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Yum! Brands Inc. Announces Third Quarter 2011 EPS Growth of 13%, Excluding Special Items; China Delivers 35% Revenue Growth and Projects Record 600 New Units This Year

2011-10-05

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Yum! Brands Foreign currency translation positively impacted operating profit by $32 million.

LOUISVILLE, Ky.--()--Yum! Brands Inc. (NYSE: YUM) reported results for the third quarter ended September 3, 2011 including EPS of $0.83, excluding Special Items. After a Special Items loss of $0.03, reported EPS was $0.80. As a result of strong performance in China and other emerging markets, Yum! reconfirms full year EPS growth forecast of at least 12%, excluding special items.

THIRD-QUARTER HIGHLIGHTS

Operating profit grew 7% in China and 3% at Yum! Restaurants International (“YRI”), prior to foreign currency translation. Operating profit declined 16% in the U.S.
Foreign currency translation positively impacted operating profit by $32 million.
Worldwide system sales grew 6%, prior to foreign currency translation, including 29% in China and 8% at YRI. System sales in the U.S. declined 3%.
Strong international development continued with 331 new restaurants opened, including 138 new units in China. We are now expecting to open a record 600 new units in China this year. Additionally, we expect to open 900 new units in YRI.
Same-store sales grew 19% in China and 3% at YRI, and declined 3% in the U.S.
Worldwide restaurant margin declined 1.9 percentage points to 17.2%.
During the quarter, the Company announced a 14% increase in its quarterly dividend.

Reconfirms Full Year EPS Growth Forecast of at least 12%, Excluding Special Items


	Third Quarter					Year-to-Date
	2011		2010		% Change	2011		2010		% Change
EPS Excluding Special Items	$0.83		$	0.73	13%	$2.12		$1.90		11%
Special Items Gain/(Loss)¹	($0.03	)	$	0.01	NM	($0.13	)	($0.08	)	NM
EPS	$0.80		$	0.74	8%	$1.99		$1.82		9%

¹ See Reconciliation of Non-GAAP Measurements to GAAP Results for further detail of the Special Items. Special Items in the third quarter are primarily related to Pizza Hut UK impairment and the planned sale of Long John Silver’s and A&W All-American Restaurants.

Note: All comparisons are versus the same period a year ago and exclude Special Items unless noted.

David C. Novak, Chairman and CEO said, “I’m pleased to report EPS growth of 13% in the third quarter, excluding special items. As a result of strong performance in China and other emerging markets, we confidently reaffirm our full-year EPS growth forecast of at least 12%, which will make 2011 the 10^th consecutive year we exceed our annual target of at least 10% EPS growth.

In China, operating profit grew 7% for the quarter as system sales jumped 29%, prior to foreign currency translation. Likewise, year-to-date operating profit increased 15% with system sales up 27%. This tremendous sales growth, combined with our expectation to open a record 600 new restaurants this year, gives us even more confidence our China business model is as strong as ever. At Yum! Restaurants International (YRI), operating profit increased 3% in the quarter and 7% year-to-date, prior to foreign currency translation. We are extremely excited about our progress in emerging markets like India, Africa and Russia, as these businesses will contribute meaningful profit growth to Yum! in the coming years. Importantly, we expect to open about 900 new restaurants this year at YRI. The robust new unit growth in China and YRI not only contributes to this year’s earnings, but positions Yum! for strong growth in 2012 as well.

Our impressive international growth was offset by a 16% decline in U.S. profits. We’re obviously disappointed in our U.S. performance. However, we have aggressively developed a pipeline of category leading innovation and have productivity initiatives planned to dramatically improve sales and profit performance in 2012. Looking ahead, the strength of our international brands and outstanding new unit development, combined with aggressive U.S. initiatives, make us confident we will continue our track record of double-digit earnings growth next year and beyond.”

CHINA DIVISION

Third Quarter

Year-to-Date

% Change

2011

2010

Reported

Ex F/X

2011

2010

Reported

Ex F/X

System Sales Growth

+36

+29

+33

+27

Same-Store Sales Growth (%)

+19

+17

Restaurant Margin (%)

21.3

25.2

(3.9)

21.7

24.0

(2.3)

Operating Profit ($MM)

301

267

+13

698

582

+20

+15

China Division system sales increased 29%, prior to foreign currency translation, driven by same-store sales growth of 19% and new unit development. The same-store sales growth was driven by a 27% increase in same-store transactions.
- KFC same-store sales grew 19%.
- Pizza Hut Casual Dining same-store sales grew 19%, marking its seventh consecutive quarter of double-digit same-store sales growth.
- 138 new restaurants opened in the third quarter. We are now expecting to open a record 600 new units this year in China.


China Units	Q3 2011	% Change¹
Traditional Restaurants	4,187	+14
KFC	3,475	+14
Pizza Hut Casual Dining	564	+18
Pizza Hut Home Service	127	+20

¹ Annual Rate of Change

Restaurant margin decreased 3.9 percentage points, driven by commodity and labor inflation. New menu pricing was taken after the quarter ended. We expect full year restaurant margins of 20%.
Consistent with our previously communicated full year commodity inflation guidance of 9%, we are expecting peak commodity inflation in the fourth quarter.
Operating profit growth of 7%, prior to foreign currency translation, included the impact of a $10 million benefit from our participation in the Shanghai World Expo last year. This reduced operating profit growth by 4 percentage points.
Foreign currency translation positively impacted operating profit by $16 million.

YUM! RESTAURANTS INTERNATIONAL (YRI) DIVISION

Third Quarter

Year-to-Date

% Change

2011

2010

Reported

Ex F/X

2011

2010

Reported

Ex F/X

Traditional Restaurants

14,478

14,001

14,478

14,001

System Sales Growth

+18

+13

Franchise & License Fees ($MM)

215

171

+26

+15

593

499

+19

+12

Operating Profit ($MM)

163

142

+15

466

405

+15

Operating Margin (%)

20.3

20.1

0.2

0.1

21.0

19.3

1.7

1.5

YRI Division system sales increased 8%, prior to foreign currency translation, driven by new unit development and same-store sales growth of 3%.
- Emerging markets led the way with 13% system sales growth, driven by 6% unit growth and 7% same-store sales growth.
- Developed market system sales grew 4%, including 2% unit growth.
YRI opened 193 new units in 50 countries, including 127 new units in emerging markets. Our franchise partners opened 94% of all new units. Franchise fees are on pace for a record year of over $850 million, growing at a double-digit pace.
Operating profit grew 3%, prior to foreign currency translation, driven by strong emerging market performance. Third quarter operating profit growth was hindered by a 5 percentage point impact from a $6 million non-cash expense related to expected Pizza Hut UK restaurant closures.
Restaurant margin decreased 0.2 percentage points to 12.3%.
Foreign currency translation positively impacted operating profit by $16 million.


Key YRI Markets	System Sales Ex F/X
Key YRI Markets	Percent of YRI¹	Third Quarter Growth (%)	Year-to-Date Growth (%)
Franchise Only Markets
Asia (ex China Division)	26%	+5	+5
Latin America	11%	+8	+8
Middle East	8%	+16	+12
Continental Europe	7%	+8	+5
Canada	7%	(4)	(4)
Africa	5%	+14	+12
Company/Franchise Markets
UK²	14%	+5	+2
Australia/New Zealand	10%	(1)	+1
Thailand	2%	+20	+21
Key Growth Markets
France	4%	+18	+23
Germany/Netherlands	2%	+19	+15
India	1%	+42	+42
Russia	1%	+32	+23

¹ Percentage of Total YRI System Sales for Full Year 2010.
² KFC UK system sales grew 5% for the quarter and year-to-date; Pizza Hut UK system sales grew 5% for the quarter and declined 3% year-to-date.

U.S. DIVISION

	Third Quarter			Year-to-Date
	2011	2010	% Change	2011	2010	% Change
Same-Store Sales Growth (%)	(3)	+1	NM	(2)	Even	NM
Restaurant Margin (%)	12.1	14.4	(2.3)	11.5	14.3	(2.8)
Franchise and License Fees ($MM)	182	179	+1	534	532	--
Operating Profit ($MM)	143	168	(16)	398	495	(20)
Operating Margin (%)	16.3	17.4	(1.1)	15.3	17.1	(1.8)

U.S. Division same-store sales declined 3%, including declines of 2% at Taco Bell, 3% at Pizza Hut, and 3% at KFC.
Restaurant margin declined 2.3 percentage points and operating profit declined 16% due to $15 million of commodity inflation and a decline in same-store sales.
Profit performance is expected to improve in the fourth quarter.

OTHER ITEMS UPDATE

Worldwide effective tax rate, prior to Special Items, declined to 25.1% from 27.4% in the third quarter of last year.
Share repurchases totaled $238 million for 4.6 million shares at an average price of $52 per share. Share repurchases totaled $545 million year-to-date.

OWNERSHIP / SPECIAL ITEMS UPDATE

During the third quarter, we decided to refranchise our entire Pizza Hut UK business. As a result, we recorded a non-cash pre-tax charge in Special Items of $76 million, primarily related to the impairment of long-lived assets.
Subsequent to the end of the third quarter, we reached definitive agreements to sell Long John Silver’s and A&W All American Restaurants to key franchisee leaders. During the third quarter, we recorded $53 million in tax benefits related to tax losses from the sales.
In the U.S., we have essentially completed Pizza Hut refranchising, and KFC is now our main refranchising focus. Year-to-date we have refranchised 128 restaurants, including 104 KFCs. Our target for Pizza Hut and KFC is about 5% company ownership. We expect to refranchise about 400 restaurants in the U.S. for the full year. Since the inception of our refranchising program in late 2007, we have sold over 1,400 units across all brands, excluding Long John Silver’s and A&W Restaurants.


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

	Quarter						% Change	Year to Date						% Change
	9/3/11			9/4/10			B/(W)	9/3/11			9/4/10			B/(W)

Company sales	$	2,854		$	2,496		14	$	7,336		$	6,712		9
Franchise and license fees and income	420			366			15	1,179			1,069			10
Total revenues	3,274			2,862			14	8,515			7,781			9

Company restaurants
Food and paper	970			788			(23)	2,424			2,112			(15)
Payroll and employee benefits	600			516			(16)	1,609			1,480			(9)
Occupancy and other operating expenses	790			713			(11)	2,063			1,935			(7)
Company restaurant expenses	2,360			2,017			(17)	6,096			5,527			(10)

General and administrative expenses	310			285			(9)	873			813			(7)
Franchise and license expenses	41			24			(78)	104			71			(48)
Closures and impairment (income) expenses	25			5			NM	113			21			NM
Refranchising (gain) loss	66			(2		)	NM	69			51			(34)
Other (income) expense	(16		)	(11		)	51	(48		)	(31		)	54
Total costs and expenses, net	2,786			2,318			(20)	7,207			6,452			(12)

Operating Profit	488			544			(10)	1,308			1,329			(2)
Interest expense, net	32			38			18	110			121			9
Income before income taxes	456			506			(10)	1,198			1,208			(1)
Income tax provision	67			139			52	220			307			28
Net income - including noncontrolling interests	389			367			6	978			901			9
Net income - noncontrolling interests	6			10			40	15			17			14
Net income - YUM! Brands, Inc.	$	383		$	357		7	$	963		$	884		9

Effective tax rate	14.6		%	27.5		%	12.9 ppts.	18.4		%	25.4		%	7.0 ppts.

Basic EPS Data
EPS	$	0.82		$	0.76		8	$	2.05		$	1.87		10
Average shares outstanding	469			473			1	471			473			1

Diluted EPS Data
EPS	$	0.80		$	0.74		8	$	1.99		$	1.82		9
Average shares outstanding	481			484			1	483			485			—

Dividends declared per common share	$	—		$	—			$	0.50		$	0.42

See accompanying notes.

Percentages may not recompute due to rounding.


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

	Quarter						% Change	Year to Date						% Change
	9/3/11			9/4/10			B/(W)	9/3/11			9/4/10			B/(W)

Company sales	$	1,577		$	1,172		35	$	3,634		$	2,745		32
Franchise and license fees and income	23			16			41	52			38			36
Total revenues	1,600			1,188			35	3,686			2,783			32

Company restaurant expenses, net
Food and paper	568			390			(46)	1,274			909			(40)
Payroll and employee benefits	242			151			(60)	556			372			(49)
Occupancy and other operating expenses	431			335			(29)	1,015			806			(26)
	1,241			876			(42)	2,845			2,087			(36)
General and administrative expenses	67			55			(20)	171			136			(25)
Franchise and license expenses	2			1			NM	3			1			NM
Closures and impairment (income) expenses	—			—			—	3			5			42
Other (income) expense	(11		)	(11		)	(3)	(34		)	(28		)	19
	1,299			921			(41)	2,988			2,201			(36)
Operating Profit	$	301		$	267		13	$	698		$	582		20

Company sales	100.0		%	100.0		%		100.0		%	100.0		%
Food and paper	36.0			33.3			(2.7) ppts.	35.1			33.1			(2.0) ppts.
Payroll and employee benefits	15.3			12.9			(2.4) ppts.	15.3			13.6			(1.7) ppts.
Occupancy and other operating expenses	27.4			28.6			1.2 ppts.	27.9			29.3			1.4 ppts.
Restaurant margin	21.3		%	25.2		%	(3.9) ppts.	21.7		%	24.0		%	(2.3) ppts.

Operating margin	18.9		%	22.4		%	(3.5) ppts.	18.9		%	20.9		%	(2.0) ppts.

See accompanying notes.

Percentages may not recompute due to rounding.


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

	Quarter						% Change	Year to Date						% Change
	9/3/11			9/4/10			B/(W)	9/3/11			9/4/10			B/(W)

Company sales	$	586		$	533		10	$	1,627		$	1,602		2
Franchise and license fees and income	215			171			26	593			499			19
Total revenues	801			704			14	2,220			2,101			6

Company restaurant expenses, net
Food and paper	189			170			(11)	516			516			—
Payroll and employee benefits	152			133			(14)	418			404			(3)
Occupancy and other operating expenses	173			163			(6)	489			498			2
	514			466			(10)	1,423			1,418			—
General and administrative expenses	101			84			(20)	277			248			(12)
Franchise and license expenses	14			9			(90)	36			24			(58)
Closures and impairment (income) expenses	9			3			NM	18			6			NM
Other (income) expense	—			—			—	—			—			—
	638			562			(14)	1,754			1,696			(3)
Operating Profit	$	163		$	142		15	$	466		$	405		15

Company sales	100.0		%	100.0		%		100.0		%	100.0		%
Food and paper	32.2			31.9			(0.3) ppts.	31.6			32.2			0.6 ppts.
Payroll and employee benefits	25.9			24.9			(1.0) ppts.	25.7			25.2			(0.5) ppts.
Occupancy and other operating expenses	29.6			30.7			1.1 ppts.	30.1			31.1			1.0 ppts.
Restaurant margin	12.3		%	12.5		%	(0.2) ppts.	12.6		%	11.5		%	1.1 ppts.

Operating margin	20.3		%	20.1		%	0.2 ppts.	21.0		%	19.3		%	1.7 ppts.

See accompanying notes.

Percentages may not recompute due to rounding.


YUM! Brands, Inc. UNITED STATES Operating Results (amounts in millions) (unaudited)

	Quarter						% Change	Year to Date						% Change
	9/3/11			9/4/10			B/(W)	9/3/11			9/4/10			B/(W)

Company sales	$	691		$	791		(13)	$	2,075		$	2,365		(12)
Franchise and license fees and income	182			179			1	534			532			—
Total revenues	873			970			(10)	2,609			2,897			(10)

Company restaurant expenses, net
Food and paper	213			228			7	634			687			8
Payroll and employee benefits	206			232			11	635			704			10
Occupancy and other operating expenses	188			217			14	567			636			11
	607			677			10	1,836			2,027			9
General and administrative expenses	99			110			9	302			323			7
Franchise and license expenses	25			14			(70)	66			46			(42)
Closures and impairment (income) expenses	—			2			95	10			10			(1)
Other (income) expense	(1		)	(1		)	NM	(3		)	(4		)	(25)
	730			802			9	2,211			2,402			8
Operating Profit	$	143		$	168		(16)	$	398		$	495		(20)

Company sales	100.0		%	100.0		%		100.0		%	100.0		%
Food and paper	30.9			28.9			(2.0) ppts.	30.6			29.1			(1.5) ppts.
Payroll and employee benefits	29.9			29.2			(0.7) ppts.	30.6			29.7			(0.9) ppts.
Occupancy and other operating expenses	27.1			27.5			0.4 ppts.	27.3			26.9			(0.4) ppts.
	12.1		%	14.4		%	(2.3) ppts.	11.5		%	14.3		%	(2.8) ppts.

Operating margin	16.3		%	17.4		%	(1.1) ppts.	15.3		%	17.1		%	(1.8) ppts.

See accompanying notes.


Percentages may not recompute due to rounding.


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

	(unaudited)
	9/3/11		12/25/10
ASSETS
Current Assets
Cash and cash equivalents	$	1,236	$	1,426
Accounts and notes receivable, less allowance: $27 in 2011 and $33 in 2010	281		256
Inventories	186		189
Prepaid expenses and other current assets	466		269
Deferred income taxes	76		61
Advertising cooperative assets, restricted	106		112
Total Current Assets	2,351