Yum! Brands Announces Full-Year 2012 EPS Growth of 13%, or $3.25 Per Share, Excluding Special Items

Yum! Brands
Published: February 5th, 2013

Opens a Record 1,976 New International Restaurants; Adverse Publicity Regarding Poultry Supply Continues to Significantly Impact China KFC Sales

LOUISVILLE, Ky. - Feb. 5, 2013 - (BUSINESS WIRE) - Yum! Brands Inc. (NYSE: YUM) today reported results for the fourth quarter ended December 29, 2012 including EPS of $0.83, excluding Special Items. Reported EPS was $0.72 for the quarter and $3.38 for the year.

“Our growth strategies are unchanged, in China, Yum! Restaurants International, India and the U.S. With our category-leading brands and outstanding people capability, I’m confident we will bounce back strongly and restore our track record of double-digit EPS growth in the years ahead.”

Full-Year Highlights

• Worldwide system sales grew 5%, prior to foreign currency translation.
  • Worldwide system sales growth was 8%, excluding the 2011 divestiture of Long John Silver’s (LJS) and A&W All American Restaurants (A&W), the 53rd-week impact and the acquisition of Little Sheep, including 17% in China, 7% at Yum! Restaurants International (YRI) and 5% in the U.S. The 2011 fourth-quarter and full-year results reflect the benefit of an additional (53rd) week.
• Same-store sales grew 4% in China, 3% at YRI and 5% in the U.S.
• Worldwide restaurant margin increased 0.6 percentage points to 16.6%.
• Worldwide operating profit grew 12%, prior to foreign currency translation.
• Record international development with 1,976 new restaurants opened, including 889 new units in China, 949 new units at YRI and 138 in India Division; 83% of this development occurred in emerging markets.

Fourth-Quarter Highlights

• China Division KFC same-store sales turned sharply negative during the last two weeks of December as a result of adverse publicity from the poultry supply situation.
• Worldwide system sales were flat, prior to foreign currency translation.
  • Worldwide system sales growth was 5%, excluding the 2011 divestiture of LJS and A&W, the 53rd week impact and the acquisition of Little Sheep, including 7% in China, 7% at YRI and 3% in the U.S.
• Same-store sales grew 3% at YRI and 3% in the U.S. Same-store sales declined 6% in China.
• Worldwide restaurant margin increased 0.1 percentage point to 14.4%.
• Worldwide operating profit grew 6%, prior to foreign currency translation. Operating profit grew 10% at YRI, declined 5% in China and declined 5% in the U.S.
  • Excluding the 53rd-week impact, worldwide operating profit grew 11%, including 15% at YRI and 5% in the U.S.

The current negative sales trend in our China KFC business will adversely impact 2013 EPS. See next page for details.

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China Update

KFC sales in the last two weeks of the fourth quarter were significantly impacted by the intense media attention surrounding an investigation by the Shanghai FDA (SFDA) into poultry supply management at Yum! China. The investigation was prompted by a report broadcast on China’s national television (CCTV), which aired on December 18, 2012. The report showed that a few poultry farmers were ignoring laws and regulations by using excessive levels of antibiotics in chicken. Regrettably, some of this product was purchased by two poultry suppliers of KFC China. The investigation caused further media attention, including social media commentary, and this negatively affected consumer perceptions of poultry safety, and KFC in particular.

On January 25, 2013, the SFDA concluded its investigation and released its recommendations. We appreciate their thorough and diligent review. The SFDA identified issues and provided “Supervisory Recommendations” to Yum! China to strengthen our poultry supply chain practices including refined voluntary self testing procedures, improved reporting and communications and enhanced supplier management. Our team in China has taken a comprehensive review of our current system and is in the process of incorporating all of the SFDA’s recommendations. We have always recognized the importance of building a world-class supply chain in China, which is why we have implemented a wide range of quality assurance and testing practices over the years above legal and regulatory standards. The SFDA’s recommendations will further strengthen those practices. The SFDA did not bring a case against Yum! China and no fine was assessed.

The past seven weeks of media attention have been intense and negative towards the KFC brand image. Even though this is a very disappointing setback, we are more committed than ever to continue to strengthen our efforts, restore the confidence of our customers and win back their brand loyalty. To that end, the China team will soon be launching a brand reputation quality campaign to re-assure consumers of our high quality food, along with aggressive marketing plans.

2013 Outlook

We are confident the YRI and U.S. businesses will deliver annual operating profit growth consistent with our ongoing growth model. Given current uncertainties related to KFC sales in China, it is difficult to confidently forecast our overall financial performance. We have made the assumption that KFC China same-store sales will improve as the year progresses and will be positive in the fourth quarter. With these assumptions, we estimate a mid-single digit EPS decline in 2013 versus prior year, excluding Special Items. This includes an expectation for a significant decline in EPS performance in the first half of the year followed by EPS growth in the second half.

The first quarter for our China business includes only the months of January and February and is highly impacted by consumer spending during the Chinese New Year holiday. The timing of this holiday changes each year. This year it is important to note that while the timing impact of Chinese New Year is neutral to our first quarter, there is a significant negative impact to January sales and a corresponding significant benefit to February sales due to the timing of this week-long holiday. We expect that the underlying performance of our China business will remain relatively unchanged for the balance of the first quarter, with a same-store sales decline of approximately 25% for January and February combined (China’s first quarter).

David C. Novak Comments

David C. Novak, Chairman and CEO, said, “We delivered full-year 2012 EPS growth of 13% or $3.25 per share, excluding Special Items. This marks the 11th consecutive year we delivered at least 13% growth, which puts us in an elite group of high-growth companies. We also take satisfaction with our record level of international development in 2012 which lays the foundation for future growth and makes Yum! a leader in emerging market development. With new-unit development at the core of our growth model and the continued rapid expansion of the consuming class overseas, we believe our opportunity for long-term growth has never been better.

“We are obviously proud of our track record of achieving double-digit EPS growth, and I am as confident as ever we can deliver this performance over the long term. However, as a result of adverse publicity from the poultry supply situation in mid-December, China KFC sales experienced a sharp decline. Due to continued negative same-store sales and our assumption that it will take time to recover consumer confidence, we no longer expect to achieve EPS growth in 2013.

“Although we cannot predict how long it will take to restore sales, we are steadfast in our belief that the power and popularity of the KFC brand in China will ultimately drive a full sales recovery. Having weathered other storms in the past, we know that our brands are resilient. As a result, we will stay the course with our target to develop at least 700 new units in 2013 in China to lay the foundation for future growth, and will not let this event detract from our unparalleled China growth opportunity.

“Our growth strategies are unchanged, in China, Yum! Restaurants International, India and the U.S. With our category-leading brands and outstanding people capability, I’m confident we will bounce back strongly and restore our track record of double-digit EPS growth in the years ahead.”

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• China Division KFC same-store sales turned sharply negative during the last two weeks of December as a result of adverse publicity from the China poultry supply situation.
• China system sales increased 20% for the year and 11% in the fourth quarter, prior to foreign currency translation.
  • KFC same-store sales grew 3% for the year and declined 8% in the fourth quarter.
  • Pizza Hut Casual Dining same-store sales grew 10% for the year and 7% in the fourth quarter.
• We estimate the timing of Chinese New Year had a negative mid teen impact on January same-store sales growth for both KFC and Pizza Hut Casual Dining. We expect this negative impact of Chinese New Year to reverse in February. January 2013 estimated same-store sales declined 37%, including 41% for KFC and 15% at Pizza Hut Casual Dining.
• China opened a record 889 new units during the year, including 369 in the fourth quarter.

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• Restaurant margin decreased 1.6 percentage points to 18.1% for the year, driven by wage rate inflation of 10%, commodity inflation of 1% and higher start-up costs from an increased pace of development. Restaurant margin decreased 1.9 percentage points to 13.9% in the fourth quarter, driven by a decline in same-store transactions.
• Foreign currency translation positively impacted operating profit by $26 million for the year and $3 million in the quarter.
• For the year, the Little Sheep acquisition had a positive impact of 3 percentage points on system sales growth, a negative impact of 0.4 percentage points on restaurant margin and a negative impact of 1 percentage point on operating profit. For the quarter, the Little Sheep acquisition had a positive impact of 4 percentage points on system sales growth, a negative impact of 0.3 percentage points on restaurant margin and a negligible impact on operating profit.

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• YRI Division system sales increased 5% for the year and 3% in the fourth quarter, prior to foreign currency translation. The system sales increases were driven by record new-unit development and 3% same-store sales growth for both the quarter and the year.
  • The 2011 divestiture of LJS / A&W and 53rd week had a negative impact of 2% on system sales for the year.
  • Emerging markets system sales grew 12% for the year, driven by 7% same-store sales growth and 7% unit growth.
  • Developed markets system sales grew 1% for the year, driven by 1% same-store sales growth and 1% unit growth.
• YRI opened a record 949 new units in 78 countries. This included 473 new units in the fourth quarter.
  • For the year, 617 new units were opened in emerging markets.
  • Our franchise partners opened 92% of all new units.
• Foreign currency negatively impacted operating profit by $26 million for the year and $5 million in the fourth quarter.
• The 2011 divestiture of LJS / A&W had a negative impact of 1% on operating profit growth for the year.

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• U.S. Division same-store sales increased 5% for the year, including growth of 8% at Taco Bell, 3% at Pizza Hut and 3% at KFC. In the fourth quarter, same-store sales increased 3%, driven by growth of 5% at Taco Bell, 4% at KFC and offset by a decline of 1% at Pizza Hut.
• Restaurant margin increased 4.2 percentage points for the year, driven primarily by strong sales leverage. In the fourth quarter, restaurant margin increased 3.3 percentage points.
• Positive net-unit development of 21 units for the year.
• The 2011 divestiture of LJS / A&W and the 53rd week negatively impacted franchise and license fees by 7 percentage points and operating profit by 1 percentage point for the year; and negatively impacted franchise and license fees by 10 percentage points and operating profit by 12 percentage points for the quarter.

India Division

• India Division system sales increased 29% for the year and 24% for the fourth quarter, prior to foreign currency translation. The system sales increase was driven by unit growth of 27% and same-store sales growth of 5% for the year.

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Ownership / Special Items Update

• For the year in the U.S., we refranchised 468 units for proceeds of $311 million, primarily related to Taco Bell. We recorded pre-tax U.S. refranchising gains of $122 million in Special Items. At fiscal year end, our company ownership in the U.S. is 11%.
• During the quarter, we refranchised our Pizza Hut UK Dine-In business, which included 331 units. This resulted in a Special Items charge of $46 million for the quarter. At fiscal year end, our company ownership at YRI is 8%.
• During the quarter, in an effort to reduce ongoing volatility and administration expense in connection with the Company’s U.S. pension obligation, the Company offered certain former employees the limited opportunity to voluntarily elect an early payout of their pension benefits funded from existing pension plan assets. As a result of the program, we recorded a pre-tax non-cash pension settlement charge of $84 million in Special Items for the quarter.

Other Items Update

• For the year, worldwide effective tax rate, prior to Special Items, increased 1.6 percentage points to 25.8%.
• Increased annual dividend rate to $1.34 per share. This 18% increase marked the eighth consecutive year the dividend increased at a double-digit percentage rate.
• For the year, we repurchased 14.9 million shares totaling $985 million at an average of $66. In the quarter, we repurchased 4.1 million shares for $283 million at an average price of $69.

Conference Call

Yum! Brands Inc. will host a conference call to review the company’s financial performance and strategies at 9:15 a.m. Eastern Time Tuesday, February 5, 2013. 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 Time Tuesday, February 5, through midnight Tuesday, February 19, 2013. To access the playback, dial 855/859-2056 in the United States and 404/537-3406 internationally. The playback pass code is 92461813.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands’ Web site, www.yum.com/investors and selecting “Q4 2012 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 www.yum.com 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 39,000 restaurants in more than 120 countries and territories. Yum! is ranked #213 on the Fortune 500 List with 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 five new restaurants each day of the year, making it a leader in international retail development.

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Contacts:

Yum! Brands Inc.

Analysts:
Tim Jerzyk
Senior Vice President Investor Relations
888-298-6986

Steve Schmitt
Senior Director Investor Relations
888-298-6986

Media:
Amy Sherwood
Vice President Public Relations
502-874-8200