Yum! Brands Reports Second-Quarter 2016 EPS

LOUISVILLE, Ky.–(hospitalitybusinessnews.com)–Yum! Brands, Inc. today reported results for the second quarter ended June 11, 2016, including GAAP EPS of $0.81 and EPS excluding Special Items of $0.75.

Core operating profit growth figures exclude foreign currency translation (“F/X”) and Special Items. Special Items are not allocated to any segment and therefore only impact worldwide reported results. See reconciliation of non-GAAP measurements to GAAP results within this release for further details.

SECOND-QUARTER HIGHLIGHTS

  • Opened 373 new restaurants worldwide; 72% of international development occurred in emerging markets.
  • On track to finalize China separation with targeted completion date around October 31, 2016.
  • Foreign currency translation negatively impacted operating profit by $16 million.
% Change

System Sales
(Ex F/X)

Same-Store
Sales

Units

GAAP
Operating
Profit

Core
Operating
Profit

China Division +3 Even +6 +1 +6
KFC Division +6 +2 +3 Even +6
Pizza Hut Division +1 Even +1 +6 +7
Taco Bell Division +2 (1) +3 (1) (1)
Worldwide +3 Even +3 +32 +7
Second Quarter Year-to-Date
2016 2015 % Change 2016 2015 % Change
EPS Excluding Special Items $0.75

$0.69

9%

$1.71

$1.50 14%
Special Items Gain/(Loss)1 $0.06

$(0.16)

NM

$0.03

$(0.16)

NM
EPS $0.81

$0.53

54% $1.74 $1.34 30%

GREG CREED COMMENTS

Greg Creed, CEO, said “Yum! Brands delivered second-quarter core operating profit growth of 7% and EPS growth, excluding Special Items, of 9%. Given our strong first-half results and current trends in China, I’m pleased to raise our full-year core operating profit growth forecast to at least 14% from 12% previously. I’m particularly pleased with the continued sales momentum at KFC China, which delivered better-than-expected same-store sales growth of 3%. This represents our fourth-consecutive quarter of positive same-store sales growth at KFC China despite the second quarter being our most difficult of the year from a historical sales overlap standpoint. Importantly, our China Division is off to a good start in the third quarter for both KFC and Pizza Hut Casual Dining, including a return to positive same-store sales at Pizza Hut Casual Dining in recent weeks.

Outside of China, challenging industry conditions in the U.S. contributed to soft sales results. However, our three brand divisions in the aggregate delivered core operating profit growth largely in-line with our expectations and remain on track to deliver against their full-year core operating profit growth targets. We’re confident in our plans to drive second-half sales improvement led by a continued focus on innovation, value and our core products.

This is a transformational year for our company as we remain on track to finalize the separation of our China business with a targeted completion date around October 31, 2016, ultimately creating two powerful, independent, focused growth companies. Our capital structure is fully in place and we plan to return a significant amount of capital to shareholders both prior to and after the spin. I look forward to sharing additional details on the transformative initiatives we are undertaking as we become a more heavily franchised company at our New York investor conference on Tuesday, October 11th.”

CHINA DIVISION

Second Quarter Year-to-Date

%/ppts Change

%/ppts Change

2016 2015 Reported Ex F/X 2016 2015 Reported Ex F/X
System Sales Growth (1) +3 +2 +7
Same-Store Sales Growth (%) Even (10) NM NM +2 (11) NM NM
Franchise & License Fees ($MM) 30 28 +7 +12 55 49

+12

+18

Restaurant Margin (%) 15.7 14.6 1.1 1.1 18.7 16.4 2.3 2.3
Operating Profit ($MM) 147 144 +1 +6 403 334 +20 +26
Operating Margin (%) 9.2 8.8 0.4 0.4 13.9 11.6 2.3 2.3
  • China Division system sales increased 3%, excluding foreign currency translation.
    • Same-store sales were even, with an increase of 3% at KFC, offset by a decline of 11% at Pizza Hut Casual Dining.
  • China Division opened 72 new units during the quarter.
China Units Q2 2016 % Change2
Restaurants1 7,246 +6
KFC 5,039 +3
Pizza Hut
Casual Dining 1,610 +16
Home Service 339 +23

1 Total includes East Dawning and Little Sheep units.

2 Represents year-over-year change.

  • Operating profit was negatively impacted by an additional $14 million in closures and impairment expense versus prior year, as well as a $4 million expense related to our RGM convention. These expenses were partially offset by a benefit from recent value-added tax reform in China, which went into effect on May 1, 2016.
  • Foreign currency translation negatively impacted operating profit by $7 million.
  • Consistent with prior years, China Division’s second quarter includes March, April and May results.

KFC DIVISION

Second Quarter Year-to-Date

%/ppts Change

%/ppts Change

2016 2015 Reported Ex F/X 2016 2015 Reported Ex F/X
Restaurants 15,003 14,619 +3 N/A 15,003 14,619 +3 N/A
System Sales Growth +1 +6 (1) +5
Same-Store Sales Growth (%) +2 +2 NM NM +1 +3 NM NM
Franchise & License Fees ($MM) 194 191 +1 +5 389 389 +6
Restaurant Margin (%) 14.5 14.5 14.7 14.5 0.2 0.1
Operating Profit ($MM) 149 149 +6 309 315 (2) +5
Operating Margin (%) 21.0 20.5 0.5 0.5 23.1 22.7 0.4 0.3
  • KFC Division system sales increased 6%, excluding foreign currency translation.
Second Quarter (% Change)
Int’l Emerging Markets Int’l Developed Markets U.S.
System Sales Growth (Ex F/X) +10 +4 Even
Same-Store Sales Growth +2 +1 +2
  • KFC Division opened 132 new international restaurants in 42 countries, including 90 units in emerging markets. 88% of new international units were opened by franchisees.
  • Operating margin increased 0.5 percentage points driven by new-unit development.
  • Foreign currency translation negatively impacted operating profit by $9 million, as approximately 90% of division profits are generated outside the U.S.
KFC MARKETS1

Percent of KFC
System Sales 2

SYSTEM Sales Growth Ex F/X
Second Quarter (%) Year-to-Date (%)
Emerging Markets
Asia (e.g. Malaysia, Indonesia, Philippines) 7% +11 +10
Africa 6% +8 +8
Latin America (e.g. Mexico, Peru) 6% +5 +5
Middle East / North Africa 6% +4 +4
Russia 5% +33 +31
Thailand 3% +6 +6
Continental Europe (e.g. Poland) 3% +17 +17
India 1% (1) (1)
Developed Markets
U.S. 24% Even Even
Australia 10% +4 +5
Asia (e.g. Japan, Korea, Taiwan) 9% +6 +6
U.K. 9% +2 +1
Continental Europe (e.g. France, Germany) 7% +9 +9
Canada 3% +5 +5
Latin America (e.g. Puerto Rico) 1% (5) (4)

2 Reflects Full Year 2015.

PIZZA HUT DIVISION

Second Quarter Year-to-Date

%/ppts Change

%/ppts Change

2016 2015 Reported Ex F/X 2016 2015 Reported Ex F/X
Restaurants 14,176 14,013 +1 N/A 14,176 14,013 +1 N/A
System Sales Growth Even +1 Even +3
Same-Store Sales Growth (%) Even Even NM NM +1 Even NM NM
Franchise & License Fees ($MM) 121 121 +1 +3 254 249 +2 +4
Restaurant Margin (%) 9.4 9.9 (0.5) (0.9) 10.3 10.8 (0.5) (0.9)
Operating Profit ($MM) 64 60 +6 +7 151 141 +7 +8
Operating Margin (%) 25.8 22.5 3.3 3.0 29.5 26.2 3.3 2.9
  • Pizza Hut Division system sales increased 1%, excluding foreign currency translation.
Second Quarter (% Change)
Int’l Emerging Markets Int’l Developed Markets U.S.
System Sales Growth (Ex F/X) +4 +1 Even
Same-Store Sales Growth (1) (1) +1
  • Pizza Hut Division opened 84 new international restaurants in 38 countries, including 45 units in emerging markets. 94% of new international units were opened by franchisees.
  • Operating margin increased 3.3 percentage points, driven by reduced G&A.
  • Foreign currency translation negatively impacted operating profit by less than $1 million.
PIZZA HUT MARKETS1

Percent of Pizza Hut
System Sales2

SYSTEM Sales Growth Ex F/X
Second Quarter (%) Year-to-Date (%)
Emerging Markets
Latin America (e.g. Mexico, Peru) 7% +8 +9
Asia (e.g. Malaysia, Indonesia, Philippines) 5% +5 +3
Middle East / North Africa 5% (2) +1
Continental Europe (e.g. Poland) 1% +10 +12
India 1% (7) (6)
Developed Markets
U.S. 55% Even +2
Asia (e.g. Japan, Korea, Taiwan) 8% (7) (7)
U.K. 7% +5 +5
Continental Europe (e.g. France, Germany) 5% +8 +7
Canada 3% +9 +10
Australia 2% (3) (7)
Latin America (e.g. Puerto Rico) 1% Even (2)

2 Reflects Full Year 2015.

TACO BELL DIVISION

Second Quarter Year-to-Date
%/ppts Change %/ppts Change
2016 2015 Reported Ex F/X 2016 2015 Reported Ex F/X
Restaurants 6,468 6,263 +3 N/A 6,468 6,263 +3 N/A
System Sales Growth +2 +2 +3 +3
Same-Store Sales Growth (%) (1) +6 NM NM Even +6 NM NM
Franchise & License Fees ($MM) 110 106 +4 +4 211 202 +5 +5
Restaurant Margin (%) 22.3 22.9 (0.6) (0.7) 21.6 21.3 0.3 0.3
Operating Profit ($MM) 139 140 (1) (1) 258 254 +1 +1
Operating Margin (%) 29.9 29.3 0.6 0.6 29.0 28.0 1.0 1.0
  • Taco Bell Division system sales increased 2%, driven by 3% unit growth and partially offset by a 1% decline in same-store sales.
  • Taco Bell Division opened 48 new restaurants; 88% of these new units were opened by franchisees.
  • Restaurant margin was 22.3%, a decrease of 0.6 percentage points driven by higher labor costs and store level investments. This was partially offset by favorable commodities pricing.
  • Operating margin increased 0.6 percentage points driven by new-unit development and reduced G&A.

SPECIAL ITEMS / SHARE REPURCHASE / RECAPITALIZATION UPDATE

  • During the first quarter of 2015, we reached an agreement with our KFC U.S. franchisees that gave us brand marketing control, as well as an accelerated path to expanded menu offerings, improved assets and an enhanced customer experience. In connection with this agreement, we recognized a Special Items charge of $8 million during the quarter, primarily related to the funding of investments for new back-of-house equipment for franchisees.
  • During the quarter, we incurred a Special Items charge of $10 million for costs related to the planned separation of our China business and the Yum! recapitalization.
  • During the quarter, we refranchised 82 units outside of China, primarily related to Pizza Hut U.S., for proceeds of $83 million. We recorded refranchising gains of $53 million in Special Items.
  • Year-to-date through July 12, 2016, we repurchased 31.4 million shares totaling $2.4 billion at an average price of $77. Since we announced our intention to separate the China business, we have repurchased approximately $3.3 billion of shares at an average price of $76, reducing our share count by 42.9 million shares. This is part of our previously announced plan to return $6.2 billion of capital to shareholders in connection to the separation of our China business.
  • We have completed our recapitalization consisting of $6.9 billion of new debt in May and June 2016; $4.6 billion of this new debt was issued subsequent to the end of our second quarter.

 

YUM! Brands, Inc.

Condensed Consolidated Summary of Results

(amounts in millions, except per share amounts)

(unaudited)

Quarter ended % Change Year to date % Change
6/11/16 6/13/15 B/(W) 6/11/16 6/13/15 B/(W)
Company sales $ 2,554 $ 2,659 (4) $ 4,719 $ 4,838 (2)
Franchise and license fees and income 454 446 (2) 908 889 2
Total revenues 3,008 3,105 (3) 5,627 5,727 (2)
Company restaurant expenses
Food and paper 764 841 9 1,413 1,529 8
Payroll and employee benefits 603 602 1,089 1,095 1
Occupancy and other operating expenses 779 805 3 1,376 1,421 3
Company restaurant expenses 2,146 2,248 5 3,878 4,045 4
General and administrative expenses 365 353 (3) 651 648 (1)
Franchise and license expenses 50 47 (8) 98 81 (20)
Closures and impairment (income) expenses 37 24 (60) 40 27 (52)
Refranchising (gain) loss (53 ) 68 NM (60 ) 58 NM
Other (income) expense (28 ) (6 ) NM (35 ) (9 ) NM
Total costs and expenses, net 2,517 2,734 8 4,572 4,850 6
Operating Profit 491 371 32 1,055 877 20
Interest expense, net 40 33 (22) 77 67 (15)
Income before income taxes 451 338 33 978 810 21
Income tax provision 116 102 (13) 248 213 (16)
Net income – including noncontrolling interests 335 236 42 730 597 22
Net income (loss) – noncontrolling interests (4 ) 1 NM 90
Net income – YUM! Brands, Inc. $ 339 $ 235 44 $ 730 $ 597 22

Effective tax rate

25.8 % 30.4 % 4.6 ppts. 25.4 % 26.3 % 0.9 ppts.

Basic EPS Data

EPS $ 0.82 $ 0.54 53 $ 1.77 $ 1.36 30
Average shares outstanding 410 437 6 413 437 6

Diluted EPS Data

EPS $ 0.81 $ 0.53 54 $ 1.74 $ 1.34 30
Average shares outstanding 417 445 6 420 446 6
Dividends declared per common share $ 0.46 $ 0.82 $ 0.92 $ 0.82

See accompanying notes.

Percentages may not recompute due to rounding.

YUM! Brands, Inc.

CHINA DIVISION Operating Results

(amounts in millions)

(unaudited)

Quarter ended % Change Year to date % Change
6/11/16 6/13/15 B/(W) 6/11/16 6/13/15 B/(W)
Company sales $ 1,558 $ 1,608 (3) $ 2,836 $ 2,843
Franchise and license fees and income 30 28 7 55 49 12
Total revenues 1,588 1,636 (3) 2,891 2,892
Company restaurant expenses
Food and paper 462 515 10 847 907 7
Payroll and employee benefits 342 333 (3) 587 577 (2)
Occupancy and other operating expenses 511 526 3 873 892 2
Company restaurant expenses 1,315 1,374 4 2,307 2,376 3
General and administrative expenses 102 100 (2) 168 168
Franchise and license expenses 5 5 1 9 9 3
Closures and impairment (income) expenses 31 17 (92) 31 19 (70)
Other (income) expense (12 ) (4 ) NM (27 ) (14 ) 84
Total costs and expenses, net 1,441 1,492 3 2,488 2,558 3
Operating Profit $ 147 $ 144 1 $ 403 $ 334 20
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 29.6 32.0 2.4 ppts. 29.8 31.9 2.1 ppts.
Payroll and employee benefits 21.9 20.7 (1.2 ppts.) 20.7 20.3 (0.4 ppts.)
Occupancy and other operating expenses 32.8 32.7 (0.1 ppts.) 30.8 31.4 0.6 ppts.
Restaurant margin 15.7 % 14.6 % 1.1 ppts. 18.7 % 16.4 % 2.3 ppts.
Operating margin 9.2 % 8.8 % 0.4 ppts. 13.9 % 11.6 % 2.3 ppts.

See accompanying notes.

Percentages may not recompute due to rounding.

YUM! Brands, Inc.

KFC DIVISION Operating Results

(amounts in millions)

(unaudited)

Quarter ended % Change Year to date % Change
6/11/16 6/13/15 B/(W) 6/11/16 6/13/15 B/(W)
Company sales $ 518 $ 535 (3) $ 948 $ 999 (5)
Franchise and license fees and income 194 191 1 389 389
Total revenues 712 726 (2) 1,337 1,388 (4)
Company restaurant expenses
Food and paper 176 183 4 321 344 7
Payroll and employee benefits 122 123 1 225 230 3
Occupancy and other operating expenses 145 151 4 263 280 6
Company restaurant expenses 443 457 3 809 854 5
General and administrative expenses 94 97 4 170 179 5
Franchise and license expenses 23 21 (9) 44 38 (16)
Closures and impairment (income) expenses 3 3 (33) 5 3 (79)
Other (income) expense (1 ) (71) (1 )

(75)

Total costs and expenses, net 563 577 3 1,028 1,073 4
Operating Profit $ 149 $ 149 $ 309 $ 315 (2)
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 34.0 34.4 0.4 ppts. 33.9 34.5 0.6 ppts.
Payroll and employee benefits 23.4 22.9 (0.5 ppts.) 23.6 23.0 (0.6 ppts.)
Occupancy and other operating expenses 28.1 28.2 0.1 ppts. 27.8 28.0 0.2 ppts.
Restaurant margin 14.5 % 14.5 % 14.7 % 14.5 % 0.2 ppts.
Operating margin 21.0 % 20.5 % 0.5 ppts. 23.1 % 22.7 % 0.4 ppts.

See accompanying notes.

Percentages may not recompute due to rounding.

YUM! Brands, Inc.

PIZZA HUT DIVISION Operating Results

(amounts in millions)

(unaudited)

Quarter ended % Change Year to date % Change
6/11/16 6/13/15 B/(W) 6/11/16 6/13/15 B/(W)
Company sales $ 125 $ 145 (14) $ 257 $ 289 (11)
Franchise and license fees and income 121 121 1 254 249 2
Total revenues 246 266 (7) 511 538 (5)
Company restaurant expenses
Food and paper 35 40 14 71 80 12
Payroll and employee benefits 39 45 12 80 89 10
Occupancy and other operating expenses 40 46 14 80 89 10
Company restaurant expenses 114 131 13 231 258 10
General and administrative expenses 56 63 9 106 120 11
Franchise and license expenses 10 9 (13) 20 18 (13)
Closures and impairment (income) expenses 2 3 32 3 3 8
Other (income) expense NM (2 ) (98)
Total costs and expenses, net 182 206 11 360 397 9
Operating Profit $ 64 $ 60 6 $ 151 $ 141 7
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 27.5 27.5 27.4 27.7 0.3 ppts.
Payroll and employee benefits 31.5 30.9 (0.6 ppts.) 31.3 30.8 (0.5 ppts.)
Occupancy and other operating expenses 31.6 31.7 0.1 ppts. 31.0 30.7 (0.3 ppts.)
Restaurant margin 9.4 % 9.9 % (0.5 ppts.) 10.3 % 10.8 %

(0.5 ppts.)

Operating margin 25.8 % 22.5 % 3.3 ppts. 29.5 % 26.2 % 3.3 ppts.

See accompanying notes.

Percentages may not recompute due to rounding.

YUM! Brands, Inc.

TACO BELL DIVISION Operating Results

(amounts in millions)

(unaudited)

Quarter ended % Change Year to date % Change
6/11/16 6/13/15 B/(W) 6/11/16 6/13/15 B/(W)
Company sales $ 353 $ 371 (5) $ 678 $ 707 (4)
Franchise and license fees and income 110 106 4 211 202 5
Total revenues 463 477 (3) 889 909 (2)
Company restaurant expenses
Food and paper 91 103 11 174 198 12
Payroll and employee benefits 100 101 1 197 199 1
Occupancy and other operating expenses 83 82 (2) 160 160
Company restaurant expenses 274 286 4 531 557 4
General and administrative expenses 45 47 5 91 91
Franchise and license expenses 5 4 (70) 9 6 (46)
Closures and impairment (income) expenses 1 1 47 1 2 63
Other (income) expense (1 ) (1 ) 50 (1 ) (1 ) 23
Total costs and expenses, net 324 337 4 631 655 3
Operating Profit $ 139 $ 140 (1) $ 258 $ 254 1
Company sales 100.0 % 100.0 % 100.0 % 100.0 %
Food and paper 25.9 27.8 1.9 ppts. 25.7 28.0 2.3 ppts.
Payroll and employee benefits 28.4 27.4 (1.0 ppts.) 29.1 28.2 (0.9 ppts.)
Occupancy and other operating expenses 23.4 21.9 (1.5 ppts.) 23.6 22.5 (1.1 ppts.)
Restaurant margin 22.3 % 22.9 % (0.6 ppts.) 21.6 % 21.3 % 0.3 ppts.
Operating margin 29.9 % 29.3 % 0.6 ppts. 29.0 % 28.0 % 1.0 ppts.

See accompanying notes.

Percentages may not recompute due to rounding.

YUM! Brands, Inc.

Condensed Consolidated Balance Sheets

(amounts in millions)

(unaudited)
6/11/16 12/26/15
ASSETS
Current Assets
Cash and cash equivalents $ 795 $ 737
Accounts and notes receivable, less allowance: $18 in 2016 and $16 in 2015 395 377
Inventories 255 229
Prepaid expenses and other current assets 332 241
Advertising cooperative assets, restricted 102 103
Total Current Assets 1,879 1,687

Property, plant and equipment, net of accumulated depreciation and amortization of $3,699 in 2016 and $3,643 in 2015

4,096 4,189
Goodwill 649 656
Intangible assets, net 264 271
Investments in unconsolidated affiliates 46 61
Other assets 528 521
Deferred income taxes 722 676
Total Assets $ 8,184 $ 8,061
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities
Accounts payable and other current liabilities $ 2,016 $ 1,985
Income taxes payable 122 77
Short-term borrowings 39 922
Advertising cooperative liabilities 102 103
Total Current Liabilities 2,279 3,087
Long-term debt 5,324 3,041
Other liabilities and deferred credits 912 958
Total Liabilities 8,515 7,086
Redeemable noncontrolling interest 6
Shareholders’ Equity (Deficit)
Common stock, no par value, 750 shares authorized; 399 shares and 420 shares issued in 2016 and 2015, respectively
Retained earnings (deficit) (123 ) 1,150
Accumulated other comprehensive income (loss) (266 ) (239 )
Total Shareholders’ Equity (Deficit) – YUM! Brands, Inc. (389 ) 911
Noncontrolling interests 58 58
Total Shareholders’ Equity (Deficit) (331 ) 969
Total Liabilities, Redeemable Noncontrolling Interest and Shareholders’ Equity (Deficit) $ 8,184 $ 8,061

See accompanying notes.

YUM! Brands, Inc.

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

(unaudited)

Year to date
6/11/16 6/13/15
Cash Flows – Operating Activities
Net income – including noncontrolling interests $ 730 $ 597
Depreciation and amortization 314 326
Closures and impairment (income) expenses 40 27
Refranchising (gain) loss (60 ) 58
Contributions to defined benefit pension plans (3 ) (78 )
Deferred income taxes (43 ) (77 )
Equity income from investments in unconsolidated affiliates (26 ) (16 )
Distributions of income received from unconsolidated affiliates 13 4
Excess tax benefit from share-based compensation (26 ) (40 )
Share-based compensation expense 27 28
Changes in accounts and notes receivable 32 16
Changes in inventories (29 ) 21
Changes in prepaid expenses and other current assets 3 (27 )
Changes in accounts payable and other current liabilities (44 ) 17
Changes in income taxes payable 84 91
Changes in restricted cash (81 ) (6 )
Other, net (35 ) 6
Net Cash Provided by Operating Activities 896 947
Cash Flows – Investing Activities
Capital spending (343 ) (404 )
Changes in short-term investments, net (51 ) (16 )
Proceeds from refranchising of restaurants 98 29
Other, net 8 39
Net Cash Used in Investing Activities (288 ) (352 )
Cash Flows – Financing Activities
Proceeds from long-term debt 2,300
Repayments of long-term debt (304 ) (7 )
Short-term borrowings by original maturity
More than three months – proceeds 1,400
More than three months – payments (2,000 )
Three months or less, net
Revolving credit facilities, three months or less, net 37 65
Repurchase shares of Common Stock (1,559 ) (287 )
Excess tax benefit from share-based compensation 26 40
Employee stock option proceeds 2 11
Dividends paid on Common Stock (379 ) (355 )
Other, net (61 ) (43 )
Net Cash Used in Financing Activities (538 ) (576 )
Effect of Exchange Rate on Cash and Cash Equivalents (12 ) 39
Net Increase in Cash and Cash Equivalents 58 58
Cash and Cash Equivalents – Beginning of Period 737 578
Cash and Cash Equivalents – End of Period $ 795 $ 636

See accompanying notes.

Reconciliation of Non-GAAP Measurements to GAAP Results
(amounts in millions, except per share amounts)
(unaudited)

In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) throughout this document, the Company has provided non-GAAP measurements which present earnings before Special Items and Operating profit on a basis before Special Items and foreign currency translation (“Core Operating Profit”). Included in Special Items are gains/(losses) associated with the costs associated with the planned spin-off of the China business and YUM recapitalization, costs associated with the KFC U.S. Acceleration Agreement, certain refranchising initiatives and the impact of redeeming the Little Sheep noncontrolling interest. These amounts are described in (c), (d), (e) and (f) in the accompanying notes.

The Company excludes Special Items and foreign currency translation impacts for the purposes of evaluating performance internally. Special Items are not included in any of our externally reported segment results. Additionally, we believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations, which is quantified by translating current year results at prior year average exchange rates. 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 earnings before Special Items and Core Operating Profit provide additional information to investors to facilitate the comparison of past and present operations, excluding items in the quarters and years to date ended June 11, 2016 and June 13, 2015 that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

Quarter ended

Year to date

6/11/16 6/13/15 6/11/16 6/13/15
Detail of Special Items
Costs associated with the planned spin-off of the China business and YUM recapitalization(c) $ (10 ) $ $ (19 ) $
Costs associated with KFC U.S. Acceleration Agreement(d) (8 ) (8 ) (17 ) (10 )
Refranchising initiatives(e) 53 (72 ) 56 (65 )
Other Special Items Income (Expense) (6 ) 2 (6 ) 2
Special Items Income (Expense) – Operating Profit 29 (78 ) 14 (73 )
Tax Benefit (Expense) on Special Items (13 ) 3 (9 ) 1
Special Items Income (Expense), net of tax – including noncontrolling interests 16 (75 ) 5 (72 )
Special Items Income (Expense), net of tax – noncontrolling interests(f) (8 ) (8 )
Special Items Income (Expense), net of tax – Yum! Brands, Inc. $ 24 $ (75 ) $ 13 $ (72 )
Average diluted shares outstanding 417 445 420 446
Special Items diluted EPS $ 0.06 $ (0.16 ) $ 0.03 $ (0.16 )
Reconciliation of Core Operating Profit to Reported Operating Profit
Core Operating Profit $ 478 $ 449 $ 1,085 $ 950
Special Items Income (Expense) 29 (78 ) 14 (73 )
Foreign Currency Impact on Reported Operating Profit (16 ) N/A (44 ) N/A
Reported Operating Profit $ 491 $ 371 $ 1,055 $ 877
Reconciliation of EPS Before Special Items to Reported EPS
Diluted EPS Before Special Items $ 0.75 $ 0.69 $ 1.71 $ 1.50
Special Items EPS 0.06 (0.16 ) 0.03 (0.16 )
Reported EPS $ 0.81 $ 0.53 $ 1.74 $ 1.34
Reconciliation of Effective Tax Rate Before Special Items to Reported Effective Tax Rate
Effective Tax Rate Before Special Items 24.6 % 25.6 % 24.8 % 24.4 %
Impact on Tax Rate as a result of Special Items 1.2 % 4.8 % 0.6 % 1.9 %
Reported Effective Tax Rate 25.8 % 30.4 % 25.4 % 26.3 %

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

Quarter Ended 6/11/16 China KFC

Pizza
Hut

Taco
Bell

Corporate
and
Unallocated

Consolidated
Total revenues $ 1,588 $ 712 $ 246 $ 463 $ (1 ) $ 3,008
Company restaurant expenses 1,315 443 114 274 2,146
General and administrative expenses 102 94 56 45 68 365
Franchise and license expenses 5 23 10 5 7 50
Closures and impairment (income) expenses 31 3 2 1 37
Refranchising (gain) loss (53 ) (53 )
Other (income) expense (12 ) (1 ) (15 ) (28 )
1,441 563 182 324 7 2,517
Operating Profit (loss) $ 147 $ 149 $ 64 $ 139 $ (8 ) $ 491
Quarter Ended 6/13/15 China KFC

Pizza
Hut

Taco
Bell

Corporate
and
Unallocated

Consolidated
Total revenues $ 1,636 $ 726 $ 266 $ 477 $ $ 3,105
Company restaurant expenses 1,374 457 131 286 2,248
General and administrative expenses 100 97 63 47 46 353
Franchise and license expenses 5 21 9 4 8 47
Closures and impairment (income) expenses 17 3 3 1 24
Refranchising (gain) loss 68 68
Other (income) expense (4 ) (1 ) (1 ) (6 )
1,492 577 206 337 122 2,734
Operating Profit (loss) $ 144 $ 149 $ 60 $ 140 $ (122 ) $ 371

The above tables reconcile segment information, which is based on management responsibility, with our Condensed Consolidated Summary of Results. Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items. See Reconciliation of Non-GAAP Measurements to GAAP Results.

YUM! Brands, Inc.

Segment Results

(amounts in millions)

(unaudited)

Year to Date 6/11/16 China KFC

Pizza
Hut

Taco
Bell

Corporate
and
Unallocated

Consolidated
Total revenues $ 2,891 $ 1,337 $ 511 $ 889 $ (1 ) $ 5,627
Company restaurant expenses 2,307 809 231 531 3,878
General and administrative expenses 168 170 106 91 116 651
Franchise and license expenses 9 44 20 9 16 98
Closures and impairment (income) expenses 31 5 3 1 40
Refranchising (gain) loss (60 ) (60 )
Other (income) expense (27 ) (1 ) (7 ) (35 )
2,488 1,028 360 631 65 4,572
Operating Profit (loss) $ 403 $ 309 $ 151 $ 258 $ (66 ) $ 1,055
Year to Date 6/13/15 China KFC

Pizza
Hut

Taco
Bell

Corporate
and
Unallocated

Consolidated
Total revenues $ 2,892 $ 1,388 $ 538 $ 909 $ $ 5,727
Company restaurant expenses 2,376 854 258 557 4,045
General and administrative expenses 168 179 120 91 90 648
Franchise and license expenses 9 38 18 6 10 81
Closures and impairment (income) expenses 19 3 3 2 27
Refranchising (gain) loss 58 58
Other (income) expense (14 ) (1 ) (2 ) (1 ) 9 (9 )
2,558 1,073 397 655 167 4,850
Operating Profit (loss) $ 334 $ 315 $ 141 $ 254 $ (167 ) $ 877
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