01—Abstract
Summary
Summary of the 10-K filed February 21, 2019. Cited figures are marked; the original filing is the authoritative source.
YUM!
Brands, Inc. reported 2018 total revenues of $5.69 billiona, down from $5.88 billion in 2017, as the company continued its Strategic Transformation Initiatives and became 98% franchised by December 31, 2018. Company sales fell to $2.00 billion from $3.57 billion, reflecting refranchising of 660 restaurants during the year for pre-tax proceeds of $825 million. Operating Profit declined to $2.30 billion from $2.76 billion, largely because 2017 included larger refranchising gains ($540 million in 2018 versus $1.08 billion in 2017).
GAAP diluted EPS from continuing operations rose to $4.69b from $3.77, while diluted EPS excluding Special Items increased to $3.17 from $2.96. System sales reached $49.24 billion, and the company adopted Topic 606 on January 1, 2018, which affected how upfront franchise fees and advertising contributions are presented. The company returned capital to shareholders, repurchasing 28.2 million shares for $2.39 billion and paying $462 million in dividends.
Total debt was $10.07 billionc at year end, with approximately 91% effectively fixed-rate at an effective overall interest rate of about 4.7%. Management said it targets about 5.0x EBITDA leverage, cut annual capital expenditures to about $100 million in 2019 as planned, and set a G&A target of 1.7% of system sales for 2019. The company disclosed the Telepizza strategic alliance, under which Telepizza became master franchisee of Pizza Hut in Latin America and portions of Europe, adding 1,282 units at year end.
The filing highlights ongoing dependence on Yum China as its largest franchisee and royalty source, along with exposure to currency movements, a KFC U.K. supply disruption in 2018, and a 2018 effective tax rate of 16.2% that was lowered by Tax Act-related items. Net cash provided by operating activities from continuing operations was $1.18 billiond, compared with $1.03 billion in 2017.
02—Key points
Key Highlights
- Total revenues of $5.69 billion in 2018, down from $5.88 billion in 2017, while Company sales fell to $2.00 billion from $3.57 billion due to refranchising.
- GAAP diluted EPS from continuing operations of $4.69, up from $3.77; diluted EPS excluding Special Items of $3.17, up from $2.96.
- Operating Profit of $2.30 billion versus $2.76 billion in 2017, which included $1.08 billion of refranchising gains compared with $540 million in 2018.
- Ownership of 98% franchised restaurants at December 31, 2018, with 856 Company-owned restaurants remaining; 48,124 total units.
- Returned capital through share repurchases of $2.39 billion and dividends of $462 million; $1.1 billion of repurchase capacity remained under the August 2018 authorization.
- Total debt of $10.07 billion, approximately 91% effectively fixed-rate at an effective overall interest rate of about 4.7%.
- Telepizza strategic alliance added 1,282 Pizza Hut-branded units to the Pizza Hut Division count as of December 31, 2018.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Yum! Brands kept $0.27.
- Revenue$5.69B100.0%
- Cost of revenue−$1.63B28.7%
- Gross profit$4.05B71.3%
- Operating costs−$1.76B30.9%
- Operating income$2.30B40.4%
- Interest, other & tax−$754.0M13.3%
- Net income$1.54B27.1%
Where FY2018 revenue went
$5.69B- Operating costs: $1.76B, 31% of revenue
- Cost of revenue: $1.63B, 29% of revenue
- Net income: $1.54B, 27% of revenue
- Interest, other & tax: $754.0M, 13% of revenue
Kept 27% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 21, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $5.69B$5.88B | −3.2% |
| Cost of Revenue | $1.63B$2.95B | −44.7% |
| Gross Profit | $4.05B$2.92B | +38.6% |
| Operating Expenses | $3.39B$3.12B | +8.8% |
| Operating Income | $2.30B$2.76B | −16.8% |
| Interest Expense | $496.00M$473.00M | +4.9% |
| Net Income | $1.54B$1.34B | +15.1% |
| EPS (Basic) | $4.80$3.86 | +24.4% |
| EPS (Diluted) | $4.69$3.77 | +24.4% |
| Shares Outstanding (Basic) | 322.00M347.00M | −7.2% |
| Shares Outstanding (Diluted) | 329.00M355.00M | −7.3% |
05—Questions
Frequently Asked Questions
How did refranchising affect YUM's 2018 results?
The company refranchised 660 restaurants for pre-tax proceeds of $825 million and recorded net refranchising gains of $540 million. Company sales fell to $2.00 billion from $3.57 billion, and Restaurant profit declined to $366 million from $618 million, as the company operated fewer restaurants.
What is the company's exposure to Yum China?
Yum China is the company's largest franchisee and is the exclusive licensee of the KFC, Pizza Hut and Taco Bell concepts in China under a Master License Agreement. The filing states that YUM's financial results are significantly affected by Yum China's results, and that royalty income is subject to Chinese regulatory, currency and tax risks.
What drove the change in reported earnings per share?
GAAP diluted EPS from continuing operations increased 24% to $4.69 in 2018. Special Items contributed $1.52 per diluted share, including net refranchising gains, while diluted EPS excluding Special Items increased 7% to $3.17.
What are the company's 2019 targets?
Management stated it intends to reduce annual capital expenditures to approximately $100 million in 2019, lower G&A to 1.7% of system sales, and maintain an optimized capital structure of approximately 5.0x EBITDA leverage. It also expects an effective tax rate of 20% to 22% in 2019 and ongoing.
What was the effect of adopting Topic 606 on 2018 results?
Adopting Topic 606 on January 1, 2018 under the modified retrospective method reduced 2018 GAAP Operating Profit by $14 million and Core Operating Profit by $41 million compared with Legacy GAAP. Total revenues were presented at $5.69 billion, with $1.21 billion of franchise contributions for advertising and other services now shown on a gross basis.
06—Continue