Yum! Brands, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods. Amounts are in U.S. dollars unless noted. Interim financial statements were reviewed by the independent accountant, not audited.
Business context and results
Yum! franchises or operates more than 53,000 KFC, Taco Bell, Pizza Hut and Habit Burger Grill restaurants in 155 countries and territories; 98% were franchisee-operated at quarter-end. The company removed its Russian units and associated sales from reported system metrics beginning in Q2.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $1.636bn (+2%) | $1.602bn | $3.183bn (+3%) | $3.088bn |
| Operating profit | $554m (-2%) | $567m | $1.063bn (-4%) | $1.110bn |
| Net income | $224m (-43%) | $391m | $623m (-13%) | $717m |
| Diluted EPS | $0.77 (-40%) | $1.29 | $2.13 (-9%) | $2.35 |
| Adjusted diluted EPS, excluding special items | $1.05 (-9%) | $1.16 | $2.10 (-5%) | $2.22 |
| Company restaurant margin | 16.8%, down 3.0 pts | 19.8% | 15.7%, down 3.0 pts | 18.7% |
| Operating cash flow | Not separately reported for quarter | $522m | $773m |
Q2 diluted EPS included a $71m Russia-related tax expense and $28m of debt-redemption premium and issuance-cost expense, partly offset by Russia-related operating profit classified as a special item. The effective tax rate was 42.6% in Q2 versus 4.0% a year earlier; excluding special items, it was 24.2% versus 20.0%. Six-month reported tax rates were 21.0% and 12.1%, respectively.
Operating trends and material changes
- Worldwide same-store sales grew 1% in Q2 and 2% year to date; system sales excluding foreign-exchange effects rose 3% and 5%, respectively. Reported system sales declined 1% in Q2, reflecting currency and other effects.
- Taco Bell was the strongest major segment: Q2 revenue increased 10% and operating profit 9%, with 8% same-store sales growth. KFC operating profit fell 8% reported (2% excluding FX); Pizza Hut operating profit fell 10% reported (7% excluding FX). Habit Burger Grill reported a $2m Q2 operating loss versus $5m profit.
- Commodity and wage inflation reduced company restaurant margins. Management also cited higher headcount, salaries, travel and professional fees. Q2 G&A increased to $254m from $230m.
- The company opened 781 gross units in Q2, adding 463 net units before the Russia unit-count removal; net additions were 1,091 year to date. Total reported units were 53,350 at June 30, up 4% year over year.
- Cash from operations declined to $522m from $773m, primarily due to incentive-compensation payments, advertising-spend timing and lower operating profit before special items. Capital spending was $97m; investing activities used $64m. Financing activities used $586m, including $557m of share repurchases and $327m of dividends paid.
Debt, liquidity and capital allocation
- Long-term debt was $11.540bn and short-term borrowings $72m at June 30; debt excluding finance leases was approximately $11.6bn. Long-term debt increased from $11.178bn at December 31, 2021.
- Management reported approximately 94% of debt fixed-rate, including swaps, with an effective overall rate of about 4.3%; net leverage was described as in line with its approximately 5.0x EBITDA target.
- Cash and cash equivalents were $412m; cash plus restricted cash was $628m. The $1.25bn revolving credit facility was undrawn. Management expects 2022 operating cash flow to exceed $1.3bn and believes cash, operating cash generation and revolver availability will cover requirements over the next 12 months.
- Yum issued $1bn of 5.375% notes due 2032 and redeemed $600m of 7.75% notes due 2025. The board’s share-repurchase authorization had approximately $393m remaining at June 30.
Outlook, risks and unusual items
- No specific revenue or EPS forecast is provided. Management said COVID-19 restrictions continued to affect some markets, primarily China, and that the evolving situation made the remaining-2022 impact difficult to forecast. Excluding China, Q2 same-store sales growth was 6% company-wide.
- Yum completed the transfer of its Pizza Hut Russia business to a local operator and was pursuing transfer of KFC Russia restaurants, systems and franchise rights. The KFC transfer was expected by year-end, subject to approvals and customary conditions; held-for-sale accounting was expected to begin in Q3. The company reported no Q2 impairment following its review of Russian assets.
- In August 2022, after quarter-end, the IRS asserted a proposed $2.1bn tax underpayment plus $418m penalties for 2014, with estimated interest of approximately $700m through Q2 2022. Yum disputes the position, intends to contest it, and recorded no reserve, believing its tax position is more likely than not to be sustained. An unfavorable outcome could materially adversely affect future financial statements.
- An Indian regulatory penalty of approximately $140m remains under an interim court stay; Yum denies liability and does not consider significant loss probable. Yum China paid approximately $4m of disputed license fees under protest. Potential undiscounted lease-guarantee payments were approximately $400m; the recorded expected-loss liability was not material.
- Other relevant exposures include foreign-exchange movements, inflation, geopolitical and sanctions risks, and possible franchisee or operational effects from pandemic restrictions. Management reported no material change to other disclosed risk factors.
Important facts for investors to verify
- Whether the Russia KFC transfer closes on the expected timetable and what proceeds, tax effects or further impairment charges result.
- The status and potential financial exposure of the IRS dispute, including subsequent developments in the appeals process.
- Whether operating cash flow recovers, and how inflation and sales mix affect restaurant margins and segment profits.
- Debt maturities, interest-rate exposure and continued capacity to fund dividends and repurchases while maintaining targeted leverage.
- China trading conditions and the scale and duration of COVID-related restrictions and foreign-exchange impacts.