YUM BRANDS INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction and Overview The following Management's Discussion and Analysis (“MD&A”), should be read in conjunction with the unaudited Condensed Consolidated Financial Statements (“Financial Statements”), the Forward-Looking Statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, (“2022 Form 10-K”). All Note references herein refer to the Notes to the Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding. Yum! Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “YUM,” “we,” “us” or “our”) franchise or operate a system of over 56,000 restaurants in more than 155 countries and territories, primarily under the concepts of KFC, Taco Bell, Pizza Hut and The Habit Burger Grill (collectively, the “Concepts”). The Company’s KFC, Taco Bell and Pizza Hut brands are global leaders of the chicken, Mexican-style and pizza 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 56,000 restaurants, 98% are operated by franchisees. YUM currently consists of four operating segments: • The KFC Division which includes our worldwide operations of the KFC concept • The Taco Bell Division which includes our worldwide operations of the Taco Bell concept • The Pizza Hut Division which includes our worldwide operations of the Pizza Hut concept • The Habit Burger Grill Division which includes our worldwide operations of the Habit Burger Grill concept Through our Recipe for Good Growth we intend to unlock the growth potential of our Concepts and YUM, drive increased collaboration across our Concepts and geographies and consistently deliver better customer experiences, improved unit economics and higher rates of growth. Key enablers include accelerated use of technology and better leverage of our systemwide scale. Our global citizenship and sustainability strategy is reflected in our Good agenda, which includes our priorities for social responsibility, risk management and sustainable stewardship of our people, food and planet. Our Growth agenda is based on four key drivers: • Unrivaled Culture and Talent: Leverage our culture and people capability to fuel brand performance and franchise success • Unmatched Operating Capability: Recruit and equip the best restaurant operators in the world to deliver great customer experiences • Relevant, Easy and Distinctive Brands: Innovate and elevate iconic restaurant brands people trust and champion • Bold Restaurant Development: Drive market and franchise expansion with strong economics and value We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including performance metrics that management uses to assess the Company's performance. Throughout this MD&A, we commonly discuss the following performance metrics: • Same-store sales growth is the estimated percentage change in system sales of all restaurants that have been open and in the YUM system for one year or more, including those temporarily closed. From time-to-time restaurants may be temporarily closed due to remodeling or image enhancement, rebuilding, natural disasters, health epidemic or pandemic, landlord disputes or other issues. The system sales of restaurants we deem temporarily closed remain in our base for purposes of determining same-store sales growth and the restaurants remain in our unit count (see below). We believe same-store sales growth is useful to investors because our results are heavily dependent on the results of our Concepts' existing store base. Additionally, same-store sales growth is reflective of the strength of our Brands, the effectiveness of our operational and advertising initiatives and local economic and consumer trends. • Gross unit openings reflects new openings by us and our franchisees. Net new unit growth reflects gross unit openings offset by permanent store closures, by us and our franchisees. To determine whether a restaurant meets the definition of a unit we consider whether the restaurant has operations that are ongoing and independent from another YUM unit, serves the primary product of one of our Concepts, operates under a separate franchise agreement (if operated by a franchisee) and has substantial and sustainable sales. We believe gross unit openings and net new unit growth are useful to investors because we depend on new units for a significant portion of our growth. Additionally, gross unit openings and net new unit 22 growth are generally reflective of the economic returns to us and our franchisees from opening and operating our Concept restaurants. • System sales and System sales excluding the impacts of foreign currency translation (“FX”) reflect the results of all restaurants regardless of ownership, including Company-owned and franchise restaurants. Sales at franchise restaurants typically generate ongoing franchise and license fees for the Company at a rate of 3% to 6% of sales. Increasingly, customers are paying a fee to a third party to deliver or facilitate the ordering of our Concepts' products. We also include in System sales any portion of the amount customers pay these third parties for which the third party is obligated to pay us a license fee as a percentage of such amount. Franchise restaurant sales and fees paid by customers to third parties to deliver or facilitate the ordering of our Concepts' products are not included in Company sales on the Condensed Consolidated Statements of Income; however, any resulting franchise and license fees we receive are included in the Company's revenues. We believe System sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates our primary revenue drivers, Company and franchise same-store sales as well as net unit growth. As of the beginning of the second quarter of 2022, as a result of our progress towards exiting Russia and our decision to reclass future net profits attributable to Russia subsequent to the date of their invasion of Ukraine from the Division 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 begin excluding those units' associated sales from our system sales totals. We removed 1,112 units and 53 units in Russia from our global KFC and Pizza Hut unit counts, respectively. These units were treated similar to permanent store closures for purposes of our same-store sales calculations and thus they were removed from our same-store sales calculations beginning April 1, 2022. In addition to the results provided in accordance with Generally Accepted Accounting Principles in the United States of America ( “ GAAP ” ), the Company provides the following non-GAAP measurements: • Diluted Earnings Per Share excluding Special Items (as defined below); • Effective Tax Rate excluding Special Items; • Core Operating Profit. Core Operating Profit excludes Special Items and FX and we use Core Operating Profit for the purposes of evaluating performance internally; • Company restaurant profit and Company restaurant margin as a percentage of sales (as defined below). These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these non-GAAP measurements provide additional information to investors to facilitate the comparison of past and present operations. Special Items are not included in any of our Division segment results as the Company does not believe they are indicative of our ongoing operations due to their size and/or nature. Our chief operating decision maker does not consider the impact of Special Items when assessing segment performance. Company restaurant profit is defined as Company sales less Company restaurant expenses, both of which appear on the face of our Condensed Consolidated Statements of Income. Company restaurant expenses include those expenses incurred directly by our Company-owned restaurants in generating Company sales, including cost of food and paper, cost of restaurant-level labor, rent, depreciation and amortization of restaurant-level assets and advertising expenses incurred by and on behalf of that Company restaurant. Company restaurant margin as a percentage of sales (“Company restaurant margin %”) is defined as Company restaurant profit divided by Company sales. We use Company restaurant profit for the purposes of internally evaluating the performance of our Company-owned restaurants and we believe Company restaurant profit provides useful information to investors as to the profitability of our Company-owned restaurants. In calculating Company restaurant profit, the Company excludes revenues and expenses directly associated with our franchise operations as well as non-restaurant-level costs included in General and administrative expenses, some of which may support Company-owned restaurant operations. The Company also excludes restaurant-level asset impairment and closures expenses, which have historically not been significant, from the determination of Company restaurant profit as such expenses are not believed to be indicative of ongoing operations. Company restaurant profit and Company restaurant margin % as presented may not be comparable to other similarly titled measures of other companies in the industry. 23 Certain performance metrics and non-GAAP measurements are presented excluding the impact of FX. These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the FX impact provides better year-to-year comparability without the distortion of foreign currency fluctuations. Results of Operations Summary All comparisons within this summary are versus the same period a year ago. 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: % Change System Sales, ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit KFC Division +19 +13 +7 +11 +16 Taco Bell Division +7 +4 +5 +6 +6 Pizza Hut Division +7 +4 +4 (2) +1 YUM +13 +9 +6 +4 +12 Year to date Financial Highlights: % Change 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: • As of the beginning of the second quarter of 2022, we elected to remove 1,165 Russia units from our unit count and begin excluding 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. As a result: ◦ 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: ◦ 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 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 24 • 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. Gross unit openings for the year to date were 1,771 units resulting in 1,065 net new units. Worldwide GAAP Results Quarter ended Year to date 2023 2022 % B/(W) 2023 2022 % B/(W) Company sales $ 511 $ 499 3 $ 985 $ 969 2 Franchise and property revenues 785 737 6 1,555 1,451 7 Franchise contributions for advertising and other services 391 400 (2) 792 763 4 Total revenues 1,687 1,636 3 3,332 3,183 5 Company restaurant expenses 415 415 — 818 817 — G&A expenses 291 254 (15) 573 507 (13) Franchise and property expenses 32 29 (12) 68 61 (12) Franchise advertising and other services expense 388 396 2 783 757 (3) 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 (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) 60 166 64 131 165 21 Net Income $ 418 $ 224 86 $ 718 $ 623 15 Diluted EPS (a) $ 1.46 $ 0.77 89 $ 2.51 $ 2.13 18 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. Performance Metrics Unit Count 6/30/2023 6/30/2022 % Increase (Decrease) Franchise 55,416 52,363 6 Company-owned 1,009 987 2 Total 56,425 53,350 6 Quarter ended Year to date 2023 2022 2023 2022 Same-store Sales Growth (Decline) % 9 1 8 2 System Sales Growth (Decline) %, reported 11 (1) 8 2 System Sales Growth (Decline) %, excluding FX 13 3 12 5 25 Our system sales breakdown by Company and franchise sales was as follows: Quarter ended Year to date 2023 2022 2023 2022 Consolidated 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 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 KFC Division 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 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 Taco Bell Division 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 Negative Foreign Currency Impact on System sales (b) — N/A 10 N/A System sales, excluding FX $ 3,760 $ 3,509 $ 7,234 $ 6,617 Pizza Hut Division 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 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 Habit Burger Grill Division Company sales (a) $ 139 $ 136 $ 269 $ 261 Franchise sales 29 20 57 40 System sales 168 156 326 301 Foreign Currency Impact on System sales (b) — N/A — N/A System sales, excluding FX $ 168 $ 156 $ 326 $ 301 (a) Company sales represents sales from our Company-operated stores as presented on our Condensed Consolidated Statements of Income. (b) The foreign currency impact on System sales is presented in relation only to the immediately preceding year presented. When determining applicable System sales growth percentages, the System sales excluding FX for the current year should be compared to the prior year System sales. Non-GAAP Items Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, as presented below. Quarter ended Year to date 2023 2022 2023 2022 Core Operating Profit Growth (Decline) % 12 (1) 11 (3) 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 % 26 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 % Reconciliation of GAAP Operating Profit to Core Operating Profit Quarter ended Year to date 2023 2022 2023 2022 Consolidated GAAP Operating Profit $ 573 $ 554 $ 1,096 $ 1,063 Detail of Special Items: (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) 8 — 10 1 Other Special Items Expense — — 1 — Special Items (Income) Expense - Operating Profit 15 (13) 18 (22) 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) KFC Division GAAP Operating Profit $ 326 $ 293 $ 631 $ 584 Negative Foreign Currency Impact on Divisional Operating Profit (d) 15 N/A 36 N/A Core Operating Profit $ 341 $ 293 $ 667 $ 584 Taco Bell Division GAAP Operating Profit $ 228 $ 215 $ 432 $ 400 Negative Foreign Currency Impact on Divisional Operating Profit (d) — N/A 1 N/A Core Operating Profit $ 228 $ 215 $ 433 $ 400 Pizza Hut Division GAAP Operating Profit $ 91 $ 93 $ 195 $ 195 Negative Foreign Currency Impact on Divisional Operating Profit (d) 2 N/A 7 N/A Core Operating Profit $ 93 $ 93 $ 202 $ 195 Habit Burger Grill Division GAAP Operating Loss $ 3 $ (2) $ (2) $ (10) Foreign Currency Impact on Divisional Operating Profit (d) — N/A — N/A 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) — 28 — 28 Special Items Tax (Benefit) Expense (f) (30) 68 (32) (12) Net Income excluding Special Items $ 403 $ 307 $ 704 $ 617 27 Reconciliation of Diluted EPS to Diluted EPS excluding Special Items Diluted EPS $ 1.46 $ 0.77 $ 2.51 $ 2.13 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 Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items GAAP Effective Tax Rate 12.6 % 42.6 % 15.4 % 21.0 % Impact on Tax Rate as a result of Special Items (5.6) % 18.4 % (3.3) % (1.3) % Effective Tax Rate excluding Special Items 18.2 % 24.2 % 18.7 % 22.3 % (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. 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 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. 28 (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. 29 Reconciliation of GAAP Operating Profit to Company Restaurant Profit Quarter ended 6/30/2023 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated GAAP Operating Profit (Loss) $ 326 $ 228 $ 91 $ 3 $ (75) $ 573 Less: Franchise and property revenues 416 218 149 2 — 785 Franchise contributions for advertising and other services 151 150 89 1 — 391 Add: General and administrative expenses 90 49 53 13 86 291 Franchise and property expenses 16 9 6 — 1 32 Franchise advertising and other services expense 150 148 89 1 — 388 Refranchising (gain) loss — — — — (17) (17) Other (income) expense 1 — (1) — 5 5 Company restaurant profit $ 16 $ 66 $ — $ 14 $ — $ 96 Company sales $ 115 $ 253 $ 4 $ 139 $ — $ 511 Company restaurant margin % 14.3 % 25.6 % 3.2 % 11.1 % N/A 18.9 % Quarter ended 6/30/2022 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated GAAP Operating Profit (Loss) $ 293 $ 215 $ 93 $ (2) $ (45) $ 554 Less: Franchise and property revenues 394 199 142 2 — 737 Franchise contributions for advertising and other services 168 144 88 — — 400 Add: General and administrative expenses 89 39 50 11 65 254 Franchise and property expenses 14 8 2 1 4 29 Franchise advertising and other services expense 163 144 88 1 — 396 Refranchising (gain) loss — — — — (8) (8) Other (income) expense 16 (1) (3) — (16) (4) Company restaurant profit $ 13 $ 62 $ — $ 9 $ — $ 84 Company sales $ 115 $ 243 $ 5 $ 136 $ — $ 499 Company restaurant margin % 11.6 % 25.7 % (8.0) % 6.0 % N/A 16.8 % 30 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 Less: Franchise and property revenues 828 419 304 4 — 1,555 Franchise contributions for advertising and other services 316 292 183 1 — 792 Add: 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 Less: Franchise and property revenues 777 378 293 3 — 1,451 Franchise contributions for advertising and other services 319 268 176 — — 763 Add: 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 in this MD&A for other items similarly impacting results. Russia Invasion of Ukraine 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. 31 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. 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 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. 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. 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 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 $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 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. KFC Division 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 June 30, 2023. 32 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) % 13 (1) N/A N/A 11 1 N/A N/A Company sales $ 115 $ 115 1 7 $ 225 $ 241 (7) — Franchise and property revenues 416 394 5 9 828 777 7 11 Franchise contributions for advertising and other services 151 168 (9) (6) 316 319 (1) 3 Total revenues $ 682 $ 677 1 5 $ 1,369 $ 1,337 2 7 Company restaurant profit $ 16 $ 13 24 34 $ 30 $ 31 (5) 3 Company restaurant margin % 14.3 % 11.6 % 2.7 ppts. 2.8 ppts. 13.2 % 12.9 % 0.3 ppts. 0.4 ppts. G&A expenses $ 90 $ 89 (1) (2) $ 179 $ 173 (3) (5) Franchise and property expenses 16 14 (10) (15) 42 38 (11) (17) Franchise advertising and other services expense 150 163 8 4 314 314 — (4) Operating Profit $ 326 $ 293 11 16 $ 631 $ 584 8 14 % Increase (Decrease) Unit Count 6/30/2023 6/30/2022 Franchise 28,282 26,300 8 Company-owned 218 221 (1) Total 28,500 26,521 7 Company sales and Company restaurant margin % 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 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 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. 33 G&A 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 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 The Taco Bell Division has 8,320 units, 87% of which are in the U.S. The Company owned 7% of the Taco Bell units in the U.S. 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 % 4 8 N/A N/A 6 6 N/A N/A Company sales $ 253 $ 243 4 4 $ 482 $ 457 5 5 Franchise and property revenues 218 199 9 9 419 378 11 11 Franchise contributions for advertising and other services 150 144 5 5 292 268 9 9 Total revenues $ 621 $ 586 6 6 $ 1,193 $ 1,103 8 8 Company restaurant profit $ 66 $ 62 4 4 $ 116 $ 109 6 6 Company restaurant margin % 25.6 % 25.7 % (0.1) ppts. (0.1) ppts. 24.0 % 23.9 % 0.1 ppts. 0.1 ppts. G&A expenses $ 49 $ 39 (25) (25) $ 94 $ 75 (25) (25) Franchise and property expenses 9 8 (6) (6) 14 14 3 4 Franchise advertising and other services expense 148 144 (2) (2) 286 267 (7) (7) Operating Profit $ 228 $ 215 6 6 $ 432 $ 400 8 8 34 % Increase (Decrease) Unit Count 6/30/2023 6/30/2022 Franchise 7,847 7,435 6 Company-owned 473 465 2 Total 8,320 7,900 5 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 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 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. G&A 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 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 The Pizza Hut Division has 19,242 units, 66% of which are located outside the U.S. The Pizza Hut Division uses multiple distribution channels including delivery, dine-in and express (e.g. airports) and includes units operating under both the Pizza Hut and Telepizza brands. Additionally, over 99% of the Pizza Hut Division units were operated by franchisees as of June 30, 2023. 35 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) % 4 (3) N/A N/A 5 (1) N/A N/A Company sales $ 4 $ 5 (9) (9) $ 9 $ 10 (3) (3) Franchise and property revenues 149 142 5 7 304 293 4 7 Franchise contributions for advertising and other services 89 88 1 1 183 176 4 4 Total revenues $ 242 $ 235 3 4 $ 496 $ 479 4 6 Company restaurant profit $ — $ — NM NM $ — $ — NM NM Company restaurant margin % 3.2 % (8.0) % 11.2 ppts. 11.2 ppts. 3.6 % (4.4) % 8.0 ppts. 8.0 ppts. G&A expenses $ 53 $ 50 (7) (7) $ 104 $ 100 (5) (6) Franchise and property expenses 6 2 (167) (173) 9 4 (108) (102) Franchise advertising and other services expense 89 88 (2) (2) 182 175 (4) (5) Operating Profit $ 91 $ 93 (2) 1 $ 195 $ 195 Even 4 % Increase (Decrease) Unit Count 6/30/2023 6/30/2022 Franchise 19,221 18,569 4 Company-owned 21 22 (5) Total 19,242 18,591 4 Franchise and property revenues The quarterly increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by franchise same-store sales growth of 4% and unit growth. The 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. G&A 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. 36 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 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 The Habit Burger Grill Division has 363 units, the vast majority of which are in the U.S. The Company owned 85% of the Habit Burger Grill units in the U.S. 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 % Even (4) N/A Even Even N/A Total revenues $ 142 $ 138 4 $ 274 $ 264 4 Operating Profit (Loss) $ 3 $ (2) NM $ (2) $ (10) 81 Unit Count 6/30/2023 6/30/2022 % Increase (Decrease) Franchise 66 59 12 Company-owned 297 279 6 Total 363 338 7 Corporate & Unallocated 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) ( 1 ) ( 4 ) NM ( 2 ) ( 4 ) NM Unallocated Refranchising gain (loss) 17 8 NM 21 12 NM Unallocated Other income (expense) (See Note 8) ( 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) (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 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. 37 Interest expense, net 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 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 net borrowings, partially offset by lower current year share repurchases. Liquidity and Capital Resources We have historically generated substantial cash flows from our extensive franchise operations, which require a limited YUM investment, and from the operations of our Company-owned stores. Our annual operating cash flows have been in excess of $1.3 billion in each of the past four years and we expect that to continue to be the case in 2023. 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 $30 million outstanding as of June 30, 2023. 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. Due to the ongoing significance of our debt obligations, we are providing the update below. Debt Instruments 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. We continually reassess our optimal leverage ratio to maximize shareholder returns. We target a capital structure 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, 2023. 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2037 2043 Total Securitization Notes $ 10 $ 938 $ 884 $ 595 $ 589 $ 737 $ 3,753 Credit Agreement 17 $ 48 $ 53 662 15 1,398 2,193 Revolving Facility 30 30 Subsidiary Senior Unsecured Notes 750 750 YUM Senior Unsecured Notes 325 $ 800 1,050 $ 2,100 $ 325 $ 275 4,875 Total $ 352 $ 48 $ 53 $ 1,630 $ 1,649 $ 1,993 $ 589 $ 800 $ 1,787 $ 2,100 $ 325 $ 275 $ 11,601 38 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 On January 18, 2023, the Company announced a ransomware attack that impacted certain Information Technology (“IT”) systems. Promptly upon the detection of the incident, the Company initiated response protocols and an investigation, engaged the services of industry-leading cybersecurity and forensics professionals and consulted Federal law enforcement. This incident resulted in the closure of fewer than 300 restaurants in one market for one day, and certain of the Company’s IT systems and data were affected. In addition, although data was taken from our network, with our forensic investigation complete we have concluded that the affected data was limited to certain personal information of former and current employees, and there continues to be no evidence that customer databases were accessed. 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, 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. We do not believe the impact of the incident or the aforementioned matters will ultimately have a material adverse effect on our business, results of operations or financial condition. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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.