What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-08 · 124 added, 98 removed, 452 unchanged (33% of the section changed)

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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 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”).

and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchise or operate a system of nearly 54,000 restaurants in over 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 53,000 restaurants, 98% are operated by franchisees.

Of the nearly 54,000 restaurants, 98% are operated by franchisees.

YUM currently consists of four operating segments:

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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.

As of the beginning of the second quarter, as a result of our progress towards exiting Russia and our decision to reclass net operating profits attributable to Russia from the operating segments in which those profits were earned to Unallocated Other income (see Notes 1 and 8), we 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.

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All comparisons within this summary are versus the same period a year ago.

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.

The Quarterly and Year to date Financial Highlights tables below reflect the impact of removing all Russian units from our unit count and their associated sales from our system sales totals as of the beginning of the second quarter.

Quarterly Financial Highlights:

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Taco Bell Division +9 +6 +5 +10 +11

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

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

Pizza Hut Division +4 +1 +4 (8) (3)

YUM +7 +5 +4 +4 +8

Year to date Financial Highlights:

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Taco Bell Division +9 +6 +5 +8 +8

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

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

Pizza Hut Division +3 Even +4 (6) (3)

YUM +6 +3 +4 (2) Even

Additionally:

• 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.

• As of the beginning of the second quarter, we have elected to remove 1,165 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 KFC and Pizza Hut units counts, respectively.

◦ YUM and KFC Division year-over-year unit growth as shown above were negatively impacted by two and five percentage points, respectively.

◦ YUM system sales growth excluding foreign currency as shown above was negatively impacted by three and one percentage points for the quarter and year to date ended September 30, 2022, respectively.

YUM Core Operating Profit as shown above was negatively impacted by 3 and 2 percentage points for the quarter and year to date ended September 30, 2022, respectively.

◦ KFC Division system sales growth excluding foreign currency as shown above was negatively impacted by four and three percentage points for the quarter and year to date ended September 30, 2022, respectively.

KFC Division Core Operating Profit as shown above was negatively impacted by five and four percentage points for the quarter and year to date ended September 30, 2022, respectively.

• Foreign currency translation negatively impacted Divisional Operating Profit for the quarter and year to date by $39 million and $76 million, respectively.

Third-Quarter Year-to-Date

2022 2021 % Change 2022 2021 % Change

GAAP EPS $1.14 $1.75 (35) $3.28 $4.10 (20)

Special Items EPS

$0.05 $0.53 NM $0.08 $0.66 NM

EPS Excluding Special Items $1.09 $1.22 (11) $3.20 $3.44 (7)

• Our diluted EPS, excluding Special Items reflects a $0.23 and $0.35 negative impact for the quarter and year to date ended September 30, 2022, respectively, from a higher current year tax rate, lower investment gains and the removal of Russia-based profits.

Foreign currency translation also unfavorably impacted our diluted EPS, excluding Special Items, by approximately $0.10 and $0.20 for the quarter and year to date ended September 30, 2022, respectively.

• Gross unit openings for the quarter were 979 units resulting in 644 net new units.

Gross unit openings for the year to date were 2,757 units resulting in 1,735 net new units.

Quarter ended Year to date

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Franchise advertising and other services expense 396 375 (6) 1,153 1,090 (6)

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

Refranchising (gain) loss (3) 1 NM (15) (21) (26)

Other (income) expense 10 (2) NM — (12) NM

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Operating Profit 546 527 4 1,609 1,637 (2)

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

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

Investment (income) expense, net (27) (51) (49) (19) (52) (64)

Other pension (income) expense 2 1 NM 3 6 48

Interest expense, net 124 126 1 390 416 6

Income before income taxes 447 451 (1) 1,235 1,267 (3)

Income tax provision 166 16 NM 165 99 (67)

Income tax provision (benefit) 116 (77) NM 281 22 NM

Net Income $ 331 $ 528 (37) $ 954 $ 1,245 (23)

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2022 2021 2022 2021

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

Core Operating Profit Growth (Decline) % 8 3 Even 26

Diluted EPS Growth (Decline) %, excluding Special Items (11) 21 (7) 39

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Charges associated with resource optimization (c)

(2) (4) (2) (7)

Other Special Items Income (Expense) — 1 (1) 2

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— — (28) (34)

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

Special Items Income (Expense) before Income Taxes 15 (3) 11 (34)

Tax (Expense) Benefit on Special Items (e)

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

(2) 11 (2) 18

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

Tax Benefit - Newly issued U.S.

foreign tax credit regulations (g)

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

(71) — (71) —

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

Special Items Income (Expense), net of tax $ 15 $ 160 $ 22 $ 200

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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 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.

During the quarter ended September 30, 2022, we recorded net refranchising gains of $1 million that have been reflected as Special Items.

During the years to date ended September 30, 2022 and 2021, we recorded net refranchising gains of $5 million and $4 million, respectively, that have been reflected as Special Items.

Additionally, we recorded net refranchising gains of $2 million and net refranchising losses of $1 million during the quarters ended September 30, 2022 and 2021, respectively, that have not been reflected as Special Items.

During the years to date ended September 30, 2022 and 2021, we recorded net refranchising gains of $10 million and $17 million, respectively, that have not been reflected as Special Items.

These net refranchising gains and losses 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) In the first quarter of 2022, as a result of the Russian invasion of Ukraine, we suspended all investment and restaurant development in Russia.

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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.

Our GAAP operating results 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 ended September 30, 2022 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 operating 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 $16 million and $37 million for the

quarter and year to date ended September 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 September 30, 2022, we recorded charges of $1 million to General and administrative expenses and $1 million to Other (income) expense related to a resource optimization program initiated in the third quarter of 2020.

During the quarter ended September 30, 2021, we recorded a charge of $4 million to General and administrative expenses related to the program.

During the year to date ended September 30, 2021, we recorded a charge of $7 million to General and administrative and a credit of $1 million to Other pension (income) expense related to the program.

This program is 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.

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(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.

Additionally, during the quarter ended September 30, 2021, we recorded as a Special Item a $10 million tax benefit related to prior refranchisings for which the associated pre-tax gain or loss was recorded as Special.

(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.

In July 2021, we concentrated management responsibility for European (excluding the UK) KFC franchise development, support operations and management oversight in Switzerland.

Concurrent with this change in management responsibility, we completed intra-entity transfers of certain KFC IP rights from subsidiaries in the UK to subsidiaries in Switzerland.

With the transfer of these rights, we received a step-up in amortizable tax basis to current fair value under applicable Swiss tax law.

As a result of this transfer, we recorded a net, one-time benefit of $152 million as a Special Item in the quarter ended September 30, 2021.

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

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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 in the year to date ended June 30, 2022 that was reflected as a Special Item.

This valuation allowance reversal resulted in a one-time tax benefit of $82 million in the year to date ended September 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.

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

In addition, we have 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.

Primarily as a result of these items, we

recorded a net tax benefit of $2 million and net tax expense of $69 million in the quarter and year to date ended September 30, 2022, respectively, that were reflected as Special Items.

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

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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.

The following items impacted reported results in 2022 and/or 2021 and/or are reasonably likely to impact future results.

See also the Detail of Special Items section of this MD&A for other items similarly impacting results.

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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.

In October 2022, we announced that we have entered into a sale and purchase agreement to transfer ownership of our KFC Russia restaurants, operating system and master franchise rights, including the network of KFC franchised restaurants, to Smart Service Ltd., a business operated by one of our existing KFC franchisees in Russia.

Under the agreement, the buyer will be responsible for re-branding locations to a non-YUM concept and retaining the Company's employees in Russia.

Completion of the transaction is subject to regulatory and governmental approvals, as well as other conditions.

Following the completion of the transaction, we will have ceased our corporate presence in Russia.

As of the beginning of the second quarter, we 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.

This negatively impacted YUM and KFC Division year-over-year unit growth by two and five percentage points, respectively at September 30, 2022.

This also negatively impacted our system sales growth for YUM and KFC Division by three and four percentage points, respectively, during the quarter ended September 30, 2022, and negatively impacted our system sales growth for YUM and KFC Division by one and three percentage points, respectively, for the year to date September 30, 2022.

Russia units were removed from our same-store sales calculations as of the beginning of the second 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 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.

During the quarter ended September 30, 2022, our Core Operating Profits in Russia declined versus the third quarter of last year, negatively impacting YUM and KFC Division Core Operating Profit growth by three and five percentage points.

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

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

Impact of Foreign Currency Translation on Operating Profit

Changes in foreign currency exchange rates negatively impacted the translation of our foreign currency denominated Divisional Operating Profit by $39 million and $76 million for the quarter and year to date ended September 30, 2022, respectively.

This included a negative impact to our KFC Division Operating Profit of $33 million and $64 million for the quarter and year to date ended September 30, 2022, respectively.

For the full year 2022 we currently expect changes in foreign currency to negatively impact Divisional Operating Profit by approximately $100 million.

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.

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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 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.

Throughout 2022, COVID-19 outbreaks and resulting government restrictions limiting mobility have continued to impact sales in a few key markets, primarily in China.

Excluding China, our YUM same-store sales growth was 7% and our KFC Division same-store sales growth was 9% for the quarter ended September 30, 2022.

Excluding China, our YUM same-store sales growth was 6% and our KFC Division same-store sales growth was 9% for the year to date ended September 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.

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.

In 2020, we received a 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.

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

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 $27 million and $20 million, in the quarter and year to date ended September 30, 2022, respectively, and pre-tax investment income of $52 million in both the quarter and year to date ended September 30, 2021.

The KFC Division has 26,872 units, 85% of which are located outside the U.S.

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

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

Quarter ended Year to date

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2022 2021 Reported Ex FX 2022 2021 Reported Ex FX

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

System Sales $ 7,824 $ 7,878 (1) 8 $ 22,809 $ 22,789 Even 6

Same-Store Sales Growth (Decline) % 7 6 N/A N/A 3 14 N/A N/A

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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.

Company same-store sales grew 2% and

were flat 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.

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Franchise and property revenues

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.

The quarterly and year to date increases in Franchise and property revenues, excluding the impacts of foreign currency translation, were driven by franchise same-store sales growth of 7% and 3%, respectively, 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.

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

Operating Profit

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.

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 the negative impact of 5 percentage points on year-over-year operating profit growth as a result of lower profits in Russia, higher G&A and higher restaurant operating costs.

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

Taco Bell Division

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

as of June 30, 2022.

as of September 30, 2022.

Quarter ended Year to date

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Company sales and Company restaurant margin %

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.

The quarterly and year to date increases in Company sales were driven by same-store sales growth of 6% and 8% for the quarter and year to date, respectively, and unit growth partially offset by refranchising.

The quarterly increase in Company restaurant margin percentage was driven by Company same-store sales growth partially offset by commodity and wage inflation.

The year to date decrease in Company restaurant margin percentage was driven by commodity and wage inflation partially offset by Company same-store sales growth.

Franchise and property revenues

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.

The quarterly and year to date increases in Franchise and property revenues were driven by franchise same-store sales growth of 6% for both the quarter and year to date and unit growth.

The quarterly increase in G&A was driven by higher headcount and salaries and higher travel related costs partially offset by lower professional fees.

The year to date increase in G&A was driven by higher headcount and salaries and higher travel related costs.

Operating Profit

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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 June 30, 2022.

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

Quarter ended Year to date

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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

System Sales $ 3,146 $ 3,170 (1) 4 $ 9,345 $ 9,409 (1) 3

Same-Store Sales Growth (Decline) % 1 4 N/A N/A Even 9 N/A N/A

Company sales $ 4 $ 13 (63) (63) $ 14 $ 39 (64) (64)

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Franchise and property revenues

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.

The quarterly increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by unit growth and franchise same-store sales growth of 1%.

The quarterly and year to date increases in G&A, excluding the impacts of foreign currency translation, were driven by higher headcount and salaries and higher travel related expenses.

Operating Profit

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 quarterly decrease in Operating Profit, excluding the impacts of foreign currency translation, was driven by current year net bad debt expense lapping prior year net bad debt recoveries and higher G&A 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.

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The Company owned 84% of the Habit Burger Grill units in the U.S.

as of June 30, 2022.

as of September 30, 2022.

Quarter ended Year to date

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Total revenues $ 131 $ 133 (1) $ 395 $ 394 —

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

Operating Profit (Loss) $ (4) $ 1 NM $ (14) $ 6 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 10% and 13% for the quarter and year to date ended June 30, 2022, respectively.

System sales growth, excluding the impact of the reporting calendar change, was 12% and 13% for the quarter and year to date ended September 30, 2022, respectively.

Unit Count 9/30/2022 9/30/2021 % Increase (Decrease)

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Corporate and unallocated G&A $ ( 67 ) $ ( 70 ) 3 $ ( 203 ) $ ( 183 ) (11)

Unallocated Franchise and license expenses (See Note 8)

Unallocated Franchise and property expenses (See Note 8)

— — NM ( 4 ) — NM

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

Unallocated Refranchising gain (loss) 3 ( 1 ) NM 15 21 (26)

Unallocated Other income (expense) (See Note 8)

14 ( 2 ) NM 36 ( 5 ) NM

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

Investment income (expense), net (See Note 8) 27 51 (49) 19 52 (64)

Other pension income (expense) (See Note 9)

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

( 2 ) ( 1 ) NM ( 3 ) ( 6 ) 48

Interest expense, net ( 124 ) ( 126 ) 1 ( 390 ) ( 416 ) 6

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

Income tax benefit (provision) (See Note 6) (116) 77 NM (281) (22) NM

Effective tax rate (See Note 6) 25.8 % ( 17.0 ) % (42.8) ppts.

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

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.

The quarterly decrease in Corporate and Unallocated G&A expense was driven by lower current year expenses related to our annual incentive compensation programs and lower professional fees, offset by higher software costs and amortization, higher headcount and salaries including personnel associated with our 2021 investments in digital and technology companies and higher travel costs.

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 software costs and amortization, higher meeting costs, 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 $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.

The quarterly decrease in Interest expense, net was primarily driven by a lower weighted average interest rate offset by higher borrowings.

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 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 $975 million in 2022 versus $1,292 million in 2021.

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.

The decrease was primarily driven by an increase in incentive compensation payments, timing of spending on advertising and a decrease in Operating profit before Special Items, which includes the impact of foreign currency translation.

Net cash used in investing activities was $112 million in 2022 versus $123 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.

The change was primarily driven by the lapping of our prior year acquisition of Dragontail Systems Limited, partially offset 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 $928 million in 2022 versus $881 million in 2021.

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

The change was primarily driven by lower current year net borrowings and higher dividends paid, partially offset by lower share repurchases.

Liquidity and Capital Resources

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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), that was undrawn as of June 30, 2022.

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.

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 that was undrawn as of September 30, 2022.

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

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Debt Instruments

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%.

As of September 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.

Our total debt outstanding currently has an effective overall interest rate of approximately 4.4%.

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 June 30, 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 September 30, 2022.

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

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Quantitative and Qualitative Disclosures About Market Risk

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.

There were no material changes during the quarter ended September 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