Yum! brands reports third-quarter eps growth of 3%, excluding special
items; soft china sales reduce 2014 full-year eps expectations
Louisville, ky.--(business wire)--yum! brands, inc. (nyse: yum) today reported results for the third quarter ended september 6, 2014, including eps of $0.87, excluding special items. reported eps was $0.89. the company now estimates 2014 eps growth to be between 6% and 10% versus prior year, excluding special items. third-quarter highlights 1 see reconciliation of non-gaap measurements to gaap results for further detail of the special items. special items for 2014 are primarily related to u.s. refranchising gains. special items for 2013 are primarily related to the impairment of little sheep and u.s. refranchising gains. note: all comparisons are versus the same period a year ago and exclude special items unless noted. system sales and operating profit figures on this page exclude foreign currency translation. china update on july 20th, an undercover report was televised in china depicting improper food handling practices by supplier shanghai husi, a division of osi, which is a large, global supplier to many in the restaurant industry. this triggered extensive news coverage in china that has shaken consumer confidence and impacted brand usage. subsequently, the shanghai fda launched an investigation into this matter, alleging illegal activity by osi. upon learning of these events, we terminated our relationship with osi globally, with minimal disruption to our menu offerings in china. even though osi was a minor supplier, sales at kfc and pizza hut were disproportionately impacted given our category-leading positions. while sales are rebounding, they continue to be negative. our brands have proven resilient over time and we expect this to be the case with this situation as well. revised 2014 outlook it is difficult to confidently forecast the exact trajectory of china sales. in our experience, sales typically take six to nine months to recover from these types of events. with the assumption that china same-store sales continue to improve, but are negative for the fourth-quarter, we now estimate 2014 eps growth to be between 6% and 10% versus prior year, excluding special items. david novak comments david c. novak, chairman and ceo said, "i'm absolutely confident in yum! brands' ability to deliver strong, sustainable growth in the years ahead despite the recent supplier incident in china, which has significantly impacted china sales, leading us to reduce our full-year eps outlook. china sales are on the path to recovery and we expect to develop at least 700 new restaurants in china this year, which we're confident will ultimately deliver high returns as we further capitalize on the world’s fastest growing consuming class. outside of china, we expect continued solid sales and profit growth at our kfc division, led by strong international performance and improving u.s. results. at taco bell, we’re extremely pleased with restaurant margins of nearly 21% in the quarter and the overall results of our breakfast offering, which has given us a new growth platform to build upon in the years to come. at pizza hut, we are making progress with our u.s. turnaround and have major actions in place to drive same-store sales growth balance of year and beyond. overall, our business model is compelling and we firmly believe we are building momentum behind major initiatives around the world that will drive strong sales and profit growth in 2015. we remain focused on the three keys to driving shareholder value: new-unit development, same-store sales growth and generating high returns on invested capital." china division our new 2014 reporting structure does not impact the china division. for the full year 2013, china division contributed 35% of yum!'s total operating profit. ○ system sales declined 11% for kfc and increased 3% for pizza hut casual dining. ○ same-store sales declined 14%, including declines of 14% at kfc and 11% at pizza hut casual dining. 1 total includes east dawning and little sheep units. 2 represents year-over-year change. restaurant margin decreased 4.6 percentage points to 14.9%, driven by sales deleverage, the corresponding impact to food and labor efficiencies, and inventory write-offs. ○ excluding the impact of little sheep, restaurant margin would have been 15.9%. kfc division 1 restaurant counts now reflect licensed units. kfc is a new reporting division for 2014 and includes all kfc results outside of the china and india divisions. for the full year 2013, kfc division contributed 29% of yum!'s total operating profit, 91% of which was generated outside the u.s. this division is 91% franchised. ○ international system sales grew 12% in emerging markets and 6% in developed markets. u.s. system sales were even. ○ international same-store sales grew 4% in emerging markets and 3% in developed markets. u.s. same-store sales grew 2%. ○ 81% of these new units were opened by franchisees. percent of kfc system sales 2 1 see website www.yum.com under tab "investors" for a list of the countries within each of the markets. 2 reflects full year 2013. 3 starting in 2014, africa market includes mauritius results. for comparability purposes, systems sales growth excludes mauritius. pizza hut division 1 restaurant counts now reflect licensed units. pizza hut is a new reporting division for 2014 and includes all pizza hut results outside of the china and india divisions. for the full year 2013, pizza hut division contributed 15% of yum!'s total operating profit, 54% of which was generated in the u.s. this division is 94% franchised. ○ international system sales grew 6% in emerging markets and were even in developed markets. u.s. system sales declined 2%. ○ international same-store sales grew 3% in emerging markets and declined 1% in developed markets. u.s. same-store sales declined 2%. ○ 85% of these new units were opened by franchisees. 1 see website www.yum.com under tab "investors" for a list of the countries within each of the markets. 2 reflects full year 2013. taco bell division 1 restaurant counts now reflect licensed units. taco bell is a new reporting division for 2014, which includes all taco bell results outside of the india division. for the full year 2013, taco bell division contributed 21% of yum!'s total operating profit, 97% of which was generated in the u.s. this division is 85% franchised. ○ u.s. same-store sales grew 3%, driven by breakfast sales. india division 1 total includes 5 taco bell units. 2 represents year-over-year change. tax / share repurchase update during the quarter an agreement was reached with the irs on a previously disclosed issue related to the valuation of intangible assets. as a result of this agreement, we closed out our 2004-2006 audit cycle and made a cash payment to the irs of $120 million, which was effectively fully reserved, to settle all issues. the agreement also covers claims made by the irs related to the same valuation issue for years 2007-2013. we anticipate making further cash payments, for which we are fully reserved, of lesser amounts with respect to these years. ○ our effective tax rate before special items in the third quarter of 2013 included higher reserve amounts recorded for this issue. we now estimate our full year 2014 effective tax rate before special items will be between 25% and 26%. 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 8, 2014. 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 12:45 p.m. eastern time wednesday, october 8, through midnight monday, november 3, 2014. to access the playback, dial 855/859-2056 in the united states and 404/537-3406 internationally. the playback pass code is 10524298. the webcast and the playback can be accessed via the internet by visiting yum! brands' website, www.yum.com/investors and selecting “q3 2014 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 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; changes in economic and political conditions in the other countries outside the u.s. where we operate; the impact or threat of any widespread illness or outbreaks of viruses or other diseases; 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; a potential suspension of the chinese affiliate of our independent auditor; 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 40,000 restaurants in more than 125 countries and territories. yum! is ranked #216 on the fortune 500 list with revenues of over $13 billion and in 2014 was named among the top 100 corporate citizens by corporate responsibility magazine. 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 over five new restaurants per day, making it a leader in international retail development. yum! brands, inc. condensed consolidated summary of results (amounts in millions, except per share amounts) (unaudited) effective tax rate basic eps data diluted eps data yum! brands, inc. china division operating results (amounts in millions) (unaudited) yum! brands, inc. kfc division operating results (amounts in millions) (unaudited) yum! brands, inc. pizza hut division operating results (amounts in millions) (unaudited) yum! brands, inc. taco bell division operating results (amounts in millions) (unaudited) yum! brands, inc. condensed consolidated balance sheets (amounts in millions) property, plant and equipment, net of accumulated depreciation and amortization of $3,620 in 2014 and $3,391 in 2013 see accompanying notes. yum! brands, inc. condensed consolidated statements of cash flows (amounts in millions) (unaudited) see accompanying notes. reconciliation of non-gaap measurements to gaap results (amounts in millions, except per share amounts) (unaudited) yum! brands, inc. segment results (amounts in millions) (unaudited) the above tables reconcile segment information, which is based on management responsibility, with our condensed consolidated summary of results. corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes. the corporate and unallocated column in the above tables includes, among other amounts, all amounts that we have deemed special items. see reconciliation of non-gaap measurements to gaap results. yum! brands, inc. segment results (amounts in millions) (unaudited) the above tables reconcile segment information, which is based on management responsibility, with our condensed consolidated summary of results. corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes. the corporate and unallocated column in the above tables includes, among other amounts, all amounts that we have deemed special items. see reconciliation of non-gaap measurements to gaap results. notes to the condensed consolidated summary of results, condensed consolidated balance sheets and condensed consolidated statements of cash flows (amounts in millions) (unaudited) (a) amounts presented as of and for the quarter and year to date ended september 6, 2014 are preliminary. (b) other (income) expense for the china division primarily consists of equity income (loss) from investments in unconsolidated affiliates. (c) previously, our reporting segments consisted of yum restaurants international, the united states, china and india. in the first quarter of 2014, we combined our yum restaurants international and united states reporting segments and began reporting this information by three new reporting segments: kfc division, pizza hut division and taco bell division. china and india remain separate reporting segments. this new structure is designed to drive greater global brand focus, enabling us to more effectively share know-how and accelerate growth. while our consolidated results have not been impacted, we have restated our comparable segment information for consistent presentation. (d) during the quarters ended september 6, 2014 and september 7, 2013, we recorded gains of $8 million and $37 million, respectively, related to refranchising in the u.s. during the years to date ended september 6, 2014 and september 7, 2013, we recorded gains of $11 million and $82 million, respectively, related to refranchising in the u.s. 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 (see accompanying reconciliation to reported results) consistent with our historical presentation. (e) during the quarter ended september 7, 2013, we recorded an impairment charge related to little sheep totaling $258 million (net of income tax benefit of $18 million and amounts allocated to noncontrolling interests of $19 million). this charge was driven by a write down in goodwill from $384 million to $162 million and a write down in trademark from $415 million to $345 million. the impairment charge was not allocated for segment reporting purposes and was reflected as a special item for certain performance measures (see accompanying reconciliation to reported results).
