Louisville, KY (April 18, 2012) — Yum! Brands Inc. (NYSE: YUM) today reported results for the first quarter ended March 24, 2012, including EPS of $0.76, excluding Special Items. Reported EPS for the quarter was $0.96.
FIRST QUARTER HIGHLIGHTS
● Worldwide operating profit grew 15 percent, prior to foreign currency translation, including 14 percent in China, 9 percent at Yum! Restaurants International (YRI) and 27 percent in the U.S.
● Worldwide system sales grew 7 percent, prior to foreign currency translation, including 28 percent in China, 8 percent at YRI and 1 percent in the U.S.
● The 2011 fourth-quarter divestiture of Long John Silver’s (LJS) and A&W All-American Restaurants (A&W) negatively impacted worldwide system sales growth by 2 percentage points, including an impact of 5 percentage points to the U.S. and 1 percentage point to YRI.
● Same-store sales grew 14 percent in China, 5 percent at YRI and 5 percent in the U.S.
● China new unit development set a first-quarter record with 168 new restaurants. Total international development was 297 new restaurants.
● Worldwide restaurant margin increased 1.2 percentage points to 18.6 percent.
● Foreign currency translation positively impacted operating profit by $8 million.
● On February 1, 2012, we acquired a controlling interest in Little Sheep Group, Ltd., the leading hot-pot casual-dining concept based in China. Little Sheep operating results for February through April will be included in our second quarter results. Full-year EPS growth forecast raised to at least 12 percent, or at least $3.22, excluding Special Items.
First Quarter 2012 2011 % Change
EPS Excl. Special Items $0.76 $0.63 21 percent
Special Items Gain/(Loss) $0.20 ($0.09) NM
EPS $0.96 $0.54 76 percent
David C. Novak, Chairman and CEO, said, “I am pleased to report each of our divisions produced impressive sales and profit results, driving 21 percent first-quarter EPS growth. Given the strength of our first-quarter results, we are raising our full-year EPS growth forecast to at least 12 percent, excluding Special Items.
“Our China business continues to fire on all cylinders, and our category-leading brands are as strong as ever. China system sales grew 28 percent as we opened 168 new restaurants and delivered same-store sales growth of 14 percent; operating profit grew 14 percent, prior to foreign currency translation. Yum! Restaurants International continues to generate consistent growth as system sales grew 8 percent and we opened 123 new units in 41 countries. Same-store sales growth of 5 percent was led by an 8 percent increase in emerging markets at YRI, driving 9 percent operating profit growth, prior to foreign currency translation. Yum! Restaurants India, our newest division, grew system sales 34 percent and we expect to open 100 new restaurants this year. Overall for the first quarter, we opened 250 new restaurants in high-growth emerging markets. We believe our new unit potential in emerging markets is the best in the restaurant industry and we’re still on the ground floor of growth.
“While we realize there is much work to do, we are optimistic we will dramatically improve our U.S. brand positions, consistency and returns. We are pleased with our first-quarter performance in the United States, with same-store sales growth of 5 percent, led by Taco Bell, and operating profit growth of 27 percent. “In summary, we’re off to a strong start to the year in each of our businesses. These results give us even more confidence that we will continue our track record of double-digit annual EPS growth.”
CHINA DIVISION
● China Division system sales increased 28 percent, prior to foreign currency translation. Same-store sales increased 14 percent, driven by a 9 percent increase in same-store transactions. Our same-store sales growth was 13 percent at KFC and 18 percent at Pizza Hut Casual Dining.
● China opened a first-quarter record of 168 new units. China Units End of 12Q1 Annual Rate of Change Traditional Restaurants 4,649 +17% KFC 3,819 +15 Pizza Hut Casual Dining 662 +25
● Restaurant margin decreased 1.5 percentage points to 23.6 percent, driven primarily by wage rate inflation of 17 percent. Commodity inflation was 10 percent.
● Foreign currency translation positively impacted operating profit by $11 million.
● Leap year added an extra day in the quarter and resulted in an additional $5 million of operating profit. This was offset by $6 million of non-recurring expense related to the acquisition of Little Sheep.
YUM! RESTAURANTS INTERNATIONAL
During the fourth quarter of 2011, we sold the LJS and A&W brands. As a result, 341 LJS and A&W restaurants have been removed from the 2011 unit balance. LJS and A&W results remain in all other 2011 financial numbers.
The 2011 divestiture of LJS and A&W had a negligible impact on operating profit. Results for all periods exclude the India Division.
India is now a standalone segment and reported separately.
● YRI Division system sales increased 8 percent, prior to foreign currency translation.
○ Emerging markets system sales grew 13 percent, driven by 8 percent same-store sales growth and 6 percent unit growth. ○ Developed markets system sales grew 4 percent, driven by 2 percent same-store sales growth.
● YRI opened 123 new units in 41 countries.
○ For the quarter, 76 new units were opened in emerging markets.
○ Our franchise partners opened 91 percent of all new units.
● Restaurant margin decreased 0.6 percentage points. This was primarily driven by declines in KFC UK, Pizza Hut Korea and increased costs associated with last year’s flooding in Thailand.
YRI MARKETS
System Sales Ex F/X Percent of YRI2 First Quarter Growth ( percent) Franchise
Asia (ex Japan) 16 percent +11
Japan 11 percent (2)
Latin America 11 percent +9
Middle East 8 percent +19
Continental Europe 7 percent +8
Canada 6 percent Even Combined Company / Franchise
UK 12 percent +6 Australia / New Zealand 12 percent Even
Thailand 2 percent +4
Korea 1 percent +2
Key Growth
Africa 6 percent +14
France 4 percent +22
Germany / Netherlands 2 percent +15
Russia 2 percent +47
YRI System Sales for Full Year 2011. 4
U.S. DIVISION
First Quarter 2012 2011 percent Change
Same-Store Sales Growth ( percent) +5 (1)
NM Restaurant Margin ( percent) 14.4 10.7 3.7
Franchise and License Fees ($MM) 178 172 +4
Operating Profit ($MM) 158 123 +27
Operating Margin ( percent) 19.7 14.5 5.2 ●
U.S. Division same-store sales increased 5 percent, including growth of 6 percent at Taco Bell, 5 percent at Pizza Hut and 2 percent at KFC.
● Restaurant margin increased 3.7 percentage points, driven by increased pricing and transaction growth.
● The 2011 fourth-quarter divestiture of LJS and A&W negatively impacted revenue 1 percent and franchise and license fees 5 percent. The operating profit impact was negligible.
YUM! RESTAURANTS INDIA
● India Division system sales increased 34 percent, prior to foreign currency translation. The system sales increase was driven by new unit development and same-store sales growth of 8 percent.
● India Division reports on a monthly calendar, with two months in the first quarter, three months in the second and third quarters, and four months in the fourth quarter.
India Units Q1 2012 percent Change1
Traditional Restaurants2 471 +31
KFC 208 +41
Pizza Hut Casual Dining 166 +6
Pizza Hut Home Service 94 +74
OWNERSHIP / SPECIAL ITEMS UPDATE
In the U.S., we refranchised 126 units for proceeds of $96 million, primarily related to Taco Bell. We recorded pre-tax gains of $45 million related to these transactions in Special Items. Currently, our company ownership is 13 percent in the U.S. Over the next two years we plan to reduce company ownership in Taco Bell from 22 percent to about 16 percent. Our target for Pizza Hut and KFC is about 5 percent company ownership. In 2011, we decided to sell our Pizza Hut UK dine-in business. Based on our latest estimates of proceeds, we recorded a non-cash pre-tax charge in Special Items of $20 million.
As required by U.S. GAAP, upon our acquisition of a controlling interest in Little Sheep, we adjusted our previously owned 27 percent interest up to fair value resulting in a $74 million non-cash gain in Special Items.
OTHER ITEMS UPDATE
Shares repurchased at an average price of $64 totaled $78 million for 1.2 million shares.
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 Thursday, April 19, 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 Time Thursday, April 19, through midnight Thursday, May 3, 2012. To access the playback, dial 855/859-2056 in the United States and 404/537-3406 internationally. The playback pass code is 64974638. The webcast and the playback can be accessed via the internet by visiting Yum! Brands’ Web site, www.yum.com/investors and selecting ―Q1 2012 Earnings Conference Call‖ under ―Investment Events. A podcast will be available within 24 hours.
Yum! Brands Inc., based in Louisville, is the world’s largest restaurant company in terms of system restaurants with over 37,000 restaurants in more than 120 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.
As part of our plan to transform our U.S. business we took several measures (“the U.S. business transformation measures”) in 2012 and 2011 which includes the continuation of our U.S. refranchising, potentially reducing our Company ownership in the U.S. to about 8 percent, including a reduction of Taco Bell Co. ownership from 23 percent to 16 percent. During the quarter ended March 24, 2012, we recorded gains of $45 million related to refranchising in the U.S., primarily at Taco Bell. We have traditionally not allocated refranchising (gains) losses for segment reporting purposes. Additionally, U.S. refranchising (gains) losses have been reflected as Special Items for certain performance measures.
On February 1, 2012 we acquired an additional 66 percent interest in Little Sheep for $540 million, net of cash acquired of $44 million, increasing our ownership to 93 percent. The acquisition was driven by our strategy to build leading brands across China in every significant category. Prior to our acquisition of this additional interest, our 27 percent interest in Little Sheep was accounted for under the equity method of accounting. As a result of the acquisition we obtained voting control of Little Sheep, and thus we began consolidating Little Sheep upon acquisition.
As required by GAAP, we remeasured our previously held 27 percent ownership in Little Sheep, which had a recorded value of $107 million at the date of acquisition, at fair value and recognized a non-cash gain of $74 million. This gain, which resulted in no related income tax expense, was recorded in Other (income) expense on our Condensed Consolidated Statement of Income during the quarter ended March 24, 2012 and was not allocated to any segment for performance reporting purposes. Other than the $74 million gain discussed above, for the quarter ended March 24, 2012, the consolidation of Little Sheep did not impact Operating Profit or Net Income – YUM! Brands Inc.
While we have not yet completed our allocation of the purchase price, our Condensed Consolidated Balance Sheet at March 24, 2012 reflects the consolidation of this entity using preliminary amounts, including $283 million of goodwill and $521 million of other intangible assets. Also, we released from escrow $300 million of cash that was deemed restricted prior to our acquisition of Little Sheep.
In 2011, we decided to sell our Pizza Hut UK dine-in business. Based on bids we received from prospective buyers in 2012, we recorded a non cash pre-tax impairment charge of $20 million to Refranchising (gain) loss to adjust the carrying amount of the asset group to its fair value. We had previously recorded a $74 million non cash pre-tax impairment charge to Refranchising (gain) loss to reduce the carrying amount of the asset group to its then estimated fair value upon our initial decision to sell the Pizza Hut dine-in business in the quarter ended September 3, 2011. Upon the ultimate sale of the restaurants, we could also be required to record a charge for the fair value of any guarantee of future leases we assign to a franchisee depending on the form of the transaction. This charge was not allocated to any segment for performance reporting purposes and was reflected as a Special Item for certain performance measures (see accompanying reconciliation to reported results).
During the quarter ended March 19, 2011, we decided to sell the LJS and A&W brands resulting in a pre-tax non-cash write down of the brands’ intangible assets totaling $66 million and other charges relating to the planned sale totaling $2 million. Neither the write-down nor the other charges were allocated to any segment for performance reporting purposes and both were reflected as a Special Item for certain performance measures. The LJS and A&W brands were sold in the fourth quarter of 2011.
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