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Yum targets 15% EPS growth with China spin-off

China division is expected to split from company by end of 2016

Yum! Brands Inc. is targeting annual earnings growth of 15 percent in the two companies that will result from the planned spin-off of its 7,000-unit China division in 2016, executives said Thursday.

Executives of the Louisville, Ky.-based parent of KFC, Pizza Hut and Taco Bell at the annual investor conference in Plano, Texas, outlined further plans for the China division spin-off, which was announced Oct. 20 and is expected to be completed by the end of next year.

China has been a fast-growing division for Yum, but investors had pressured the company to spin it into its own publicly traded company.

Micky Pant, CEO of the China division, said the company is building two units a day in the nation. China currently has about 5,000 KFC units and 2,000 Pizza Hut restaurants, most in a casual-dining format. Sales for the two brands in China for 2015 are expected to total $8.2 billion, he said, despite seeing comparative sales slip 13 percent in 2013 and 5 percent in 2014.

China sales have generally stabilized this year, Pant said. The company reiterated its guidance for fourth-quarter China division same-store sales growth of 0 percent to 4 percent, with positive same-store sales growth at KFC and negative same-store sales at Pizza Hut Casual Dining.

Greg Creed, Yum! Brands CEO, said the China division has the potential of expanding from those 7,000 restaurants to more than 20,000 units.

Yum has more than 41,000 restaurants in 125 countries, and has about $13 billion in annual revenue.

Patrick Grismer, who has announced his resignation effective Feb. 19, suggested in his presentation that Taco Bell would soon be in test in China as well.

David Novak, executive chairman and architect of the China separation, told investors: “We’re not spinning off the ugly duckling. We’re spinning off the eagle."

The China company will be predominantly franchised, said Steve Schmitt, vice president of investor relations and corporate strategy. “We would expect to have a 3-percent license fee from the China division once the separation occurs, and that will be ongoing,” he said.

“The 'New Yum,’ for lack of a better term right now, is going to be 96 percent franchised,” Schmitt said. “So I want to reiterate that this is essentially no change with the branded divisions. Last year, we intended to be 95 percent franchised outside of China and India. Once you bring the China division as a licensee into the franchise portfolio, it will move that number to 96 — so definitely more of a pure-play franchise company.”

For the current 2015 year, Yum’s profit streams come 32 percent from the China division, 30 percent from KFC, 25 percent from Taco Bell and 13 from Pizza Hut, Schmitt noted.

With the separation into two companies, Schmitt said Yum China should see 76 percent of its profit from KFC and 24 percent from Pizza Hut.

And the “New Yum,” he said, would see profit streams of 38 percent from KFC, 32 percent from Taco Bell, 16 percent from Pizza Hut, 11 percent from KFC China and 3 percent from Pizza Hut China.

“The long-term story of China is intact,” Pant said.

Pant said the China division has several projects underway to help boost sales, including the remodeling of older units, the addition of digital offerings such as free WiFi, the expansion of cashless payments and the creation of loyalty and delivery programs.

Between the October announcement and when the separation into two companies will be completed by the end of next year, Yum said Thursday that it would return up to $6.2 billion of capital to its shareholders.

Yum also confirmed its forecast of flat to low-single-digit positive full-year 2015 earnings-per-share growth, excluding special items.

Contact Ron Ruggless at [email protected].
Follow him on Twitter: @RonRuggless

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