ADDING MULTIMEDIA Yum! Brands Inc. Reports Strong Full-Year 2006 EPS of $2.92, an Increase of 14%, Led By Powerful Growth in China and International

Yum! Brands Inc. (NYSE: YUM) today also reported results for the fourth quarter ended December 30, 2006, and provided the company’s latest outlook for 2007.

The sales, profit, and margin percentage highlights for the fourth quarter and full year that follow are stated on a like-for-like basis excluding the benefit of an extra week in the fourth quarter of 2005.

Highlights for the fourth quarter are . . .

EPS of $0.83, an increase of 8%.

Worldwide system sales increased by 7%.

Worldwide same-store sales grew 3%, and total worldwide restaurants increased by 2%.

Worldwide restaurant margin improved 0.9 percentage points with improvements in both international businesses, and U.S. margin was even.

Worldwide operating profit grew 7%.

Highlights for the full year are . . .

Worldwide system sales grew by 5%.

Worldwide operating profit increased 12%.

Strong double-digit operating-profit growth from our international divisions: China, 37% and YRI, 11%.

Mainland China restaurant unit growth of 18%.

Yum! Restaurants International Division (YRI) restaurant growth of 3%, making this our eighth consecutive year with at least 3% restaurant growth.

Worldwide franchise fees increased 7%.

Restaurant margin increased 1.2 percentage points worldwide and improved in all three business segments.

Operating margin expanded 1.0 percentage points worldwide.

Average diluted shares outstanding were reduced by 6%.

Note: All preceding comparisons are versus the same period a year ago.

FULL-YEAR 2007 OUTLOOK

The company continues to expect full-year 2007 EPS growth of at least 10%, or at least $3.21 per share.

CONSOLIDATED FINANCIAL HIGHLIGHTS

 

Fourth Quarter

Full Year

2006 

2005 

% Change 

2006 

2005 

% Change 

Traditional Restaurants

32,458 

31,901 

+2 

32,458 

31,901 

+2 

System-Sales Growth

+3%

+7%

NM 

+4%

+7%

NM 

Excluding 53rd Week

+7%

+4%

NM 

+5%

+6%

NM 

Reported EPS

$0.83 

$0.77 

+8 

$2.92 

$2.55 

+14 

Note: YUM has 34,595 restaurant locations around the world, which include 2,137 license units.

David C. Novak, Chairman and CEO, said, “I am pleased to report that in 2006 we again demonstrated the power of Yum! with our capability to consistently deliver double-digit EPS growth through our global portfolio of leading restaurant brands. We achieved strong EPS growth of 14%, led by continued profitable international growth, including nearly 400 new restaurants in our China Division, despite a disappointing fourth-quarter performance in the U.S. This marks the fifth straight year of delivering on our annual commitment of at least 10% EPS growth.

“Importantly, we continued to return significant cash to shareholders in 2006 while maintaining a strong balance sheet. In fact, we returned $1.1 billion through share buy backs and dividends, making this the second straight year that we returned more than $1 billion to our shareholders. Additionally, this past December we announced the doubling of our quarterly dividend rate from $0.15 to $0.30 per share after initiating a dividend only two years ago. This new quarterly dividend rate is expected to generate an approximate 2% yield for our shareholders beginning in our second quarter 2007.

“As we look ahead to our expectations for 2007, we remain confident we can continue to build on our track record of growing EPS at least 10% each year by generating 20% operating profit growth from our China Division, 10% from our YRI Division and 5% from our U.S. businesses.

“Shareholders should expect us to continue building consistent value by focusing on executing YUM’s unique growth opportunities — building dominant restaurant brands in China, driving profitable international growth, improving U.S. brand positioning and returns, and driving high ROIC and strong shareholder payout — that make us a global growth company and allow us to generate substantial free cash flow.”

CHINA DIVISION

 

Fourth Quarter

Full Year

($ million, except restaurant counts and percentages)

%Change 

%Change 

2006 

2005 

Reported

ExclF/x

2006 

2005 

Reported

Excl F/x

Key Financial Measures

System-Sales Growth

+27 

+23 

+26 

+23 

Mainland China only

+32 

+29 

+31 

+28 

Company Sales

521 

411 

+27 

+23 

1,587 

1,255 

+26 

+23 

Restaurant Margin %

17.8 

13.9 

+3.9 

+3.9 

20.4 

17.4 

+3.0 

+2.9 

Operating Profit

70 

51 

+36 

+31 

290 

211 

+37 

+33 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Development Metrics for Mainland China

Total YUM Restaurants

2,121 

1,792 

+18 

NA

2,121 

1,792 

+18 

NA

KFC

1,822 

1,557 

+17 

NA

1,822 

1,557 

+17 

NA

Pizza Hut Casual Dining

254 

204 

+25 

NA

254 

204 

+25 

NA

Pizza Hut Home Service

37 

26 

+42 

NA

37 

26 

+42 

NA

Note: China Division includes mainland China, Thailand and the KFC Taiwan business.

For the fourth quarter 2006, company sales for the China Division increased 23% in local-currency terms due to the continued strong expansion of both our KFC and Pizza Hut brands in mainland China. In particular, mainland China experienced strong fourth-quarter system-same-store-sales growth of 12%, and restaurant unit growth of 18%.

Fourth-quarter 2006 reported operating profit increased 36% versus last year. The key contributing factor was continued sales growth in mainland China for both KFC and Pizza Hut.

YUM! RESTAURANTS INTERNATIONAL DIVISION (YRI)

 

Fourth Quarter

Full Year

($ million, except restaurant counts and percentages)

%Change 

%Change 

2006 

2005 

Reported

Excl

F/x &

53rd

Wk

2006 

2005 

Reported

Excl

F/x & 53rd

Wk

Key Financial Measures

System-Sales Growth

+10 

+11 

+7 

+9 

Franchise & License Fees

157 

147 

+7 

+8 

494 

448 

+10 

+11 

Franchisee Sales

2,788 

2,654 

+5 

+7 

9,072 

8,499 

+7 

+8 

Company Sales

687 

511 

+34 

+37 

1,826 

1,676 

+9 

+10 

Operating Margin %

14.2 

16.4 

(2.2)

(1.9)

17.6 

17.5 

+0.1 

+0.2 

Operating Profit

119 

108 

+11 

+15 

407 

372 

+9 

+12 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Development Metrics

Traditional Restaurants

11,710 

11,319 

+3 

NA

11,710 

11,319 

+3 

NA

KFC

6,550 

6,246 

+5 

NA

6,550 

6,246 

+5 

NA

Pizza Hut

4,694 

4,610 

+2 

NA

4,694 

4,610 

+2 

NA

Franchise Restaurants

9,387 

8,848 

+6 

NA

9,387 

8,848 

+6 

NA

Note: Full year 2005 and Q4 2005 benefited from having an extra week. The following discussion addresses 2006 performance on a like-for-like basis or without this benefit in 2005.

Fourth-quarter 2006 operating profit increased 18% including the positive impact of foreign exchange. In addition, system-sales increased 11% in local currency terms, one of the best quarterly performances ever for the division. The key contributing factors were the strength of the franchise businesses around the world with strong same-store-sales growth of 7% and the recovery of the KFC U.K. business. Finally, YRI opened 333 and 785 new traditional restaurants for the fourth quarter and full year 2006 respectively, of which 90% were opened by franchisees.

The acquisition of the remaining 50% ownership of the Pizza Hut U.K. joint venture from Whitbread was completed during the fourth quarter 2006, which impacted certain fourth-quarter and full-year financial measures. Excluding the impact of the acquisition and foreign exchange, the growth rates for the following fourth-quarter and full-year measures would have been: franchise fees, 13% and 13%, and company sales, +4% and even. Additionally, operating margin would have been 17.3% and 18.9% respectively.

 

UNITED STATES BUSINESS

 

Fourth Quarter

Full Year

($ million, except restaurant counts and percentages)

%Change 

%Change 

2006 

2005 

Reported

Excl53rd Wk

2006 

2005 

Reported

Excl53rd Wk

Key Financial Measures

Blended Same-Store-Sales Growth %

Company

(2)

+4 

NM 

NM 

Even

+4 

NM 

NM 

System

Even

+3 

NM 

NM 

+1 

+3 

NM 

NM 

Franchisee Sales

3,877 

3,898 

(1)

+3 

12,804 

12,428 

+3 

+4 

Company Sales

1,437 

1,616 

(11)

(8)

4,952 

5,294 

(6)

(5)

Franchise & License Fees

197 

200 

(1)

+3 

651 

635 

+3 

+4 

Restaurant Margin %

13.5 

13.9 

(0.4)

0.0 

14.6 

13.8 

0.8 

0.9 

Operating Margin %

12.1 

12.9 

(0.8)

(0.2)

13.6 

12.8 

0.8 

1.0 

Operating Profit

198 

235 

(15)

(8)

763 

760 

Even

+3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Development Metrics

Total Traditional Restaurants

18,117 

18,291 

(1)

NA

18,117 

18,291 

(1)

NA

System Multibrand Restaurants

3,433 

3,096 

+11 

NA

3,433 

3,096 

+11 

NA

Franchise Restaurants

13,905 

13,605 

+2 

NA

13,905 

13,605 

+2 

NA

Note: Full year 2005 and Q4 2005 benefited from having an extra week. The following discussion addresses 2006 performance on a like-for-like basis or without this benefit in 2005.

For the fourth quarter, operating profit was lower by 8% primarily as a result of higher closure and impairment expenses. An additional factor was a 2% decline in blended company same-stores sales. The primary driver of the same-store sales decline was Taco Bell’s decline of 5%, lapping a very strong +7% in the fourth quarter last year. This also reflects a very significant negative sales impact during the month of December from adverse publicity related to a produce-sourcing issue. The low point of the Taco Bell sales decline occurred during the third week of December, and sales have begun to recover from that point in time.

Refranchising company restaurants negatively impacted fourth-quarter and full-year company-sales growth by 6 and 5 percentage points respectively.

For the fourth quarter, franchise sales and fees grew as a result of the expansion of our franchise-restaurant base due to the sale of 452 company-owned restaurants to franchisees (refranchising) over the past year.

TAX RATE

The tax rates for the full year and fourth quarter, 2006 were better than anticipated. The low rate for the fourth quarter included the reversal of tax reserves in connection with our regular U.S. audit cycle, which we had communicated earlier this year, as well as other adjustments to prior years’ accruals and reserves.

U.S. FRANCHISE OWNERSHIP UPDATE

As previously communicated during our analyst meeting on December 6, 2006, we extended our original two-year plan to sell approximately 1,000 company restaurants to franchisees during 2006 and 2007. Our current three-year plan, through 2008, is to sell approximately 1,500 company restaurants to franchisees, which will reduce company ownership to approximately 17% of the U.S. system. For the full year 2006, 452 company-owned U.S. restaurants were sold to our franchisees.

Our latest estimate for 2007 is cash proceeds from U.S. refranchising of $200 million. Operating-profit impact for the U.S. in 2007, due to refranchising activities, is expected to be about neutral. Our three-year program is targeted to produce total cash proceeds of $550 to $600 million, improvements in restaurant margin and ROIC, and an approximate neutral impact on U.S. operating profit.

FREE CASH FLOW

For full-year 2006, we generated a record $1.3 billion in Cash from Operating Activities and invested $614 million in capital in our businesses. Additionally, we generated $456 million in cash from refranchising, stock option proceeds and sale of excess properties. As a result, total free cash available totaled over $1.1 billion. More importantly, all three of our reporting segments continue to generate free cash flow.

In 2006, we again returned virtually all free cash available to our shareholders through share buy backs and quarterly dividends. Specifically, we returned a total of over $1.1 billion to our shareholders, that included significant share buy backs totaling $1.0 billion at an average price of $49.60, and $144 million returned through the quarterly dividends.

For 2007, we expect similar total payout levels to our shareholders through both significant share buy backs and dividends. As we announced December 5, 2006, we have doubled our quarterly dividend for the second-quarter 2007 payment from $0.15 to $0.30 per share.

YUM GROWTH MODEL AND 2007 OUTLOOK

Earnings Growth Model:

China Division operating-profit growth of 20%. This growth is driven largely by development in mainland China measured by 20% system-sales growth and 375 new-restaurant openings.

YRI Division operating-profit growth of 10%. This growth is driven by system-sales growth of at least 5% (unit and same-store-sales growth), with 750 new-restaurant openings.

U.S. operating-profit growth of 5%. This growth is driven by 2% to 3% same-store-sales growth.

EPS growth of at least 10%. This assumes operating profit from our three lines of business as previously noted with additional benefit from the reduction in shares outstanding due to substantial share buy backs.

Full-Year Outlook:

Full-year 2007 EPS growth of at least 10%, or at least $3.21 per share.

Profit growth from our combined international businesses is expected to be solidly double digit each quarter. In addition, full-year targeted U.S. sales and profit growth is expected to occur with solidly positive U.S. growth in the second half of 2007, offsetting a negative first quarter in the U.S.

2006 Fourth-Quarter End Dates

2007 First-Quarter End Dates

International Division

12/4/2006 

International Division

2/26/2007 

China Division

12/31/2006 

China Division

2/28/2007 

U.S. Business

12/30/2006 

U.S. Business

3/24/2007 

CONFERENCE CALL

Yum! Brands Inc. will host a conference call to review the company’s financial performance and strategies at 9:15 a.m. EST Tuesday, February 13, 2007.

For U.S. callers, the number is 877/815-2029. For international callers, the number is 706/645-9271.

The call will be available for playback beginning at noon Eastern Time Tuesday, February 13, through 5 p.m. Friday, February 23. To access the playback, dial 800/642-1687 in the United States and 706/645-9291 internationally. The playback pass code is 5699345.

The call and the playback can be accessed via the Internet by visiting Yum! Brands’ Web site, www.yum.com, and selecting “4th-Quarter Earnings Webcast.”

For your added convenience . . . A podcast will be available within 24 hours of the end of the call at www.yum.com/investors.

ADDITIONAL INFORMATION ONLINE

Fourth-quarter restaurant-count details and definitions of terms are available online at

http://media.corporate-ir.net/media_files/irol/11/117941/ YumQ406Earnings.pdf. (Due to its length, this URL may need to be copied/pasted into your Internet browser’s address field. Remove the extra space if one exists.)

Segment-results reconciliation is available online at

http://media.corporate-ir.net/media_files/irol/11/117941/ YumQ406Segment.pdf. (Due to its length, this URL may need to be copied/pasted into your Internet browser’s address field. Remove the extra space if one exists.)

This announcement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include those identified by such words as may, will, expect, project, anticipate, believe, plan and other similar terminology. These “forward-looking” statements reflect management’s current expectations regarding future events and operating and financial performance and are based on currently available data. However, actual results are subject to future events and uncertainties, which could cause actual results to differ from those projected in this announcement. Accordingly, you are cautioned not to place undue reliance on forward-looking statements. Factors that can cause actual results to differ materially include, but are not limited to, changes in global and local business, economic and political conditions in the countries and territories where Yum! Brands operates, including the effects of war and terrorist activities; changes in currency exchange and interest rates; changes in commodity, labor and other operating costs; changes in competition in the food industry, consumer preferences or perceptions concerning the products of the company and/or our competitors, spending patterns and demographic trends; the impact that any widespread illness or general health concern may have on our business and the economy of the countries in which we operate; the effectiveness of our operating initiatives and marketing, advertising and promotional efforts; new-product and concept development by Yum! Brands and other food-industry competitors; the success of our strategies for refranchising and international development and operations; the ongoing business viability of our franchise and license operators; our ability to secure distribution to our restaurants at competitive rates and to ensure adequate supplies of restaurant products and equipment in our stores; unexpected disruptions in our supply chain; publicity that may impact our business and/or industry; severe weather conditions; effects and outcomes of pending or future legal claims involving the company; changes in effective tax rates; our actuarially determined casualty loss estimates; new legislation and governmental regulations or changes in legislation and regulations and the consequent impact on our business; and changes in accounting policies and practices. Further information about factors that could affect Yum! Brands’ financial and other results are included in the company’s Forms 10-Q and 10-K, filed with the Securities and Exchange Commission.

Yum! Brands Inc., based in Louisville, Kentucky, is the world’s largest restaurant company in terms of system restaurants with over 34,000 restaurants, which includes over 2,000 licensed restaurants, in more than 100 countries and territories. Four of the company’s restaurant brands — KFC, Pizza Hut, Taco Bell and Long John Silver’s — are the global leaders of the chicken, pizza, Mexican-style food and quick-service seafood categories respectively. Yum! Brands is the worldwide leader in multibranding, which offers consumers more choice and convenience at one restaurant location from a combination of KFC, Taco Bell, Pizza Hut, A&W or Long John Silver’s brands. The company and its franchisees today operate over 3,400 multibrand restaurants. Outside the United States in 2006, the Yum! Brands’ system opened about three new restaurants each day of the year, making it one of the fastest growing retailers in the world. For the past four years, the company has been recognized as one of Fortune Magazine’s “Top 50 Employers for Minorities.” It also has been recognized as one of the “Top 50 Employers for Women” by Fortune, one of the “40 Best Companies for Diversity” by Black Enterprise Magazine for the past two years, one of Black Enterprise Magazine’s “30 Hottest Franchises for 2006, one of the “Corporate 100 Companies Providing Opportunities for Hispanics” by Hispanic Magazine, one of the “Top 50 Corporations for Supplier Diversity” by Hispanic Trends Magazine and by BusinessWeek as one of the “Top 15 Companies for In-Kind Corporate Philanthropy.”

Yum! Brands, Inc.

Consolidated Summary of Results

(amounts in millions, except per share amounts)

(unaudited)

 

Quarter

%

Change 

Year to date

%

Change 

12/30/06 

12/31/05 

B/(W)

12/30/06 

12/31/05 

B/(W)

Company sales

$

2,645 

$

2,538 

4 

$

8,365 

$

8,225 

2 

Franchise and license fees

 

371 

 

361 

3 

 

1,196 

 

1,124 

7 

Total revenues

 

3,016 

 

2,899 

4 

 

9,561 

 

9,349 

2 

 

Costs and expenses

Food and paper

803 

791 

(1)

2,549 

2,584 

1 

Payroll and employee benefits

681 

678 

– 

2,142 

2,171 

1 

Occupancy and other operating expenses

 

796 

 

733 

(9)

 

2,403 

 

2,315 

(4)

Company restaurant expenses

2,280 

2,202 

(3)

7,094 

7,070 

– 

General and administrative expenses

398 

374 

(6)

1,187 

1,158 

(2)

Franchise and license expenses

11 

9 

(25)

35 

33 

(8)

Closures and impairment expenses

34 

19 

NM 

59 

62 

NM 

Refranchising (gain) loss

(17)

(22)

NM 

(24)

(43)

NM 

Other (income) expense

(18)

(14)

23 

(51)

(80)

(37)

Wrench litigation (income) expense

– 

– 

NM 

– 

(2)

NM 

AmeriServe and other charges (credits)

 

(1)

 

(2)

NM 

 

(1)

 

(2)

NM 

Total costs and expenses

 

2,687 

 

2,566 

(5)

 

8,299 

 

8,196 

(1)

Operating profit

329 

333 

(1)

1,262 

1,153 

9 

Interest expense, net

 

49 

 

41 

(23)

 

154 

 

127 

(22)

Income before income taxes

280 

292 

(4)

1,108 

1,026 

8 

Income tax provision

 

48 

 

66 

27 

 

284 

 

264 

(7)

Net income

$

232 

$

226 

3 

$

824 

$

762 

8 

 

Effective tax rate

 

17.2%

 

22.7%

 

25.6%

 

25.8%

 

Basic EPS Data

EPS

$

0.86 

$

0.80 

8 

$

3.02 

$

2.66 

13 

Average shares outstanding

 

268 

 

281 

5 

 

273 

 

286 

5 

 

Diluted EPS Data

EPS

$

0.83 

$

0.77 

8 

$

2.92 

$

2.55 

14 

Average shares outstanding

 

278 

 

292 

5 

 

282 

 

298 

6 

 

Dividends declared per common share

$

0.60 

$

0.23 

$

0.865 

$

0.445 

 

 

Please note that the results for all periods presented include the negative impact of expensing stock options and stock appreciation rights.

 

See accompanying notes.

Yum! Brands, Inc.

UNITED STATES Operating Results

(amounts in millions)

(unaudited)

 

Quarter

%

Change 

Year to date

%

Change 

12/30/06 

12/31/05 

B/(W)

12/30/06 

12/31/05 

B/(W)

 

Company sales

$

1,437 

$

1,616 

(11)

$

4,952 

$

5,294 

(6)

Franchise and license fees

 

197 

 

200 

(1)

 

651 

 

635 

3 

Revenues

 

1,634 

 

1,816 

(10)

 

5,603 

 

5,929 

(5)

 

Company restaurants

Food and paper

408 

471 

13 

1,399 

1,576 

11 

Payroll and employee benefits

434 

495 

12 

1,489 

1,600 

7 

Occupancy and other operating expenses

 

400 

 

425 

6 

 

1,340 

 

1,385 

3 

1,242 

1,391 

11 

4,228 

4,561 

7 

General and administrative expenses

166 

171 

4 

546 

536 

(2)

Franchise and license expenses

8 

8 

(10)

23 

26 

9 

Closures and impairment expenses

22 

11 

NM 

37 

46 

NM 

Other (income) expense

 

(2)

 

– 

NM 

 

6 

 

– 

NM 

 

1,436 

 

1,581 

9 

 

4,840 

 

5,169 

6 

Operating profit

$

198 

$

235 

(15)

$

763 

$

760 

– 

 

Company sales

100.0%

100.0%

100.0%

100.0%

Food and paper

28.4 

29.2 

0.8ppts. 

28.2 

29.8 

1.6ppts. 

Payroll and employee benefits

30.2 

30.6 

0.4ppts. 

30.1 

30.2 

0.1ppts. 

Occupancy and other operating expenses

 

27.9 

 

26.3 

(1.6)ppts. 

 

27.1 

 

26.2 

(0.9)ppts. 

Restaurant margin

 

13.5%

 

13.9%

(0.4)ppts. 

 

14.6%

 

13.8%

0.8ppts. 

 

Operating margin

 

12.1%

 

12.9%

(0.8)ppts. 

 

13.6%

 

12.8%

0.8ppts. 

 

Please note that the results for all periods presented include the negative impact of expensing stock options and stock appreciation rights.

 

See accompanying notes.

Yum! Brands, Inc.

INTERNATIONAL DIVISION Operating Results

(amounts in millions)

(unaudited)

 

Quarter

%

Change 

Year to date

%

Change 

12/30/06 

12/31/05 

B/(W)

12/30/06 

12/31/05 

B/(W)

 

Company sales

$

687 

$

511 

34 

$

1,826 

$

1,676 

9 

Franchise and license fees

 

157 

 

147 

7 

 

494 

 

448 

10 

Revenues

 

844 

 

658 

28 

 

2,320 

 

2,124 

9 

 

Company restaurants

Food and paper

211 

170 

(23)

588 

554 

(6)

Payroll and employee benefits

175 

124 

(41)

448 

404 

(11)

Occupancy and other operating expenses

 

224 

 

163 

(38)

 

566 

 

515 

(10)

610 

457 

(33)

1,602 

1,473 

(9)

General and administrative expenses

106 

92 

(14)

293 

284 

(4)

Franchise and license expenses

3 

1 

NM 

12 

7 

(69)

Closures and impairment expenses

8 

3 

NM 

16 

9 

NM 

Other (income) expense

 

(2)

 

(3)

(62)

 

(10)

 

(21)

(54)

 

725 

 

550 

(32)

 

1,913 

 

1,752 

(9)

Operating profit

$

119 

$

108 

11 

$

407 

$

372 

9 

 

Company sales

100.0%

100.0%

100.0%

100.0%

Food and paper

30.6 

33.2 

2.6ppts. 

32.2 

33.1 

0.9ppts. 

Payroll and employee benefits

25.5 

24.3 

(1.2)ppts. 

24.6 

24.1 

(0.5)ppts. 

Occupancy and other operating expenses

 

32.6 

 

31.8 

(0.8)ppts. 

 

31.0 

 

30.7 

(0.3)ppts. 

Restaurant margin

 

11.3%

 

10.7%

0.6ppts. 

 

12.2%

 

12.1%

0.1ppts. 

 

Operating margin

 

14.2%

 

16.4%

(2.2)ppts. 

 

17.6%

 

17.5%

0.1ppts. 

 

Please note that the results for all periods presented include the negative impact of expensing stock options and stock appreciation rights.

 

See accompanying notes.

Yum! Brands, Inc.

CHINA DIVISION Operating Results

(amounts in millions)

(unaudited)

 

Quarter

%

Change 

Year to date

%

Change 

12/30/06 

12/31/05 

B/(W)

12/30/06 

12/31/05 

B/(W)

 

Company sales

$

521 

$

411 

27 

$

1,587 

$

1,255 

26 

Franchise and license fees

 

17 

 

14 

27 

 

51 

 

41 

25 

Revenues

 

538 

 

425 

27 

 

1,638 

 

1,296 

26 

 

Company restaurants

Food and paper

184 

150 

(23)

562 

454 

(24)

Payroll and employee benefits

72 

59 

(21)

205 

167 

(23)

Occupancy and other operating expenses

 

172 

 

145 

(18)

 

497 

 

415 

(20)

428 

354 

(21)

1,264 

1,036 

(22)

General and administrative expenses

48 

32 

(53)

119 

92 

(30)

Franchise and license expenses

– 

– 

NM 

– 

– 

NM 

Closures and impairment expenses

4 

5 

NM 

6 

7 

NM 

Other (income) expense

 

(12)

 

(17)

(26)

 

(41)

 

(50)

(17)

 

468 

 

374 

(25)

 

1,348 

 

1,085 

(24)

Operating profit

$

70 

$

51 

36 

$

290 

$

211 

37 

 

Company sales

100.0%

100.0%

100.0%

100.0%

Food and paper

35.5 

36.5 

1.0ppts. 

35.4 

36.2 

0.8ppts. 

Payroll and employee benefits

13.7 

14.4 

0.7ppts. 

12.9 

13.3 

0.4ppts. 

Occupancy and other operating expenses

 

33.0 

 

35.2 

2.2ppts. 

 

31.3 

 

33.1 

1.8ppts. 

Restaurant margin

 

17.8%

 

13.9%

3.9ppts. 

 

20.4%

 

17.4%

3.0ppts. 

 

 

Please note that the results for all periods presented include the negative impact of expensing stock options and stock appreciation rights.

 

See accompanying notes.

 

China Division includes mainland China, Thailand and KFC Taiwan

Yum! Brands, Inc.

Consolidated Balance Sheets

(amounts in millions)

 

(unaudited)

12/30/06 

12/31/05 

ASSETS

Current Assets

Cash and cash equivalents

$

319 

$

158 

Short-term investments

6 

43 

Accounts and notes receivable, less allowance: $18 in 2006 and $23 in 2005

220 

236 

Inventories

93 

85 

Prepaid expenses and other current assets

132 

75 

Deferred income taxes

55 

181 

Advertising cooperative assets, restricted

 

74 

 

77 

Total Current Assets

899 

855 

Property, plant and equipment, net of accumulated depreciation and amortization of $3,146 in 2006 and $2,830 in 2005

3,631 

3,356 

Goodwill

662 

538 

Intangible assets, net

347 

330 

Investments in unconsolidated affiliates

138 

173 

Other assets

363 

308 

Deferred income taxes

 

341 

 

243 

Total Assets

$

6,381 

$

5,803 

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Accounts payable and other current liabilities

$

1,387 

$

1,256 

Income taxes payable

37 

79 

Short-term borrowings

227 

211 

Advertising cooperative liabilities

 

74 

 

77 

Total Current Liabilities

1,725 

1,623 

Long-term debt

2,045 

1,649 

Other liabilities and deferred credits

 

1,174 

 

1,082 

Total Liabilities

 

4,944 

 

4,354 

 

Shareholders’ Equity

Preferred stock, no par value, 250 shares authorized; no shares issued

– 

– 

Common stock, no par value, 750 shares authorized; 265 shares and 278 shares issued in 2006 and 2005, respectively

– 

– 

Retained earnings

1,593 

1,619 

Accumulated other comprehensive loss

 

(156)

 

(170)

Total Shareholders’ Equity

 

1,437 

 

1,449 

Total Liabilities and Shareholders’ Equity

$

6,381 

$

5,803 

 

 

See accompanying notes.

Yum! Brands, Inc.

Consolidated Statements of Cash Flows

(amounts in millions)

 

Year to date

(unaudited)

 

 

 

12/30/06 

12/31/05 

Cash Flows — Operating Activities

Net income

$

824 

$

762 

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

479 

469 

Closures and impairment expenses

59 

62 

Refranchising (gain) loss

(24)

(43)

Contributions to defined benefit pension plans

(43)

(74)

Deferred income taxes

(30)

(101)

Equity income from investments in unconsolidated affiliates

(51)

(51)

Distributions of income received from unconsolidated affiliates

32 

44 

Excess tax benefit from share-based compensation

(62)

(87)

Share-based compensation expense

65 

62 

Other non-cash charges and credits, net

101 

78 

Changes in operating working capital, excluding effects of acquisitions and dispositions:

Accounts and notes receivable

24 

(1)

Inventories

(3)

(4)

Prepaid expenses and other current assets

(33)

78 

Accounts payable and other current liabilities

(46)

(10)

Income taxes payable

 

10 

 

54 

Net change in operating working capital

 

(48)

 

117 

Net Cash Provided by Operating Activities

 

1,302 

 

1,238 

 

Cash Flows — Investing Activities

Capital spending

(614)

(609)

Proceeds from refranchising of restaurants

257 

145 

Acquisition of remaining interest in unconsolidated affiliate, net of cash assumed

(178)

– 

Acquisition of restaurants from franchisees

(7)

(2)

Short-term investments

39 

12 

Sales of property, plant and equipment

57 

81 

Other, net

 

(30)

 

28 

Net Cash Used in Investing Activities

 

(476)

 

(345)

 

Cash Flows — Financing Activities

 

 

Proceeds from issuance of long-term debt

300 

– 

Payments of long-term debt

(211)

(14)

Short-term borrowings by original maturity

 

 

More than three months – proceeds

236 

– 

More than three months – payments

(54)

– 

Three months or less, net

4 

(34)

Revolving credit facilities, three months or less, net

(23)

160 

Repurchase shares of common stock

(983)

(1,056)

Excess tax benefit from share-based compensation

62 

87 

Employee stock option proceeds

142 

148 

Dividends paid on common shares

(144)

(123)

Other, net

 

(2)

 

– 

Net Cash Used in Financing Activities

 

(673)

 

(832)

Effect of Exchange Rate on Cash and Cash Equivalents

 

8 

 

1 

Net Increase (Decrease) in Cash and Cash Equivalents

161 

62 

Net Increase in Cash and Cash Equivalents of Mainland China for December 2004

– 

34 

Cash and Cash Equivalents – Beginning of Period

 

158 

 

62 

Cash and Cash Equivalents – End of Period

$

319 

$

158 

 

See accompanying notes.

Notes to the Consolidated Summary of Results, Consolidated Balance Sheets and Consolidated Statements of Cash Flows(amounts in millions, except per share amounts)(unaudited)

 

(a) Percentages may not recompute due to rounding.

 

(b) All periods presented reflect the Company’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R) effective September 4, 2005. The Company adopted SFAS 123R by applying the modified retrospective application transition method to the beginning of 2005, and as such the first three fiscal quarters of 2005 were adjusted to recognize the compensation cost for stock options previously reported only in the financial statement proforma footnote disclosures as required by SFAS No. 123, “Accounting for Stock-Based Compensation”.

 

(c) Amounts presented as of and for the quarter and year to date ended December 30, 2006 are preliminary.

 

(d) Foreign currency translation impacted the YRI Division’s operating profit by a positive $2 million in the quarter ended December 30, 2006 and by a negative $1 million in the year to date ended December 30, 2006. Foreign currency translation positively impacted the China Division’s operating profit by $2 million and $8 million in the quarter and year to date ended December 30, 2006, respectively.

 

(e) The effective tax rate for the year to date ended December 30, 2006 was lower than originally forecasted due to the net impact of several non-recurring items. The most significant of these items included out-of-year adjustments to reserves and accruals (which lowered our effective tax rate by approximately 2 percentage points) and a state tax law change that resulted in the loss of certain net operating loss carryforwards (which increased our effective tax rate by approximately 1 percentage point).

 

(f) Other (income) expense primarily includes equity income from investments in unconsolidated affiliates. In the year to date ended December 30, 2006, other (income) expense also includes an $8 million charge associated with the termination of a beverage agreement in the United States segment recorded as other expense in the first quarter of 2006. In the quarter and year to date ended December 31, 2005, other (income) expense also includes a partial financial recovery of $10 million and $24 million, respectively, related to a China supplier ingredient issue. In the year to date ended December 31, 2005, other (income) expense also includes an $11 million gain associated with the IPO of our Poland/Czech Republic business, including a $6 million adjustment to the previously recorded gain in the quarter ended December 31, 2005.

 

(g) During the fourth quarter of 2006, we completed the acquisition of the remaining fifty percent ownership interest of our Pizza Hut United Kingdom (“PH UK”) unconsolidated affiliate. This unconsolidated affiliate owned over 500 restaurants in the United Kingdom. Prior to this acquisition, we accounted for our interest under the equity method. From the acquisition date of September 12, 2006 through December 4, 2006 (the end of the fiscal year for PH UK), our financial statements are presented consolidating the PH UK’s results of operations and cash flows. Additionally, our Consolidated Balance Sheet at December 30, 2006 now reflects the individual assets and liabilities of the PH UK, including the results of our initial purchase price allocation, as opposed to the investment in unconsolidated affiliate that was previously presented. As a result of this acquisition, company sales and restaurant profit increased $164 million and $16 million, respectively, franchise fees decreased $7 million and general and administrative expenses increased $8 million compared to the quarter and year to date ended December 31, 2005. The impacts on operating profit and net income were not significant.