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 57,000 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 57,000 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 23 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. 24 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 year to date Financial Highlights table below reflects 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 +12 +6 +8 +13 +14 Taco Bell Division +11 +8 +5 +11 +11 Pizza Hut Division +4 +1 +4 +5 +7 YUM +10 +6 +6 +12 +16 Year to date Financial Highlights: % Change System Sales, ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit KFC Division +14 +9 +8 +10 +14 Taco Bell Division +10 +7 +5 +9 +9 Pizza Hut Division +7 +4 +4 +2 +5 YUM +11 +7 +6 +6 +13 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 each negatively impacted by 1 percentage point. • 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: ◦ Year to date YUM and KFC Division Core Operating Profit as shown above were each negatively impacted by 1 percentage point. • Foreign currency translation unfavorably impacted Divisional Operating Profit by $5 million and $49 million for the quarter and year to date ended September 30, 2023, respectively. Third Quarter Year to date 2023 2022 % Change 2023 2022 % Change GAAP EPS $1.46 $1.14 +27 $3.97 $3.28 +21 Less Special Items EPS $0.02 $0.05 NM $0.06 $0.07 NM EPS Excluding Special Items $1.44 $1.09 +32 $3.91 $3.21 +22 25 • In addition to the aforementioned factors impacting Operating Profit, our diluted EPS, excluding Special Items, was favorably impacted by $0.05 and $0.07 for the quarter and year to date ended September 30, 2023, respectively, and $0.08 and $0.06 for the quarter and year to date ended September 30, 2022, respectively, from mark to market adjustments from unrealized investment gains. Foreign currency translation negatively impacted our diluted EPS, excluding Special Items, by approximately $0.01 and $0.14 for the quarter and year to date ended September 30, 2023, respectively. • Gross unit openings for the quarter were 1,130 units resulting in 849 net new units. Gross unit openings for the year to date were 2,901 units resulting in 1,914 net new units. Worldwide GAAP Results Quarter ended Year to date 2023 2022 % B/(W) 2023 2022 % B/(W) Company sales $ 510 $ 479 6 $ 1,495 $ 1,448 3 Franchise and property revenues 796 760 5 2,351 2,211 6 Franchise contributions for advertising and other services 402 401 — 1,194 1,164 3 Total revenues 1,708 1,640 4 5,040 4,823 5 Company restaurant expenses 421 402 (5) 1,239 1,219 (2) G&A expenses 267 261 (2) 840 768 (9) Franchise and property expenses 27 28 8 95 89 (5) Franchise advertising and other services expense 400 396 (1) 1,183 1,153 (3) Refranchising (gain) loss (19) (3) NM (40) (15) NM Other (income) expense (1) 10 NM 14 — NM Total costs and expenses, net 1,095 1,094 — 3,331 3,214 (4) Operating Profit 613 546 12 1,709 1,609 6 Investment (income) expense, net (16) (27) NM (21) (19) NM Other pension (income) expense (2) 2 NM (5) 3 NM Interest expense, net 126 124 (1) 381 390 2 Income before income taxes 505 447 13 1,354 1,235 10 Income tax provision (benefit) 89 116 22 220 281 21 Net Income $ 416 $ 331 26 $ 1,134 $ 954 19 Diluted EPS (a) $ 1.46 $ 1.14 27 $ 3.97 $ 3.28 21 Effective tax rate 17.7 % 25.8 % 8.1 ppts. 16.3 % 22.7 % 6.4 ppts. (a) See Note 2 for the number of shares used in this calculation. Performance Metrics Unit Count 9/30/2023 9/30/2022 % Increase (Decrease) Franchise 56,269 53,014 6 Company-owned 1,005 980 3 Total 57,274 53,994 6 Quarter ended Year to date 2023 2022 2023 2022 Same-store Sales Growth (Decline) % 6 5 7 3 System Sales Growth (Decline) %, reported 9 1 9 2 System Sales Growth (Decline) %, excluding FX 10 7 11 6 26 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) $ 510 $ 479 $ 1,495 $ 1,448 Franchise sales 15,320 14,064 44,777 41,197 System sales 15,830 14,543 46,272 42,645 Negative (Positive) Foreign Currency Impact (b) 148 N/A 1,177 N/A System sales, excluding FX $ 15,978 $ 14,543 $ 47,449 $ 42,645 KFC Division Company sales (a) $ 117 $ 112 $ 342 $ 353 Franchise sales 8,503 7,712 24,633 22,456 System sales 8,620 7,824 24,975 22,809 Negative (Positive) Foreign Currency Impact (b) 133 N/A 967 N/A System sales, excluding FX $ 8,753 $ 7,824 $ 25,942 $ 22,809 Taco Bell Division Company sales (a) $ 256 $ 234 $ 738 $ 691 Franchise sales 3,548 3,183 10,290 9,343 System sales 3,804 3,417 11,028 10,034 Negative (Positive) Foreign Currency Impact (b) (7) N/A 3 N/A System sales, excluding FX $ 3,797 $ 3,417 $ 11,031 $ 10,034 Pizza Hut Division Company sales (a) $ 2 $ 4 $ 11 $ 14 Franchise sales 3,241 3,142 9,769 9,331 System sales 3,243 3,146 9,780 9,345 Negative (Positive) Foreign Currency Impact (b) 22 N/A 207 N/A System sales, excluding FX $ 3,265 $ 3,146 $ 9,987 $ 9,345 Habit Burger Grill Division Company sales (a) $ 135 $ 129 $ 404 $ 390 Franchise sales 28 27 85 67 System sales 163 156 489 457 Negative (Positive) Foreign Currency Impact (b) — N/A — N/A System sales, excluding FX $ 163 $ 156 $ 489 $ 457 (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 % 16 8 13 Even Diluted EPS Growth (Decline) %, excluding Special Items 32 (11) 22 (7) Effective Tax Rate excluding Special Items 18.6 % 26.6 % 18.7 % 23.8 % 27 Quarter ended Year to date 2023 2022 2023 2022 Company restaurant profit $ 89 $ 77 $ 256 $ 229 Company restaurant margin % 17.3 % 16.2 % 17.1 % 15.8 % Reconciliation of GAAP Operating Profit to Core Operating Profit Quarter ended Year to date 2023 2022 2023 2022 Consolidated GAAP Operating Profit $ 613 $ 546 $ 1,709 $ 1,609 Detail of Special Items: (Gain) loss associated with market-wide refranchisings (a) (2) — (7) (2) Operating (profit) loss impact from decision to exit Russia (b) (2) (16) 10 (37) Charges associated with Resource Optimization (c) 3 2 13 3 Other Special Items Expense 2 — 3 — Special Items (Income) Expense - Operating Profit 1 (14) 19 (36) Negative (Positive) Foreign Currency Impact on Operating Profit 5 N/A 49 N/A Core Operating Profit $ 619 $ 532 $ 1,777 $ 1,573 Special Items as shown above were recorded to the financial statement line items identified below. Condensed Consolidated Statements of Income Line Item General and administrative expenses $ 4 $ 2 $ 19 $ 5 Franchise and property expenses (1) 1 1 5 Refranchising (gain) loss (2) — (7) (2) Other (income) expense — (17) 6 (44) Special Items (Income) Expense - Operating Profit $ 1 $ (14) $ 19 $ (36) KFC Division GAAP Operating Profit $ 344 $ 304 $ 975 $ 888 Negative (Positive) Foreign Currency Impact 4 N/A 40 N/A Core Operating Profit $ 348 $ 304 $ 1,015 $ 888 Taco Bell Division GAAP Operating Profit $ 226 $ 204 $ 658 $ 604 Negative (Positive) Foreign Currency Impact (1) N/A — N/A Core Operating Profit $ 225 $ 204 $ 658 $ 604 Pizza Hut Division GAAP Operating Profit $ 97 $ 92 $ 292 $ 287 Negative (Positive) Foreign Currency Impact 2 N/A 9 N/A Core Operating Profit $ 99 $ 92 $ 301 $ 287 Habit Burger Grill Division GAAP Operating Loss $ (2) $ (4) $ (4) $ (14) Negative (Positive) Foreign Currency Impact — N/A — N/A Core Operating Profit (Loss) $ (2) $ (4) $ (4) $ (14) Reconciliation of GAAP Net Income to Net Income excluding Special Items GAAP Net Income $ 416 $ 331 $ 1,134 $ 954 Special Items (Income) Expense - Operating Profit 1 (14) 19 (36) Special Items (Income) Expense - Interest Expense, net (d) — — — 28 Special Items Tax (Benefit) (e) (4) — (36) (12) Net Income excluding Special Items $ 413 $ 317 $ 1,117 $ 934 28 Reconciliation of Diluted EPS to Diluted EPS excluding Special Items Diluted EPS $ 1.46 $ 1.14 $ 3.97 $ 3.28 Less Special Items Diluted EPS 0.02 0.05 0.06 0.07 Diluted EPS excluding Special Items $ 1.44 $ 1.09 $ 3.91 $ 3.21 Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items GAAP Effective Tax Rate 17.7 % 25.8 % 16.3 % 22.7 % Impact on Tax Rate as a result of Special Items (0.9) % (0.8) % (2.4) % (1.1) % Effective Tax Rate excluding Special Items 18.6 % 26.6 % 18.7 % 23.8 % (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 quarter ended September 30, 2023, we recorded net refranchising gains of $2 million, that have been reflected as a Special Item. During the years to date ended September 30, 2023 and 2022, we recorded net refranchising gains of $7 million and $2 million, respectively, that have been reflected as Special Items. Additionally, we recorded net refranchising gains of $17 million and $3 million during the quarters ended September 30, 2023 and 2022, respectively, that have not been reflected as Special Items. During the years to date ended September 30, 2023 and 2022, we recorded net refranchising gains of $33 million and $13 million, respectively, that have not been reflected as Special Items. These net refranchising gains relate to refranchising of restaurants unrelated to market-wide refranchisings 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 the second quarter of 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 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 reclassed such net operating profits or losses from the Division segment results in which they were earned to Unallocated Other income (expense). Additionally, we incurred certain expenses related to the dispositions of the businesses and other one-time costs related to our exit from Russia which we 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 income of $1 million and a charge of $3 million recorded during the quarter and year to date ended September 30, 2023, respectively, as a result of the completion of the sale of the KFC Russia business. The resulting net Operating Profit of $2 million and net Operating Loss of $10 million for the quarter and year to date ended September 30, 2023, respectively, and net Operating Profit of $16 million and $37 million for the quarter and year to date ended September 30, 2022, respectively, have been reflected as Special Items. (c) We recorded charges of $3 million and $13 million during the quarter and year to date ended September 30, 2023, respectively, and $2 million and $3 million during the quarter and year to date ended September 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. Due to their scope and size, these charges have been reflected as Special Items. (d) During the year to date ended September 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. 29 (e) The below table includes the detail of Special Items Tax (Benefit) Expense: Quarter ended Year to date 9/30/23 9/30/22 9/30/23 9/30/22 Tax (Benefit) Expense on Special Items Operating Profit and Interest Expense $ — $ 2 $ (2) $ 1 Tax (Benefit) Expense - Income tax impacts from decision to exit Russia (4) (2) (12) 69 Tax (Benefit) - U.S. foreign tax credit regulations issued in January 2022 — — — (82) Tax (Benefit) - Other Income tax impacts recorded as Special — — (22) — Special Items Tax (Benefit) Expense $ (4) $ — $ (36) $ (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 $69 million of net tax expense recorded in the year to date ended September 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 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 would reverse by way of sale. Special Items Tax (Benefit) Expense includes a tax benefit discretely recorded in the year to date ended September 30, 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 year to date ended September 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 year to date ended September 30, 2023 also include the release of valuation allowances associated with a jurisdiction in which a market-wide refranchising event occurred. 30 Reconciliation of GAAP Operating Profit to Company Restaurant Profit Quarter ended 9/30/2023 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated GAAP Operating Profit (Loss) $ 344 $ 226 $ 97 $ (2) $ (52) $ 613 Less: Franchise and property revenues 426 218 150 2 — 796 Franchise contributions for advertising and other services 157 155 90 — — 402 Add: General and administrative expenses 86 47 51 15 68 267 Franchise and property expenses 15 7 5 1 (1) 27 Franchise advertising and other services expense 156 153 91 — — 400 Refranchising (gain) loss — — — — (19) (19) Other (income) expense (1) 1 (4) (1) 4 (1) Company restaurant profit $ 17 $ 61 $ — $ 11 $ — $ 89 Company sales $ 117 $ 256 $ 2 $ 135 $ — $ 510 Company restaurant margin % 14.3 % 23.8 % (9.0) % 7.8 % N/A 17.3 % Quarter ended 9/30/2022 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated GAAP Operating Profit (Loss) $ 304 $ 204 $ 92 $ (4) $ (50) $ 546 Less: Franchise and property revenues 418 196 145 1 — 760 Franchise contributions for advertising and other services 174 138 88 1 — 401 Add: General and administrative expenses 96 41 45 12 67 261 Franchise and property expenses 15 8 5 — — 28 Franchise advertising and other services expense 166 139 91 — — 396 Refranchising (gain) loss — — — — (3) (3) Other (income) expense 26 (1) (1) — (14) 10 Company restaurant profit $ 15 $ 57 $ (1) $ 6 $ — $ 77 Company sales $ 112 $ 234 $ 4 $ 129 $ — $ 479 Company restaurant margin % 13.6 % 23.9 % (5.4) % 5.2 % N/A 16.2 % 31 Year to date 9/30/2023 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated GAAP Operating Profit (Loss) $ 975 $ 658 $ 292 $ (4) $ (212) $ 1,709 Less: Franchise and property revenues 1,254 637 454 6 — 2,351 Franchise contributions for advertising and other services 473 447 273 1 — 1,194 Add: General and administrative expenses 265 141 155 41 238 840 Franchise and property expenses 57 21 14 2 1 95 Franchise advertising and other services expense 470 439 273 1 — 1,183 Refranchising (gain) loss — — — — (40) (40) Other (income) expense 7 2 (7) (1) 13 14 Company restaurant profit $ 47 $ 177 $ — $ 32 $ — $ 256 Company sales $ 342 $ 738 $ 11 $ 404 $ — $ 1,495 Company restaurant margin % 13.6 % 23.9 % 1.2 % 8.0 % N/A 17.1 % Year to date 9/30/2022 KFC Division Taco Bell Division Pizza Hut Division Habit Burger Grill Division Corporate and Unallocated Consolidated GAAP Operating Profit (Loss) $ 888 $ 604 $ 287 $ (14) $ (156) $ 1,609 Less: Franchise and property revenues 1,195 574 438 4 — 2,211 Franchise contributions for advertising and other services 493 406 264 1 — 1,164 Add: General and administrative expenses 269 116 145 35 203 768 Franchise and property expenses 53 22 9 1 4 89 Franchise advertising and other services expense 480 406 266 1 — 1,153 Refranchising (gain) loss — — — — (15) (15) Other (income) expense 44 (2) (6) — (36) — Company restaurant profit $ 46 $ 166 $ (1) $ 18 $ — $ 229 Company sales $ 353 $ 691 $ 14 $ 390 $ — $ 1,448 Company restaurant margin % 13.1 % 23.9 % (4.7) % 4.8 % N/A 15.8 % 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. 32 During the second quarter of 2022, we completed the transfer of ownership of the Pizza Hut Russia business to a local operator. During the second quarter of 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 percentage point for the year to date ended September 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 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 incurred certain expenses related to the dispositions of the businesses and other one-time costs related to our exit from Russia which we 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 income of $1 million and a charge of $3 million recorded during the quarter and year to date ended September 30, 2023, respectively, as a result of the sale of the KFC Russia business. The resulting net Operating Profit of $2 million and net Operating Loss of $10 million for the quarter and year to date ended September 30, 2023, respectively, and net Operating Profit of $16 million and $37 million for the quarter and year to date ended September 30, 2022, respectively, have been reflected as a Special Items. Prior to the invasion, our Russian business constituted approximately 3% of our total operating profit and 2% of our total system sales. During the year to date ended September 30, 2023, our Core Operating Profits in Russia declined versus the prior year, negatively impacting both YUM and KFC Division Core Operating Profit growth by 1 percentage point. 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 $5 million and $49 million for the quarter and year to date ended September 30, 2023, respectively. This included a negative impact to our KFC Division Operating Profit of $4 million and $40 million for the quarter and year to date ended September 30, 2023, respectively. We currently expect changes in foreign currency to negatively impact Divisional Operating Profit by approximately $45 to $55 million on a full-year basis. 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 $16 million and $21 million in the quarter and year to date ended September 30, 2023, respectively, and pre-tax investment income of $27 million and $20 million in the quarter and year to date ended September 30, 2022, respectively. KFC Division The KFC Division has 29,051 units, 87% of which are located outside the U.S. Additionally, 99% of the KFC Division units were operated by franchisees as of September 30, 2023. 33 Quarter ended Year to date % B/(W) % B/(W) 2023 2022 Reported Ex FX 2023 2022 Reported Ex FX System Sales $ 8,620 $ 7,824 10 12 $ 24,975 $ 22,809 9 14 Same-Store Sales Growth (Decline) % 6 7 N/A N/A 9 3 N/A N/A Company sales $ 117 $ 112 4 6 $ 342 $ 353 (3) 2 Franchise and property revenues 426 418 2 3 1,254 1,195 5 8 Franchise contributions for advertising and other services 157 174 (10) (11) 473 493 (4) (2) Total revenues $ 700 $ 704 (1) — $ 2,069 $ 2,041 1 5 Company restaurant profit $ 17 $ 15 10 13 $ 47 $ 46 — 6 Company restaurant margin % 14.3 % 13.6 % 0.7 ppts. 1.0 ppts. 13.6 % 13.1 % 0.5 ppts. 0.6 ppts. G&A expenses $ 86 $ 96 10 10 $ 265 $ 269 1 — Franchise and property expenses 15 15 3 7 57 53 (7) (10) Franchise advertising and other services expense 156 166 6 7 470 480 2 — Operating Profit $ 344 $ 304 13 14 $ 975 $ 888 10 14 % Increase (Decrease) Unit Count 9/30/2023 9/30/2022 Franchise 28,833 26,652 8 Company-owned 218 220 (1) Total 29,051 26,872 8 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 5%. The year to date increase in Company sales, excluding the impact of foreign currency translation, was driven by Company same-store sales growth of 6%, partially offset by the suspension of operations of our 70 company owned KFC restaurants in Russia. 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 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 6% and 10%, 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. 34 G&A The quarterly decrease in G&A, excluding the impact of foreign currency translation, was driven by the impact of the sale of our Russia business during the quarter ended June 30, 2023 and lower professional fees, partially offset by higher expenses related to our annual incentive compensation programs and higher headcount and salaries. G&A was flat year to date, excluding the impact of foreign currency translation, as the impact of the sale of our Russia business during the quarter ended June 30, 2023 and lower professional fees were offset by higher expenses related to our annual incentive compensation programs, higher headcount and salaries, and higher travel related costs. 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. The year to date increase in Operating Profit, excluding the impact of foreign currency translation, was driven by same-store sales growth and unit growth, partially offset by higher restaurant operating costs and the negative impact of 1 percentage point on operating profit growth as a result of lower profits in Russia. Taco Bell Division The Taco Bell Division has 8,385 units, 87% of which are in the U.S. The Company owned 7% of the Taco Bell units in the U.S. as of September 30, 2023. Quarter ended Year to date % B/(W) % B/(W) 2023 2022 Reported Ex FX 2023 2022 Reported Ex FX System Sales $ 3,804 $ 3,417 11 11 $ 11,028 $ 10,034 10 10 Same-Store Sales Growth % 8 6 N/A N/A 7 6 N/A N/A Company sales $ 256 $ 234 10 10 $ 738 $ 691 7 7 Franchise and property revenues 218 196 12 12 637 574 11 11 Franchise contributions for advertising and other services 155 138 12 12 447 406 10 10 Total revenues $ 629 $ 568 11 11 $ 1,822 $ 1,671 9 9 Company restaurant profit $ 61 $ 57 9 9 $ 177 $ 166 7 7 Company restaurant margin % 23.8 % 23.9 % (0.1) ppts. (0.1) ppts. 23.9 % 23.9 % Even Even G&A expenses $ 47 $ 41 (14) (14) $ 141 $ 116 (21) (21) Franchise and property expenses 7 8 1 1 21 22 2 3 Franchise advertising and other services expense 153 139 (11) (11) 439 406 (8) (8) Operating Profit $ 226 $ 204 11 11 $ 658 $ 604 9 9 35 % Increase (Decrease) Unit Count 9/30/2023 9/30/2022 Franchise 7,908 7,510 5 Company-owned 477 464 3 Total 8,385 7,974 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 8% and 6% 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, commodity inflation and an increase in other restaurant operating costs partially offset by same-store sales growth. Company restaurant margin percentage for the year to date was flat with prior year, as same-store sales growth was offset by higher labor costs, commodity inflation and an increase in other restaurant operating costs. Franchise and property revenues The quarterly and year to date increases in Franchise and property revenues were driven by franchise same-store sales growth of 8% and 7% for the quarter and year to date, respectively, and unit growth. G&A The quarterly and year to date increase in G&A, excluding the impacts of foreign currency translation, were driven by higher digital and technology expenses, higher headcount and salaries and higher share-based compensation offset partially by lower expenses related to our annual incentive compensation programs. 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 19,469 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 September 30, 2023. 36 Quarter ended Year to date % B/(W) % B/(W) 2023 2022 Reported Ex FX 2023 2022 Reported Ex FX System Sales $ 3,243 $ 3,146 3 4 $ 9,780 $ 9,345 5 7 Same-Store Sales Growth (Decline) % 1 1 N/A N/A 4 Even N/A N/A Company sales $ 2 $ 4 (55) (55) $ 11 $ 14 (20) (20) Franchise and property revenues 150 145 3 4 454 438 4 6 Franchise contributions for advertising and other services 90 88 2 2 273 264 3 4 Total revenues $ 242 $ 237 2 2 $ 738 $ 716 3 4 Company restaurant profit $ — $ (1) 24 24 $ — $ (1) NM NM Company restaurant margin % (9.0) % (5.4) % (3.6) ppts. (3.6) ppts. 1.2 % (4.7) % 5.9 ppts. 5.9 ppts. G&A expenses $ 51 $ 45 (11) (10) $ 155 $ 145 (7) (7) Franchise and property expenses 5 5 (4) (4) 14 9 (56) (53) Franchise advertising and other services expense 91 91 — 1 273 266 (3) (3) Operating Profit $ 97 $ 92 5 7 $ 292 $ 287 2 5 % Increase (Decrease) Unit Count 9/30/2023 9/30/2022 Franchise 19,461 18,786 4 Company-owned 8 21 (62) Total 19,469 18,807 4 Franchise and property revenues The quarterly increase in Franchise and property revenues, excluding the impacts of foreign currency translation, was driven by unit growth and franchise same-store sales growth of 2%. 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 4% 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 and higher headcount and salaries. The year to date increase in G&A, excluding the impacts of foreign currency translation, was driven by higher headcount and salaries, higher professional fees and higher travel related expenses. 37 Operating Profit The quarterly increase in Operating Profit, excluding the impacts of foreign currency translation, was driven by unit growth and same-store sales growth, partially offset by higher G&A. 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 and lapping the prior year recognition of franchise fees related to unexercised development rights arising from a master franchise agreement. Habit Burger Grill Division The Habit Burger Grill Division has 369 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 September 30, 2023. Quarter ended Year to date % B/(W) % B/(W) 2023 2022 Reported 2023 2022 Reported System Sales $ 163 $ 156 4 $ 489 $ 457 7 Same-Store Sales Growth % (5) (1) N/A (2) (1) N/A Total revenues $ 137 $ 131 4 $ 411 $ 395 4 Operating Profit (Loss) $ (2) $ (4) 43 $ (4) $ (14) 70 Unit Count 9/30/2023 9/30/2022 % Increase (Decrease) Franchise 67 66 2 Company-owned 302 275 10 Total 369 341 8 Corporate & Unallocated Quarter ended Year to date (Expense) / Income 2023 2022 % B/(W) 2023 2022 % B/(W) Corporate and unallocated G&A $ ( 68 ) $ ( 67 ) (1) $ ( 238 ) $ ( 203 ) (17) Unallocated Franchise and property income (expenses) (See Note 8) 1 — NM ( 1 ) ( 4 ) NM Unallocated Refranchising gain (loss) 19 3 NM 40 15 NM Unallocated Other income (expense) (See Note 8) ( 4 ) 14 NM ( 13 ) 36 NM Investment income (expense), net (See Note 8) 16 27 NM 21 19 NM Other pension income (expense) (See Note 9) 2 ( 2 ) NM 5 ( 3 ) NM Interest expense, net ( 126 ) ( 124 ) (1) ( 381 ) ( 390 ) 2 Income tax benefit (provision) (See Note 6) (89) (116) 22 (220) (281) 21 Effective tax rate (See Note 6) 17.7 % 25.8 % 8.1 ppts. 16.3 % 22.7 % 6.4 ppts. Corporate and unallocated G&A The quarterly increase in Corporate and Unallocated G&A expense was driven by higher current year expenses related to our annual incentive compensation programs, partially offset by actions taken to mitigate the negative G&A impacts of the previously disclosed January 2023 ransomware attack. The year to date increase in Corporate and Unallocated G&A expense was driven by higher current year expenses related to our annual incentive compensation programs and costs associated with the previously disclosed January 2023 ransomware attack. Interest expense, net The quarterly increase in Interest expense, net was primarily driven by a higher weighted average interest rate, partially offset by higher interest income. 38 The year to date decrease in Interest expense, net was primarily driven by lapping of $28 million 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 was partially offset by a higher weighted average interest rate. Consolidated Cash Flows Net cash provided by operating activities was $1,155 million in 2023 versus $975 million in 2022. The increase was primarily driven by an increase in Operating profit and a decrease in incentive compensation payments, partially offset by higher interest payments. Net cash used in investing activities was $4 million in 2023 versus $112 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 $921 million in 2023 versus $928 million in 2022. The change was primarily driven by lower current year share repurchases, partially offset by lower net borrowings. 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 that was undrawn as of September 30, 2023. We believe that our ongoing cash from operations, cash on hand, which was approximately $650 million at September 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 September 30, 2023, approximately 94%, including the impact of interest rate swaps, of our $11.6 billion of total debt outstanding, excluding finance leases and debt issuance costs and discounts, is fixed with an effective overall interest rate of approximately 4.6%. We ended the quarter with a consolidated net leverage ratio of 4.4x 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 September 30, 2023. 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2037 2043 Total Securitization Notes $ 938 $ 884 $ 595 $ 589 $ 737 $ 3,743 Credit Agreement $ 8 $ 48 $ 53 662 15 1,399 2,185 Subsidiary Senior Unsecured Notes 750 750 YUM Senior Unsecured Notes 325 $ 800 1,050 $ 2,100 $ 325 $ 275 4,875 Total $ 333 $ 48 $ 53 $ 1,600 $ 1,649 $ 1,994 $ 589 $ 800 $ 1,787 $ 2,100 $ 325 $ 275 $ 11,553 See Note 10 for details on the Securitization Notes, the Credit Agreement, Revolving Facility, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes. 39 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 September 30, 2023, to the disclosures made in Item 7A of the Company’s 2022 Form 10-K.