Yum! Brands Inc. Announces Full-Year EPS Growth of 14%, or $2.87 Per Share, Excluding Special Items

Yum! Brands
Published: February 7th, 2012

Marks 10th Consecutive Year of at least 13% EPS Growth; China Opens a Record 656 New Units

LOUISVILLE, Ky.--(BUSINESS WIRE)--Yum! Brands Inc. (NYSE: YUM) today reported results for the fourth quarter ended December 31, 2011 including EPS of $0.75. Reported EPS for the full year was $2.74. Full year and fourth quarter results for Yum! Restaurants International (YRI) and the U.S. reflect the benefit of an additional week. This 53rd week did not impact China Division results.

FULL YEAR HIGHLIGHTS

• Worldwide system sales grew 7%, prior to foreign currency translation, including 29% in China and 8% at YRI. System sales in the U.S. were even.
• Same-store sales grew 19% in China, 3% at YRI and declined 1% in the U.S.
• Record international development with 1,561 new restaurants, including 656 in China and 905 at YRI.
• Worldwide operating profit grew 8%, including a positive impact from foreign currency translation of $77 million. Prior to foreign currency translation, operating profit grew 4%, including 15% in China and 9% at YRI, offsetting a 12% decline in the U.S.
• Worldwide restaurant margin declined 0.9 points to 16.0%.
• Increased annual dividend rate to $1.14 per share. This marked the seventh consecutive year we increased our dividend at a double-digit rate since initiating a dividend in 2004.
• Repurchased 14.3 million shares totaling $733 million at an average price of $51.
• Remained an industry leader with return on invested capital of over 22%.

FOURTH QUARTER HIGHLIGHTS

• Worldwide system sales grew 11%, prior to foreign currency translation, including 33% in China, 10% at YRI and 6% in the U.S.
• Same-store sales grew 21% in China, 3% at YRI and 1% in the U.S.
• Operating profit grew 15% in China and 12% at YRI, prior to foreign currency translation. Operating profit grew 10% in the U.S.
• Worldwide restaurant margin declined 1.1 percentage points to 14.3%

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David C. Novak, Chairman and CEO said, "I'm pleased to report full-year EPS growth of 14%, making 2011 the tenth consecutive year we exceeded our annual target of at least 10%.

The highlight of 2011 was again the exceptional performance of our China business, which grew system sales by 29% and operating profit by 15%, prior to foreign currency translation. We opened a record 656 new restaurants and delivered extraordinary same-store sales growth of 19%. Clearly, our KFC and Pizza Hut brands in China continued to strengthen their category-leading positions. At the same time, Yum! Restaurants International opened 905 new units, including 622 in high-growth emerging markets. We are on the ground floor of growth in India, Russia and Africa, where system sales grew at strong double-digit rates. For the year, our emerging market businesses at Yum! Restaurants International grew system sales 13%, prior to foreign currency translation, including new-unit growth of 7%. Emerging markets contributed nearly 50% of operating profit at Yum! Restaurants International. The Yum! growth story is clearly about China and a whole lot more.

We continue to focus on three key elements that drive the value of our company: new-unit development, same-store sales growth, and high returns. Our new-unit potential in emerging markets is arguably the best in the restaurant industry. To put this in perspective, today we have fewer than two restaurants per million people in the top 10 emerging markets compared to nearly 60 restaurants per million people in the U.S. Clearly, we have a very long runway for growth. To fully maximize the value of our existing asset base of 37,000 restaurants, we are introducing sales layers like breakfast, expanded beverages and new product platforms. Finally, we continue to be disciplined with capital as we invest in high-return growth opportunities around the world, along with paying a meaningful dividend and making significant share repurchases. Our return on invested capital of over 22% is among industry leaders and has improved for eight consecutive years.

We are proud of our consistent track record of growth and are well-positioned to meet or exceed our annual target of at least 10% EPS growth in 2012."

CHINA DIVISION

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• China Division system sales increased 29% for the year and 33% in the fourth quarter, prior to foreign currency
• translation, driven by same-store sales growth and new-unit development.
• KFC same-store sales grew 19% for the year and 22% in the fourth quarter.
• Pizza Hut Casual Dining same-store sales grew 17% for the year and 15% in the fourth quarter.
• Pizza Hut Home Service same-store sales grew 19% for the year and 25% in the fourth quarter.
• China division same-store sales growth was driven by a 21% increase in same-store transactions for the year, including 20% in the fourth quarter.
• China opened a record 656 new units during the year, including 327 in the fourth quarter.

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• Total revenues for the year surpassed the $5 billion mark, at $5.6 billion.
• Restaurant margin decreased 2.4 percentage points to 19.7% for the year, driven by commodity inflation of 8% and wage rate inflation of 20%. Consistent with expectations, restaurant margin decreased 2.4 percentage points to 15.8% in the fourth quarter. This decline was driven by 11% commodity inflation and 18% wage rate inflation.
• Foreign currency translation positively impacted operating profit by $43 million for the year and $11 million in the fourth quarter.

Our China Division reports on a calendar year basis and was not impacted by the 53rd week.

YUM! RESTAURANTS INTERNATIONAL (YRI) DIVISION

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• YRI Divisionsystem sales increased 8% for the year and 10% in the fourth quarter, prior to foreign currency translation. The system sales increases were driven by new-unit development and by same-store sales growth of 3% for both the quarter and the year.
  • Emerging markets system sales grew 13% for the year, prior to foreign currency translation.
  • Developed markets system sales grew 4% for the year, prior to foreign currency translation.
• YRI opened 905 new units in 81 countries for the year. This included 452 new units in the fourth quarter.
  • For the year, 622 new units were opened in emerging markets.
  • Our franchise partners opened 91% of all new units for the year.
• Restaurant margin increased 0.6 percentage points to 12.3% for the full year. In the fourth quarter, restaurant margin declined 0.6 percentage points to 11.6%.
• Foreign currency translation positively impacted operating profit by $34 million for the year and $2 million in the fourth quarter.
• Beginning in the first quarter of 2012, India will be reported as a separate business segment not included in YRI results. Yum! Restaurants India will also include franchise businesses in the neighboring countries of Bangladesh, Mauritius, Nepal and Sri Lanka.

The 53^rd week had a positive impact on YRI's fourth quarter which included benefits of 3 percentage points to system sales growth, $35 million to total revenue, 0.3 percentage points to restaurant margin, $8 million to operating profit, and 0.1 percentage point to operating margin.

For the full year, the positive impact of the 53^rd week included benefits of 1 percentage point to system sales growth and 0.1 percentage point to restaurant margin.

YUM! RESTAURANTS INTERNATIONAL (YRI) DIVISION

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U.S. DIVISION

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• U.S. Division same-store sales declined 1% for the year, including declines of 2% at Taco Bell and 2% at KFC. Pizza Hut was even for the year. In the fourth quarter, same-store sales increased 1%, driven by growth of 6% at Pizza Hut and offset by declines of 2% at Taco Bell and 1% at KFC.
• Restaurant margin declined 2.1 percentage points for the year, driven by commodity inflation of 6% and sales deleverage. In the fourth quarter, restaurant margin decreased 0.7 percentage points, driven by 7% commodity inflation.

The 53 ^rd week had a positive impact on U.S. fourth quarter results which included benefits of 6 percentage points to system sales growth, $56 million to total revenue, 0.5 percentage points to restaurant margin, $18 million to operating profit, and 0.8 percentage points to operating margin.

For the full year, the positive impact of the 53^rd week included benefits of 2 percentage points to system sales growth and 0.2 percentage points to restaurant margin.

OWNERSHIP UPDATE

• On February 1, 2012, we acquired a controlling interest in Little Sheep Group, Ltd., the leading hot-pot concept based in China. This included approximately 450 system units.

• During the fourth quarter, we divested our Long John Silver's and A&W All-American Restaurants brands. LJS was sold on December 16^th and A&W was sold on December 19^th. These divestitures included 349 franchise units at YRI and 1,232 franchise units in the U.S. The U.S. franchise restaurants provided 5 percent of franchise revenue in the U.S. in 2011. We do not expect these divestitures to have a material impact to ongoing earnings.
• Our company ownership in the U.S. dropped to 13% from 15% last year. We refranchised 404 restaurants, including 264 KFCs, 74 Taco Bells and 66 Pizza Huts in 2011. Our target for Pizza Hut and KFC is about 5% company ownership. We also announced in December our decision to reduce company ownership in Taco Bell from 23% to about 16% over the next two years.

OTHER ITEMS UPDATE

• Our fiscal year ends on the last Saturday in December and, as a result, a 53rd week is added every five or six years. In 2011, this 53rd week benefited the U.S. and a portion of YRI markets by providing an additional week in their reporting calendars. This yielded a $26 million benefit to YRI and U.S. operating profit in the fourth quarter. As a result, the operating profit growth rate in the fourth quarter of 2012 will be negatively impacted by this overlap. This benefit was offset throughout 2011 by investments, including franchise development incentives, as well as higher-than-normal spending, such as restaurant closures in the U.S. and YRI.
• Worldwide effective tax rate, prior to Special Items, declined to 24.2% from 25.3% for the year, but increased to 26.7% from 23.8% in the fourth quarter of last year.

CONFERENCE CALL

Yum! Brands Inc. will host a conference call to review the company's financial performance and strategies at9:15 a.m. Eastern Time Tuesday, February 7, 2012. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers.

The call will be available for playback beginning at noon Eastern TimeTuesday, February 7, through midnight Tuesday, February 21, 2012. To access the playback, dial 855/859-2056 inthe United States and 404/537-3406 internationally. The playback pass code is 42233114.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands' Web site, www.yum.com/investors and selecting "Q4 2011 Earnings Conference Call" under "Investment Events." A podcast will be available within 24 hours.

ADDITIONAL INFORMATION ONLINE

Quarter end dates for each division, restaurant-count details, and definitions of terms are available online at http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.yum.com&esheet=50157745&lan=en-US&anchor=www.yum.com&index=2&md5=cd71df8dddc2a3fa577cf73b0f216fec under "Investors".

This announcement, any related announcements and the related webcast may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected. Factors that can cause our actual results to differ materially include, but are not limited to: food borne-illness or food safety issues; economic and political conditions in the countries where we operate; currency exchange and interest rates; commodity, labor and other operating costs; our ability to secure and maintain distribution and adequate supply to our restaurants; the effectiveness of our operating initiatives and marketing; the success of our strategies for refranchising and international development; the continued viability and success of our franchise and license operators; publicity that may impact our business and/or industry; pending or future legal claims; the impact of any widespread illness; our effective tax rates; our actuarially determined casualty loss estimates; government regulations; accounting policies and practices; and competition, consumer preferences or perceptions. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions "Risk Factors" and "Forward-Looking Statements" in our Annual Report on Form 10-K) for additional detail about factors that could affect our financial and other results. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. We are not undertaking to update any of these statements.

Yum! Brands, Inc., based in Louisville, Kentucky, is the world's largest restaurant company in terms of system restaurants with over 37,000 restaurants in more than 110 countries and territories. Yum! is ranked #214 on the Fortune 500 List and generated revenues of more than $12 billion in 2011. The Company's restaurant brands - KFC, Pizza Hut and Taco Bell - are the global leaders of the chicken, pizza and Mexican-style food categories. Outside the United States, the Yum! Brands system opened approximately four new restaurants each day of the year, making it a leader in international retail development.

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See accompanying notes.

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See accompanying notes.

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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 operating results in 2011 and 2010 on a basis before Special Items. Included in Special Items are the U.S. refranchising gain (loss), the depreciation reduction from the KFC restaurants impaired upon our offer to refranchise in 2010 that remained Company stores for some or all of the quarter or year presented, charges relating to U.S. General and Administrative ("G&A") productivity initiatives and realignment of resources, the losses and other costs relating to the sales of Long John Silver's ("LJS") and A&W All-American Food Restaurants ("A&W") brands, the losses associated with refranchising equity markets outside the U.S. and the depreciation reduction from the Pizza Hut UK restaurants impaired upon our decision to refranchise these restaurants which remain company-owned as of December 31, 2011. These amounts are described in (b), (c), (d) and (e) in the accompanying notes.

The Company uses earnings before Special Items as a key performance measure of results of operations for the purpose of evaluating performance internally. This non-GAAP measurement is 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 provides additional information to investors to facilitate the comparison of past and present operations, excluding items in 2011 and 2010 that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.

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The above tables reconcile segment information, which is based on management responsibility, with our 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.

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The above tables reconcile segment information, which is based on management responsibility, with our 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.

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Source: Yum! Brands Inc.