Yum! Brands Reports Third-Quarter EPS Growth of 14%, Excluding Special Items; China Sales Recovery Continues although Slower-than-Expected Pace and Stronger Foreign Exchange Headwinds Result in Lower

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Yum! Brands, Inc. (NYSE: YUM) today reported results for the third quarter ended September 5, 2015, including EPS of $1.00, excluding Special Items. Reported EPS was $0.95.

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THIRD-QUARTER HIGHLIGHTS

• Worldwide system sales grew 6%. Worldwide restaurant margin increased 3.3 percentage points to 18.2%, and worldwide operating profit increased 23%.
• Total international development was 376 new restaurants; 72% of this development occurred in emerging markets.
• China Division system sales increased 8%, driven by 7% unit growth and 2% same-store sales growth. Restaurant margin increased 4.7 percentage points to 19.6%. Operating profit increased 64%.
• KFC Division system sales increased 6%, driven by 3% unit growth and 3% same-store sales growth. Operating margin decreased 0.2 percentage points to 21.7%. Operating profit increased 3%.
• Pizza Hut Division system sales increased 2%, driven by 2% unit growth and 1% same-store sales growth. Operating margin decreased 0.7 percentage points to 25.4%. Operating profit was even.
• Taco Bell Division system sales increased 7%, driven by 3% unit growth and 4% same-store sales growth. Operating margin decreased 0.1 percentage points to 28.0%. Operating profit increased 6%.
• India Division system sales decreased 9%, as 10% unit growth was offset by an 18% same-store sales decline.
• Worldwide effective tax rate increased to 24.8% from 22.4%.
• Foreign currency translation negatively impacted operating profit by $29 million.

FULL-YEAR CHINA SALES AND EPS UPDATE

While it remains difficult to forecast China sales, we are now estimating full-year same-store sales to be low-single-digit negative. For the fourth quarter, this assumes mid-single-digit same-store sales growth for the Division, with positive same-store sales growth at KFC and negative same-store sales at Pizza Hut Casual Dining. Given a slower-than-expected recovery in China sales, particularly at Pizza Hut Casual Dining, as well as stronger foreign exchange headwinds, we now expect full-year EPS growth to be low-single-digit positive.

GREG CREED COMMENTS

Greg Creed, CEO, said “Third-quarter EPS grew 14%. We’re pleased same-store sales turned positive and we achieved restaurant margins of nearly 20% in our China business. However, the pace of recovery in our China Division is below our expectations. Outside of China, our Taco Bell and KFC Divisions continued to sustain their positive sales momentum while Pizza Hut was relatively flat. Given our lower full-year expectations in China, combined with additional foreign exchange impact, we now expect 2015 EPS growth to be well below our target of at least 10%.

Our growth fundamentals in China, including new-unit development, remain intact. However, we’re experiencing unexpected headwinds, making the second half of the year more challenging than we anticipated. Our new China Division CEO, Micky Pant, and his leadership team are taking significant actions to get sales, traffic and profits back to historic levels. Outside of China, KFC continued its solid growth across both emerging and developed markets. Taco Bell’s same-store sales growth was boosted by insight-driven innovation coupled with industry-leading value. We remain confident in the actions underway at Pizza Hut to turn this business around longer term.

Our central goal remains building three iconic, global brands people trust and champion. We are focused on the three keys to driving shareholder value: new-unit development, same-store sales growth, and high returns on invested capital. I’m confident that this formula will produce strong, sustainable EPS growth over the long term. As evidence of this, we’re pleased to announce a 12% increase to our quarterly dividend, which marks the eleventh consecutive year we’ve raised our dividend at a double-digit percentage rate.”

• China Division system sales increased 8%, prior to foreign currency translation.
  • Same-store sales increased 2%, with an increase of 3% at KFC, partially offset by a decline of 1% at Pizza Hut Casual Dining.
  • Negative same-store sales in the first half of the quarter were more than offset by sales growth in the second half of the quarter, as sales turned significantly positive when we overlapped the supplier incident on July 20th of last year.
• China Division opened 108 new units during the quarter.

• Restaurant margin was 19.6%, an increase of 4.7 percentage points driven by productivity initiatives and sales leverage.
• Foreign currency translation negatively impacted operating profit by $4 million.

• KFC Division system sales increased 6%, excluding foreign currency translation.

• KFC Division opened 141 new international restaurants in 45 countries, including 101 units in emerging markets. 82% of these new units were opened by franchisees.
• Operating margin decreased 0.2 percentage points, including higher advertising expense as part of our recent agreement with KFC U.S. franchisees, partially offset by an increase of 0.6 percentage points in restaurant margin.
• Foreign currency translation negatively impacted operating profit by $23 million, as approximately 90% of division profits are generated outside the U.S.

• Pizza Hut Division system sales increased 2%, excluding foreign currency translation.

• Pizza Hut Division opened 105 new international restaurants in 38 countries, including 46 units in emerging markets. 95% of these new units were opened by franchisees.
• Operating margin declined 0.7 percentage points, driven by strategic investments in international G&A.
• Foreign currency translation negatively impacted operating profit by $2 million.

• Taco Bell Division system sales increased 7%, driven by 4% same-store sales growth and 3% unit growth.
• Taco Bell Division opened 62 new restaurants; 81% of these new units were opened by franchisees.
• Restaurant margin was 22.1%, an increase of 1.4 percentage points, driven by same-store sales growth.
• Operating margin decreased 0.1 percentage points, driven by an increase in G&A related to incentive compensation and pension. This was largely offset by an increase of 1.4 percentage points in restaurant margin.

INDIA DIVISION

• India Division system sales decreased 9% prior to foreign currency translation, as 10% unit growth was offset by an 18% same-store sales decline.
• Operating loss was $8 million, as compared to an operating loss of $3 million in prior year.

SPECIAL ITEMS / SHARE REPURCHASE UPDATE / DIVIDEND INCREASE

• For the third quarter in the U.S., we refranchised 24 units, primarily related to Taco Bell, for proceeds of $30 million. We recorded pre-tax U.S. refranchising gains of $16 million in Special Items. At the end of the third quarter, our company ownership in the U.S. across our three branded divisions was 9%.
• During the first quarter of 2015, we reached an agreement with our KFC U.S. franchisees that will give us brand marketing control, as well as an accelerated path to expanded menu offerings, improved assets and an enhanced customer experience. In connection with this agreement, we recognized a Special Items charge of $21 million during the quarter, primarily related to the funding of investments for new back-of-house equipment for franchisees.
• During the quarter, we recorded a $20 million refranchising loss in Special Items related to the planned refranchising of certain international markets.
• Year-to-date through October 5, 2015, we repurchased 4.5 million shares totaling $370 million at an average price of $82.
• The Company’s Board of Directors approved a 12% increase in the Company’s quarterly dividend. The quarterly cash dividend will increase from $0.41 to $0.46 per share and will be effective with the dividend payment to be distributed on November 6, 2015 to shareholders of record at the close of business on October 16, 2015. This increase raises the annual dividend rate to $1.84 per share. Over the long term, Yum! is now targeting a payout ratio of 45% to 50% of annual net income, before Special Items.

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 Wednesday, October 7, 2015. 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 12:30 p.m. Eastern Time Wednesday, October 7, through midnight Saturday, November 7, 2015. To access the playback, dial 855/859-2056 in the United States and 404/537-3406 internationally. The playback pass code is 98023873.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands’ website, www.yum.com/investors and selecting “Q3 2015 Earnings Conference Call” under “Events & Presentations.” 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 safety and food borne-illness issues; changes in economic conditions, consumer preferences, tax rates and laws and the regulatory environment, as well as increased competition and other risks in China, where a significant and growing portion of our restaurants are located; the impact or threat of any widespread illness or outbreaks of viruses or other diseases; changes in economic and political conditions in the other countries outside the U.S. where we operate; our ability to protect the integrity and security of individually identifiable data of our customers and employees; our ability to secure and maintain distribution and adequate supply to our restaurants; the success of our international development strategy; commodity, labor and other operating costs; the continued viability and success of our franchise and license operators; consumer preferences and perceptions of our brands; the impact of social media; pending or future litigation and legal claims or proceedings; changes in or noncompliance with government regulations; tax matters, including disagreements with taxing authorities; significant changes in global economic conditions, including consumer spending, consumer confidence and unemployment; and competition within the retail food industry, including with respect to price and quality of food products, new product development, advertising levels and promotional initiatives, customer service, reputation, restaurant location, and attractiveness and maintenance of properties. 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, has over 41,000 restaurants in more than 125 countries and territories. Yum! is ranked #228 on the Fortune 500 List with revenues of over $13 billion in 2014 and is one of the Aon Hewitt Top Companies for Leaders in North America. 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 opens over five new restaurants per day on average, making it a leader in international retail development.