Yum! Brands, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with the three months ended March 31, 2023. Yum! franchises or operates more than 59,000 restaurants in over 155 countries and territories; 98% were franchise-operated at quarter-end.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $1.598 billion | $1.645 billion | -3% |
| Operating profit | $520 million | $523 million | -1% |
| Net income | $314 million | $300 million | +5% |
| Diluted EPS | $1.10 | $1.05 | +5% |
| Diluted EPS excluding special items | $1.15 | $1.06 | +9% |
| Operating cash flow | $363 million | $349 million | +4% |
- System sales grew 2% excluding foreign currency translation, while same-store sales declined 3%. Net new units were 421; 808 gross openings contributed to 6% year-over-year unit growth.
- Core operating profit, a non-GAAP measure excluding special items and foreign exchange, increased 6% to $555 million. Special items included $21 million of resource-optimization charges and other items, totaling $24 million of operating-profit adjustments.
- Company restaurant profit was $74 million versus $71 million, and company restaurant margin expanded to 15.6% from 14.9%.
- Segment operating profit: KFC $313 million (+3%; +6% excluding FX), Taco Bell $208 million (+2%), Pizza Hut $93 million (-11%), and Habit Burger Grill loss of $5 million (unchanged). Same-store sales were KFC -2%, Taco Bell +1%, Pizza Hut -7%, and Habit -8%.
- Interest expense, net declined to $117 million from $130 million. The effective tax rate was 18.0%, down from 19.1%.
Cash, liquidity and debt
- Cash and cash equivalents were $652 million at March 31, 2024, versus $512 million at year-end; this excludes restricted cash. Cash, cash equivalents and restricted cash totaled $878 million.
- Operating cash flow was $363 million; capital spending was $49 million. Investing activities provided $45 million, including $104 million of proceeds from the sale of the Devyani investment. Financing activities used $247 million, including $189 million of dividends paid.
- Total debt was approximately $11.2 billion, including finance leases and before debt issuance costs and discounts; long-term debt on the balance sheet was $11.13 billion. Net leverage was 4.1x EBITDA. Management reported approximately 94% of debt fixed, including swaps, at an effective overall rate of about 4.6%.
- The $1.25 billion revolving facility was undrawn at quarter-end. An April refinancing increased its capacity to $1.5 billion and refinanced the Term Loan A facility; the company said it added no net new debt. Management believes cash, operating cash flow and available borrowing capacity will meet requirements over the next 12 months.
Material changes, outlook and risks
- Revenue declined as franchise and advertising contributions fell, while company sales were flat. Profit growth was supported by lower interest expense and tax rate; weaker Pizza Hut results and special-item costs weighed on operating profit.
- Management expects 2024 operating cash flow to exceed $1.3 billion. It expects foreign-exchange movements to reduce divisional operating profit by approximately $20 million to $30 million for the full year; no specific EPS guidance is provided in the filing.
- The Middle East conflict was estimated to create a low-single-digit headwind to company-wide same-store sales growth in Q1, with management expecting the impact to ease and sales in the most affected markets to improve over the balance of 2024.
- Q1 included a $20 million pre-tax loss related to changes in the value of the Devyani investment before its sale. The company no longer considers itself materially exposed to equity investment risk from that holding.
- IRS dispute: The IRS proposed a $2.1 billion tax underpayment, $418 million in penalties and approximately $1.2 billion in interest through Q1 2024, relating to 2014 transactions. Yum disputes the position, is contesting it, and recorded no reserve, stating its tax position is more likely than not to be sustained. An unfavorable outcome could materially adversely affect future results.
- India regulatory matter: A penalty order of approximately $135 million remains under an interim stay; hearings were scheduled for July 2024. The company denies liability and does not consider a significant loss probable.
- Potential undiscounted payments under lease guarantees were approximately $375 million; the recorded expected-loss liability was not material. On April 29, 2024, the company completed the acquisition of 216 KFC restaurants in the U.K. and Ireland for approximately $180 million in cash, subject to adjustments.
Important facts for investors to verify
- Whether same-store sales stabilize, particularly at Pizza Hut and in markets affected by the Middle East conflict, and whether unit growth translates into sustained system-sales and profit growth.
- Progress on the IRS dispute and India regulatory matter, including potential financial exposure and timing of resolution.
- Debt, refinancing terms, leverage and the company’s ability to sustain cash generation while funding dividends, investment and potential repurchases.
- Whether expected foreign-exchange headwinds and resource-optimization costs affect full-year operating performance as management anticipates.
- The interim financial statements received an independent accountant’s review, not an audit; the auditor reported no material modifications needed for GAAP conformity.