What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-09 · 234 added, 138 removed, 319 unchanged (54% of the section changed)

72 unchanged sentences

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

The Quarterly Financial Highlights table below reflects 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 of 2022.

The Financial Highlights tables below reflect the impact of removing the system sales of all Russian units from our system sales totals as of the beginning of the second quarter of 2022.

Quarterly Financial Highlights:

4 unchanged sentences

YUM +13 +9 +6 +4 +12

Year to date Financial Highlights:

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

KFC Division +15 +11 +7 +8 +14

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

Pizza Hut Division +8 +5 +4 Even +4

YUM +12 +8 +6 +3 +11

Additionally:

1 unchanged sentence

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

◦ YUM and KFC Division system sales growth excluding foreign currency as shown above were negatively impacted by 2 and 4 percentage points, respectively.

◦ YUM and KFC Division year-over-year unit growth as shown above were negatively impacted by 2 and 5 percentage points, respectively.

◦ Year to date YUM and KFC Division system sales growth excluding foreign currency as shown above were negatively impacted by 1 and 2 percentage points, respectively.

• Also, we elected to reclass future net profits attributable to Russia subsequent to the date of invasion from the Division segments in which those profits were earned to Unallocated Other income and reflected such profits as a Special Item as they are not indicative of our ongoing results.

As a result of the decline in Core Operating Profits attributable to Russia:

◦ YUM and KFC Division Core Operating Profit as shown above were negatively impacted by 1 and 2 percentage points, respectively, for the quarter ended March 31, 2023.

• Foreign currency translation unfavorably impacted Divisional Operating Profit by $27 million for the quarter ended March 31, 2023.

First Quarter

2023 2022 % Change

◦ Both the quarter and year to date YUM and KFC Division Core Operating Profit as shown above were negatively impacted by 1 and 2 percentage points, respectively.

• Foreign currency translation unfavorably impacted Divisional Operating Profit by $17 million and $44 million for the quarter and year to date ended June 30, 2023, respectively.

Second Quarter Year to date

2023 2022 % Change 2023 2022 % Change

GAAP EPS $1.46 $0.77 +89 $2.51 $2.13 +18

Special Items EPS

$(0.01) $0.31 NM

EPS Excluding Special Items $1.06 $1.05 Even

• In addition to the aforementioned factors impacting Operating Profit, our 2023 diluted EPS, excluding Special Items, was negatively impacted by $0.07 from mark to market adjustments from unrealized investment losses and $0.08 from foreign currency translation.

Less Special Items EPS

$0.05 $(0.29) NM $0.05 $0.02 NM

EPS Excluding Special Items $1.41 $1.06 +33 $2.46 $2.11 +17

• In addition to the aforementioned factors impacting Operating Profit, our 2023 diluted EPS, excluding Special Items, was favorably impacted by $0.09 and $0.02 for the quarter and year to date ended June 30, 2023, respectively, from mark to market adjustments from unrealized investment gains and was unfavorably impacted by $0.04 and $0.02 for the quarter and year to date ended June 30, 2022, respectively, from mark to market adjustments from unrealized investment losses.

Foreign currency translation unfavorably impacted our diluted EPS, excluding Special Items, by approximately $0.05 and $0.12 for the quarter and year to date ended June 30, 2023, respectively.

• Gross unit openings for the quarter were 1,025 units resulting in 742 net new units.

Quarter ended

2023 2022 % B/(W)

Gross unit openings for the year to date were 1,771 units resulting in 1,065 net new units.

Quarter ended Year to date

2023 2022 % B/(W) 2023 2022 % B/(W)

Company sales $ 511 $ 499 3 $ 985 $ 969 2

6 unchanged sentences

Franchise advertising and other services expense 388 396 2 783 757 (3)

Refranchising (gain) loss (4) (4) 17

Other (income) expense 10 (6) NM

Refranchising (gain) loss (17) (8) NM (21) (12) NM

Other (income) expense 5 (4) NM 15 (10) NM

Total costs and expenses, net 1,114 1,082 (3) 2,236 2,120 (5)

Operating Profit 573 554 4 1,096 1,063 3

Investment (income) expense, net 24 (7) NM

Other pension (income) expense (2) — NM

Investment (income) expense, net (29) 15 NM (5) 8 NM

Other pension (income) expense (1) 1 NM (3) 1 NM

Interest expense, net 125 148 15 255 266 4

Income before income taxes 478 390 22 849 788 8

Income tax provision (benefit) 71 (1) NM

Income tax provision (benefit) 60 166 64 131 165 21

Net Income $ 418 $ 224 86 $ 718 $ 623 15

2 unchanged sentences

Effective tax rate 12.6 % 42.6 % 30 ppts.

15.4 % 21.0 % 5.6 ppts.

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

4 unchanged sentences

Total 56,425 53,350 6

Quarter ended

Quarter ended Year to date

2023 2022 2023 2022

Same-store Sales Growth (Decline) % 9 1 8 2

2 unchanged sentences

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

Quarter ended

Quarter ended Year to date

2023 2022 2023 2022

Company sales (a)

$ 511 $ 499 $ 985 $ 969

Franchise sales 14,916 13,457 29,457 27,133

System sales 15,427 13,956 30,442 28,102

Foreign Currency Impact on System sales (b)

Negative Foreign Currency Impact on System sales (b)

388 N/A 1,029 N/A

System sales, excluding FX $ 15,815 $ 13,956 $ 31,471 $ 28,102

Company sales (a)

$ 115 $ 115 $ 225 $ 241

Franchise sales 8,183 7,137 16,130 14,744

System sales 8,298 7,252 16,355 14,985

Foreign Currency Impact on System sales (b)

Negative Foreign Currency Impact on System sales (b)

330 N/A 834 N/A

System sales, excluding FX $ 8,628 $ 7,252 $ 17,189 $ 14,985

1 unchanged sentence

Company sales (a)

$ 253 $ 243 $ 482 $ 457

Franchise sales 3,507 3,266 6,742 6,160

System sales 3,760 3,509 7,224 6,617

Foreign Currency Impact on System sales (b)

Negative Foreign Currency Impact on System sales (b)

System sales, excluding FX $ 3,760 $ 3,509 $ 7,234 $ 6,617

1 unchanged sentence

Company sales (a)

$ 4 $ 5 $ 9 $ 10

Franchise sales 3,197 3,034 6,528 6,189

System sales 3,201 3,039 6,537 6,199

Foreign Currency Impact on System sales (b)

Negative Foreign Currency Impact on System sales (b)

58 N/A 185 N/A

System sales, excluding FX $ 3,259 $ 3,039 $ 6,722 $ 6,199

1 unchanged sentence

Company sales (a)

$ 139 $ 136 $ 269 $ 261

Franchise sales 29 20 57 40

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

2023 2022 2023 2022

Core Operating Profit Growth (Decline) % 12 (1) 11 (3)

Diluted EPS Growth (Decline) %, excluding Special Items Even (1)

Diluted EPS Growth (Decline) %, excluding Special Items 33 (9) 17 (5)

Effective Tax Rate excluding Special Items 18.2 % 24.2 % 18.7 % 22.3 %

Quarter ended

Quarter ended Year to date

2023 2022 2023 2022

Company restaurant profit $ 96 $ 84 $ 167 $ 152

Company restaurant margin % 18.9 % 16.8 % 17.0 % 15.7 %

Quarter ended

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

2023 2022 2023 2022

GAAP Operating Profit $ 573 $ 554 $ 1,096 $ 1,063

Detail of Special Items:

Gain associated with market-wide refranchisings (a)

Operating profit impact from decision to exit Russia (b)

(Gain) loss associated with market-wide refranchisings (a)

(2) 1 (5) (2)

Operating (profit) loss impact from decision to exit Russia (b)

9 (14) 12 (21)

Charges associated with Resource Optimization (c)

Other Special Items Expense — — 1 —

Special Items (Income) Expense - Operating Profit 15 (13) 18 (22)

Tax (Expense) Benefit on Special Items (c)

Tax Benefit - U.S.

foreign tax credit regulations issued in January 2022 (d)

Special Items Income (Expense), net of tax $ (1) $ 89

Average diluted shares outstanding 285 294

Special Items diluted EPS $ (0.01) $ 0.31

(a) Due to their size and volatility, we have reflected as Special Items those refranchising gains and losses that were recorded in connection with market-wide refranchisings.

During both the quarters ended March 31, 2023 and 2022, we recorded net refranchising gains of $3 million, respectively, that have been reflected as Special Items.

Additionally, we recorded net refranchising gains of $1 million, during both the quarters ended March 31, 2023 and 2022, respectively, that have not been reflected as Special Items.

These net refranchising gains relate to refranchising of restaurants unrelated to market-wide refranchisings and that we believe are 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.

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 subsequent to the date of invasion to humanitarian efforts.

During the second quarter of 2022, we completed the transfer of ownership of the Pizza Hut Russia business to a local operator.

In April 2023, we completed our exit from the Russian market by selling the KFC business in Russia to Smart Service Ltd., including all Russian company-owned KFC restaurants, operating system, and master franchise rights as well as the trademark for the Rostik’s brand.

Under the sale and purchase agreement, the buyer has agreed to lead the process to rebrand KFC restaurants in Russia to Rostik's and retain the Company's employees in Russia.

Our GAAP operating results continue to reflect revenues from and expenses to support the Russian operations for KFC for the quarter ended March 31, 2023, as well as for both Pizza Hut and KFC for the quarter ended March 31, 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 or losses from the Division segment results in which they were earned to Unallocated Other income (expense).

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 G&A and Unallocated Franchise and property expenses.

Also recorded in Unallocated Other income (expense) were foreign exchange impacts attributable to fluctuations in the value of the Russian ruble.

The resulting net Operating Loss of $3 million and net Operating Profit of $7 million for the quarters ended March 31, 2023 and 2022, respectively, have been reflected as a Special Item as the amounts are not indicative of our ongoing results.

(c) Tax (Expense) Benefit on Special Items was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items.

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

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

These regulations made foreign taxes paid to certain countries no longer creditable in the U.S., which was expected to result in additional foreign tax credit carryforward utilization prospectively.

we reversed a valuation allowance associated with existing foreign tax credit carryforwards.

This valuation allowance reversal resulted in a one-time tax benefit of $82 million in the quarter ended March 31, 2022 that was reflected as a Special Item.

Treasury published clarifying guidance in November 2022 which resulted in foreign taxes originally determined to be non-creditable under the January 2022 regulations to now be treated as creditable taxes.

As such, the valuation allowance on foreign tax credit carryforwards that was released in the quarter ended March 31, 2022, was re-established in the quarter ended December 31, 2022.

Reconciliation of GAAP Operating Profit to Core Operating Profit Quarter ended

GAAP Operating Profit $ 523 $ 509

Special Items Income (Expense) (3) 9

Foreign Currency Impact on Divisional Operating Profit (a)

Negative Foreign Currency Impact on Divisional Operating Profit (d)

17 N/A 44 N/A

Core Operating Profit $ 605 $ 541 $ 1,158 $ 1,041

Special Items as shown above were recorded to the financial statement line items identified below.

Condensed Consolidated Summary of Results Line Item

General and administrative expenses $ 11 $ 2 $ 15 $ 3

Franchise and property expenses 1 4 2 4

Refranchising (gain) loss (2) 1 (5) (2)

Other (income) expense 5 (20) 6 (27)

Special Items (Income) Expense - Operating Profit $ 15 $ (13) $ 18 $ (22)

GAAP Operating Profit $ 326 $ 293 $ 631 $ 584

Foreign Currency Impact on Divisional Operating Profit (a)

Negative Foreign Currency Impact on Divisional Operating Profit (d)

15 N/A 36 N/A

Core Operating Profit $ 341 $ 293 $ 667 $ 584

1 unchanged sentence

GAAP Operating Profit $ 228 $ 215 $ 432 $ 400

Foreign Currency Impact on Divisional Operating Profit (a)

Negative Foreign Currency Impact on Divisional Operating Profit (d)

Core Operating Profit $ 228 $ 215 $ 433 $ 400

1 unchanged sentence

GAAP Operating Profit $ 91 $ 93 $ 195 $ 195

Foreign Currency Impact on Divisional Operating Profit (a)

Negative Foreign Currency Impact on Divisional Operating Profit (d)

Core Operating Profit $ 93 $ 93 $ 202 $ 195

1 unchanged sentence

GAAP Operating Loss $ 3 $ (2) $ (2) $ (10)

Foreign Currency Impact on Divisional Operating Profit (a)

Core Operating Loss $ (5) $ (8)

Foreign Currency Impact on Divisional Operating Profit (d)

Core Operating Profit (Loss) $ 3 $ (2) $ (2) $ (10)

Reconciliation of GAAP Net Income to Net Income excluding Special Items

GAAP Net Income $ 418 $ 224 $ 718 $ 623

Special Items (Income) Expense - Operating Profit 15 (13) 18 (22)

Special Items (Income) Expense - Interest Expense, net (e)

Special Items Tax (Benefit) Expense (f)

(30) 68 (32) (12)

Net Income excluding Special Items $ 403 $ 307 $ 704 $ 617

Reconciliation of Diluted EPS to Diluted EPS excluding Special Items

Diluted EPS $ 1.46 $ 0.77 $ 2.51 $ 2.13

Special Items Diluted EPS (0.01) 0.31

Less Special Items Diluted EPS 0.05 (0.29) 0.05 0.02

Diluted EPS excluding Special Items $ 1.41 $ 1.06 $ 2.46 $ 2.11

3 unchanged sentences

Effective Tax Rate excluding Special Items 18.2 % 24.2 % 18.7 % 22.3 %

(a) The foreign currency impact on reported Operating Profit is presented in relation only to the immediately preceding year presented.

(a) Due to their size and volatility, we have reflected as Special Items those refranchising gains and losses that were recorded in connection with market-wide refranchisings.

During the quarters ended June 30, 2023 and 2022, we recorded net refranchising gains of $2 million and net refranchising losses of $1 million, respectively, that have been reflected as a Special Item.

During the years ended June 30, 2023 and 2022, we recorded net refranchising gains of $5 million and $2 million, respectively, that have been reflected as a Special Item.

Additionally, we recorded net refranchising gains of $15 million and $9 million during the quarters ended June 30, 2023 and 2022, respectively, that have not been reflected as Special Items.

During the years ended June 30, 2023 and 2022, we recorded net refranchising gains of $16 million and $10 million, respectively, that have not been reflected as Special Items.

These net refranchising gains relate to refranchising of restaurants unrelated to market-wide refranchisings and that we believe are 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.

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 of 2022, 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.

In April 2023, we completed our exit from the Russia market by selling the KFC business in Russia.

Our GAAP operating results presented herein reflect revenues from and expenses to support the Russian operations for KFC and Pizza Hut prior to the dates of sale or transfer, 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 or losses subsequent to such date from the Division segment results in which they were earned to Unallocated Other income (expense).

Additionally, we have incurred certain expenses related to the dispositions of the businesses and other one-time costs related to our exit from Russia which we have recorded within Corporate and unallocated G&A and Unallocated Franchise and property expenses.

Also recorded in Unallocated Other income (expense) were foreign exchange impacts attributable to fluctuations in the value of the Russian ruble and a $4 million loss recorded during the quarter ended June 30, 2023 as a result of the sale of the KFC Russia business.

The resulting net Operating Loss of $9 million and $12 million for the quarter and year to date ended June 30, 2023, respectively, and net Operating Profit of $14 million and $21 million for the quarter and year to date ended June 30, 2022, respectively, have been reflected as Special Items.

(c) We recorded charges of $8 million and $10 million during the quarter and year to date ended June 30, 2023, respectively, and $1 million during the year to date ended June 30, 2022, to General and administrative expenses related to a resource optimization program initiated in the third quarter of 2020.

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.

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

(d) The foreign currency impact on reported Operating Profit is presented in relation only to the immediately preceding year presented.

When determining applicable Core Operating Profit growth percentages, the Core Operating Profit for the current year should be compared to the prior year GAAP Operating Profit adjusted only for any prior year Special Items (Income) Expense.

(e) 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 as a Special Item due to their size and the fact that the amounts are not indicative of our ongoing interest expense.

(f) The below table includes the detail of Special Items Tax (Benefit) Expense:

Quarter ended Year to date

6/30/23 6/30/22 6/30/23 6/30/22

Tax (Benefit) Expense on Special Items Operating Profit and Interest Expense $ (2) $ (3) $ (2) $ (1)

Tax (Benefit) Expense - Income tax impacts from decision to exit Russia (6) 71 (8) 71

Tax (Benefit) - U.S.

foreign tax credit regulations issued in January 2022 — — — (82)

Tax (Benefit) - Other Income tax impacts recorded as Special (22) — (22) —

Special Items Tax (Benefit) Expense $ (30) $ 68 $ (32) $ (12)

Tax (Benefit) Expense on Special Items Operating Profit and Interest Expense was determined by assessing the tax impact of each individual component within Special Items based upon the nature of the item and jurisdictional tax law.

Special Items Tax (Benefit) Expense includes $71 million of net tax expense recorded in the quarter ended June 30, 2022, resulting from the Company’s decision to exit KFC Russia.

We remeasured and reassessed the need for a valuation allowance on deferred tax assets in Switzerland due to the then expected reduction in the tax basis of intellectual property rights associated with the loss of the Russian royalty income.

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

Special Items Tax (Benefit) Expense includes a tax benefit discretely recorded in the quarter ended March 31, 2022 of $82 million.

In January 2022, the U.S.

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

These regulations made foreign taxes paid to certain countries no longer creditable in the U.S., which was expected to result in additional foreign tax credit carryforward utilization prospectively.

As a result, we reversed a valuation allowance associated with existing foreign tax credit carryforwards.

This valuation allowance reversal resulted in a one-time tax benefit of $82 million in the quarter ended March 31, 2022 that was reflected as a Special Item.

The U.S Treasury published clarifying guidance in November 2022 which resulted in foreign taxes originally determined to be non-creditable under the January 2022 regulations to now be treated as creditable taxes.

As such the valuation allowance on foreign tax credit carryforwards that was released in the quarter ended March 31, 2022, was re-established in the quarter ended December 31, 2022.

Other Income Tax impacts recorded as Special in the quarter and year to date ended June 30, 2023 include benefits related to the reversal of a reserve due to the favorable resolution of a tax audit in a foreign jurisdiction.

Such reserve was established in prior years related to deferred tax assets originally recorded as a Special Item as part of an intercompany restructuring of intellectual property.

Other Income Tax impacts recorded as Special in the quarter and year to date ended June 30, 2023 also include the release of valuation allowances associated with a jurisdiction in which a market-wide refranchising event occurred.

Reconciliation of GAAP Operating Profit to Company Restaurant Profit

25 unchanged sentences

Company restaurant margin % 11.6 % 25.7 % (8.0) % 6.0 % N/A 16.8 %

Year to date 6/30/2023

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

GAAP Operating Profit (Loss) $ 631 $ 432 $ 195 $ (2) $ (160) $ 1,096

Franchise and property revenues 828 419 304 4 — 1,555

Franchise contributions for advertising and other services 316 292 183 1 — 792

General and administrative expenses 179 94 104 26 170 573

Franchise and property expenses 42 14 9 1 2 68

Franchise advertising and other services expense 314 286 182 1 — 783

Refranchising (gain) loss — — — — (21) (21)

Other (income) expense 8 1 (3) — 9 15

Company restaurant profit $ 30 $ 116 $ — $ 21 $ — $ 167

Company sales $ 225 $ 482 $ 9 $ 269 $ — $ 985

Company restaurant margin % 13.2 % 24.0 % 3.6 % 8.2 % N/A 17.0 %

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 %

Items Impacting Reported Results and Reasonably Likely to Impact Future Results

The following items impacted reported results in 2023 and/or 2022 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.

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

Russia Invasion of Ukraine

4 unchanged sentences

Under the sale and purchase agreement, the buyer has agreed to lead the process to rebrand KFC restaurants in Russia to Rostik's and retain the Company's employees in Russia.

With the completion of this transaction we have now ceased our corporate presence in Russia.

As of the beginning of the second quarter of 2022, 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 YUM and KFC Division year-over-year unit growth by 2 and 5 percentage points, respectively at March 31, 2023.

This also negatively impacted our system sales growth excluding foreign currency for YUM and KFC Division by 2 and 4 percentage points, respectively, during the quarter ended March 31, 2023.

This negatively impacted our system sales growth excluding foreign currency for YUM and KFC Division by 1 and 2 percentage points, respectively, for the year to date ended June 30, 2023.

Russia units were removed from our same-store sales calculations as of the beginning of the second quarter of 2022.

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 reclassed such net operating profits or losses from the Division segment results in which they were earned to Unallocated Other income (expense) and reflected such net profits as a Special Item.

Additionally, we have incurred certain expenses related to the transfer of the businesses and other costs related to our exit from Russia which we have recorded within Corporate and unallocated G&A and Unallocated Franchise and property expenses.

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, 2023, our Core Operating Profits in Russia declined versus the first quarter of last year, negatively impacting YUM and KFC Division Core Operating Profit growth by 1 and 2 percentage points, respectively.

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

Our GAAP operating results presented herein reflect revenues from and expenses to support the Russian operations for KFC and Pizza Hut prior to the dates of transfer or sale, 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 or losses subsequent to that date from the Division segment results in which they were earned to Unallocated Other income (expense) and reflected such net profits as a Special item.

Prior to the invasion, our Russian business has constituted approximately 3% of our total operating profit and 2% of our total system sales.

During both the quarter and year to date ended June 30, 2023, our Core Operating Profits in Russia declined versus the prior year, negatively impacting YUM and KFC Division Core Operating Profit growth by 1 and 2 percentage points, respectively.

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 $27 million for the quarter ended March 31, 2023.

This included a negative impact to our KFC Division Operating Profit of $21 million.

For the second quarter of 2023, we currently expect changes in foreign currency to negatively impact Divisional Operating Profit by approximately $10 to $20 million.

Changes in foreign currency exchange rates negatively impacted the translation of our foreign currency denominated Divisional Operating Profit by $17 million and $44 million for the quarter and year to date ended June 30, 2023, respectively.

This included a negative impact to our KFC Division Operating Profit of $15 million and $36 million for the quarter and year to date ended June 30, 2023, respectively.

For the second half of 2023, we currently expect changes in foreign currency to have an insignificant impact on Divisional Operating Profit.

Investment in Devyani

Changes in the fair value of our approximate 5% minority investment in Devyani International Limited ("Devyani"), a franchise entity that operates KFC and Pizza Hut restaurants in India, resulted in a pre-tax loss of $23 million and a pre-tax gain of $7 million in the quarters ended March 31, 2023 and 2022, respectively.

Changes in the fair value of our approximate 5% minority investment in Devyani International Limited ("Devyani"), a franchise entity that operates KFC and Pizza Hut restaurants in India, resulted in pre-tax gains of $28 million and $5 million in the quarter and year to date ended June 30, 2023, respectively, and pre-tax investment losses of $14 million and $7 million in the quarter and year to date ended June 30, 2022, respectively.

The KFC Division has 28,500 units, 86% of which are located outside the U.S.

Additionally, 99% of the KFC Division units were operated by franchisees as of March 31, 2023.

Quarter ended

2023 2022 Reported Ex FX

Additionally, 99% of the KFC Division units were operated by franchisees as of June 30, 2023.

Quarter ended Year to date

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

2023 2022 Reported Ex FX 2023 2022 Reported Ex FX

System Sales $ 8,298 $ 7,252 14 19 $ 16,355 $ 14,985 9 15

Same-Store Sales Growth (Decline) % 9 3 N/A N/A

Same-Store Sales Growth (Decline) % 13 (1) N/A N/A 11 1 N/A N/A

Company sales $ 115 $ 115 1 7 $ 225 $ 241 (7) —

4 unchanged sentences

Company restaurant margin % 14.3 % 11.6 % 2.7 ppts.

13.2 % 12.9 % 0.3 ppts.

G&A expenses $ 90 $ 89 (1) (2) $ 179 $ 173 (3) (5)

8 unchanged sentences

Company sales and Company restaurant margin %

The quarterly decrease in Company sales, excluding the impacts of foreign currency translation, was driven by the suspension of operations of our 70 company owned KFC restaurants in Russia during the quarter ended March 31, 2022, partially offset by Company same-store sales growth of 6%.

The quarterly increase in Company sales, excluding the impact of foreign currency translation, was driven by Company same-store sales growth of 8%.

The year to date increase in Company sales, excluding the impact of foreign currency translation, was driven by Company same-store sales growth of 7%, partially offset by the suspension of operations of our 70 company owned KFC restaurants in Russia in the first quarter of 2022.

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 decrease in Company restaurant margin percentage was driven by commodity inflation.

The quarterly and year to date increases in Company restaurant margin percentage were driven by driven by Company same-store sales growth, partially offset by commodity 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 9% 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 13% and 11%, respectively, and unit growth, partially offset by the impact of the sale of our Russia business during the quarter ended June 30, 2023.

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 and higher travel related costs.

The quarterly increase in G&A, excluding the impact of foreign currency translation, was driven by higher expenses related to our annual incentive compensation programs, higher travel related costs, and higher headcount and salaries, partially offset by the impact of the sale of our Russia business during the quarter ended June 30, 2023 and lower professional fees.

The year to date increase in G&A, excluding the impact of foreign currency translation, was driven by higher headcount and salaries, higher expenses related to our annual incentive compensation programs, and higher travel related costs, partially offset by the impact of the sale of our Russia business during the quarter ended June 30, 2023 and lower professional fees.

Operating Profit

The quarterly increase in Operating Profit, excluding the impact of foreign currency translation, was driven by same-store sales growth and unit growth, partially offset by higher restaurant operating costs, higher G&A, and the negative impact of 2 percentage points on year-over-year operating profit growth as a result of lower profits in Russia.

The quarterly and year to date increases in Operating Profit, excluding the impact of foreign currency translation, were driven by same-store sales growth and unit growth, partially offset by higher G&A, higher restaurant operating costs, and the negative impact of 2 percentage points on both quarterly and year to date operating profit growth as a result of lower profits in Russia.

Taco Bell Division

1 unchanged sentence

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

as of March 31, 2023.

Quarter ended

2023 2022 Reported Ex FX

as of June 30, 2023.

Quarter ended Year to date

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

2023 2022 Reported Ex FX 2023 2022 Reported Ex FX

System Sales $ 3,760 $ 3,509 7 7 $ 7,224 $ 6,617 9 9

Same-Store Sales Growth % 8 5 N/A N/A

Same-Store Sales Growth % 4 8 N/A N/A 6 6 N/A N/A

Company sales $ 253 $ 243 4 4 $ 482 $ 457 5 5

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Company restaurant margin % 25.6 % 25.7 % (0.1) ppts.

24.0 % 23.9 % 0.1 ppts.

G&A expenses $ 49 $ 39 (25) (25) $ 94 $ 75 (25) (25)

8 unchanged sentences

Company sales and Company restaurant margin %

The quarterly increase in Company sales was driven by company same-store sales growth of 7% and unit growth partially offset by refranchising.

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

The quarterly and year to date increases in Company sales were driven by company same-store sales growth of 3% and 5% for the quarter and year to date, respectively, and unit growth partially offset by refranchising.

The quarterly decrease in Company restaurant margin percentage was driven by higher labor costs and commodity inflation partially offset by same-store sales growth.

The year to date increase in Company restaurant margin percentage was driven by same-store sales growth partially offset by higher labor costs and commodity inflation.

Franchise and property revenues

The quarterly increases in Franchise and property revenues was driven by franchise same-store sales growth of 9% and unit growth.

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

The quarterly and year to date increases in Franchise and property revenues were driven by franchise same-store sales growth of 4% and 6% for the quarter and year to date, respectively, and unit growth.

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

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.

Pizza Hut Division

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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 March 31, 2023.

Quarter ended

2023 2022 Reported Ex FX

Additionally, over 99% of the Pizza Hut Division units were operated by franchisees as of June 30, 2023.

Quarter ended Year to date

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

2023 2022 Reported Ex FX 2023 2022 Reported Ex FX

System Sales $ 3,201 $ 3,039 5 7 $ 6,537 $ 6,199 5 8

Same-Store Sales Growth (Decline) % 7 Even N/A N/A

Same-Store Sales Growth (Decline) % 4 (3) N/A N/A 5 (1) N/A N/A

Company sales $ 4 $ 5 (9) (9) $ 9 $ 10 (3) (3)

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Total revenues $ 242 $ 235 3 4 $ 496 $ 479 4 6

Company restaurant profit $ — $ — NM NM

Company restaurant profit $ — $ — NM NM $ — $ — NM NM

Company restaurant margin % 3.2 % (8.0) % 11.2 ppts.

3.6 % (4.4) % 8.0 ppts.

G&A expenses $ 53 $ 50 (7) (7) $ 104 $ 100 (5) (6)

1 unchanged sentence

Franchise advertising and other services expense 89 88 (2) (2) 182 175 (4) (5)

Operating Profit $ 104 $ 102 2 7

Operating Profit $ 91 $ 93 (2) 1 $ 195 $ 195 Even 4

% Increase (Decrease)

3 unchanged sentences

Total 19,242 18,591 4

Company sales

The quarterly increase in Company sales, excluding the impacts of foreign currency translation, was driven by company same-store sales growth of 6%.

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 7% and unit growth, partially offset by lapping the prior year recognition of franchise fees related to unexercised development rights arising from a master franchise agreement.

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, partially offset by lower legal fees.

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 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 5% and unit growth, partially offset by lapping the prior year recognition of franchise fees related to unexercised development rights arising from a master franchise agreement.

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

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

Operating Profit

The quarterly increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales growth and unit growth, partially offset by lapping the upfront recognition of franchise fees related to unexercised development rights arising from a master franchise agreement.

The quarterly increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales growth and unit growth, partially offset by higher G&A and current year bad debt expense lapping prior year net bad debt recoveries for past due franchise receivables .

The year to date increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by same-store sales growth and unit growth partially offset by higher G&A, lapping the upfront recognition of franchise fees related to unexercised development rights arising from a master franchise agreement and current year bad debt expense lapping prior year net bad debt recoveries for past due franchise receivables.

Habit Burger Grill Division

1 unchanged sentence

The Company owned 85% of the Habit Burger Grill units in the U.S.

as of March 31, 2023.

Quarter ended

2023 2022 Reported

as of June 30, 2023.

Quarter ended Year to date

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

2023 2022 Reported 2023 2022 Reported

System Sales $ 168 $ 156 9 $ 326 $ 301 8

Same-Store Sales Growth % — 3 N/A

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

Total revenues $ 142 $ 138 4 $ 274 $ 264 4

Operating Profit (Loss) $ (5) $ (8) 35

Operating Profit (Loss) $ 3 $ (2) NM $ (2) $ (10) 81

Unit Count 6/30/2023 6/30/2022 % Increase (Decrease)

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Corporate & Unallocated

Quarter ended

(Expense) / Income 2023 2022 % B/(W)

Quarter ended Year to date

(Expense) / Income 2023 2022 % B/(W) 2023 2022 % B/(W)

Corporate and unallocated G&A $ ( 86 ) $ ( 65 ) (34) $ ( 170 ) $ ( 136 ) (25)

Unallocated Franchise and property expenses (See Note 8)

Unallocated Refranchising gain (loss) 4 4 17

( 1 ) ( 4 ) NM ( 2 ) ( 4 ) NM

Unallocated Refranchising gain (loss) 17 8 NM 21 12 NM

Unallocated Other income (expense) (See Note 8)

Investment income (expense), net (See Note 8) ( 24 ) 7 NM

( 5 ) 16 NM ( 9 ) 22 NM

Investment income (expense), net (See Note 8) 29 ( 15 ) NM 5 ( 8 ) NM

Other pension income (expense) (See Note 9)

1 ( 1 ) NM 3 ( 1 ) NM

Interest expense, net ( 125 ) ( 148 ) 15 ( 255 ) ( 266 ) 4

Income tax benefit (provision) (See Note 6) (71) 1 NM

Income tax benefit (provision) (See Note 6) (60) (166) 64 (131) (165) 21

Effective tax rate (See Note 6) 12.6 % 42.6 % 30.0 ppts.

15.4 % 21.0 % 5.6 ppts.

Corporate and unallocated G&A

The quarterly increase in Corporate and Unallocated G&A expense was driven by costs associated with the previously disclosed ransomware attack.

The quarterly increase in Corporate and Unallocated G&A expense was driven by higher professional fees, higher current year expenses related to our annual incentive compensation programs, higher software costs and amortization and costs associated with the previously disclosed ransomware attack.

The year to date increase in Corporate and Unallocated G&A expense was driven by costs associated with the previously disclosed ransomware attack, higher professional fees, higher current year expenses related to our annual incentive compensation programs and higher software costs and amortization.

Interest expense, net

The quarterly increase in Interest expense, net was primarily driven by a higher weighted average interest rate.

The quarterly and year to date decrease in Interest expense, net was primarily driven by lapping of $28 millon of expense in the prior year relating to the call premium and unamortized debt issuance costs written-off associated with the redemption of the 2025 Notes (as discussed in our 2022 Form 10-K) and higher interest income.

This decrease was partially offset by a higher weighted average interest rate on our outstanding borrowings.

Consolidated Cash Flows

Net cash provided by operating activities was $678 million in 2023 versus $522 million in 2022.

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

Net cash used in investing activities was $56 million in 2023 versus $29 million in 2022.

The change was primarily driven by higher current year capital spending and lower refranchising proceeds.

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

Net cash provided by investing activities was $26 million in 2023 versus net cash used in investing activities of $64 million in 2022.

The change was primarily driven by proceeds from the current year sale of KFC Russia, partially offset by higher current year capital spending.

Net cash used in financing activities was $698 million in 2023 versus $586 million in 2022.

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

The change was primarily driven by lower net borrowings, partially offset by lower current year 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 which had $194 million outstanding as of March 31, 2023.

We believe that our ongoing cash from operations, cash on hand, which was approximately $350 million at March 31, 2023, 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 $440 million at June 30, 2023, 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 2022 Form 10-K regarding our material cash requirements.

1 unchanged sentence

Debt Instruments

As of March 31, 2023, approximately 94%, including the impact of interest rate swaps, of our $11.6 billion of total debt outstanding, excluding the Revolving Facility balances, finance leases and debt issuance costs and discounts, is fixed with an effective overall interest rate of approximately 4.5%.

As of June 30, 2023, approximately 94%, including the impact of interest rate swaps, of our $11.6 billion of total debt outstanding, excluding the Revolving Facility balances, finance leases and debt issuance costs and discounts, is fixed with an effective overall interest rate of approximately 4.5%.

We ended the quarter with a consolidated net leverage ratio of 4.7x EBITDA.

2 unchanged sentences

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, 2023.

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, 2023.

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

5 unchanged sentences

Total $ 352 $ 48 $ 53 $ 1,630 $ 1,649 $ 1,993 $ 589 $ 800 $ 1,787 $ 2,100 $ 325 $ 275 $ 11,601

See Note 10 for details on the Securitization Notes, the Credit Agreement, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes.

See Note 10 for details on the Securitization Notes, the Credit Agreement, Revolving Facility, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes.

Ransomware Attack

4 unchanged sentences

We have incurred, and may continue to incur, certain expenses related to this attack, including expenses to respond to, remediate and investigate this matter.

In addition, in April 2023, several separate putative class actions were filed in U.S.

In addition, several separate putative class actions have been filed in U.S.

federal and state court by current and/or former employees alleging violations of privacy and other rights in connection with the ransomware incident.

1 unchanged sentence

Quantitative and Qualitative Disclosures About Market Risk

There were no material changes during the quarter ended March 31, 2023, to the disclosures made in Item 7A of the Company’s 2022 Form 10-K.

There were no material changes during the quarter ended June 30, 2023, to the disclosures made in Item 7A of the Company’s 2022 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