Yum! Brands Inc. Reports Strong 2006 Second-Quarter Earnings Per Share of $0.68 or +15% Versus Last Year
2006-07-20
Raises Full-Year Forecast
Yum! Brands Inc. (NYSE: YUM) today reported financial results for the second quarter ended June 17, 2006, and provided estimated Period 7 global sales results.
In the second quarter, we and our franchise partners continued to expand our brands around the world and grow same-store sales:
-- Yum! Restaurants International Division (YRI) system restaurants grew by 4%.
-- Mainland China KFC and Pizza Hut restaurants increased by 21%.
-- Worldwide system same-store sales grew by 2%.
For the second quarter, key highlights are . . .
-- Worldwide operating profit increased 18%.
-- All three business segments reported operating-profit growth: YRI, 2%; China, 136%; and U.S., 5%.
-- Worldwide franchise fees increased 7%.
-- China Division restaurant margin increased nearly 5 percentage points.
-- U.S. multibrand restaurants in operation expanded 15%.
-- Average diluted shares outstanding were reduced by 7%.
-- Announced a 30% increase in the quarterly dividend to $0.15 per share, payable August 4, 2006.
Note: All preceding comparisons are versus the same period a year ago.
FULL-YEAR OUTLOOK
The company raised its full-year earnings per share (EPS) outlook to at least $2.83, or 11% growth, based on very strong second-quarter results in our China Division and an expected strong second half of 2006 for YRI. The company expects solid full-year operating-profit growth from each of its three divisions: China, YRI, and the U.S. The company's prior EPS guidance for 2006 was at least $2.81.
CONSOLIDATED FINANCIAL HIGHLIGHTS
---------------------------------
Second Quarter Year To Date
------------------------- -------------------------
2006 2005 % Change 2006 2005 % Change
------- ------- --------- ------- ------- ---------
Traditional
Restaurants 32,022 31,434 +2 32,022 31,434 +2
System-Sales Growth +5% +7% NM +5% +7% NM
Earnings Per Share
(EPS) $0.68 $0.59 +15 $1.28 $1.09 +17
----------------------------------------------------------------------
David C. Novak, Chairman and CEO, said, "I am pleased to report we had another outstanding quarter. Our entire portfolio contributed to the strong worldwide second-quarter operating profit growth of 18% and EPS growth of 15%. Given the robust growth we expect from our China and YRI Divisions, we are able to once again raise our full-year EPS forecast from at least $2.81 to at least $2.83.
"Our China business is obviously experiencing booming growth. It's particularly impressive that we are achieving record second-quarter restaurant margin as we are on track to open another 400 new restaurants this year. In addition, our Yum! Restaurants International Division brings strong business trends into the second half and is expected to exceed our target of opening at least 750 new restaurants for 2006. This will be the sixth straight year of at least 1,000 new restaurants opened outside the U.S., and we expect to maintain at least that development pace going forward into 2007.
"In the U.S., significant improvement in commodity costs will more than offset what we believe is short-term sales softness that Taco Bell and KFC experienced during Period 7, as the brands lapped last year's outstanding same-store-sales growth of +10% and +7% respectively. We are confident of our positioning and programs for these brands and expect to have overall positive same-store-sales growth at both of them for the second half of 2006. At Pizza Hut, we foresee a slow recovery as the brand begins to execute a turnaround plan. Overall, we expect to grow the operating profit of our U.S. business by 6%, our strongest performance in four years.
"This will be our fifth straight year where we demonstrate the strength of our portfolio to deliver at least 10% EPS growth. The key factor for the consistency of our growth is our global portfolio that provides us the opportunity to build dominant restaurant brands in China, drive profitable international expansion, improve U.S. brands and operations, and multibrand category-leading brands."
YUM! RESTAURANTS INTERNATIONAL DIVISION (YRI)
---------------------------------------------
Second Quarter Year to Date
($ million, % %
except Change Change
restaurant -------- --------
counts and Excl Excl
percentages) 2006 2005 Reported F/x 2006 2005 Reported F/x
-------------------------------------------------------
Key Financial
Measures
Franchise &
License Fees 108 98 +10 +12 218 198 +10 +13
Franchisee
Sales 2,026 1,895 +7 +10 4,097 3,888 +5 +9
Company Sales 381 394 (3) (2) 740 778 (5) (3)
Operating
Margin 18.1% 17.7% +0.4 ppt NA 19.1% 18.3% +0.8 ppt NA
Operating
Profit 88 87 +2 +5 183 178 +3 +5
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Key Operating
Metrics
System-Sales
Growth (Local
Currency) +8 +7
System
Restaurants 11,438 10,978 +4 NA 11,438 10,978 +4 NA
Franchise & JV
Restaurants 10,087 9,539 +6 NA 10,087 9,539 +6 NA
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Key growth driver: Franchise-fee growth by opening new franchise restaurants and leveraging our substantial infrastructure across an array of international markets.
For the second quarter, franchise fees continued to grow as a result of new-restaurant expansion, same-store-sales growth of 4%, and the expansion of our franchise base due to the sale of company restaurants to franchisees (refranchising). YRI opened 152 new restaurants in the second quarter, 92% of those by franchise and joint-venture partners, including 87 KFCs, 54 Pizza Huts, 9 A&Ws, and 2 Taco Bells. Strong same-store-sales-growth performance continued in YRI's franchise-only markets of Asia, southern Africa, the Middle East and the Caribbean/Latin America.
For the second quarter, company sales were negatively affected by the refranchising of 103 company restaurants over the past year, impacting company-sales growth by 5 percentage points. Company same-store-sales growth was slightly positive, improving from a decline in the first quarter.
In our emerging-markets category, we finalized the acquisition of the Rostik's brand in Russia during the second quarter. As we convert the existing Rostik's restaurants, we will add a substantial number of new cobranded Rostik's/KFCs in Russia over the next 18 months. In India, our scale continues to build with 125 Pizza Hut and 15 KFC restaurants currently in operation.
Foreign currency conversion for the second quarter negatively impacted YRI operating profit by $3 million and $5 million year to date. Based on current foreign currency rates, we expect that the balance-of-year conversion impact will be slightly favorable.
For YRI full-year 2006 in local-currency terms we expect:
-- System-sales growth of 7%, from at least 5% previously.
-- To exceed our target of 750 new restaurants.
-- Franchise-fee growth of at least 10%, from at least 8% previously.
-- Operating-profit growth of 10%.
These full-year growth rates are on a like-for-like basis excluding the fifty-third-week benefit in 2005.
CHINA DIVISION
--------------
Second Quarter Year to Date
($ million, except % %
restaurant counts Change Change
and percentages) -------- --------
Excl Excl
2006 2005 Reported F/x 2006 2005 Reported F/x
----------------------------------------------------
Key Financial
Measures
Company Sales 352 268 +31 +28 621 495 +25 +23
Restaurant Margin 18.8% 13.9% +4.9 NA 20.1% 18.1% +2.0 NA
Operating Profit 57 25 +136 +130 115 77 +50 +46
----------------------------------------------------------------------
Key Operating
Metrics
MAINLAND CHINA:
KFC Restaurants 1,657 1,378 +20 NA 1,657 1,378 +20 NA
Pizza Hut
Restaurants 252 201 +25 NA 252 201 +25 NA
System-Sales
Growth (Local
Currency) +36 +26
----------------------------------------------------------------------
Note: China Division includes mainland China, Thailand and the KFC
Taiwan business.
Key growth driver: Profitable expansion of new KFC and Pizza Hut company restaurants in mainland China.
For the second quarter 2006, company sales for the China Division increased 28% in local currency due to the continued strong expansion of both our KFC and Pizza Hut brands in mainland China. Mainland China system restaurants in operation grew 21% and system-same-store sales grew 16%.
Second-quarter 2006 operating profit increased 130% in local currency terms versus second quarter last year. The key contributing factor to the significant increase was continued improvement in mainland China KFC sales trends, lapping the negative sales impact that KFC restaurants experienced during the second quarter last year from an unapproved food ingredient issue. Importantly, second-quarter restaurant margin was up solidly even against results from 2004.
Foreign currency conversion added approximately $2 million to operating profit for the second quarter and $3 million year to date. We expect similar favorable quarterly impacts from foreign currency conversion for the balance of 2006.
For the China Division full-year 2006 in local currency terms, we expect:
-- System-sales growth of at least 22%.
-- Operating-profit growth of at least 25%, from at least 20% previously.
-- 375 new-restaurant openings in mainland China and 400 in total for the Division.
UNITED STATES BUSINESS
----------------------
($ million, except Second Quarter Year to Date
restaurant counts % %
and percentages) 2006 2005 Change 2006 2005 Change
--------------------------------------------
Key Financial Measures
Franchisee Sales 2,967 2,849 +4 5,879 5,531 +6
Franchise & License Fees 151 145 +4 299 281 +6
Company Sales 1,179 1,240 (5) 2,370 2,439 (3)
Restaurant Margin 16.1% 14.4% +1.7 15.5% 13.8% +1.7
Operating Margin 14.6% 13.4% +1.2 14.3% 12.6% +1.7
Operating Profit 194 185 +5 382 342 +11
----------------------------------------------------------------------
Key Operating Metrics
Blended System
Same-Store-Sales Growth % +1 +3 NM +3 +3 NM
System Multibrand
Restaurants 3,224 2,813 +15 3,224 2,813 +15
Franchise Restaurants 13,603 13,508 +1 13,603 13,508 +1
----------------------------------------------------------------------
Key growth drivers: Positive blended same-store-sales growth, improvements in restaurant and operating margins.
For the second quarter, franchise sales and fees continued to grow as a result of adding new franchise restaurants and the expansion of our franchise-system base across all brands due to the sale of 268 company-owned restaurants to franchisees (refranchising) over the past year.
Company sales declined by 5% for the second quarter from the impact of refranchising 268 company-owned restaurants the past 12 months.
The key driver of improvements in second-quarter restaurant and operating margins was a much improved commodity-cost environment. Overall, commodity costs declined by approximately $16 million versus last year.
For the U.S. in 2006, we expect:
-- Approximately +1% U.S. blended same-store-sales growth, from +2% to +3% previously.
-- Significantly lower commodity costs: approximately $40 million favorable impact versus 2005, from $18 million favorable impact previously expected.
-- Full-year operating-profit growth of 6% on a like-for-like basis excluding the fifty-third-week benefit in 2005.
U.S. FRANCHISE OWNERSHIP UPDATE
As previously communicated, in the U.S. business we have targeted to sell approximately 1,000 company restaurants to franchisees during 2006 and 2007. We are currently ahead of schedule in this plan and remain fully confident of meeting or exceeding our original two-year plan.
For the full year 2006, we now expect cash proceeds of at least $250 million versus the original target of $150 million. Year to date 2006, 107 company-owned U.S. restaurants have been sold to our franchisees.
Logos, product and company names mentioned are the property of their respective owners.
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