 662 15 1,398 2,235 Subsidiary Senior Unsecured Notes 750 750 YUM Senior Unsecured Notes 325 600 800 1,050 $ 1,100 $ 325 $ 275 4,475 Revolving Facility 174 174 Total $ 55 $ 398 $ 87 $ 692 $ 1,780 $ 1,640 $ 1,980 $ 565 $ 807 $ 1,732 $ 1,100 $ 325 $ 275 $ 11,436 See Note 10 for details on the Securitization Notes, the Credit Agreement, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes. On February 23, 2022, Yum! Brands, Inc. issued a notice of redemption for the $600 million aggregate principal amount of 7.75% YUM Senior Unsecured Notes due April 1, 2025 (the “2025 Notes”). The 2025 Notes were redeemed subsequent to the first quarter, on April 1, 2022, at an amount equal to 103.875% of the aggregate principal amount of the 2025 Notes, reflecting a $23 million “call premium”, plus accrued and unpaid interest to the date of redemption. 33 Also subsequent to the first quarter, on April 1, 2022, Yum! Brands, Inc. issued $1.0 billion aggregate principal amount of 5.375% YUM Senior Unsecured Notes due April 1, 2032 (the “April 2032 Notes”). The net proceeds from the April 2032 Notes were used to fund the redemption of the 2025 Notes discussed above and for general corporate purposes. The redemption of the 2025 Notes and issuance of the April 2032 Notes are not included in the table above. New Accounting Pronouncements Not Yet Adopted In March 2020, the FASB issued guidance related to reference rate reform. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference rates, including the impact on our interest rate swaps with notional amounts of $1.5 billion expiring in March 2025. These interest rate swaps are designated cash flow hedges. We do not anticipate the impact of adopting this standard will be material to our Financial Statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes during the quarter ended March 31, 2022, to the disclosures made in Item 7A of the Company’s 2021 Form 10-K.