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, 2023, (“2023 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 60,000 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 60,000 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 Good Growth Strategy 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 unit 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, boycotts, social or civil unrest 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). Same-store sales growth excludes, for subsidiaries operating on a monthly calendar, the extra day resulting from a leap year and excludes, for subsidiaries operating on a weekly periodic calendar, the last week of the year in fiscal years with 53rd weeks. 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 23 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 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 new unit growth. 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. Further, while we generally include depreciation and amortization of restaurant-level assets within Divisional Company restaurant expenses used to derive Divisional Company restaurant profit, we record amortization of reacquired franchise rights arising from acquisition accounting within Corporate and Unallocated Company restaurant expenses as such amortization is not believed to be indicative of ongoing Divisional results as well as to enhance comparability of acquired stores' margins with those of existing restaurants. Company restaurant profit and Company restaurant margin % as presented may not be comparable to other similarly titled measures of other companies in the industry. 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. 24 Results of Operations Summary All comparisons within this summary are versus the same period a year ago. Quarterly Financial Highlights: % Change System Sales, ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit KFC Division +1 (4) +7 (2) (1) Taco Bell Division +5 +4 +2 +11 +11 Pizza Hut Division (1) (4) +2 (6) (5) YUM +1 (2) +5 +1 +3 Year to date Financial Highlights: % Change System Sales, ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit KFC Division +2 (3) +7 +1 +3 Taco Bell Division +5 +3 +2 +8 +8 Pizza Hut Division (2) (5) +2 (5) (3) YUM +2 (2) +5 +2 +6 Additionally: • Foreign currency translation unfavorably impacted Divisional Operating Profit by $3 million and $26 million for the quarter and year to date ended September 30, 2024, respectively. Third Quarter Year to date 2024 2023 % Change 2024 2023 % Change GAAP EPS $1.35 $1.46 (8) $3.73 $3.97 (6) Less Special Items EPS $(0.02) $0.02 NM $(0.14) $0.06 NM EPS Excluding Special Items $1.37 $1.44 (5) $3.87 $3.91 (1) • On a year-over-year basis, our diluted EPS, excluding Special Items, reflects a $0.14 and $0.32 negative impact for the quarter and year to date ended September 30, 2024, respectively, from a higher current year tax rate and unfavorability in after-tax investment gains and losses. Foreign currency translation negatively impacted our diluted EPS, excluding Special Items, by approximately $0.01 and $0.07 for the quarter and year to date ended September 30, 2024, respectively. • Gross unit openings for the quarter were 1,029 units resulting in 547 net new units. Gross unit openings for the year to date were 2,731 units resulting in 1,456 net new units. 25 Worldwide GAAP Results Quarter ended Year to date 2024 2023 % B/(W) 2024 2023 % B/(W) Company sales $ 621 $ 510 22 $ 1,667 $ 1,495 12 Franchise and property revenues 804 796 1 2,350 2,351 Even Franchise contributions for advertising and other services 401 402 Even 1,170 1,194 (2) Total revenues 1,826 1,708 7 5,187 5,040 3 Company restaurant expenses 523 421 (24) 1,393 1,239 (12) G&A expenses 263 267 2 830 840 1 Franchise and property expenses 36 27 (41) 90 95 5 Franchise advertising and other services expense 401 400 Even 1,169 1,183 1 Refranchising (gain) loss (12) (19) NM (31) (40) NM Other (income) expense (4) (1) NM (10) 14 NM Total costs and expenses, net 1,207 1,095 (10) 3,441 3,331 (3) Operating Profit 619 613 1 1,746 1,709 2 Investment (income) expense, net (1) (16) NM 21 (21) NM Other pension (income) expense (2) (2) NM (5) (5) NM Interest expense, net 120 126 5 358 381 6 Income before income taxes 502 505 (1) 1,372 1,354 1 Income tax provision (benefit) 120 89 (34) 309 220 (40) Net Income $ 382 $ 416 (8) $ 1,063 $ 1,134 (6) Diluted EPS (a) $ 1.35 $ 1.46 (8) $ 3.73 $ 3.97 (6) Effective tax rate 23.8 % 17.7 % (6.1) ppts. 22.5 % 16.3 % (6.2) ppts. (a) See Note 3 for the number of shares used in this calculation. Performance Metrics Unit Count 9/30/2024 9/30/2023 % Increase (Decrease) Franchise 58,775 56,269 4 Company-owned 1,270 1,005 26 Total 60,045 57,274 5 Quarter ended Year to date 2024 2023 2024 2023 Same-store Sales Growth (Decline) % (2) 6 (2) 7 System Sales Growth %, reported 1 9 1 9 System Sales Growth %, excluding FX 1 10 2 11 26 Our system sales breakdown by Company and franchise sales was as follows: Quarter ended Year to date 2024 2023 2024 2023 Consolidated Company sales (a) $ 621 $ 510 $ 1,667 $ 1,495 Franchise sales 15,401 15,320 44,952 44,777 System sales 16,022 15,830 46,619 46,272 Negative (Positive) Foreign Currency Impact (b) 32 N/A 588 N/A System sales, excluding FX $ 16,054 $ 15,830 $ 47,207 $ 46,272 KFC Division Company sales (a) $ 220 $ 117 $ 488 $ 342 Franchise sales 8,449 8,503 24,535 24,633 System sales 8,669 8,620 25,023 24,975 Negative (Positive) Foreign Currency Impact (b) 21 N/A 480 N/A System sales, excluding FX $ 8,690 $ 8,620 $ 25,503 $ 24,975 Taco Bell Division Company sales (a) $ 267 $ 256 $ 775 $ 738 Franchise sales 3,741 3,548 10,847 10,290 System sales 4,008 3,804 11,622 11,028 Negative (Positive) Foreign Currency Impact (b) (1) N/A (1) N/A System sales, excluding FX $ 4,007 $ 3,804 $ 11,621 $ 11,028 Pizza Hut Division Company sales (a) $ 1 $ 2 $ 5 $ 11 Franchise sales 3,183 3,241 9,486 9,769 System sales 3,184 3,243 9,491 9,780 Negative (Positive) Foreign Currency Impact (b) 12 N/A 109 N/A System sales, excluding FX $ 3,196 $ 3,243 $ 9,600 $ 9,780 Habit Burger & Grill Division Company sales (a) $ 133 $ 135 $ 399 $ 404 Franchise sales 28 28 84 85 System sales 161 163 483 489 Negative (Positive) Foreign Currency Impact (b) — N/A — N/A System sales, excluding FX $ 161 $ 163 $ 483 $ 489 (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 2024 2023 2024 2023 Core Operating Profit Growth % 3 16 6 13 Diluted EPS Growth (Decline) %, excluding Special Items (5) 32 (1) 22 Effective Tax Rate excluding Special Items 23.9 % 18.6 % 22.9 % 18.7 % 27 Quarter ended Year to date 2024 2023 2024 2023 Company restaurant profit $ 98 $ 89 $ 274 $ 256 Company restaurant margin % 15.8 % 17.3 % 16.4 % 17.1 % Reconciliation of GAAP Operating Profit to Core Operating Profit Quarter ended Year to date 2024 2023 2024 2023 Consolidated GAAP Operating Profit $ 619 $ 613 $ 1,746 $ 1,709 Detail of Special Items: (Gain) loss associated with market-wide refranchisings (a) (1) (2) 3 (7) Operating (profit) loss impact from decision to exit Russia (b) — (2) — 10 Charges associated with Resource Optimization (c) 12 3 58 13 Other Special Items Expense — 2 — 3 Special Items Expense - Operating Profit 11 1 61 19 Negative Foreign Currency Impact on Division Operating Profit 3 N/A 26 N/A Core Operating Profit $ 633 $ 614 $ 1,833 $ 1,728 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 $ 11 $ 4 $ 57 $ 19 Franchise and property expenses — (1) — 1 Refranchising (gain) loss (1) (2) 3 (7) Other (income) expense 1 — 1 6 Special Items Expense - Operating Profit $ 11 $ 1 $ 61 $ 19 KFC Division GAAP Operating Profit $ 339 $ 344 $ 986 $ 975 Negative (Positive) Foreign Currency Impact 1 N/A 21 N/A Core Operating Profit $ 340 $ 344 $ 1,007 $ 975 Taco Bell Division GAAP Operating Profit $ 251 $ 226 $ 709 $ 658 Negative (Positive) Foreign Currency Impact — N/A — N/A Core Operating Profit $ 251 $ 226 $ 709 $ 658 Pizza Hut Division GAAP Operating Profit $ 91 $ 97 $ 278 $ 292 Negative (Positive) Foreign Currency Impact 2 N/A 5 N/A Core Operating Profit $ 93 $ 97 $ 283 $ 292 Habit Burger & Grill Division GAAP Operating Profit (Loss) $ 1 $ (2) $ (2) $ (4) Negative (Positive) Foreign Currency Impact — N/A — N/A Core Operating Profit (Loss) $ 1 $ (2) $ (2) $ (4) Reconciliation of GAAP Net Income to Net Income excluding Special Items GAAP Net Income $ 382 $ 416 $ 1,063 $ 1,134 Special Items Expense - Operating Profit 11 1 61 19 Special Items Tax Benefit (d) (2) (4) (19) (36) Net Income excluding Special Items $ 391 $ 413 $ 1,105 $ 1,117 28 Reconciliation of Diluted EPS to Diluted EPS excluding Special Items Diluted EPS $ 1.35 $ 1.46 $ 3.73 $ 3.97 Less Special Items Diluted EPS (0.02) 0.02 (0.14) 0.06 Diluted EPS excluding Special Items $ 1.37 $ 1.44 $ 3.87 $ 3.91 Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items GAAP Effective Tax Rate 23.8 % 17.7 % 22.5 % 16.3 % Impact on Tax Rate as a result of Special Items (0.1) % (0.9) % (0.4) % (2.4) % Effective Tax Rate excluding Special Items 23.9 % 18.6 % 22.9 % 18.7 % (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 September 30, 2024 and 2023, we recorded net refranchising gains of $1 million and $2 million, respectively, that have been reflected as Special Items. During the years to date ended September 30, 2024 and 2023, we recorded net refranchising losses of $3 million and net refranchising gains of $7 million, respectively, that have been reflected as Special Items. Additionally, we recorded net refranchising gains of $11 million and $17 million during quarters ended September 30, 2024 and 2023, respectively, that have not been reflected as Special Items. During the years to date ended September 30, 2024 and 2023, we recorded net refranchising gains of $34 million and $33 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 April 2023, we completed our exit from the Russia market by selling the KFC business in Russia to Smart Service Ltd. Our GAAP operating results presented herein for the quarter and year to date ended June 30, 2023, reflect revenues from and expenses to support the Russian operations for KFC prior to the date of 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 KFC Division segment results 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. 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, have been reflected as a Special Items. (c) We recorded charges of $11 million and $57 million during the quarter and year to date ended September 30, 2024, respectively, and $3 million and $13 million during the quarter and year to date ended September 30, 2023, respectively, to General and administrative expenses and charges of $1 million during both the quarter and year to date ended September 30, 2024 to Other (income) expense related to a resource optimization program. This program has allowed us to reallocate significant resources to accelerate our digital, technology and innovation capabilities to deliver a modern, world-class team member and customer experience and improve unit economics. We recently expanded the program to identify further opportunities to optimize the Company’s spending and identify additional, critical areas in which to potentially reallocate resources, both with a goal to enable the acceleration of the Company’s growth rate. Costs incurred to date related to the program primarily include severance associated with positions that have been eliminated or relocated and consultant fees. Due to their scope and size, these charges have been reflected as Special Items. (d) The below table includes the detail of Special Items Tax Benefit: Quarter ended Year to date 9/30/2024 9/30/2023 9/30/2024 9/30/2023 Tax Benefit on Special Items Operating Profit $ (2) $ — $ (15) $ (2) Tax Benefit - Income tax impacts from decision to exit Russia — (4) — (12) Tax Benefit - Other Income tax impacts recorded as Special — — (4) (22) Special Items Tax Benefit $ (2) $ (4) $ (19) $ (36) Tax Benefit on Special Items Operating Profit 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. 29 Other Income Tax impacts recorded as Special in the years to date ended September 30, 2024 and 2023 include benefits related to the reversal of reserves due to the favorable resolution of tax audits in foreign jurisdictions. Such reserves were established in prior years related to income tax liabilities and deferred tax assets originally recorded as Special Items as part of intercompany restructurings 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 marketwide refranchising event occurred. Reconciliation of GAAP Operating Profit to Company Restaurant Profit Quarter ended 9/30/2024 KFC Division Taco Bell Division Pizza Hut Division Habit Burger & Grill Division Corporate and Unallocated Consolidated GAAP Operating Profit (Loss) $ 339 $ 251 $ 91 $ 1 $ (63) $ 619 Less: Franchise and property revenues 417 234 150 3 — 804 Franchise contributions for advertising and other services 148 165 87 1 — 401 Add: General and administrative expenses 86 41 51 11 74 263 Franchise and property expenses 20 6 9 1 — 36 Franchise advertising and other services expense 148 163 89 1 — 401 Refranchising (gain) loss — — — — (12) (12) Other (income) expense — — (3) 1 (2) (4) Company restaurant profit (loss) $ 28 $ 62 $ — $ 11 $ (3) $ 98 Company sales $ 220 $ 267 $ 1 $ 133 $ — $ 621 Company restaurant margin % 12.5 % 23.4 % (6.1) % 8.3 % N/A 15.8 % 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 % 30 Year to date 9/30/2024 KFC Division Taco Bell Division Pizza Hut Division Habit Burger & Grill Division Corporate and Unallocated Consolidated GAAP Operating Profit (Loss) $ 986 $ 709 $ 278 $ (2) $ (225) $ 1,746 Less: Franchise and property revenues 1,219 678 446 7 — 2,350 Franchise contributions for advertising and other services 427 477 264 2 — 1,170 Add: General and administrative expenses 253 137 153 38 249 830 Franchise and property expenses 46 22 19 3 — 90 Franchise advertising and other services expense 424 473 270 2 — 1,169 Refranchising (gain) loss — — — — (31) (31) Other (income) expense (3) (1) (10) 1 3 (10) Company restaurant profit (loss) $ 60 $ 185 $ — $ 33 $ (4) $ 274 Company sales $ 488 $ 775 $ 5 $ 399 $ — $ 1,667 Company restaurant margin % 12.2 % 23.9 % (1.9) % 8.2 % N/A 16.4 % 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 % Items Impacting Reported Results and Reasonably Likely to Impact Future Results The following items impacted reported results in 2024 and/or 2023 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. Middle East Conflict During the fourth quarter of 2023, certain of our markets, principally in our KFC and Pizza Hut Divisions, began being impacted by a military conflict in the Middle East region. Our sales continue to be impacted significantly in markets across the Middle East, Malaysia and Indonesia. The impact in these markets represented a low single-digit headwind to YUM's overall same-store sales growth in both the quarter and year to date ended September 30, 2024. Additionally, we believe we have experienced conflict-related impacts in a broader set of markets, though such amounts are difficult to precisely quantify. 31 In a few isolated cases, the scale and duration of these sales’ impacts are affecting the financial health of our less scaled or less well-capitalized franchisees, particularly those whose restaurants have been most heavily impacted. We have experienced an increase in restaurant closures in those markets most heavily impacted by the Middle East conflict during the first three quarters of 2024. We have approximately 275 restaurants in these markets that are currently temporarily closed as of September 30, 2024. Subsequent to the end of the third quarter, we defaulted a franchisee who operates a market in the Middle East under the terms of their franchise agreement. The number of units impacted by this default comprise less than 1% of our global store count. We are working closely with our franchisees in markets who have been most heavily impacted by the Middle East conflict to improve their profitability and position their businesses for healthy growth in the future. Additionally, we are working with the franchisee who we defaulted subsequent to the quarter end in an attempt to help them cure their default and/or transition their franchise agreement to another party. There is risk that we experience further permanent closures in these markets in the fourth quarter of 2024, which would have a negative impact on our unit growth rate and result in the write-off of cash incentives we have previously provided in connection with these units. Given the lower volume nature of the units most at risk for potential closure, we do not currently anticipate that any ongoing financial impact would be material. The Middle East conflict is ongoing, and its dynamic nature makes it difficult to forecast any impacts on the Company’s balance of year 2024 revenues, operating profit, including the impacts of any bad debt expense, and unit count with any certainty. 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 $3 million and $26 million for the quarter and year to date ended September 30, 2024, respectively. This included a negative impact to our KFC Division Operating Profit of $1 million and $21 million for the quarter and year to date ended September 30, 2024, respectively. We currently expect changes in foreign currency to negatively impact Divisional Operating Profit by approximately $20 to $30 million on a full-year basis. Investment in Devyani During the quarter ended March 31, 2024, we sold our approximate 5% minority investment in Devyani International Limited ("Devyani"), a franchise entity that operates KFC and Pizza Hut restaurants in India, for pre-tax proceeds of $104 million. Changes in the fair value of our ownership interest in Devyani prior to the date of sale resulted in pre-tax investment losses of $20 million in the year to date ended September 30, 2024 and pre-tax gains of $16 million and $21 million in the quarter and year to date ended September 30, 2023, respectively. KFC Division The KFC Division has 31,143 units, 88% of which are located outside the U.S. Additionally, 99% of the KFC Division units were operated by franchisees as of September 30, 2024. 32 Quarter ended Year to date % B/(W) % B/(W) 2024 2023 Reported Ex FX 2024 2023 Reported Ex FX System Sales $ 8,669 $ 8,620 1 1 $ 25,023 $ 24,975 Even 2 Same-Store Sales Growth (Decline) % (4) 6 N/A N/A (3) 9 N/A N/A Company sales $ 220 $ 117 88 87 $ 488 $ 342 43 42 Franchise and property revenues 417 426 (2) (2) 1,219 1,254 (3) (1) Franchise contributions for advertising and other services 148 157 (5) (6) 427 473 (10) (9) Total revenues $ 785 $ 700 12 12 $ 2,134 $ 2,069 3 4 Company restaurant profit $ 28 $ 17 65 63 $ 60 $ 47 29 29 Company restaurant margin % 12.5 % 14.3 % (1.8) ppts. (1.8) ppts. 12.2 % 13.6 % (1.4) ppts. (1.3) ppts. G&A expenses $ 86 $ 86 (1) Even $ 253 $ 265 4 5 Franchise and property expenses 20 15 (38) (42) 46 57 19 18 Franchise advertising and other services expense 148 156 5 6 424 470 10 10 Operating Profit $ 339 $ 344 (2) (1) $ 986 $ 975 1 3 % Increase (Decrease) Unit Count 9/30/2024 9/30/2023 Franchise 30,684 28,833 6 Company-owned 459 218 111 Total 31,143 29,051 7 Company sales and Company restaurant margin % The quarterly and year to date increases in Company sales, excluding the impact of foreign currency translation, were driven by the KFC U.K. and Ireland restaurant acquisition (see Note 2) in the second quarter of 2024, partially offset by Company same-store sales declines of 4%. The quarterly and year to date decreases in Company restaurant margin percentage were driven by higher restaurant operating and labor costs and Company same-store sales declines. Franchise and property revenues The quarterly decrease in Franchise and property revenues, excluding the impact of foreign currency translation, was driven by a franchise same-store sales decline of 3% and a 2% negative impact from the KFC U.K. and Ireland restaurant acquisition, partially offset by unit growth. The year to date decrease in Franchise and property revenues, excluding the impact of foreign currency translation, was driven by a franchise same-store sales decline of 3% and a 1% negative impact from the sale of our KFC Russia business, partially offset by unit growth. 33 G&A G&A, excluding the impact of foreign currency translation, was flat during the quarter as higher professional fees and higher salaries and benefits were offset by lower expenses related to our annual incentive compensation programs. The year to date decrease in G&A, excluding the impact of foreign currency translation, was driven by lower expenses related to our annual incentive compensation programs, refranchising, the impact of the sale of our KFC Russia business and lower travel related costs, partially offset by higher professional fees and higher salaries and benefits. Operating Profit The quarterly decrease in Operating Profit, excluding the impact of foreign currency translation, was driven by a same-store sales decline and higher bad debt expense, partially offset by unit growth. The year to date increase in Operating Profit, excluding the impact of foreign currency translation, was driven by unit growth and lower G&A, partially offset by a same-store sales decline. Taco Bell Division The Taco Bell Division has 8,594 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, 2024. Quarter ended Year to date % B/(W) % B/(W) 2024 2023 Reported Ex FX 2024 2023 Reported Ex FX System Sales $ 4,008 $ 3,804 5 5 $ 11,622 $ 11,028 5 5 Same-Store Sales Growth % 4 8 N/A N/A 3 7 N/A N/A Company sales $ 267 $ 256 4 4 $ 775 $ 738 5 5 Franchise and property revenues 234 218 7 7 678 637 6 6 Franchise contributions for advertising and other services 165 155 6 6 477 447 7 7 Total revenues $ 666 $ 629 6 6 $ 1,930 $ 1,822 6 6 Company restaurant profit $ 62 $ 61 3 3 $ 185 $ 177 5 5 Company restaurant margin % 23.4 % 23.8 % (0.4) (0.4) 23.9 % 23.9 % Even Even G&A expenses $ 41 $ 47 11 12 $ 137 $ 141 3 3 Franchise and property expenses 6 7 14 14 22 21 (5) (5) Franchise advertising and other services expense 163 153 (6) (6) 473 439 (8) (8) Operating Profit $ 251 $ 226 11 11 $ 709 $ 658 8 8 34 % Increase (Decrease) Unit Count 9/30/2024 9/30/2023 Franchise 8,103 7,908 2 Company-owned 491 477 3 Total 8,594 8,385 2 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 2% and unit growth. The quarterly decrease in Company restaurant margin percentage was driven by higher labor and other restaurant operating costs partially offset by same-store sales growth. Company restaurant margin percentage was flat for the year to date as Company same-store sales growth was offset by higher labor and 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 4% and 3% for the quarter and year to date, respectively, and unit growth. G&A The quarterly decrease in G&A was driven by lower expenses related to our annual incentive compensation programs and lower share-based compensation, partially offset by higher digital and technology expenses. The year to date decrease in G&A was driven by lower share-based compensation and lower expenses related to our annual incentive compensation programs, partially offset 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, unit growth and lower G&A partially offset by higher restaurant operating costs. Pizza Hut Division The Pizza Hut Division has 19,927 units, 67% 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, 2024. 35 Quarter ended Year to date % B/(W) % B/(W) 2024 2023 Reported Ex FX 2024 2023 Reported Ex FX System Sales $ 3,184 $ 3,243 (2) (1) $ 9,491 $ 9,780 (3) (2) Same-Store Sales Growth (Decline) % (4) 1 N/A N/A (5) 4 N/A N/A Company sales $ 1 $ 2 (31) (31) $ 5 $ 11 (57) (57) Franchise and property revenues 150 150 Even 1 446 454 (2) (1) Franchise contributions for advertising and other services 87 90 (3) (3) 264 273 (3) (3) Total revenues $ 238 $ 242 (1) (1) $ 715 $ 738 (3) (2) Company restaurant profit $ — $ — NM NM $ — $ — NM NM Company restaurant margin % (6.1) % (9.0) % 2.9 ppts. 2.9 ppts. (1.9) % 1.2 % (3.1) ppts. (3.1) ppts. G&A expenses $ 51 $ 51 2 2 $ 153 $ 155 1 2 Franchise and property expenses 9 5 (113) (107) 19 14 (45) (45) Franchise advertising and other services expense 89 91 2 2 270 273 1 1 Operating Profit $ 91 $ 97 (6) (5) $ 278 $ 292 (5) (3) % Increase (Decrease) Unit Count 9/30/2024 9/30/2023 Franchise 19,920 19,461 2 Company-owned 7 8 (13) Total 19,927 19,469 2 Franchise and property revenues The quarterly increase in Franchise and property revenues, excluding the impact of foreign currency translation, was driven by unit growth offset by a franchise same-store sales decline of 4%. The year to date decrease in Franchise and property revenues, excluding the impact of foreign currency translation, was driven by a franchise same-store sales decline of 5% partially offset by unit growth. G&A The quarterly and year to date decreases in G&A, excluding the impact of foreign currency translation, were driven by lower expenses related to our annual incentive compensation programs. Operating Profit The quarterly decrease in Operating Profit, excluding the impact of foreign currency translation, was driven by higher current year bad debt expense and a same-store sales decline, partially offset by unit growth. The year to date decrease in Operating Profit, excluding the impact of foreign currency translation, was driven by a same-store sales decline and higher current year bad debt expense, partially offset by unit growth. 36 Habit Burger & Grill Division The Habit Burger & Grill Division has 381 units, the vast majority of which are in the U.S. The Company owned 84% of the Habit Burger & Grill units in the U.S. as of September 30, 2024. Quarter ended Year to date % B/(W) % B/(W) 2024 2023 Reported Ex FX 2024 2023 Reported Ex FX System Sales $ 161 $ 163 (1) (1) $ 483 $ 489 (1) (1) Same-Store Sales Growth % (5) (5) N/A N/A (6) (2) N/A N/A Total revenues $ 137 $ 137 (1) (1) $ 408 $ 411 (1) (1) Operating Profit (Loss) $ 1 $ (2) 122 $ 122 $ (2) $ (4) 44 44 Unit Count 9/30/2024 9/30/2023 % Increase (Decrease) Franchise 68 67 1 Company-owned 313 302 4 Total 381 369 3 Corporate & Unallocated Quarter ended Year to date (Expense) / Income 2024 2023 % B/(W) 2024 2023 % B/(W) Corporate and unallocated G&A $ ( 74 ) $ ( 68 ) (5) $ ( 249 ) $ ( 238 ) (4) Unallocated Company restaurant expenses (See Note 9) ( 3 ) — NM ( 4 ) — NM Unallocated Franchise and property expenses — 1 NM — ( 1 ) NM Unallocated Refranchising gain (loss) 12 19 NM 31 40 NM Unallocated Other income (expense) 2 ( 4 ) NM ( 3 ) ( 13 ) NM Investment income (expense), net (See Note 9) 1 16 NM ( 21 ) 21 NM Other pension income (expense) (See Note 10) 2 2 NM 5 5 NM Interest expense, net ( 120 ) ( 126 ) 5 ( 358 ) ( 381 ) 6 Income tax benefit (provision) (See Note 7) (120) (89) (34) (309) (220) (40) Effective tax rate (See Note 7) 23.8 % 17.7 % (6.1) ppts. 22.5 % 16.3 % (6.2) ppts. Corporate and unallocated G&A The quarterly increase in Corporate and Unallocated G&A expense was driven by higher costs associated with our resource optimization program, lapping net insurance recoveries associated with the prior year ransomware attack and higher meeting costs, partially offset by lower current year expenses related to our annual incentive compensation programs and lower share based compensation expense. The year to date increase in Corporate and Unallocated G&A expense was driven by higher costs associated with our resource optimization program, partially offset by lower current year expenses related to our annual incentive compensation programs, lower share based compensation expense and lapping net costs associated with the prior year ransomware attack. Interest expense, net The quarterly decrease in Interest expense, net was primarily driven by lower borrowings. The year to date decrease in Interest expense, net was primarily driven by lower borrowings and higher interest income. 37 Consolidated Cash Flows Net cash provided by operating activities was $1,176 million in 2024 versus $1,155 million in 2023. The increase was primarily driven by an increase in Operating Profit before Special Items, a decrease in interest payments and timing of accounts receivable collections, partially offset by higher income tax payments and an increase in payments related to our resource optimization program. Net cash used in investing activities was $292 million in 2024 versus $4 million in 2023. The change was primarily driven by outflows in the current year related to the KFC U.K. and Ireland restaurant acquisition, lapping proceeds from the prior year sale of KFC Russia and higher current year purchases of short-term investments, partially offset by current year proceeds arising from the sale of our approximate 5% minority investment in Devyani. Net cash used in financing activities was $991 million in 2024 versus $921 million in 2023. The change was primarily driven by higher current year share repurchases offset by lower current year net debt repayments. 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 five years and we expect that to continue to be the case in 2024. 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 $1.5 billion Revolving Facility under our Credit Agreement which had $210 million outstanding as of September 30, 2024. We believe that our ongoing cash from operations, cash on hand, which was approximately $460 million at September 30, 2024, 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 2023 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, 2024, approximately 96%, including the impact of interest rate swaps, of our $11 billion of total debt outstanding, excluding the Revolving Facility balance, 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 4.1x 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). 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, 2024. 2024 2025 2026 2027 2028 2029 2030 2031 2032 2037 2043 Total Securitization Notes $ 938 $ 884 $ 595 $ 589 $ 737 $ 3,743 Credit Agreement $ 5 $ 21 27 34 1,424 437 1,948 Revolving Facility 210 210 Subsidiary Senior Unsecured Notes 750 750 YUM Senior Unsecured Notes $ 800 1,050 $ 2,100 $ 325 $ 275 4,550 Total $ 5 $ 21 $ 965 $ 1,668 $ 2,019 $ 1,236 $ 800 $ 1,787 $ 2,100 $ 325 $ 275 $ 11,201 See Note 11 for details on the Securitization Notes, the Credit Agreement, Revolving Facility, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes, including a refinancing of the Credit Agreement that took place in April 2024. 38 New Accounting Pronouncements Not Yet Adopted In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which updates reportable segment disclosure requirements through enhanced disclosures about significant segment expenses. The standard is effective for the Company's Annual Report on Form 10-K for fiscal 2024, and subsequent interim periods, with early adoption permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. We do not anticipate the impact of the standard will result in significant new disclosures for the Company. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which updates income tax disclosure requirements related to the income tax rate reconciliation and requires disclosure of income taxes paid by jurisdiction. The standard is effective for the Company's Annual Report on Form 10-K for fiscal 2025 with early adoption permitted. The amendments should be applied prospectively; however, retrospective application is permitted. We are currently evaluating the impact of the standard on our disclosures. In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses (Subtopic 220-40), which requires new financial statement disclosures disaggregating prescribed expense categories within relevant income statement expense captions. The standard is effective for the Company's Annual Report on Form 10-K for fiscal 2027, and subsequent interim periods, with early adoption permitted. The amendments should be applied prospectively; however, retrospective application is permitted. We are currently evaluating the impact of the standard on our disclosures.