What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-10 · 217 added, 103 removed, 333 unchanged (49% of the section changed)

6 unchanged sentences

Percentages may not recompute due to rounding.

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”).

and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchise or operate a system of over 53,000 restaurants in 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.

17 unchanged sentences

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.

Our global citizenship and sustainability strategy, called the Recipe for Good, reflects our priorities for social responsibility, 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.

4 unchanged sentences

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.

2 unchanged sentences

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

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.

To determine whether a restaurant meets the definition of a 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.

7 unchanged sentences

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.

As of the beginning of the second quarter, as a result of our progress towards exiting Russia and our decision to reclass net profits attributable to Russia from the operating segments in which those profits were earned to Unallocated Other income (see Notes 1 and 8), we have elected to remove all Russia units from our unit count as well as to exclude those units' associated sales from our system sales totals.

We removed 1,112 units and 53 units in Russia from our global KFC and Pizza Hut unit counts, respectively.

These units were treated similar to permanent store closures for purposes of our same-store sales calculations and thus they were removed from our same-store sales calculations beginning April 1, 2022.

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:

20 unchanged sentences

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.

Such comparisons reflect the impact of removing all Russian units from our unit count and their associated sales from our total system sales as of the beginning of the second quarter.

For the quarter ended June 30, 2022, GAAP diluted EPS was $0.77 per share, a decrease from $1.29 per share in the quarter ended June 30, 2021, and diluted EPS, excluding Special Items, was $1.05 per share, a decrease from $1.16 per share in the quarter ended June 30, 2021.

For the year to date ended June 30, 2022, GAAP diluted EPS was $2.13 per share, a decrease from $2.35 per share in the year to date ended June 30, 2021, and diluted EPS, excluding Special Items, was $2.10 per share, a decrease from $2.22 per share in the year to date ended June 30, 2021.

Quarterly Financial highlights:

2 unchanged sentences

Taco Bell Division +10 +8 +4 +9 +9

Pizza Hut Division +3 Even +5 Even +2

Pizza Hut Division Even (3) +4 (10) (7)

Worldwide +3 +1 +4 (2) (1)

Year to date Financial highlights:

System Sales, ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit

KFC Division +5 +1 +3 (6) (1)

Taco Bell Division +9 +6 +4 +6 +7

Pizza Hut Division +2 (1) +4 (5) (2)

Worldwide +5 +2 +4 (4) (3)

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.

Quarter ended

2022 2021 % B/(W)

• During the quarter, 781 gross units were opened resulting in the addition of 463 net-new units for the quarter and 1,091 for the year to date.

◦ Net-new unit additions were offset by the removal of 1,165 Russia units for a total decline in unit count of 702 units versus our unit count at March 31, 2022 and 74 versus our unit count at December 31, 2021.

• Foreign currency translation unfavorably impacted Divisional Operating Profit for the quarter and year to date by $23 million and $37 million, respectively.

Quarter ended Year to date

2022 2021 % B/(W) 2022 2021 % B/(W)

Company sales $ 499 $ 520 (4) $ 969 $ 996 (3)

7 unchanged sentences

Refranchising (gain) loss (8) (7) 34 (12) (22) (43)

Other (income) expense (6) (6) NM

Other (income) expense (4) (4) NM (10) (10) NM

Total costs and expenses, net 1,082 1,035 (4) 2,120 1,978 (7)

Operating Profit 554 567 (2) 1,063 1,110 (4)

Investment (income) expense, net (7) — NM

Investment (income) expense, net 15 (1) NM 8 (1) NM

Other pension (income) expense 1 2 86 1 5 84

1 unchanged sentence

Income before income taxes 390 407 (4) 788 816 (3)

Income tax (benefit) provision (1) 83 101

Income tax provision 166 16 NM 165 99 (67)

Net Income $ 224 $ 391 (43) $ 623 $ 717 (13)

2 unchanged sentences

Effective tax rate 42.6 % 4.0 % (38.6) ppts.

21.0 % 12.1 % (8.9) ppts.

(a) See Note 2 for the number of shares used in this calculation.

4 unchanged sentences

Total 53,350 51,391 4

Quarter ended

Quarter ended Year to date

2022 2021 2022 2021

Same-store Sales Growth (Decline) % 1 23 2 16

2 unchanged sentences

Our system sales breakdown by Company and franchise sales was as follows:

Quarter ended

Quarter ended Year to date

2022 2021 2022 2021

Company sales (a)

$ 499 $ 520 $ 969 $ 996

Franchise sales 13,457 13,604 27,133 26,513

1 unchanged sentence

Foreign Currency Impact on System sales (b)

(553) N/A (829) N/A

System sales, excluding FX $ 14,509 $ 14,124 $ 28,931 $ 27,509

Company sales (a)

$ 115 $ 147 $ 241 $ 280

Franchise sales 7,137 7,491 14,744 14,631

1 unchanged sentence

Foreign Currency Impact on System sales (b)

(426) N/A (655) N/A

System sales, excluding FX $ 7,678 $ 7,638 $ 15,640 $ 14,911

1 unchanged sentence

Company sales (a)

$ 243 $ 223 $ 457 $ 431

Franchise sales 3,266 2,966 6,160 5,638

1 unchanged sentence

Foreign Currency Impact on System sales (b)

(13) N/A (19) N/A

System sales, excluding FX $ 3,522 $ 3,189 $ 6,636 $ 6,069

1 unchanged sentence

Company sales (a)

$ 5 $ 12 $ 10 $ 26

Franchise sales 3,034 3,131 6,189 6,213

1 unchanged sentence

Foreign Currency Impact on System sales (b)

(114) N/A (155) N/A

System sales, excluding FX $ 3,153 $ 3,143 $ 6,354 $ 6,239

1 unchanged sentence

Company sales (a)

$ 136 $ 138 $ 261 $ 259

Franchise sales 20 16 40 31

7 unchanged sentences

Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, as presented below.

Quarter ended

Quarter ended Year to date

2022 2021 2022 2021

Core Operating Profit Growth (Decline) % (1) 53 (3) 42

1 unchanged sentence

Effective Tax Rate excluding Special Items 24.2 % 20.0 % 22.3 % 20.1 %

Quarter ended

Quarter ended Year to date

2022 2021 2022 2021

Company restaurant profit $ 84 $ 103 $ 152 $ 187

Company restaurant margin % 16.8 % 19.8 % 15.7 % 18.7 %

Quarter ended

Quarter ended Year to date

Detail of Special Items 2022 2021 2022 2021

Refranchising gain (loss) (a)

Profits from operations in Russia (b)

$ — $ 2 $ 4 $ 4

Operating profit impact from decision to exit Russia (b)

Charges associated with resource optimization (c)

Other Special Items Income (Expense) — — (1) 1

Special Items Income (Expense) - Operating Profit 14 — 24 2

Tax (Expense) Benefit on Special Items (c)

Charges associated with resource optimization - Other pension (expense) income (c)

Interest expense, net (d)

(28) (34) (28) (34)

Special Items Expense before Income Taxes (14) (33) (4) (31)

Tax (Expense) Benefit on Special Items (e)

Tax Benefit - Intra-entity transfer of intellectual property (f)

Tax Benefit - Newly issued U.S.

foreign tax credit regulations (d)

foreign tax credit regulations (g)

Tax (Expense) - Income tax impacts from decision to exit Russia (h)

(71) — (71) —

Special Items Income (Expense), net of tax $ (83) $ 39 $ 7 $ 40

3 unchanged sentences

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.

During the quarters ended June 30, 2022 and 2021, we recorded net refranchising gains of less than $1 million and $2 million, respectively, that have been reflected as a Special Item.

During both the years to date ended June 30, 2022 and 2021, we recorded net refranchising gains of $4 million that have been reflected as a Special Item.

Additionally, we recorded net refranchising gains of $8 million and $5 million during the quarters ended June 30, 2022 and 2021, respectively, that have not been reflected as Special Items.

During the years to date ended June 30, 2022 and 2021, we recorded net refranchising gains of $8 million and $18 million, 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.

(b) In the first quarter of 2022, as a result of the Russian invasion of Ukraine, we suspended all investment and restaurant development in Russia.

We also suspended all operations of our 70 company-owned KFC restaurants in Russia and began finalizing an agreement to suspend all Pizza Hut operations in Russia, in partnership with our master franchisee.

Further, we pledged to redirect any future net profits attributable to Russia to humanitarian efforts.

During the second quarter, we completed the transfer of ownership of the Pizza Hut business to a local operator who has initiated the process of re-branding locations to a non-YUM concept.

We are also in the process of transferring ownership of our KFC restaurants, operating system and master franchise rights, including the network of franchised restaurants, to a local operator, after which we will have fully exited Russia.

Our GAAP operating results for the quarter and year to date ended June 30, 2022, continue to reflect royalty revenues and expenses to support the Russian operations for Pizza Hut prior to the date of transfer and for KFC for the entire quarter and year to date within their historical financial statement line items and operating segments.

However, given our decision to exit Russia and our pledge to direct any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts, we have reclassed such net profits from the Division segment results in which they were earned to Corporate and unallocated.

Additionally, we have incurred certain expenses related to the transfer of

the businesses and other one-time costs related to our exit from Russia which we have recorded within Corporate and unallocated.

The resulting net Operating Profit within Corporate and unallocated of $14 million and $21 million for the quarter and year to date ended June 30, 2022, respectively, has been reflected as a Special Item as the amounts are not indicative of our ongoing results.

(c) During the quarter and year to date ended June 30, 2021, we recorded charges of $2 million and $3 million, respectively, to General and administrative expenses and a credit of $1 million to Other pension (income) expense in both periods related to a resource optimization program initiated in the third quarter of 2020.

This program was part of our efforts to optimize our resources, reallocating them toward critical areas of the business that will drive future growth.

These critical areas include accelerating our digital, technology and innovation capabilities to deliver a modern, world-class team member and customer experience and improve unit economics.

Due to the size and scope of the resource optimization program, these charges have been reflected as Special Items.

(d) During the quarter ended June 30, 2022, the Company redeemed $600 million aggregate principal amount of 7.75% YUM Senior Unsecured Notes due in 2025 (the "2025 Notes").

The redemption amount was equal to 103.875% of the $600 million aggregate principal amount redeemed, reflecting a $23 million "call premium".

We recognized the call premium and the write-off of $5 million of unamortized debt issuance costs associated with the 2025 Notes within Interest expense, net.

During the quarter ended June 30, 2021, certain subsidiaries of the Company redeemed $1,050 million aggregate principal amount of 5.25% Subsidiary Senior Unsecured Notes due in 2026 (the "2026 Notes").

The redemption amount was equal to 102.625% of the $1,050 million aggregate principal amount redeemed, reflecting a $28 million "call premium".

We recognized the call premium and the write-off of $6 million of unamortized debt issuance costs associated with the 2026 Notes within Interest expense, net.

Due to their collective size and the fact that the amounts are not indicative of our ongoing interest expense, we reflected these charges as Special Items.

(e) 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.

(f) During the quarter ended June 30, 2021, the United Kingdom ("UK") Finance Act 2021 was enacted resulting in an increase in the UK corporate income tax rate from 19% to 25%.

As a result, in the quarter ended June 30, 2021, we remeasured the deferred tax assets originally recorded as a Special Item as part of a fourth quarter 2019 intercompany restructuring of intellectual property (“IP”) rights into the UK, which resulted in the recognition of an additional $64 million deferred tax benefit as a Special Item.

(g) In January 2022, the U.S.

Treasury published new regulations impacting foreign tax credit utilization beginning in the Company’s 2022 tax year.

1 unchanged sentence

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.

Reconciliation of GAAP Operating Profit to Core Operating Profit Quarter ended

This valuation allowance reversal resulted in a one-time tax benefit of $82 million in the year to date ended June 30, 2022 that was reflected as a Special Item.

(h) Our decision to exit the Russia market is anticipated to result in a reduction in the tax basis of IP rights held in Switzerland due to the expected loss of the associated Russian royalty income associated with such rights going forward.

As a result, we remeasured and reassessed the need for a valuation allowance on those deferred tax assets.

In addition, we reassessed certain deferred tax liabilities associated with the Russia business given the expectation that the existing basis difference will now reverse by way of sale.

This resulted in net tax expense of $71 million that was reflected as a Special Item in the quarter ended June 30, 2022.

Reconciliation of GAAP Operating Profit to Core Operating Profit Quarter ended Year to date

2022 2021 2022 2021

GAAP Operating Profit $ 554 $ 567 $ 1,063 $ 1,110

1 unchanged sentence

Foreign Currency Impact on Divisional Operating Profit (a)

(23) N/A (37) N/A

Core Operating Profit $ 563 $ 567 $ 1,076 $ 1,108

1 unchanged sentence

Foreign Currency Impact on Divisional Operating Profit (a)

(19) N/A (31) N/A

Core Operating Profit $ 312 $ 318 $ 615 $ 618

2 unchanged sentences

Foreign Currency Impact on Divisional Operating Profit (a)

(1) N/A (1) N/A

Core Operating Profit $ 216 $ 198 $ 401 $ 376

2 unchanged sentences

Foreign Currency Impact on Divisional Operating Profit (a)

(3) N/A (5) N/A

Core Operating Profit $ 96 $ 103 $ 200 $ 205

40 unchanged sentences

Company restaurant margin % 19.2 % 25.9 % 8.0 % 11.6 % N/A 19.8 %

Year to date 6/30/2022

KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated

GAAP Operating Profit (Loss) $ 584 $ 400 $ 195 $ (10) $ (106) $ 1,063

Franchise and property revenues 777 378 293 3 — 1,451

Franchise contributions for advertising and other services 319 268 176 — — 763

General and administrative expenses 173 75 100 23 136 507

Franchise and property expenses 38 14 4 1 4 61

Franchise advertising and other services expense 314 267 175 1 — 757

Refranchising (gain) loss — — — — (12) (12)

Other (income) expense 18 (1) (5) — (22) (10)

Company restaurant profit $ 31 $ 109 $ — $ 12 $ — $ 152

Company sales $ 241 $ 457 $ 10 $ 261 $ — $ 969

Company restaurant margin % 12.9 % 23.9 % (4.4) % 4.5 % N/A 15.7 %

Year to date 6/30/2021

KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated

GAAP Operating Profit (Loss) $ 618 $ 376 $ 205 $ 5 $ (94) $ 1,110

Franchise and property revenues 733 341 288 2 — 1,364

Franchise contributions for advertising and other services 294 248 186 — — 728

General and administrative expenses 153 64 83 23 113 436

Franchise and property expenses 29 14 7 — — 50

Franchise advertising and other services expense 284 246 185 — — 715

Refranchising (gain) loss — — — — (22) (22)

Other (income) expense (6) (3) (4) — 3 (10)

Company restaurant profit $ 51 $ 108 $ 2 $ 26 $ — $ 187

Company sales $ 280 $ 431 $ 26 $ 259 $ — $ 996

Company restaurant margin % 18.0 % 25.0 % 7.3 % 10.3 % N/A 18.7 %

Items Impacting Reported Results and Reasonably Likely to Impact Future Results

2 unchanged sentences

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

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.

In the first quarter of 2022, as a result of the Russian invasion of Ukraine, we suspended all investment and restaurant development in Russia.

Further, we pledged to redirect any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts.

During the second quarter, we completed the transfer of ownership of the Pizza Hut Russia business to a local operator who has initiated the process of re-branding locations to a non-YUM concept.

We are also in the process of transferring ownership of our KFC Russia restaurants, operating system and master franchise rights, including the network of franchised restaurants, to a local operator who will be responsible for re-branding locations to a non-YUM concept.

Upon the completion of this process, we will have fully exited from Russia

As of the beginning of the second quarter, we have elected to remove all Russia units from our unit count and their associated sales from our total system sales.

We removed 1,112 units and 53 units in Russia from our global KFC and Pizza Hut units counts, respectively.

This negatively impacted consolidated YUM and KFC Division year-over-year unit growth by two and four percentage points, respectively.

During the quarter ended June 30, 2022, our system sales growth for consolidated YUM and KFC Division was negatively impacted by two and three percentage points, respectively.

During the year to date ended June 30, 2022, our system sales growth for consolidated YUM and KFC Division was negatively impacted by one and two percentage points, respectively.

Russia units do not impact our same-store sales results for the quarter.

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.

During the quarter ended June 30, 2022, our Core Operating Profits in Russia declined versus the second quarter of last year, negatively impacting consolidated YUM and KFC Division Core Operating Profit growth by two and four percentage points, respectively.

During the year to date ended June 30, 2022, our Core Operating Profits in Russia declined versus the prior year, negatively impacting consolidated YUM and KFC Division Core Operating Profit growth by two and three percentage points, respectively.

See Note 1 for a discussion regarding our net asset base in Russia.

4 unchanged sentences

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.

As we ended the second 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 7% and our Pizza Hut Division same-store sales growth was 1% for the quarter ended June 30, 2022.

Excluding China, our YUM consolidated same-store sales growth was 6%, our KFC Division same-store sales growth was 8% and our Pizza Hut Division same-store sales growth was 1% for the year to date ended June 30, 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.

4 unchanged sentences

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.

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 loss of $14 million and $7 million, in the quarter and year to date ended June 30, 2022, respectively.

The KFC Division has 26,521 units, 85% of which are located outside the U.S.

Additionally, 99% of the KFC Division units were operated by franchisees as of March 31, 2022.

Quarter ended

2022 2021 Reported Ex FX

Additionally, 99% of the KFC Division units were operated by franchisees as of June 30, 2022.

Quarter ended Year to date

% B/(W) % B/(W)

2022 2021 Reported Ex FX 2022 2021 Reported Ex FX

System Sales $ 7,252 $ 7,638 (5) 1 $ 14,985 $ 14,911 1 5

Same-Store Sales Growth (Decline) % 3 8 N/A N/A

Same-Store Sales Growth (Decline) % (1) 30 N/A N/A 1 18 N/A N/A

Company sales $ 115 $ 147 (22) (16) $ 241 $ 280 (14) (9)

4 unchanged sentences

Company restaurant margin % 11.6 % 19.2 % (7.6) ppts.

12.9 % 18.0 % (5.1) ppts.

G&A expenses $ 89 $ 80 (12) (15) $ 173 $ 153 (14) (16)

8 unchanged sentences

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.

The quarterly and year to date decreases in Company sales, excluding the impacts of foreign currency translation, were driven by the suspension of operations of our 70 company-owned KFC restaurants in Russia.

Company same-store sales declined 2% and 1% for the quarter and year to date, respectively.

As discussed in the Introduction and Overview section of this MD&A, all units in Russia, both Company and franchised, were removed from our same-store sales calculations beginning April 1, 2022.

The quarterly and year to date decreases in Company restaurant margin percentage were 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.

The quarterly increase in G&A, excluding the impact of foreign currency translation, was driven by higher headcount and salaries and higher professional fees.

The quarterly increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by the impact of same-store sales and unit growth.

Franchise same-store sales growth was flat for the quarter.

The year to date increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by franchise same-store sales growth of 2% and unit growth.

As discussed in the Introduction and Overview section of this MD&A, all units in Russia, both Company and franchised, were removed from our same-store sales calculations beginning April 1, 2022.

The quarterly increase in G&A, excluding the impact of foreign currency translation, was driven by higher headcount and salaries, higher travel related costs and higher professional fees, partially offset by lower expenses related to our annual incentive compensation program.

The year to date increase in G&A, excluding the impact of foreign currency translation, was driven by higher headcount and salaries, higher professional fees and higher travel related costs, partially offset by lower expenses related to our annual incentive compensation program.

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.

The quarterly decrease in Operating Profit, excluding the impact of foreign currency translation, was driven by higher G&A and the negative impact of 4 percentage points on year-over-year operating profit growth as a result lower profits in Russia, partially offset by unit growth.

The year to date decrease in Operating Profit, excluding the impact of foreign currency translation, was driven by higher G&A, the negative impact of 3 percentage points on year-over-year operating profit growth as a result of lower profits in Russia and current year bad debt expense lapping prior year net bad debt recoveries for past due franchise receivables, partially offset by same-store sales growth and unit growth.

Taco Bell Division

1 unchanged sentence

The Company owned 7% of the Taco Bell units in the U.S.

as of March 31, 2022.

Quarter ended

2022 2021 Reported Ex FX

as of June 30, 2022.

Quarter ended Year to date

% B/(W) % B/(W)

2022 2021 Reported Ex FX 2022 2021 Reported Ex FX

System Sales $ 3,509 $ 3,189 10 10 $ 6,617 $ 6,069 9 9

Same-Store Sales Growth % 5 9 N/A N/A

Same-Store Sales Growth % 8 21 N/A N/A 6 15 N/A N/A

Company sales $ 243 $ 223 9 9 $ 457 $ 431 6 6

4 unchanged sentences

Company restaurant margin % 25.7 % 25.9 % (0.2) ppts.

23.9 % 25.0 % (1.1) ppts.

G&A expenses $ 39 $ 33 (18) (18) $ 75 $ 64 (17) (17)

8 unchanged sentences

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.

The quarterly and year to date increases in Company sales were driven by Company same-store sales growth of 11% and 8% for the quarter and year to date, respectively, and unit growth partially offset by refranchising.

The quarterly and year to date decreases in Company restaurant margin percentage were driven by commodity and wage inflation partially offset by Company 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.

The quarterly increase in G&A was driven by higher headcount and salaries and higher professional fees.

The quarterly and year to date increases in Franchise and property revenues were driven by franchise same-store sales growth of 8% and 6%, respectively, and unit growth.

The quarterly and year to date increases in G&A were driven by higher headcount and salaries, higher professional fees and higher travel related costs.

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.

The quarterly and year to date increases in Operating Profit were driven by same-store sales growth and unit growth partially offset by higher restaurant operating costs and higher G&A costs.

Pizza Hut Division

2 unchanged sentences

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

2022 2021 Reported Ex FX

System Sales $ 3,160 $ 3,096 2 3

Same-Store Sales Growth (Decline) % Even 12 N/A N/A

Additionally, over 99% of the Pizza Hut Division units were operated by franchisees as of June 30, 2022.

Quarter ended Year to date

% B/(W) % B/(W)

2022 2021 Reported Ex FX 2022 2021 Reported Ex FX

System Sales $ 3,039 $ 3,143 (3) Even $ 6,199 $ 6,239 (1) 2

Same-Store Sales Growth (Decline) % (3) 10 N/A N/A (1) 11 N/A N/A

Company sales $ 5 $ 12 (62) (62) $ 10 $ 26 (64) (64)

2 unchanged sentences

Total revenues $ 235 $ 249 (6) (3) $ 479 $ 500 (4) (3)

Company restaurant profit $ — $ 1 NM NM

Company restaurant profit $ — $ 1 NM NM $ — $ 2 NM NM

Company restaurant margin % (8.0) % 8.0 % (16.0) ppts.

(4.4) % 7.3 % (11.7) ppts.

G&A expenses $ 50 $ 43 (18) (20) $ 100 $ 83 (20) (21)

1 unchanged sentence

Franchise advertising and other services expense 88 91 3 2 175 185 5 4

Operating Profit $ 102 $ 102 Even 2

Operating Profit $ 93 $ 103 (10) (7) $ 195 $ 205 (5) (2)

% Increase (Decrease)

4 unchanged sentences

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.

The quarterly and year to date decreases in Company sales, excluding the impacts of foreign currency translation, were 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.

The quarterly increase in G&A, excluding the impacts of foreign currency translation, was driven by higher headcount and salaries and higher professional fees.

The quarterly increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by unit growth, partially offset by a franchise same-store sales decline of 3%.

The year to date increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by unit growth and the recognition of franchise fees related to unexercised development rights arising from a master franchise agreement, partially offset by a franchise same-store sales decline of 1%.

The quarterly increase in G&A, excluding the impacts of foreign currency translation, was driven by higher headcount and salaries and higher travel related expenses.

The year to date increase in G&A, excluding the impacts of foreign currency translation, was driven by higher headcount and salaries, higher travel related expenses and higher professional fees.

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.

The quarterly decrease in Operating Profit, excluding the impacts of foreign currency translation, was driven by higher G&A and same-store sales declines partially offset by unit growth.

The year to date decrease in Operating Profit, excluding the impacts of foreign currency translation, was driven by higher G&A partially offset by unit growth.

Habit Burger Grill Division

1 unchanged sentence

The Company owned 86% of the Habit Burger Grill units in the U.S.

as of March 31, 2022.

Quarter ended

2022 2021 Reported Ex FX

System Sales $ 145 $ 136 6 6

Same-Store Sales Growth % (a)

as of June 30, 2022.

Quarter ended Year to date

% B/(W) % B/(W)

2022 2021 Reported 2022 2021 Reported

System Sales (a)

$ 156 $ 154 2 $ 301 $ 290 4

Same-Store Sales Growth % (4) 31 N/A — 22 N/A

Total revenues $ 138 $ 139 (1) $ 264 $ 261 1

Operating Profit (Loss) $ (8) $ — NM NM

Operating Profit (Loss) $ (2) $ 5 (146) $ (10) $ 5 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.

System sales growth, excluding the impact of the reporting calendar change, was 10% and 13% for the quarter and year to date ended June 30, 2022, respectively.

Unit Count 6/30/2022 6/30/2021 % Increase (Decrease)

3 unchanged sentences

Corporate & Unallocated

Quarter ended

(Expense) / Income 2022 2021 % B/(W)

Quarter ended Year to date

(Expense) / Income 2022 2021 % B/(W) 2022 2021 % B/(W)

Corporate and unallocated G&A $ ( 65 ) $ ( 63 ) (3) $ ( 136 ) $ ( 113 ) (21)

Unallocated Company restaurant expenses — — NM

Unallocated Franchise and license expenses (See Note 8)

( 4 ) — NM ( 4 ) — NM

Unallocated Refranchising gain (loss) 8 7 34 12 22 (43)

Unallocated Other income (expense) 6 ( 2 ) NM

Investment income (expense), net (See Note 8) 7 — NM

Unallocated Other income (expense) (See Note 8)

16 ( 1 ) NM 22 ( 3 ) NM

Investment income (expense), net (See Note 8) ( 15 ) 1 NM ( 8 ) 1 NM

Other pension income (expense) (See Note 9)

( 1 ) ( 2 ) 86 ( 1 ) ( 5 ) 84

Interest expense, net ( 148 ) ( 159 ) 6 ( 266 ) ( 290 ) 8

Income tax benefit (provision) (See Note 6) 1 (83) 101

Income tax benefit (provision) (See Note 6) (166) (16) NM (165) (99) (67)

Effective tax rate (See Note 6) 42.6 % 4.0 % (38.6) ppts.

21.0 % 12.1 % (8.9) 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.

The year to date 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, higher professional fees and higher travel costs, offset by lower current year expenses related to our annual incentive compensation programs.

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.

The quarterly decrease in Interest expense, net was primarily driven by $6 million lower expense in the current year relating to the call premium and unamortized debt issuance costs written-off associated with the redemption of the 2025 Notes (see Note 10) as compared to the call premium and unamortized debt issuance costs written off associated with the redemption of the 2026 Notes (as discussed in our 2021 Form 10-K) in the prior year.

The year to date decrease in Interest expense, net was primarily driven by $12 million of previously unamortized debt issuance costs written-off in the prior year due to the refinancing of our Credit Agreement and $6 million lower expense in the current year relating to the call premium and unamortized debt issuance costs written-off associated with the redemption of the 2025 Notes as compared to the call premium and unamortized debt issuance costs written off associated with the redemption of the 2026 Notes (as discussed in our 2021 Form 10-K) in the prior year.

Consolidated Cash Flows

Net cash provided by operating activities was $522 million in 2022 versus $773 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.

The decrease was largely driven by an increase in incentive compensation payments, timing of spending on advertising and a decrease in Operating profit before Special Items.

Net cash used in investing activities was $64 million in 2022 versus $8 million in 2021.

The change was primarily driven by the lapping of our prior year sale of certain mutual fund investments and higher current year capital spending.

Net cash used in financing activities was $586 million in 2022 versus $966 million in 2021.

The change was primarily driven by higher net borrowings in 2022, partially offset by higher share repurchases.

The change was primarily driven by higher net borrowings in 2022, partially offset by higher dividends and share repurchases.

Liquidity and Capital Resources

2 unchanged sentences

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.

We believe that our ongoing cash from operations, cash on hand, which was approximately $400 million at June 30, 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.

1 unchanged sentence

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%.

As of June 30, 2022, approximately 94%, including the impact of interest rate swaps, of our $11.6 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.

The following table summarizes the future maturities of our outstanding long-term debt, excluding finance leases and debt issuance costs and discounts, as of June 30, 2022.

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2037 2043 Total

3 unchanged sentences

YUM Senior Unsecured Notes 325 800 1,050 $ 2,100 $ 325 $ 275 4,875

Revolving Facility 174 174

Total $ 37 $ 398 $ 87 $ 92 $ 1,606 $ 1,640 $ 1,980 $ 565 $ 807 $ 1,732 $ 2,100 $ 325 $ 275 $ 11,644

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!

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.

Also subsequent to the first quarter, on April 1, 2022, Yum!

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

6 unchanged sentences

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.

There were no material changes during the quarter ended June 30, 2022, to the disclosures made in Item 7A of the Company’s 2021 Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis