Item 7. Management’s Discussion and Analysis
Item 7. 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 Consolidated Financial Statements (“Financial Statements”) in Item 8 and the Forward-Looking Statements and the Risk Factors set forth in Item 1A. 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 61,000 restaurants in more than 155 countries and territories, primarily under the concepts of KFC, Taco Bell, Pizza Hut and Habit Burger & Grill (collectively, the “Concepts”). The Company’s KFC, Taco Bell and Pizza Hut brands are global leaders of the chicken, Mexican-style food 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 61,000 restaurants, 98% are operated by franchisees.
As of December 31, 2024, YUM 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 deliver iconic restaurant brands and consistently drive better customer experiences, improved unit economics and higher rates of growth. Key enablers include accelerated use of digital and technology, increased collaboration and better leverage of our systemwide scale. This is done through a framework of three pillars: being Loved, Trusted and Connected.
Loved: We grow by delighting customers with craveable food and a distinctive experience. We innovate and elevate our iconic restaurant brands that people trust and champion, resulting in relevant, easy and distinctive brands.
Trusted: We operate responsibly with consistency and efficiency in our restaurants, across our system and in our communities. This includes a commitment to our priorities for social responsibility, risk management and sustainable stewardship of our people, food and planet.
Connected: We use our teamwork, technology and global scale to serve every customer, everywhere, anytime. Our unmatched operating capability allows us to recruit and equip the best restaurant operators in the world to deliver great customer experiences. And our commitment to bold restaurant development drives market and franchise unit expansion with strong economics.
Our unrivaled culture and talent and leading with smart, heart and courage are key to our success, fueling brand performance and franchise success.
We intend to drive long-term growth and shareholder returns primarily through consistent same-store sales growth and new unit development across all of our Concepts. We intend to support this growth and development through a capital and operating structure that:
• Invests capital in a manner consistent with an asset light, franchisor model;
• Allocates G&A in an efficient manner that provides leverage to operating profit growth while at the same time opportunistically investing in strategic growth initiatives;
• Targets a consolidated net leverage ratio that balances shareholder returns, cost of capital and flexibility against various risk factors; and
• Maximizes shareholder return through a combination of paying a competitive dividend and returning excess free cash flow through share repurchases.
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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 53 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 factors such as 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 growth are generally reflective of the economic returns to us and our franchisees from opening and operating our Concept restaurants.
• System sales, System sales excluding the impacts of foreign currency translation (“FX”) and, in 2024, System sales excluding FX and the 53rd week for our U.S. subsidiaries and certain international subsidiaries that operate on a weekly periodic calendar, 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 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.
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 invasion of Ukraine from the Division segments in which those profits were earned to Unallocated Other income (see Notes 3 and 19), 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 ("EPS") excluding Special Items (as defined below) and, in 2024, Diluted EPS excluding Special Items and the 53rd week;
• Effective Tax Rate excluding Special Items and, in 2024, Effective Tax Rate excluding Special Items and the 53rd week;
• Core Operating Profit and, in 2024, Core Operating Profit excluding the 53rd week. Core Operating Profit excludes Special Items and FX and we use Core Operating Profit for the purposes of evaluating performance internally;
• Net Income excluding Special Items and, in 2024, Net Income excluding Special Items and the 53rd week;
• Company restaurant profit and Company restaurant margin as a percentage of sales (as defined below).
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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 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 within Divisional results. 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.
For 2024 we provided System sales excluding FX and the 53rd week, Core Operating Profit excluding the 53rd week, Net Income excluding Special Items and the 53rd week, Diluted EPS excluding Special Items and the 53rd week and Effective Tax Rate excluding Special Items and the 53rd week to further enhance the comparability given the 53rd week that was part of our fiscal calendar in 2024.
Results of Operations
Summary
All comparisons within this summary are versus the same period a year ago. For discussion of our results of operations for 2023 compared to 2022, refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 20, 2024.
2024 financial highlights:
% Change
System Sales,
ex FX Same-Store Sales Units GAAP Operating Profit Core Operating Profit
KFC Division +3 (2) +7 +4 +6
Taco Bell Division +8 +4 +2 +11 +11
Pizza Hut Division (1) (4) +2 (5) (3)
Worldwide +4 (1) +4 +4 +9
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Results Excluding 53rd Week in 2024
(% Change)
System Sales, ex FX Core Operating Profit
KFC Division +3 +5
Taco Bell Division
+6 +9
Pizza Hut Division
(1) (4)
Worldwide +3 +8
Additionally:
• Foreign currency translation negatively impacted Divisional Operating Profit by $28 million for the year ended December 31, 2024. This included a negative impact to our KFC Division Operating Profit of $22 million for the year ended December 31, 2024.
2024 2023 % Change
GAAP EPS $5.22 $5.59 (7)
Special Items EPS
$(0.26) $0.42 NM
EPS Excluding Special Items $5.48 $5.17 +6
• Gross unit openings for the year were 4,535 units resulting in 2,757 net new units.
• Full-year EPS excluding Special Items and 53rd Week was $5.39.
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Worldwide
GAAP Results
Amount % B/(W)
2024 2023 2022 2024 2023
Company sales $ 2,552 $ 2,142 $ 2,072 19 3
Franchise and property revenues 3,295 3,247 3,096 1 5
Franchise contributions for advertising and other services 1,702 1,687 1,674 1 1
Total revenues 7,549 7,076 6,842 7 3
Company restaurant expenses $ 2,120 $ 1,774 $ 1,745 (20) (2)
G&A expenses 1,181 1,193 1,140 1 (5)
Franchise and property expenses 134 123 123 (8) (1)
Franchise advertising and other services expense 1,711 1,683 1,667 (2) (1)
Refranchising (gain) loss (34) (29) (27) NM NM
Other (income) expense 34 14 7 NM NM
Total costs and expenses, net 5,146 4,758 4,655 (8) (2)
Operating Profit 2,403 2,318 2,187 4 6
Investment (income) expense, net 21 (7) (11) NM NM
Other pension (income) expense (7) (6) 9 NM NM
Interest expense, net 489 513 527 5 3
Income before income taxes 1,900 1,818 1,662 5 9
Income tax provision 414 221 337 (88) 35
Net Income $ 1,486 $ 1,597 $ 1,325 (7) 21
Diluted EPS (a)
$ 5.22 $ 5.59 $ 4.57 (7) 23
Effective tax rate 21.8 % 12.1 % 20.3 % (9.7) ppts. 8.2 ppts.
(a) See Note 4 for the number of shares used in this calculation.
Performance Metrics
% Increase (Decrease)
Unit Count 2024 2023 2022 2024 2023
Franchise 60,035 57,691 54,371 4 6
Company-owned 1,311 1,017 990 29 3
Total 61,346 58,708 55,361 4 6
2024 2023 2022
Same-Store Sales Growth (Decline) % (1) 6 4
System Sales Growth %, reported
3 8 2
System Sales Growth %, excluding FX
4 10 6
System Sales Growth %, excluding FX and 53rd week
3 N/A N/A
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Our system sales breakdown by Company and franchise sales was as follows:
Year
2024 2023 2022
Consolidated
Company sales (a)
$ 2,552 $ 2,142 $ 2,072
Franchise sales 62,914 61,647 57,211
System sales 65,466 63,789 59,283
Negative (Positive) Foreign Currency Impact (b)
638 1,169 N/A
System sales, excluding FX 66,104 64,958 59,283
Impact of 53rd week (568) N/A
N/A
System sales, excluding FX and the 53rd Week
$ 65,536 $ 64,958 $ 59,283
KFC Division
Company sales (a)
$ 801 $ 484 $ 491
Franchise sales 33,651 33,379 30,625
System sales 34,452 33,863 31,116
Negative (Positive) Foreign Currency Impact (b)
515 965 N/A
System sales, excluding FX 34,967 34,828 31,116
Impact of 53rd week (171) N/A N/A
System sales, excluding FX and the 53rd Week
$ 34,796 $ 34,828 $ 31,116
Taco Bell Division
Company sales (a)
$ 1,155 $ 1,069 $ 1,002
Franchise sales 16,038 14,846 13,651
System sales 17,193 15,915 14,653
Negative (Positive) Foreign Currency Impact (b)
(1) (3) N/A
System sales, excluding FX 17,192 15,912 14,653
Impact of 53rd week (279) N/A N/A
System sales, excluding FX and the 53rd Week
$ 16,913 $ 15,912 $ 14,653
Pizza Hut Division
Company sales (a)
$ 8 $ 14 $ 21
Franchise sales 13,100 13,301 12,832
System sales 13,108 13,315 12,853
Negative (Positive) Foreign Currency Impact (b)
124 207 N/A
System sales, excluding FX 13,232 13,522 12,853
Impact of 53rd week (107) N/A N/A
System sales, excluding FX and the 53rd Week
$ 13,125 $ 13,522 $ 12,853
Habit Burger & Grill Division
Company sales (a)
$ 588 $ 575 $ 558
Franchise sales 125 121 103
System sales 713 696 661
Negative (Positive) Foreign Currency Impact (b)
— — N/A
System sales, excluding FX 713 696 661
Impact of 53rd Week
(11) N/A
N/A
System sales, excluding FX and the 53rd Week
$ 702 $ 696 $ 661
(a) Company sales represents sales from our Company-operated stores as presented on our Consolidated Statements of Income.
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(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 prior to adjustment for the prior year FX impact.
Non-GAAP Items
Non-GAAP Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below.
2024 2023 2022
Core Operating Profit Growth % 9 12 5
Core Operating Profit Growth %, excluding the 53rd week 8 N/A N/A
Diluted EPS Growth %, excluding Special Items 6 14 1
Diluted EPS Growth %, excluding Special Items and the 53rd week 4 N/A N/A
Effective Tax Rate excluding Special Items 23.6 % 20.6 % 20.9 %
Effective Tax Rate excluding Special Items and the 53rd week 23.5 % N/A N/A
2024 2023 2022
Company restaurant profit $ 432 $ 368 $ 327
Company restaurant margin % 16.9 % 17.2 % 15.8 %
Year
2024 2023 2022
Reconciliation of GAAP Operating Profit to Core Operating Profit and Core Operating Profit, excluding the 53rd Week
Consolidated
GAAP Operating Profit $ 2,403 $ 2,318 $ 2,187
Detail of Special Items:
(Gain) loss associated with market-wide refranchisings (a)
1 5 —
Operating (profit) loss impact from decision to exit Russia (b)
— 11 (44)
Charges associated with resource optimization (c)
79 21 11
German acquisition and Turkey termination-related costs (d)
61 — —
Other Special Items (Income) Expense
— 2 —
Special Items (Income) Expense - Operating Profit
141 39 (33)
Negative (Positive) Foreign Currency Impact on Operating Profit
28 49 N/A
Core Operating Profit 2,572 2,406 2,154
Impact of 53rd Week Operating Profit
(36) N/A
N/A
Core Operating Profit, excluding the 53rd Week
$ 2,536 $ 2,406 $ 2,154
Special Items as shown above were recorded to the financial statement line items identified below:
Year
2024 2023 2022
Consolidated Statement of Income Line Item
Franchise and property revenues
$ 18 $ — $ —
General and administrative expenses
84 28 19
Franchise and property expenses
— 1 6
Refranchising (gain) loss
1 5 —
Other (income) expense
38 5 (58)
Special Items (Income) Expense - Operating Profit
$ 141 $ 39 $ (33)
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KFC Division
GAAP Operating Profit $ 1,363 $ 1,304 $ 1,198
Negative (Positive) Foreign Currency Impact 22 41 N/A
Core Operating Profit 1,385 1,345 1,198
Impact of 53rd Week (9) N/A N/A
Core Operating Profit, excluding the 53rd Week $ 1,376 $ 1,345 $ 1,198
Taco Bell Division
GAAP Operating Profit $ 1,049 $ 944 $ 850
Negative (Positive) Foreign Currency Impact — — N/A
Core Operating Profit 1,049 944 850
Impact of 53rd Week (21) N/A N/A
Core Operating Profit, excluding the 53rd Week $ 1,028 $ 944 $ 850
Pizza Hut Division
GAAP Operating Profit $ 373 $ 391 $ 387
Negative (Positive) Foreign Currency Impact 6 8 N/A
Core Operating Profit 379 399 387
Impact of 53rd Week (5) N/A N/A
Core Operating Profit, excluding the 53rd Week $ 374 $ 399 $ 387
Habit Burger & Grill Division
GAAP Operating Profit (Loss) $ — $ (14) $ (24)
Negative (Positive) Foreign Currency Impact — — N/A
Core Operating Profit (Loss) — (14) (24)
Impact of 53rd Week (1) N/A N/A
Core Operating Profit (Loss), excluding the 53rd Week $ (1) $ (14) $ (24)
Reconciliation of GAAP Net Income to Net Income excluding Special Items and Net Income excluding Special Items and the 53rd week
GAAP Net Income $ 1,486 $ 1,597 $ 1,325
Special Items (Income) Expense - Operating Profit 141 39 (33)
Special Items (Income) Expense - Interest Expense, net (e)
— — 28
Special Items Tax (Benefit) Expense (f)
(66) (161) (8)
Net Income excluding Special Items 1,561 1,475 1,312
Impact of 53rd Week
(25) — —
Net Income excluding Special Items and the 53rd Week $ 1,536 $ 1,475 $ 1,312
Reconciliation of Diluted EPS to Diluted EPS excluding Special Items and Diluted EPS excluding Special Items and the 53rd Week
Diluted EPS $ 5.22 $ 5.59 $ 4.57
Less Special Items Diluted EPS (0.26) 0.42 0.04
Diluted EPS excluding Special Items 5.48 5.17 4.53
Less Impact of 53rd Week 0.09 — —
Diluted EPS excluding Special Items and the 53rd Week $ 5.39 $ 5.17 $ 4.53
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items and Effective Tax Rate excluding Special Items and the 53rd Week
GAAP Effective Tax Rate 21.8 % 12.1 % 20.3 %
Impact on Tax Rate as a result of Special Items (1.8) % (8.5) % (0.6) %
Effective Tax Rate excluding Special Items 23.6 % 20.6 % 20.9 %
Impact on Tax Rate as a result of the 53rd Week 0.1 % N/A N/A
Effective Tax Rate excluding Special Items and the 53rd Week 23.5 % 20.6 % 20.9 %
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(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 years ended December 31, 2024 and 2023, we recorded net refranchising losses of $1 million and $5 million, respectively, that have been reflected as Special Items.
Additionally, during the years ended December 31, 2024, 2023 and 2022, we recorded net refranchising gains of $35 million, $34 million and $27 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 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 reflect revenues from and expenses to support the Russian operations for KFC and Pizza Hut prior to the dates of sale or transfer, within their historical financial statement line items and operating segments. However, given our decision to exit Russia and our pledge to direct any future net profits attributable to Russia subsequent to the date of invasion to humanitarian efforts, we 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 a charge of $3 million recorded during the year ended December 31, 2023, as a result of the completion of the sale of the KFC Russia business. The resulting net Operating Loss of $11 million for the year ended December 31, 2023, and net Operating Profit of $44 million for the year ended December 31, 2022, have been reflected as Special Items.
(c) Charges related to a resource optimization program initiated in the third quarter of 2020. See Note 5. Due to their scope and size, the charges over the life of the program, which have primarily resulted from severance associated with positions that have been eliminated or relocated and consultant fees, are being recorded within Corporate and unallocated G&A and have been reflected as Special Items.
(d) On January 8, 2025, we terminated our franchise agreements with franchisee IS Gida A.S. (IS Gida), the owner and operator of KFC and Pizza Hut restaurants in Turkey and a subsidiary of IS Holding A.S. (IS Holding), after failure by IS Gida to meet our standards. The termination affects 284 KFC restaurants and 254 Pizza Hut restaurants in Turkey. We also re-acquired the master franchise rights in Germany for KFC and Pizza Hut from the owner of IS Holding in December 2024. There is no impact in Germany from the termination in Turkey. As a result, we recorded charges of $37 million to Unallocated Other (income) expense, $18 million to Unallocated Franchise and property revenues and $6 million to Corporate and unallocated General and administrative expenses consisting primarily of transaction costs associated with the German acquisition and termination-related costs associated with the Turkey business in the year ended December 31, 2024, that have been reflected as Special Items.
(e) Amounts recorded in connection with redemptions of long-term debt. See Note 5. Due to their size and the fact that they are not indicative of our ongoing interest expense, these amounts have been reflected as Special Items.
(f) The below table includes the detail of Special Items Tax (Benefit) Expense:
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Year
2024 2023 2022
Tax (Benefit) Expense on Special Items Operating Profit and Interest Expense
$ (28) $ (8) $ 2
Tax (Benefit) Expense - Other Income tax impacts from decision to exit Russia
— (7) 72
Tax (Benefit) - Intra-entity transfers and valuations of intellectual property
(32) (183) (82)
Tax (Benefit) Expense - Other Income tax impacts recorded as Special
(6) 37 —
Special Items Tax (Benefit) Expense $ (66) $ (161) $ (8)
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.
In addition to the corresponding Tax (Benefit) Expense on the Operating (Profit) Loss impact from our decision to exit Russia as included above, Special Items Tax (Benefit) Expense also includes $72 million of incremental net tax expense recorded in the year ended December 31, 2022 from the remeasurement and reassessment of 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 ("IP") 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 $32 million, $183 million and $82 million of tax benefit recorded in the years ended December 31, 2024, 2023 and 2022 respectively, associated with intra-entity transfers and valuations of certain IP rights.
• The benefit recorded in the year ended December 31, 2024, resulted primarily from the tax liquidation of certain subsidiaries in Israel and Australia as well as the intra-entity transfer of software from those subsidiaries to subsidiaries in the U.S.
• The benefit recorded in the year ended December 31, 2023, resulted primarily from $99 million of deferred tax benefit arising from the remeasurement of deferred tax assets associated with previously transferred IP rights in Switzerland as a result of an increase in our jurisdictional tax rate, as well as a $29 million deferred tax benefit associated with credits granted by local Swiss tax authorities. The benefit recorded in the year ended December 31, 2023, also includes $30 million of deferred tax benefit associated with the intra-entity transfer of certain Asia region IP rights to Singapore or the U.S.
• The benefit recorded in the year ended December 31, 2022, resulted from the remeasurement of deferred tax assets associated with IP rights held in Switzerland in connection with an annual valuation under Swiss law, as well as the reassessment of the need for a valuation allowance on those deferred tax assets based on forecasted future taxable income. The annual valuation supported an increase to tax basis of Swiss IP rights associated with parts of our business that continue to use these IP rights due to expected royalty growth assumptions in those parts of the business that largely offset the loss of Russia royalty income associated with such IP rights as a result of our decision to exit the Russia market.
Other Income Tax impacts recorded as Special in the year ended December 31, 2023 included $41 million of expense associated with a correction in the timing of capital loss utilization related to refranchising gains previously recorded as Special Items to tax years with a lower statutory tax rate.
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Reconciliation of GAAP Operating Profit to Company Restaurant Profit
2024
KFC Division Taco Bell Division Pizza Hut Division Habit Burger & Grill Division Corporate and Unallocated Consolidated
GAAP Operating Profit (Loss) $ 1,363 $ 1,049 $ 373 $ — $ (382) $ 2,403
Less:
Franchise and property revenues 1,685 997 622 9 (18) 3,295
Franchise contributions for advertising and other services 613 708 378 3 — 1,702
Add:
General and administrative expenses 363 199 219 54 346 1,181
Franchise and property expenses 63 33 34 4 — 134
Franchise advertising and other services expense 610 708 390 3 — 1,711
Refranchising (gain) loss — — — — (34) (34)
Other (income) expense (3) (1) (16) 10 44 34
Company restaurant profit (loss)
$ 98 $ 283 $ — $ 59 (8) $ 432
Company sales $ 801 $ 1,155 $ 8 $ 588 — $ 2,552
Company restaurant margin % 12.2 % 24.4 % (0.6) % 10.1 % N/A 16.9 %
2023
KFC Division Taco Bell Division Pizza Hut Division Habit Burger & Grill Division Corporate and Unallocated Consolidated
GAAP Operating Profit (Loss) $ 1,304 $ 944 $ 391 $ (14) $ (307) $ 2,318
Less:
Franchise and property revenues 1,698 918 622 9 — 3,247
Franchise contributions for advertising and other services 648 654 383 2 — 1,687
Add:
General and administrative expenses 383 204 221 59 326 1,193
Franchise and property expenses 72 32 15 3 1 123
Franchise advertising and other services expense 648 644 389 2 — 1,683
Refranchising (gain) loss — — — — (29) (29)
Other (income) expense 6 — (11) 10 9 14
Company restaurant profit $ 67 $ 252 $ — $ 49 $ — $ 368
Company sales $ 484 $ 1,069 $ 14 $ 575 $ — $ 2,142
Company restaurant margin % 13.7 % 23.7 % 0.1 % 8.5 % N/A 17.2 %
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2022
KFC Division Taco Bell Division Pizza Hut Division Habit Burger & Grill Division Corporate and Unallocated Consolidated
GAAP Operating Profit (Loss) $ 1,198 $ 850 $ 387 $ (24) $ (224) $ 2,187
Less:
Franchise and property revenues 1,645 837 607 7 — 3,096
Franchise contributions for advertising and other services 698 598 376 2 — 1,674
Add:
General and administrative expenses 390 191 211 51 297 1,140
Franchise and property expenses 69 33 13 2 6 123
Franchise advertising and other services expense 684 599 382 2 — 1,667
Refranchising (gain) loss — — — — (27) (27)
Other (income) expense 67 (2) (10) 4 (52) 7
Company restaurant profit $ 65 $ 236 $ — $ 26 $ — $ 327
Company sales $ 491 $ 1,002 $ 21 $ 558 $ — $ 2,072
Company restaurant margin % 13.2 % 23.6 % (2.2) % 4.7 % N/A 15.8 %
Items Impacting Reported Results and/or 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 section of this MD&A for other items similarly impacting results.
Extra Week in 2024
Fiscal 2024 included a 53rd week for all of our U.S. and certain international subsidiaries that operate on a period calendar. See Note 2 for additional details related to our fiscal calendar. The following table summarizes the estimated impact of the 53rd week on Revenues and Operating Profit for the year ended December 31, 2024. The 53rd week in 2024 favorably impacted Diluted EPS by approximately $0.09 per share.
KFC Division Taco Bell Division Pizza Hut Division Habit Burger & Grill Division Total
Revenues
Company sales $ 16 $ 21 $ — $ 9 $ 46
Franchise and property revenues 8 16 6 — 30
Franchise contributions for advertising and other services 4 11 5 — 20
Total revenues $ 28 $ 48 $ 11 $ 9 $ 96
Operating Profit
Franchise and property revenues $ 8 $ 16 $ 6 $ — $ 30
Franchise contributions for advertising and other services 4 11 5 — 20
Restaurant profit 3 7 — 1 11
Franchise for advertising and other services expenses (4) (11) (5) — (20)
G&A expenses (2) (2) (1) — (5)
Operating Profit $ 9 $ 21 $ 5 $ 1 $ 36
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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 continued to be impacted during 2024, most significantly in markets across the Middle East, Malaysia and Indonesia. The impact in these markets represented an approximate one-point headwind to YUM's overall same-store sales growth in the year ended December 31, 2024. Additionally, we believe we experienced conflict-related impacts in a broader set of markets and trade areas, though such amounts are difficult to precisely quantify.
In a few isolated cases, the scale and duration of these sales impacts have affected the financial health of our less scaled or less well-capitalized franchisees, particularly those whose restaurants have been most heavily impacted. On January 8, 2025, we terminated our franchise agreements with franchisee IS Gida A.S. (IS Gida), the owner and operator of KFC and Pizza Hut restaurants in Turkey and a subsidiary of IS Holding A.S. (IS Holding), after failure by IS Gida to meet our standards. The termination affects 284 KFC restaurants and 254 Pizza Hut restaurants in Turkey, which will be reflected as a reduction in the Company’s reported unit counts at the end of the first quarter of 2025. We also re-acquired the master franchise rights in Germany for KFC and Pizza Hut from the owner of IS Holding in December 2024. There is no impact in Germany from the termination in Turkey. We recorded a charge of approximately $61 million in the year ended December 31, 2024, consisting primarily of transaction costs associated with the German acquisition and termination-related costs associated with the Turkey business. Due to issues specific to this franchisee and market, the recent sales in the Turkey restaurants were significantly below the global average sales per restaurant for each brand. As a result, the loss of royalties from the store closures will have no material impact to the Company’s Core Operating Profit in 2025 and beyond. We are actively searching for the right franchise partner to reopen the Turkey market and drive future success.
While we began to see some recovery in the markets most impacted by the Middle East conflict in the fourth quarter of 2024, the conflict is ongoing, and its dynamic nature makes it difficult to forecast any impacts on the Company’s 2025 revenues, operating profit, including the impacts of any bad debt expense, and unit count with any certainty.
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 ended December 31, 2024 and pre-tax investment income of $ 8 million and $ 11 million in the years ended December 31, 2023 and 2022, respectively.
KFC Division
The KFC Division has 31,981 units, 89% of which are located outside the U.S. Additionally, 99% of the KFC Division units were operated by franchisees as of the end of 2024.
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% B/(W) % B/(W)
2024 2023
2024 2023 2022 Reported Ex FX Ex FX and 53rd Week in 2024
Reported Ex FX
System Sales $ 34,452 $ 33,863 $ 31,116 2 3 3 9 12
Same-Store Sales Growth (Decline) % (2) % 7 % 4 % N/A N/A N/A N/A N/A
Company sales $ 801 $ 484 $ 491 66 64 60 (2) 2
Franchise and property revenues 1,685 1,698 1,645 (1) 1 Even 3 6
Franchise contributions for advertising and other services 613 648 698 (5) (6) (6) (7) (6)
Total revenues $ 3,099 $ 2,830 $ 2,834 10 10 9 Even 2
Company restaurant profit $ 98 $ 67 $ 65 48 47 43 2 7
Company restaurant margin % 12.2 % 13.7 % 13.2 % (1.5) ppts. (1.4) ppts. (1.5) ppts. 0.5 ppts. 0.6 ppts.
G&A expenses $ 363 $ 383 $ 390 5 5 6 2 2
Franchise and property expenses 63 72 69 13 12 12 (5) (6)
Franchise advertising and other services expense 610 648 684 6 6 7 5 4
Operating Profit $ 1,363 $ 1,304 $ 1,198 4 6 5 9 12
% Increase (Decrease)
Unit Count 2024 2023 2022 2024 2023
Franchise 31,513 29,680 27,541 6 8
Company-owned 468 220 219 113 —
Total 31,981 29,900 27,760 7 8
Company sales and Company restaurant margin %
In 2024, the increase in Company sales, excluding the impacts of foreign currency translation and the 53rd week, was driven by the KFC U.K. and Ireland restaurant acquisition (see Note 3) in the second quarter of 2024, partially offset by a Company same-store sales decline of 3%.
In 2024, the decrease in Company restaurant margin percentage was driven by higher labor and restaurant operating costs, partially offset by commodity deflation.
Franchise and property revenues
In 2024, Franchise and property revenues, excluding the impacts of foreign currency translation and the 53rd week, were flat as unit growth was offset by a franchise same-store sales decline of 2% and a 1% negative impact from the KFC U.K. and Ireland restaurant acquisition.
G&A
In 2024, the decrease in G&A, excluding the impacts of foreign currency translation and the 53rd week, was driven by lower expenses related to our annual incentive compensation programs, lower travel related costs, refranchising and the impact of the sale of our KFC Russia business in 2023, partially offset by higher expenses related to the operation of acquired KFC U.K. and Ireland restaurants.
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Operating Profit
In 2024, the increase in Operating Profit, excluding the impacts of foreign currency translation and the 53rd week, 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 8,757 units, 87% of which are in the U.S. The Company owned 7% of the Taco Bell units in the U.S. as of the end of 2024.
% B/(W) % B/(W)
2024 2023
2024 2023 2022 Reported Ex FX Ex FX and 53rd Week in 2024
Reported Ex FX
System Sales $ 17,193 $ 15,915 $ 14,653 8 8 6 9 9
Same-Store Sales Growth %
4 % 5 % 8 % N/A N/A N/A N/A N/A
Company sales $ 1,155 $ 1,069 $ 1,002 8 8 6 7 7
Franchise and property revenues 997 918 837 9 9 7 10 10
Franchise contributions for advertising and other services 708 654 598 8 8 7 9 9
Total revenues $ 2,860 $ 2,641 $ 2,437 8 8 7 8 8
Company restaurant profit $ 283 $ 252 $ 236 12 12 9 7 7
Company restaurant margin % 24.4 % 23.7 % 23.6 % 0.7 ppts. 0.7 ppts. 0.6 ppts. 0.1 ppts. 0.1 ppts.
G&A expenses $ 199 $ 204 $ 191 3 3 4 (7) (7)
Franchise and property expenses 33 32 33 (3) (3) (2) 4 4
Franchise advertising and other services expense 708 644 599 (10) (10) (8) (7) (7)
Operating Profit $ 1,049 $ 944 $ 850 11 11 9 11 11
% Increase (Decrease)
Unit Count 2024 2023 2022 2024 2023
Franchise 8,253 8,081 7,754 2 4
Company-owned 504 483 464 4 4
Total 8,757 8,564 8,218 2 4
Company sales and Company restaurant margin %
In 2024, the increase in Company sales, excluding the impacts of the 53rd week, was driven by company same-store sales growth of 3% and unit growth.
In 2024, the increase in Company restaurant margin percentage, excluding the impacts of the 53rd week, was driven by same-store sales growth partially offset by higher labor costs, commodity inflation and an increase in other restaurant operating costs.
Franchise and property revenues
In 2024, the increase in Franchise and property revenues, excluding the impacts of the 53rd week, was driven by franchise same-store sales growth of 4% and unit growth.
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G&A
In 2024, the decrease in G&A, excluding the impacts of the 53rd week, 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.
Operating Profit
In 2024, the increase in Operating Profit, excluding the impacts of the 53rd week, was 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 20,225 units, 68% of which are located outside the U.S. Over 99% of the Pizza Hut Division units were operated by franchisees as of the end of 2024. 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.
% B/(W) % B/(W)
2024 2023
2024 2023 2022 Reported Ex FX Ex FX and 53rd Week in 2024
Reported Ex FX
System Sales $ 13,108 $ 13,315 $ 12,853 (2) (1) (1) 4 5
Same-Store Sales Growth (Decline) % (4) % 2 % Even N/A N/A N/A N/A N/A
Company sales $ 8 $ 14 $ 21 (45) (45) (47) (33) (33)
Franchise and property revenues 622 622 607 Even 1 Even 3 4
Franchise contributions for advertising and other services 378 383 376 (1) (1) (3) 2 2
Total revenues $ 1,008 $ 1,019 $ 1,004 (1) (1) (2) 1 2
Company restaurant profit $ — $ — $ — NM NM NM NM NM
Company restaurant margin %
(0.6) % 0.1 % (2.2) % (0.7) ppts. (0.7) ppts. (0.8) ppts. 2.3 ppts. 2.3 ppts.
G&A expenses $ 219 $ 221 $ 211 1 1 2 (5) (5)
Franchise and property expenses 34 15 13 (122) (121) (118) (16) (15)
Franchise advertising and other services expense 390 389 382 Even Even 1 (2) (2)
Operating Profit $ 373 $ 391 $ 387 (5) (3) (4) 1 3
% Increase (Decrease)
Unit Count 2024 2023 2022 2024 2023
Franchise 20,202 19,859 19,013 2 4
Company-owned 23 7 21 NM (67)
Total 20,225 19,866 19,034 2 4
Franchise and property revenues
In 2024, Franchise and property revenues, excluding the impacts of foreign currency translation and the 53rd week, were flat, as a franchise same-store sales decline of 4% was offset by unit growth.
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G&A
In 2024, the decrease in G&A, excluding the impacts of foreign currency translation and the 53rd week, was driven by lower expenses related to our annual incentive compensation programs, partially offset by higher salaries and benefits.
Operating Profit
In 2024, the decrease in Operating Profit, excluding the impacts of foreign currency translation and the 53rd week, was driven by higher bad debt expense and a same-store sales decline, partially offset by unit growth.
Habit Burger & Grill Division
The Habit Burger & Grill Division has 383 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 the end of 2024.
% B/(W) % B/(W)
2024 2023
2024
2023
2022 Reported Ex FX Ex FX and 53rd Week in 2024 Reported Ex FX
System Sales $ 713 $ 696 $ 661 2 2 1 6 6
Same-Store Sales Growth (Decline) % (4) % (3) % (1) % N/A N/A N/A
N/A N/A
Total revenues $ 600 $ 586 $ 567 2 2 1 3 3
Operating Profit (Loss) $ — $ (14) $ (24) 99 99 90 42 42
% Increase (Decrease)
Unit Count 2024
2023
2022 2024
2023
Franchise 67 71 63 (6) 13
Company-owned 316 307 286 3 7
Total 383 378 349 1 8
Corporate & Unallocated
% B/(W)
(Expense)/Income 2024 2023 2022 2024 2023
Corporate and unallocated G&A $ (346) $ (326) $ (297) (6) (10)
Unallocated Company restaurant expenses (See Note 19)
(8) — — NM NM
Unallocated Franchise and property revenues (See Note 19)
(18) — — NM
NM
Unallocated Franchise and property expenses
— (1) (6) NM
NM
Unallocated Refranchising gain (loss) (See Note 5)
34 29 27 NM NM
Unallocated Other income (expense) (See Note 19)
(44) (9) 52 NM
NM
Investment income (expense), net (See Note 5)
(21) 7 11 NM NM
Other pension income (expense) (See Note 15)
7 6 (9) NM NM
Interest expense, net (489) (513) (527) 5 3
Income tax provision (See Note 18)
(414) (221) (337) (88) 35
Effective tax rate (See Note 18)
21.8 % 12.1 % 20.3 % (9.7) ppts. 8.2 ppts.
Corporate and unallocated G&A
In 2024, the year to date increase in Corporate and unallocated G&A expense was driven by higher costs associated with our resource optimization program (see Note 5), partially offset by lower current year expenses related to our annual incentive
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compensation programs, lower share based compensation expense and lapping net costs related to the prior year ransomware attack.
Interest expense, net
The decrease in Interest expense, net for 2024 was primarily driven by lower average outstanding borrowings and higher interest income.
Consolidated Cash Flows
Net cash provided by operating activities was $1,689 million in 2024 versus $1,603 million in 2023. The increase was primarily driven by an increase in Operating Profit before Special Items, 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 $422 million in 2024 versus $107 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 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 $1,163 million in 2024 versus $1,429 million in 2023. The change was primarily driven by net borrowings in the current year as compared to net debt repayments in the prior year, partially offset by higher current year share repurchases.
Liquidity and Capital Resources
We have historically generated substantial cash flows from our extensive franchise operations, which require a limited YUM investment, and from the operations of our Company-owned stores. Our annual operating cash flows have been in excess of $1.4 billion in each of the past four years and we expect that to continue to be the case in 2025. 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. Subject to market conditions, we expect to maintain our consolidated net leverage ratio at its current level of approximately 4.0x Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") over the medium term by issuing incremental debt as our business grows. As a result, we plan to deliver materially higher capital returns going forward as compared to the past two years when we were using significant amounts of excess cash to reduce our debt outstanding.
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 (see Note 11) which had $350 million outstanding as of December 31, 2024. We believe that our ongoing cash from operations, cash on hand, which was approximately $600 million at December 31, 2024, and availability under our Revolving Facility will be sufficient to fund our cash requirements over the next twelve months. Borrowings under our Revolving Facility in 2024 had original maturities of three months or less.
Our material cash requirements include the following contractual and other obligations.
Debt Obligations and Interest Payments
As of December 31, 2024, approximately 96%, including the impact of interest rate swaps, of our $11.0 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 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, and as mentioned above, we expect to maintain our net leverage ratio at approximately 4.0x EBITDA over the medium term by issuing incremental debt as our business grows. We currently have credit ratings of BB (Standard & Poor’s)/Ba2 (Moody’s).
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The following table summarizes the future maturities of our outstanding long-term debt, excluding finance leases and debt issuance costs and discounts, as of December 31, 2024.
2025 2026 2027 2028 2029 2030 2031 2032 2037 2043 Total
Securitization Notes $ 938 $ 884 $ 595 $ 589 $ 737 $ 3,743
Credit Agreement $ 21 27 34 1,424 438 1,944
Revolving Facility 350 350
Subsidiary Senior Unsecured Notes 750 750
YUM Senior Unsecured Notes $ 800 1,050 $ 2,100 $ 325 $ 275 4,550
Total $ 21 $ 965 $ 1,668 $ 2,019 $ 1,377 $ 800 $ 1,787 $ 2,100 $ 325 $ 275 $ 11,337
Interest payments on the outstanding long-term debt in the table above total approximately $2.7 billion, with approximately $500 million due within the next twelve months on the outstanding amounts on a nominal basis. The estimated interest payments related to the variable rate portion of our debt, net of our interest rate swaps, are based on current Secured Overnight Financing Rate (“SOFR”) interest rates.
See Note 11 for details on the Securitization Notes, the Credit Agreement, Subsidiary Senior Unsecured Notes and YUM Senior Unsecured Notes.
Operating and Finance Leases
Payments required under our operating and finance leases total $1,355 million, of which $148 million is payable within the next 12 months. These amounts are on a nominal basis and include payments related to lease renewal options we are reasonably certain to exercise. These leases relate primarily to approximately 950 Company-owned restaurants and approximately 200 leased restaurants for which we sublease land, building or both to our franchisees. See Note 12.
Investing Activities
We remain committed to maintaining our asset light, franchisor model that includes at least a 98% franchise mix. Our allocation strategy for investing activities includes:
• Run-rate capital expenditures consisting of company restaurant repairs, maintenance and remodels, support of our digital and technology initiatives and project-specific capital expenditures,
• Targeted new company unit development to spur additional growth that is partially funded through refranchising a comparable number of existing company units, and
• Strategic investments that create incremental value for shareholders and franchisees.
In 2025, we expect gross capital expenditures of approximately $350 million driven by technology initiatives and continued investments in Taco Bell, Habit Burger & Grill and KFC company restaurants. Additionally, we expect approximately $55 million of refranchising proceeds, resulting in net capital expenditures of approximately $295 million.
Purchase Obligations
Our purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We have excluded agreements that are cancellable without penalty. Our purchase obligations relate primarily to marketing, information technology and supply agreements. We have purchase obligations of approximately $525 million at December 31, 2024, with approximately $325 million due within the next 12 months.
In addition to our contractual and other obligations, we seek to pay a competitive dividend and return excess cash to shareholders through share repurchases. As discussed in Note 20, we are also subject to claims and contingencies related to certain tax and legal matters that may require future cash outlays.
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Dividends and Share Repurchases
In February 2025, our Board of Directors declared a quarterly dividend of $0.71 per share of Common Stock, a 6% increase from the quarterly dividend of $0.67 per share of Common Stock paid in 2024. This quarterly dividend will be distributed March 7, 2025, to shareholders of record at the close of business on February 21, 2025, and will total approximately $200 million.
In May 2024, our Board of Directors authorized share repurchases of up to $2 billion (excluding applicable transaction fees and excise taxes) of our outstanding Common Stock through December 31, 2026. This authorization took effect on July 1, 2024 upon the exhaustion of a prior authorization approved in September 2022. As of December 31, 2024, we have remaining capacity to repurchase up to $1.6 billion of Common Stock under this authorization. This authorization does not obligate the Company to acquire any specific number of shares.
Contingencies
As discussed in Note 20, as a result of an audit by the Internal Revenue Service (“IRS”) for fiscal years 2013 through 2015, in August 2022, we received a Revenue Agent’s Report (“RAR”) from the IRS asserting an underpayment of tax of $2.1 billion plus $418 million in penalties for the 2014 fiscal year. Additionally, interest on the underpayment is estimated to be approximately $1.4 billion through December 31, 2024. The proposed underpayment relates primarily to a series of reorganizations we undertook during that year in connection with the business realignment of our corporate and management reporting structure along brand lines. The IRS asserts that these transactions resulted in taxable distributions of approximately $6.0 billion.
We disagree with the IRS’s position as asserted in the RAR and intend to contest that position vigorously. In September 2022, we filed a Protest with the IRS Examination Division disputing on multiple grounds the proposed underpayment of tax and penalties. We have received the IRS Examination Division’s Rebuttal to our Protest and the matter is proceeding with the IRS Office of Appeals.
Also, as discussed in Note 20, on January 29, 2020, we received an order from the Special Director of the Directorate of Enforcement (“DOE”) in India imposing a penalty on Yum! Restaurants India Private Limited (“YRIPL”) of approximately Indian Rupee 11 billion, or approximately $130 million, primarily relating to alleged violations of operating conditions imposed in 1993 and 1994. We have been advised by external counsel that the order is flawed and have filed a writ petition with the Delhi High Court, which granted an interim stay of the penalty order on March 5, 2020. In November 2022, YRIPL was notified that an administrative tribunal bench had been constituted to hear an appeal by DOE of certain findings of the January 2020 order, including claims that certain charges had been wrongly dropped and that an insufficient amount of penalty had been imposed. A hearing with the administrative tribunal has been rescheduled to March 18, 2025. The stay order remains in effect, and the next in the Delhi High Court has been rescheduled to April 29, 2025. We deny liability and intend to continue vigorously defending this matter.
See the Lease Guarantees section of Note 20 for discussion of our off-balance sheet arrangements.
New Accounting Pronouncements Not Yet Adopted
In December 2023, the Financial Accounting Standards Board ("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. The amendments should be applied prospectively; however, retrospective application is permitted. We are currently evaluating the impact of the standard on our disclosures.
In March 2024, the SEC issued a final rule under SEC Release Nos. 33-11275 and 34-99678, The Enhancement and Standardization of Climate-Related Disclosures for Investors. The rule requires disclosure of material climate-related information outside of the audited financial statements and disclosure in the footnotes addressing specified financial statement effects of severe weather events and other natural conditions above certain financial thresholds, certain carbon offsets and renewable energy credits or certificates. The standard is effective for the Company's Annual Report on Form 10-K for fiscal 2025. In April 2024, the SEC released an order staying this final rule pending judicial review of all the petitions challenging the rule. We are in the process of analyzing the impact of the rule on our disclosures should the stay be lifted.
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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.
Critical Accounting Policies and Estimates
Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve estimations of the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations or financial condition. Changes in the estimates and judgments could significantly affect our results of operations and financial condition and cash flows in future years. A description of what we consider to be critical accounting policies follows.
Impairment or Disposal of Long-Lived Assets
We review long-lived assets of restaurants we intend to continue operating as Company restaurants (primarily PP&E, right-of-use operating lease assets and allocated intangible assets subject to amortization) annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. We use two consecutive years of operating losses as our primary indicator of potential impairment for our annual impairment testing of these restaurant assets. We evaluate recoverability based on the restaurant’s forecasted undiscounted cash flows, which incorporate our best estimate of sales growth and margin improvement based upon our plans for the unit and actual results at comparable restaurants. For restaurant assets that are deemed to not be recoverable, we write-down the impaired restaurant to its estimated fair value.
Fair value is an estimate of the price a franchisee would pay for the restaurant and its related assets, including any right-of-use assets, and is determined by discounting the estimated future after-tax cash flows of the restaurant, which include a deduction for royalties we would receive under a franchise agreement with terms substantially at market. The after-tax cash flows incorporate reasonable sales growth and margin improvement assumptions as well as expectations as to the useful lives of the restaurant assets that would be used by a franchisee in the determination of a purchase price for the restaurant.
We perform an impairment evaluation at a restaurant group level when it is more likely than not that we will refranchise restaurants as a group. Expected net sales proceeds are generally based on actual bids from the buyer, if available, or anticipated bids given the discounted projected after-tax cash flows for the group of restaurants. Historically, these anticipated bids have been reasonably accurate estimations of the proceeds ultimately received. The after-tax cash flows used in determining the anticipated bids incorporate similar assumptions to those of a restaurant level assessment.
The discount rate used in the fair value calculations is our estimate of the required rate of return that a franchisee would expect to receive when purchasing a similar restaurant or groups of restaurants and the related long-lived assets. The discount rate incorporates rates of returns for historical refranchising market transactions and is commensurate with the risks and uncertainty inherent in the forecasted cash flows.
Estimates of future cash flows are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions. We formulate these estimates in consideration of historical experience, recent economic and industry trends, and competitive conditions. If our estimates or underlying assumptions, including the discount rate, change, we may experience higher impairment charges in the future.
We evaluate indefinite-lived intangible assets for impairment on an annual basis as of the beginning of our fourth quarter or more often if an event occurs or circumstances change that indicates impairment might exist. Fair value is an estimate of the price a willing buyer would pay for the intangible asset and is generally estimated by discounting the expected future after-tax cash flows associated with the intangible asset. Our most significant indefinite-lived intangible asset is our Habit Burger & Grill brand asset with a book value of $96 million at December 31, 2024. As of our fourth quarter 2024 annual impairment testing date, the fair values of all of our indefinite-lived intangible assets were in excess of their respective carrying values and no impairment was recorded.
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Impairment of Goodwill
We evaluate goodwill for impairment on an annual basis as of the beginning of our fourth quarter or more often if an event occurs or circumstances change that indicates impairment might exist. Goodwill is evaluated for impairment by determining whether the fair value of our reporting units exceed their carrying values. Our reporting units are our business units (which are aligned based on geography) in our KFC, Taco Bell, Pizza Hut and Habit Burger & Grill Divisions. Fair value is the price a willing buyer would pay for the reporting unit, and is generally estimated using discounted expected future after-tax cash flows from franchise royalties and Company-owned restaurant operations, if any. Future cash flow estimates and the discount rate are the key assumptions when estimating the fair value of a reporting unit.
Future cash flows are based on growth expectations relative to recent historical performance and incorporate sales growth (from net new units or same-store sales growth) and margin improvement (for those reporting units which include Company-owned restaurant operations) assumptions that we believe a third-party buyer would assume when determining a purchase price for the reporting unit. Any margin improvement assumptions that factor into the discounted cash flows are highly correlated with sales growth as cash flow growth can be achieved through various interrelated strategies such as product pricing and restaurant productivity initiatives. The discount rate is our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit. We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash flows.
The fair values of all our reporting units with goodwill balances were in excess of their respective carrying values as of our fourth quarter 2024 goodwill testing date, with all but the Habit Burger & Grill reporting unit having fair values that were substantially in excess of their respective carrying values. As it relates to our Habit Burger & Grill reporting unit, which includes a goodwill balance of $66 million as of the end of 2024, the assumptions that are most impactful to our fair value estimate include margin improvement, sales growth from net new units and same-store sales growth. Significant changes in the assumptions used in our analysis could result in a future goodwill impairment charge. Circumstances that could result in changes to our assumptions and related fair value estimate include, but are not limited to, expectations of lower than originally estimated margin improvement, which can be caused by a variety of factors including changes in expected labor costs and commodity inflation.
When we refranchise restaurants, we include goodwill in the carrying amount of the restaurants disposed of based on the relative fair values of the portion of the reporting unit disposed of in the refranchising versus the portion of the reporting unit that will be retained. The fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which include a deduction for the anticipated, future royalties the franchisee will pay us associated with the franchise agreement entered into simultaneously with the refranchising transaction. The fair value of the reporting unit retained is based on the price a willing buyer would pay for the reporting unit retained and includes the value of franchise agreements. Appropriate adjustments are made to the fair value determinations if such franchise agreements are determined to not be at prevailing market rates. As such, the fair value of the reporting unit retained can include expected future cash flows from royalties from those restaurants currently being refranchised, royalties from existing franchise businesses and retained company restaurant operations. As a result, the percentage of a reporting unit’s goodwill that will be written off in a refranchising transaction will be less than the percentage of the reporting unit’s Company-owned restaurants that are refranchised in that transaction and goodwill can be allocated to a reporting unit with only franchise restaurants. When determining whether such franchise agreement is at prevailing market rates our primary consideration is consistency with the terms of our current franchise agreements both within the country that the restaurants are being refranchised in and around the world. The Company believes consistency in royalty rates as a percentage of sales is appropriate as the Company and franchisee share in the impact of near-term fluctuations in sales results with the acknowledgment that over the long-term the royalty rate represents an appropriate rate for both parties.
The discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee is reduced by future royalties the franchisee will pay the Company. The Company thus considers the fair value of future royalties to be received under the franchise agreement as fair value retained in its determination of the goodwill to be written off when refranchising. Others may consider the fair value of these future royalties as fair value disposed of and thus would conclude that a larger percentage of a reporting unit’s fair value is disposed of in a refranchising transaction.
During 2024, refranchising activity completed by the Company was limited and the write-off of goodwill associated with these transactions was less than $1 million.
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Pension Plans
Certain of our employees are covered under defined benefit pension plans. Our two most significant plans are in the U.S. and combined had a projected benefit obligation (“PBO”) of $776 million and a fair value of plan assets of $644 million at December 31, 2024.
The PBO reflects the actuarial present value of all benefits earned to date by employees and incorporates assumptions as to future compensation levels. Due to the relatively long time frame over which benefits earned to date are expected to be paid, our PBOs are highly sensitive to changes in discount rates. For these U.S. plans, we measured our PBOs using a discount rate of 5.80% at December 31, 2024. The primary basis for this discount rate determination is a model that consists of a hypothetical portfolio of ten or more corporate debt instruments rated Aa or higher by Moody’s or Standard & Poor’s (“S&P”) with cash flows that mirror our expected benefit payment cash flows under the plans. We exclude from the model those corporate debt instruments flagged by Moody’s or S&P for a potential downgrade (if the potential downgrade would result in a rating below Aa by both Moody’s and S&P) and bonds with yields that were two standard deviations or more above the mean. In considering possible bond portfolios, the model allows the bond cash flows for a particular year to exceed the expected benefit payment cash flows for that year. Such excesses are assumed to be reinvested at appropriate one-year forward rates and used to meet the benefit payment cash flows in a future year. The weighted-average yield of this hypothetical portfolio was used to arrive at an appropriate discount rate. We also ensure that changes in the discount rate as compared to the prior year are consistent with the overall change in prevailing market rates and make adjustments as necessary. A 50 basis-point increase in this discount rate would have decreased these U.S. plans’ PBOs by approximately $40 million at our measurement date. Conversely, a 50 basis-point decrease in this discount rate would have increased these U.S. plans’ PBOs by approximately $40 million at our measurement date.
The net periodic benefit cost we will record in 2025 is also impacted by the discount rate, as well as the long-term rates of return on plan assets and mortality assumptions we selected at our measurement date. We expect net periodic benefit income for these U.S. plans of $2 million in 2025 compared to $3 million of periodic benefit income in 2024, which represents a decrease in benefit of $1 million year-over-year. A 50 basis-point change in our discount rate assumption at our 2024 measurement date would impact this 2025 U.S. net periodic benefit income by approximately $1 million. The impacts of changes in net periodic benefit income are reflected primarily in Other pension (income) expense.
Our estimated long-term rate of return on U.S. plan assets is based upon the weighted-average of historical and expected future returns for each asset category. Our expected long-term rate of return on U.S. plan assets, for purposes of determining 2025 pension expense, at December 31, 2024, was 6.85%, net of administrative and investment fees paid from plan assets. We believe this rate is appropriate given the composition of our plan assets and historical market returns thereon. A 100 basis point change in our expected long-term rate of return on plan assets assumption would impact our 2025 U.S. net periodic benefit cost by approximately $8 million. Additionally, every 100 basis point variation in actual return on plan assets versus our expected return of 6.85% will impact our unrecognized pre-tax actuarial net loss by approximately $8 million.
We have an unrecognized pre-tax actuarial net loss of $125 million included in Accumulated other comprehensive income for these U.S. plans at December 31, 2024. We will recognize approximately $2 million of this loss in 2025 versus $1 million of loss recognized in 2024.
Income Taxes
At December 31, 2024, we had valuation allowances of $369 million to reduce our $1,768 million of deferred tax assets to amounts that are more likely than not to be realized. The net deferred tax assets primarily relate to temporary differences and tax credit carryforwards in profitable U.S. federal, state and foreign jurisdictions and net operating loss carryforwards in certain foreign jurisdictions, the majority of which do not expire. In evaluating our ability to recover our deferred tax assets, we consider future taxable income in the various jurisdictions, carryforward periods, restrictions on usage and prudent and feasible tax planning strategies. The estimation of future taxable income in these jurisdictions and our resulting ability to utilize deferred tax assets can significantly change based on future events, including our determinations as to feasibility of certain tax planning strategies and refranchising plans. Thus, recorded valuation allowances may be subject to material future changes.
As a matter of course, we are regularly audited by federal, state and foreign tax authorities. We recognize the benefit of positions taken or expected to be taken in our tax returns in our Income tax provision when it is more likely than not that the position would be sustained upon examination by these tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. At December 31, 2024, we had $126 million of unrecognized tax benefits, $81 million of which would impact the effective income tax rate if recognized. We
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evaluate unrecognized tax benefits, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements, which may impact our ultimate payment for such exposures.
Repatriation of earnings generated after December 31, 2017, will generally be eligible for the 100% dividends received deduction or considered a distribution of previously taxed income and, therefore, exempt from U.S. federal tax. Undistributed foreign earnings may still be subject to certain state and foreign income and withholding taxes upon repatriation. Subject to limited exceptions, we do not intend to indefinitely reinvest our unremitted earnings outside the U.S. Thus, we have provided taxes, including any U.S. federal and state income, foreign income, or foreign withholding taxes on the majority of our unremitted earnings. In jurisdictions where we do intend to indefinitely reinvest our unremitted earnings, we would be required to accrue and pay applicable income taxes (if any) and foreign withholding taxes if the funds were repatriated in taxable transactions. We believe any such taxes would be immaterial.