YUM! Brands, Inc. — Q1 2018 Form 10-Q
Reporting period: Quarter ended March 31, 2018. YUM operates and franchises KFC, Pizza Hut and Taco Bell, with more than 45,000 restaurants across over 135 countries and territories. Approximately 97% of restaurants were franchised.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $1,371 million | $1,417 million |
| Operating profit | $553 million | $484 million |
| Net income | $433 million | $280 million |
| Diluted EPS | $1.27 | $0.77 |
| Diluted EPS excluding special items | $0.90 | $0.65 |
| Operating cash flow | $189 million | $288 million |
| Cash and cash equivalents, quarter-end | $982 million | $1,522 million at December 31, 2017 |
| Long-term debt, quarter-end | $9,419 million | $9,429 million at December 31, 2017 |
System sales grew 4% excluding foreign currency effects; same-store sales increased 1%, and net units grew 3% (239 net additions). GAAP revenue comparisons are affected by adopting Topic 606: advertising contributions and related expenses, previously presented net, are now reported gross. On the company’s legacy accounting basis, Q1 2018 revenue would have been $1,101 million and net income $430 million; the filing cautions that the 2017 comparative is not restated.
GAAP operating profit included a $156 million refranchising gain. Reported net income also included $66 million of pre-tax mark-to-market income on the Grubhub share-purchase forward contract. Special items contributed $0.37 to diluted EPS; excluding special items, diluted EPS rose 38% year over year.
Segments and material changes
- KFC: System sales increased 6% excluding FX and same-store sales were flat. Segment operating profit was $221 million versus $207 million. UK supply disruption weighed on results.
- Pizza Hut: System sales increased 2% excluding FX and same-store sales grew 1%. Segment operating profit was $88 million versus $83 million.
- Taco Bell: System sales increased 4% excluding FX and same-store sales grew 1%. Segment operating profit was $132 million versus $141 million; refranchising and higher restaurant costs were cited as pressures.
Company sales fell to $512 million from $902 million, largely reflecting refranchising and the resulting shift toward franchise revenues. Operating cash flow declined to $189 million, primarily due to advertising-spending timing, newly reflected advertising-cooperative cash flows under Topic 606, and higher income-tax payments. Investing cash flow was $164 million, including $205 million of refranchising proceeds; financing cash outflow was $976 million, including $498 million of share repurchases and $120 million of dividends.
YUM repurchased 6.5 million shares for approximately $528 million at an average price of $81.08. The company repaid $325 million of notes that matured in March. It had no borrowings under its $1 billion revolving facility at quarter-end, with $8 million of letters of credit outstanding. Total liabilities were $11.6 billion, and shareholders’ deficit was $6.8 billion.
Outlook, commentary and risks
- Management maintained full-year Core Operating Profit growth guidance despite the UK supply disruption. It estimated the disruption would reduce 2018 Core Operating Profit growth by 1 percentage point company-wide and full-year same-store sales growth by 25 basis points. All affected UK and Ireland restaurants were open by the filing date, but had not returned to prior sales and profitability levels; further disruption could worsen the impact.
- Management expected refranchising, net of G&A reductions, to weigh on 2018 Core Operating Profit growth by 6–7 percentage points. It expected Topic 606 to reduce 2018 Core Operating Profit growth by 2–3 percentage points, with the impact weighted toward the fourth quarter.
- Strategic targets include at least 98% franchised restaurants by the end of 2018; approximately $100 million of annual capital expenditures and G&A at 1.7% of system sales by 2019; and returning $6.5–$7.0 billion to shareholders from 2017 through 2019. Management also targets leverage of approximately 5.0x EBITDA.
- On April 3, 2018, YUM repriced its $1.97 billion Term Loan B Facility, reducing the applicable spread by 25 basis points and extending maturity to April 3, 2025. On April 25, it completed the $200 million Grubhub share purchase; acquired shares are subject to transfer restrictions.
- Potential payments under lease guarantees were approximately $600 million undiscounted ($500 million present value); the recorded liability was not material. The company said pending legal proceedings were not expected to have a material adverse effect. The filing identifies no material changes to the risk factors previously disclosed in its 2017 Form 10-K.
Key facts for investors to verify
- Track UK KFC sales and profitability recovery against management’s estimated full-year disruption impact.
- Separate underlying operating performance from refranchising gains, Grubhub mark-to-market income and Topic 606 presentation changes.
- Monitor the effects of continued refranchising on company sales, franchise revenue, costs and the stated profit-growth outlook.
- Assess leverage, debt maturities, cash generation and planned shareholder distributions alongside the approximately 5.0x EBITDA leverage target.
- Review Grubhub’s subsequent investment performance and any future fair-value income or expense; the filing notes that share-price changes may affect future reported earnings.
The interim financial statements were reviewed, not audited, by the independent accounting firm.