Yum! Brands Reports First-Quarter GAAP Operating Profit Growth of 14%

Flat First-Quarter Core Operating Profit Growth; Maintains All Aspects of Full-Year Guidance

May 2, 2018 - 11:01

Yum! Brands, Inc. (NYSE: YUM) today reported results for the first quarter ended March 31, 2018. First-quarter GAAP EPS was $1.27, an increase of 66%. First-quarter EPS excluding Special Items was $0.90, an increase of 38%.

GREG CREED COMMENTS

Greg Creed, CEO, said “As we begin the second full year of our transformation journey, I’m pleased with our progress towards becoming a more focused, more franchised and more efficient company. As a result of the timing mismatch between refranchising and associated G&A savings and the new revenue recognition accounting standard, core operating profit growth was flat, which is consistent with our expectations. We’re maintaining all aspects of our full-year 2018 guidance and remain confident that this transformation is building a strong foundation for long-term growth and will deliver increased returns for our stakeholders.”

FIRST-QUARTER HIGHLIGHTS

  • Worldwide system sales excluding foreign currency translation grew 4%, with KFC at 6%, Taco Bell at 4% and Pizza Hut at 2%.
  • We opened 239 net new units for 3% net new unit growth.
  • We refranchised 144 restaurants, including 52 KFC, 43 Pizza Hut and 49 Taco Bell units, for pre-tax proceeds of $205 million. We recorded net refranchising gains of $156 million in Special Items. As of quarter end, our global franchise ownership mix was 97%.
  • We repurchased 6.5 million shares totaling $528 million at an average price of $81.
  • We reflected the change in fair value of our investment in Grubhub by recording $66 million of pre-tax investment income, resulting in $0.16 in EPS.
  • Foreign currency translation favorably impacted divisional operating profit by $16 million.
 

      % Change




System Sales

Ex F/X

   

Same-Store

Sales

    Net New Units    

GAAP

Operating Profit

   

Core

Operating Profit

KFC Division


+6     +2     +4     +7     Even
Pizza Hut Division


+2

+1

+2

+6

+2
Taco Bell Division       +4     +1     +4     (6)     (6)
Worldwide       +4     +1     +3     +14     Even
 
 

      First Quarter




2018   2017   % Change
GAAP EPS


$1.27   $0.77   +66

Special Items EPS1




$0.37   $0.12   NM
EPS Excluding Special Items       $0.90   $0.65   +38

1See Reconciliation of Non-GAAP Measurements to GAAP Results within this release for further detail of Special Items.

 
 

All comparisons are versus the same period a year ago. As required, we adopted a new accounting standard on revenue recognition effective January 1, 2018. Prior year results have not been restated for this change. See the Other Items section of this release for further details.

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



KFC DIVISION

 

          First Quarter







   
    %/ppts Change






2018     2017     Reported     Ex F/X
Restaurants




21,644

20,716

+4     N/A
System Sales ($MM)




6,329

5,635

+12

+6
Same-Store Sales Growth (%)




+2

+2

NM

NM
Franchise and Property Revenues ($MM)




307

257

+19

+12
Operating Profit ($MM)




221

207

+7

Even
Operating Margin (%)           33.6     28.3     5.3     4.9
 
 

                    First Quarter (% Change)
                      International       U.S.
System Sales Growth (Ex F/X)









+7       (1)
Same-Store Sales Growth                     +2       Even















 
  • KFC Division opened 262 new international restaurants in 42 countries.
  • Operating margin increased 5.3 percentage points driven by refranchising and same-store sales growth, partially offset by the gross up of advertising fund revenues and offsetting expenses required by the revenue recognition accounting standard.
  • Foreign currency translation favorably impacted operating profit by $13 million.
 
KFC Markets1          

Percent of KFC

System Sales2

     

System Sales

Growth (Ex F/X)

               

First Quarter

(% Change)

China




27%


+9

United States




18%


(1)
Asia




12%


+3
Australia




7%


+5
Russia & Eastern Europe




7%


+20
United Kingdom




6%


(9)
Latin America




5%


+15
Western Europe




5%


+14
Africa




4%


+4
Middle East / Turkey / North Africa




4%


+8
Canada




2%


+5
Thailand




2%


+5
India           1%       +19
 

1Refer to investors.yum.com/financial-reports for a list of the countries within each of the markets.

2Reflects Full Year 2017.

 
 
 
 
 

PIZZA HUT DIVISION

 

          First Quarter







   
    %/ppts Change






2018     2017     Reported     Ex F/X
Restaurants




16,796

16,454

+2     N/A
System Sales ($MM)




3,032

2,872

+6

+2
Same-Store Sales Growth (%)




+1

(3)

NM

NM
Franchise and Property Revenues ($MM)




149

144

+4

+1
Operating Profit ($MM)




88

83

+6

+2
Operating Margin (%)           35.0     35.6     (0.6)     (1.0)
 
 

                    First Quarter (% Change)
                      International       U.S.
System Sales Growth (Ex F/X)









+2       +2
Same-Store Sales Growth                     (2)       +4
 
  • Pizza Hut Division opened 148 new international restaurants in 39 countries.
  • Operating margin decreased 0.6 percentage points driven by the gross up of advertising fund revenues and offsetting expenses required by the revenue recognition accounting standard, partially offset by refranchising.
  • Foreign currency translation favorably impacted operating profit by $3 million.
 
Pizza Hut Markets1          

Percent of Pizza

Hut System Sales2

     

System Sales

Growth (Ex F/X)

               

First Quarter

(% Change)

United States




46%


+2
China




18%


(1)
Asia




13%


+6
Europe




10%


+3
Latin America




6%


+1
Middle East / Turkey / North Africa




4%


Even
Canada




2%


+1
India




1%


+21
Africa           <1%       +27
 

1Refer to investors.yum.com/financial-reports for a list of the countries within each of the markets.

2Reflects Full Year 2017.

 
 
 
 
 

TACO BELL DIVISION

 

          First Quarter







   
    %/ppts Change






2018

    2017     Reported     Ex F/X
Restaurants




6,883

6,648

+4     N/A
System Sales ($MM)




2,347

2,262

+4

+4
Same-Store Sales Growth (%)




+1

+8

NM

NM
Franchise and Property Revenues ($MM)




128

114

+12

+12
Operating Profit ($MM)




132

141

(6)

(6)
Operating Margin (%)           28.5     31.2     (2.7)     (2.7)















 
  • Taco Bell Division opened 56 new restaurants, including 11 new international restaurants.
  • Operating margin decreased 2.7 percentage points driven by the gross up of advertising fund revenues and offsetting expenses required by the revenue recognition accounting standard and higher restaurant-level costs, partially offset by refranchising and same-store sales growth.




OTHER ITEMS

  • Effective January 1, 2018, we adopted a new accounting standard on revenue recognition. As a result, we are now recognizing upfront fees, such as initial and renewal fees we receive from franchisees, as revenue over the term of the related franchise agreement. We are also now recording incentive payments we may make to franchisees (e.g., equipment funding provided under the KFC U.S. Acceleration Agreement) as a reduction of revenue over the period of expected cash flows from the franchise agreements to which the payment relates. Under our historical accounting, we recognized upfront fees from franchisees in full upon the commencement of the related franchise agreements and incentive payments made to franchisees when we were obligated to make the payment.

Additionally, the new accounting standard requires us to begin recording other revenues we receive from franchisees and the related expenses on a gross basis within our Income Statement. Previously, these revenues and expenses, the largest of which relate to franchisee contributions to and subsequent expenditures from advertising cooperatives we consolidate, have been reported on a net basis within our Income Statement. We have reported these revenues and expenses in our Income Statement on the two new line items of Franchise contributions for advertising and other services and Franchise advertising and other services expense.

Prior results have not been restated for the impact of this accounting change and therefore remain reported as they have been historically. However, the adoption was done on a modified retrospective basis resulting in the current year impact being reported as if the now-required accounting had been in place since the inception of currently active franchise agreements or when franchise incentive payments were originally made. On a full-year basis we anticipate that the non-cash impacts of adopting the new revenue recognition standard will negatively impact Core Operating Profit growth by 2 to 3 percentage points. Core Operating Profit growth was negatively impacted by less than one percentage point for the quarter ended March 31, 2018 as a result of the new standard. The lower first quarter impact was expected as the majority of our new unit development for which we receive upfront fees, which will now be spread versus recognized upfront, is expected to occur later in the year.

  • Disclosures pertaining to outstanding debt in our Restricted Group capital structure will be provided at the time of the filing of the first-quarter Form 10-Q.
 
 
 
 
 

YUM! Brands, Inc.
Condensed Consolidated Summary of Results
(amounts in millions, except per share amounts)
(unaudited)

 

        Quarter ended     % Change





3/31/18     3/31/17

B/(W)
Revenues










Company sales



$ 512


$ 902


(43)
Franchise and property revenues



584


515


13
Franchise contributions for advertising and other services



275  

 

N/A
Total revenues



1,371  

1,417  

(3)











 
Costs and Expenses, Net










Company restaurant expenses



438


758


42
General and administrative expenses



219


237


8
Franchise and property expenses



47


46


Franchise advertising and other services expense



272





N/A
Refranchising (gain) loss



(156 )

(111 )

40
Other (income) expense



(2 )

3  

NM
Total costs and expenses, net



818  

933  

12











 
Operating Profit



553


484


14
Investment (income) expense, net



(66 )

(1 )

NM
Other pension (income) expense



3


28


88
Interest expense, net



107  

110  

3
Income before income taxes



509


347


47
Income tax provision



76  

67  

(14)
Net Income



$ 433  

$ 280  

55











 
Effective tax rate



15.0 %

19.4 %

4.4 ppts.











 

Basic EPS












EPS



$ 1.30  

$ 0.78  

66
Average shares outstanding



332  

357  

7











 

Diluted EPS












EPS



$ 1.27  

$ 0.77  

66
Average shares outstanding



340  

364  

7











 
Dividends declared per common share



$ 0.36  

$ 0.30  


 

See accompanying notes.

Percentages may not recompute due to rounding.

 
 
 
 
 
 

YUM! Brands, Inc.
KFC DIVISION Operating Results
(amounts in millions)
(unaudited)

 

        Quarter ended     % Change





3/31/18     3/31/17

B/(W)











 
Company sales



$ 245


$ 475


(48)
Franchise and property revenues



307


257


19
Franchise contributions for advertising and other services



106  

 

N/A
Total revenues



658  

732  

(10)











 
Company restaurant expenses



220


410


46
General and administrative expenses



85


89


5
Franchise and property expenses



29


25


(14)
Franchise advertising and other services expense



104





N/A
Other (income) expense



(1 )

1  

NM
Total costs and expenses, net



437  

525  

17
Operating Profit



$ 221  

$ 207  

7











 
Restaurant margin



10.5 %

13.7 %

(3.2) ppts.











 
Operating margin



33.6 %

28.3 %

5.3 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





3/31/18     3/31/17

B/(W)











 
Company sales



$ 24


$ 90


(73)
Franchise and property revenues



149


144


4
Franchise contributions for advertising and other services



78  

 

N/A
Total revenues



251  

234  

8











 
Company restaurant expenses



24


85


71
General and administrative expenses



50


53


6
Franchise and property expenses



11


13


19
Franchise advertising and other services expense



78





N/A
Other (income) expense



 

 

NM
Total costs and expenses, net



163  

151  

(8)
Operating Profit



$ 88  

$ 83  

6











 
Restaurant margin



(0.1 )%

6.3 %

(6.4) ppts.











 
Operating margin



35.0 %

35.6 %

(0.6) 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





3/31/18     3/31/17

B/(W)











 
Company sales



$ 243


$ 337


(28)
Franchise and property revenues



128


114


12
Franchise contributions for advertising and other services



91  

 

N/A
Total revenues



462  

451  

2











 
Company restaurant expenses



194


263


26
General and administrative expenses



40


42


6
Franchise and property expenses



6


5


(18)
Franchise advertising and other services expense



90





N/A
Other (income) expense



 

 

NM
Total costs and expenses, net



330  

310  

(6)
Operating Profit



$ 132  

$ 141  

(6)











 
Restaurant margin



19.6 %

21.8 %

(2.2) ppts.











 
Operating margin



28.5 %

31.2 %

(2.7) ppts.
 

See accompanying notes.

Percentages may not recompute due to rounding.

 
 
 
 
 
 

YUM! Brands, Inc.
Condensed Consolidated Balance Sheets
(amounts in millions)

 

       

(unaudited)

3/31/18

    12/31/17
ASSETS







Current Assets







Cash and cash equivalents



$ 982


$ 1,522

Accounts and notes receivable, less allowance: $26 in 2018 and $19 in 2017





501


400
Prepaid expenses and other current assets



406




384
Advertising cooperative assets, restricted



 

201  
Total Current Assets



1,889




2,507








 

Property, plant and equipment, net of accumulated depreciation and amortization of $1,467 in 2018 and $1,480 in 2017





1,651


1,697
Goodwill



514


512
Intangible assets, net



105


110
Other assets



490




346
Deferred income taxes



187  

139  
Total Assets



$

4,836

 

$ 5,311  








 
LIABILITIES AND SHAREHOLDERS' DEFICIT







Current Liabilities







Accounts payable and other current liabilities



$

924




$ 813
Income taxes payable



124


123
Short-term borrowings



61


375
Advertising cooperative liabilities



 

201  
Total Current Liabilities



1,109




1,512








 
Long-term debt



9,419


9,429
Other liabilities and deferred credits



1,062  

704  
Total Liabilities



11,590

 

11,645  








 
Shareholders' Deficit







Common stock, no par value, 750 shares authorized; 327 shares and 332 shares issued in 2018 and 2017, respectively







Accumulated deficit



(6,539

)

(6,063 )
Accumulated other comprehensive loss



(215

)

(271 )
Total Shareholders' Deficit



(6,754

)

(6,334 )
Total Liabilities and Shareholders' Deficit



$

4,836

 

$ 5,311  
 

See accompanying notes.

 
 
 
 
 
 

YUM! Brands, Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
(unaudited)

 

        Quarter ended





3/31/18     3/31/17
Cash Flows - Operating Activities







Net income



$ 433


$ 280
Depreciation and amortization



37


70
Refranchising (gain) loss



(156 )

(111 )
Investment (income) expense



(66 )

(1 )
Contributions to defined benefit pension plans



(3 )

(7 )
Deferred income taxes



(1 )

20
Share-based compensation expense



17


17
Changes in accounts and notes receivable



4


18
Changes in prepaid expenses and other current assets



(22 )

(1 )
Changes in accounts payable and other current liabilities



(99 )

(48 )
Changes in income taxes payable



13


12
Other, net



32  

39  
Net Cash Provided by Operating Activities



189  

288  








 
Cash Flows - Investing Activities







Capital spending



(42 )

(76 )
Proceeds from refranchising of restaurants



205


185
Other, net



1  

(5 )
Net Cash Provided by Investing Activities



164  

104  








 
Cash Flows - Financing Activities







Proceeds from long-term debt






192
Repayments of long-term debt



(332 )

(200 )
Revolving credit facilities, three months or less, net







Short-term borrowings by original maturity







More than three months - proceeds



12



More than three months - payments



(7 )


Three months or less, net







Repurchase shares of Common Stock



(498 )

(461 )
Dividends paid on Common Stock



(120 )

(106 )
Debt issuance costs






(18 )
Other, net



(31 )

(36 )
Net Cash Used in Financing Activities



(976 )

(629 )
Effect of Exchange Rate on Cash and Cash Equivalents



38  

17  
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash Equivalents



(585 )

(220 )
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Beginning of Period



1,599


831
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Topic 606 Adoption



69  

 
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - End of Period



$ 1,083  

$ 611  
 

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 Diluted Earnings Per Share excluding Special Items, our Effective Tax Rate excluding Special Items, System Sales and Core Operating Profit. Core Operating Profit excludes Special Items and foreign currency translation ("FX") and we use Core Operating Profit for the purposes of evaluating performance internally. Special Items are not included in any of our division segment results, and we believe the elimination of FX provides better year-to-year comparability without the distortion of foreign currency fluctuations. The Special Items are described in (b), (c), (d), (e), (f) and (g) in the accompanying notes.
 

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 Diluted Earnings Per Share excluding Special Items, our Effective Tax Rate excluding 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 ended March 31, 2018 and March 31, 2017 that the Company does not believe are indicative of our ongoing operations due to their size and/or nature. System sales and System sales growth include the results of all restaurants regardless of ownership, including company-owned and franchise restaurants that operate our Concepts. Sales of franchise restaurants typically generate ongoing franchise fees for the Company at a rate of 3% to 6% of sales. Franchise restaurant sales are not included in Company sales on the Condensed Consolidated Statements of Income; however, the franchise fees are included in the Company’s revenues. We believe system sales and system sales growth are useful to investors as significant indicators of the overall strength of our business as they incorporate our primary revenue drivers, Company and franchise same-store sales as well as net unit growth.

 
 

          Quarter ended






3/31/18     3/31/17
Detail of Special Items








Refranchising gain (loss)(b)




$ 156


$ 111
YUM's Strategic Transformation Initiatives(c)




(1 )

(7 )
Costs associated with Pizza Hut U.S. Transformation Agreement(d)




(1 )


Costs associated with KFC U.S. Acceleration Agreement(e)







(3 )
Other Special Items Income (Expense)




(1 )

(2 )
Special Items Income - Operating Profit




153


99
Special Items - Other Pension Income (Expense)(f)




 

(22 )
Special Items Income before Income Taxes




153


77
Tax Expense on Special Items




(19 )

(34 )
Tax Expense - U.S. Tax Act(g)




(6 )

 
Special Items Income, net of tax




128


43
Average diluted shares outstanding




340  

364  
Special Items diluted EPS




$ 0.37  

$ 0.12  









 
Reconciliation of GAAP Operating Profit to Core Operating Profit

















 

Consolidated










GAAP Operating Profit




$ 553


$ 484
Special Items Income




153


99
Foreign Currency Impact on Divisional Operating Profit




16  

N/A  
Core Operating Profit




$ 384  

$ 385  









 

KFC Division










GAAP Operating Profit




$ 221


$ 207
Foreign Currency Impact on Divisional Operating Profit




13  

N/A  
Core Operating Profit




$ 208  

$ 207  









 

Pizza Hut Division










GAAP Operating Profit




$ 88


$ 83
Foreign Currency Impact on Divisional Operating Profit




3  

N/A  
Core Operating Profit




$ 85  

$ 83  









 

Taco Bell Division










GAAP Operating Profit




$ 132


$ 141
Foreign Currency Impact on Divisional Operating Profit




 

N/A  
Core Operating Profit




$ 132  

$ 141  
 
 
 
 
 
 

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

 

        Quarter ended





3/31/18     3/31/17
Reconciliation of Diluted EPS to Diluted EPS excluding Special Items







Diluted EPS



$ 1.27


$ 0.77
Special Items Diluted EPS



0.37  

0.12  
Diluted EPS excluding Special Items



$ 0.90  

$ 0.65  








 
Reconciliation of GAAP Effective Tax Rate to Effective Tax Rate excluding Special Items







GAAP Effective Tax Rate



15.0 %

19.4 %
Impact on Tax Rate as a result of Special Items



0.6 %

6.9 %
Effective Tax Rate excluding Special Items



14.4 %

12.5 %








 
Reconciliation of Company sales to System sales















 

Consolidated









GAAP Company sales



$ 512


$ 902
Franchise sales



11,196  

9,867  
System sales



11,708


10,769
Foreign Currency Impact on System sales



466  

N/A  
System sales, excluding FX



$ 11,242  

$ 10,769  








 

KFC Division









GAAP Company sales



$ 245


$ 475
Franchise sales



6,084  

5,160  
System sales



6,329


5,635
Foreign Currency Impact on System sales



363  

N/A  
System sales, excluding FX



$ 5,966  

$ 5,635  








 

Pizza Hut Division









GAAP Company sales



$ 24


$ 90
Franchise sales



3,008  

2,782  
System sales



3,032


2,872
Foreign Currency Impact on System sales



100  

N/A  
System sales, excluding FX



$ 2,932  

$ 2,872  








 

Taco Bell Division









GAAP Company sales



$ 243


$ 337
Franchise sales



2,104  

1,925  
System sales



2,347


2,262
Foreign Currency Impact on System sales



3  

N/A  
System sales, excluding FX



$ 2,344  

$ 2,262  
 
 
 
 
 
 

YUM! Brands, Inc.
Segment Results
(amounts in millions)
(unaudited)

 
Quarter Ended 3/31/18       KFC   Pizza Hut   Taco Bell  

Corporate

and

Unallocated

  Consolidated
Total revenues


$ 658  
$ 251
$ 462
$  
$ 1,371  












 
Company restaurant expenses


220

24
194


438
General and administrative expenses


85

50
40
44

219
Franchise and property expenses


29

11
6
1

47
Franchise advertising and other services expense


104

78
90


272
Refranchising (gain) loss






(156 )
(156 )
Other (income) expense


(1 )


(1 )
(2 )
Total costs and expenses, net


437  
163
330
(112 )
818  
Operating Profit


$ 221  
$ 88
$ 132
$ 112  
$ 553  
 
 
 
Quarter Ended 3/31/17


KFC
Pizza Hut
Taco Bell

Corporate

and

Unallocated


Consolidated
Total revenues


$ 732  
$ 234
$ 451
$  
$ 1,417  












 
Company restaurant expenses


410

85
263


758
General and administrative expenses


89

53
42
53

237
Franchise and property expenses


25

13
5
3

46
Refranchising (gain) loss






(111 )
(111 )
Other (income) expense


1  


2  
3  
Total costs and expenses, net


525  
151
310
(53 )
933  
Operating Profit


$ 207  
$ 83
$ 141
$ 53  
$ 484  
 
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.

 


 


 


 


 


 

Notes to the Condensed Consolidated Summary of Results, Condensed Consolidated Balance Sheets
and Condensed Consolidated Statements of Cash Flows
(amounts in millions)
(unaudited)



 
(a)
Amounts presented as of and for the quarters ended March 31, 2018 and 2017 are preliminary.


 
(b)
In connection with our previously announced plans to have at least 98% franchise restaurant ownership by the end of 2018, we recorded net refranchising gains during the quarters ended March 31, 2018 and 2017 of $156 million and $111 million, respectively, that have been reflected as Special Items.


 


The first quarter 2018 net refranchising gains relate primarily to refranchising KFC restaurants in the UK and Taco Bell restaurants in the U.S. The first quarter of 2017 net refranchising gains relate primarily to refranchising Taco Bell restaurants in the U.S.


 
(c)
In the fourth quarter of 2016, we announced our plan to transform our business. Major features of the Company's strategic transformation plans involve being more focused on development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure (“YUM’s Strategic Transformation Initiatives”). During the quarters ended March 31, 2018 and 2017, we recognized Special Item charges of $1 million and $7 million, respectively, related to these initiatives. In the first quarter of 2017, these costs primarily related to severance and relocation costs that were recorded within G&A.


 
(d)
On May 1, 2017, we reached an agreement with Pizza Hut U.S. franchisees that will improve brand marketing alignment, accelerate enhancements in operations and technology and includes a permanent commitment to incremental advertising contributions by franchisees beginning in 2018. During the quarter ended March 31, 2018, we recorded Special Item charges of $1 million for these investments. These amounts were recorded as Franchise and property expenses.


 
(e)
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 improved assets and customer experience. In connection with this agreement, we recognized Special Item charges of $3 million for the quarter ended March 31, 2017 within Franchise and property expenses.


 
(f)

We recorded a non-cash charge of $22 million related to the adjustment of certain historical deferred vested liability balances in our qualified U.S. plan during the first quarter of 2017. This charge was recorded in Other pension (income) expense.



 
(g)
During the first quarter of 2018, we recorded a $6 million increase to our provisional deemed repatriation tax expense recorded in the fourth quarter of 2017 associated with the Tax Cuts and Jobs Act of 2017 ("Tax Act") as enacted by the U.S. government.


 

(h)


On February 7, 2018, certain of our subsidiaries entered into a master services agreement with a subsidiary of Grubhub Inc. (“Grubhub”). Concurrent with the master services agreement, one of our subsidiaries entered into an investment agreement to invest $200 million in exchange for approximately 2.8 million shares of Grubhub common stock, subject to customary closing conditions. The investment agreement represents a forward contract to purchase shares of Grubhub stock and is required to be accounted for under GAAP as a derivative as of March 31, 2018. As a result, we recorded a non-cash gain of $66 million in Investment (income) expense, net in our Condensed Consolidated Statements of Income related to the mark-to-market of the forward contract during the quarter ended March 31, 2018, which includes the appreciation of the underlying common shares since entering into the agreement less certain valuation adjustments. Subsequent to March 31, 2018, all conditions for closing were met and we purchased the Grubhub shares.