Yum! Brands Symbol: YUM Jiawei Chen & Tianran Chen Revised by: Ryan Comisky March 31 2009 Agenda  Industry overview  Company overview  Competitors  Thesis points 1. Global 2. Management 3. Cash flow advantage  Financial Data  Risk factors Industry overview  U.S: 945,000 restaurants $552 billion in annual sales.  Quick Service Restaurants (QSR) consist of 72.8 % of the whole industry revenues.  Advantage of economies of scalelow priced value meals  Fierce competition Company Overview  World’s largest quick service restaurant (“QSR”) company based on number of system units  1997 spin-off of PepsiCo forms Tricon  2002 changed its name from TRICON Global Restaurants, Inc. to YUM! Brands, Inc.  Five concepts KFC: chicken. Pizza Hut : quick-service pizza Taco Bell: Mexican-style food LJS: seafood categories A&W  Business structure * Company-operating units * Independent franchisees or licensees   Units Distribution 3 segments: 1. United States - 20,000 units 2. YUM Restaurants International (YRI) – 13,000 units 3. China – 3,600 units  More than 36,300 units in more than 110 countries and territories Competitor  McDonald’s  Domino’s Pizza  Burger King Thesis points 1) Global distribution system which has great potential 2) Strong management team and energetic company culture 3) Strong cash flow Thesis I: Strong overseas growth potential world-wide revenue distribution (unit: million) 2008 2007 2006 US $4410 4518 4952 YRI $2375 2507 1826 China $2058 2075 1587 The China Division and YRI have been experiencing dramatic growth and now represent nearly 60% of the Company’s operating profits I. Global Development---Rapid Growth in China  Mainland China -rapidly growing economy -population of 1.3 billion  KFC -Leading QSR 2500 units in 500 cities -Yum! opens nearly one new KFC every day in mainland China (Q4 2008)  Pizza Hut -Western-style casual dining restaurants -400 in 100 cities -the first restaurant chain to introduce pizza Long Term GOAL at least 20,000 units in mainland China. China division system sales growth 2008 2007 31% 31% 2006 26% 2005 13% SO, why is Yum! successful? Competitive advantages:  1. Food Quality and Flavor!  2. Product Strategy: localization -Foreign brand with Chinese Character -Promote new product every months -Combine Chinese dining tradition  3. Marketing the Brand - Make restaurant a social communication place - Modern lifestyle behind the food Not a Coincidence!! Survey Q: Why do you go to KFC or Pizza Hut? A: Food Flavor and Quality: 85% Eating Environment: 43.6% Convenience: 38.2% Price: 25.5% Follow trend or advertisement: 0% Manager telephone interview Q: In your opinion, what is the main reason that Yum! Brands can be successful in China? A: 1. Quality 2. Food Flavor 3. Service: targeted to different age populations - Birthday party - Student discount Can the success continue in the future? -Yes!  1. Low individual visiting frequency for existing customers consistent and stable consumption pattern Survey Q: How often do you eat in these restaurants? KFC Occasionally: 57.4% Pizza Hut Occasionally: 83.3% 2. Large Potential Market for Lower Income Population Survey Q: How much do you spend on average every time you go to KFC? A: 15-25 RMB—2.2-3.6 Dollar 56% 25-50 RMB—3.6-7.1 Dollar 36.4% Pizza Hut? 30-50 RMB—4.3-7.1 Dollar 34.5% 50-80 RMB—7.2-11.4 Dollar 34.5% Survey Q: If there is an economic crisis, how will it influence your consumption in these restaurant? No Change: 55.6% Both decrease: 27.8% Decrease in Pizza Hut, no change in KFC: 13% What’s more……. New Brand, New Product  Pizza Hut Home Service (pizza delivery) East Dawning (Chinese food)  20% shares of Little Sheep Company, a Chinese Hotpot system restaurant Joining Hotpot II. Overseas--International  YRI Revenues: $3.0 billion Operating Profit: $528 million (2008)  9 straight years of opening over 700 new restaurants.  Company expects to continue to experience strong growth in new markets, including India, France, and Russia. Increase of Percentage In Franchise Fees Around The Globe (in 2008)  Asia (excluding China) 19%  Latin America 12%  Middle East Northern America 32%  South Africa 32% India  Interview Indian students at UVa - Develop in recent years - Localization of food, offer vegetarian options - Welcomed by young people - Large growing potential USA  Highly competitive marketplace  Slower profit growth  But continues to produce strong cash flows. Furthermore . . .  Multibranding, should strengthen volume sales  Refranchising company-owned restaurants. By the end of 2010, management hopes to own less than 10% of its U.S. restaurants (down from 20%)More cash flow Thesis II. Management  Core CHAMPS – Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality and Speed of Service  Various senior operators visit the company’s restaurants from time to time to help ensure adherence to system standards and mentor restaurant team members. VAR about Management - “Challenging” - “Systematic” - “Like a family” Thesis III: Strong Cash Flows  In 2009, it is important to note that management does not need to access the credit markets to finance their company  Strong cash flow and balance sheet provide them with the flexibility to successfully navigate through these challenging financial times. 3 Year Cash Flow Breakdown 2008 2007 2006 Cash flow by operating 1521 activities Repayments of long(268) term debt 1551 1257 Capital spending (935) (726) (572) Cash and Cash Equivalents $216 $789 $319 (24) (211) Financial Data  Last Trade:27.65  Market Cap(bil) 12.68B  P/E 14.5  EPS (ttm):1.96  P/S Ratio 1.09  5-Y Avg Ann Return 6.91%  Annual Dividend $0.76  Dividend Yield 2.6%  Beta 1.09 the cumulative total return  2008 Highlights · Worldwide system sales growth of 7% - same store sales growth of 3%+ international development of 1,495 new units · Worldwide operating profit growth of 8% • An industry leader with return on invested capital (ROIC) of 20%.  Earnings per share (EPS) for the previous four quarters: $1.90  Worldwide Operating Profit growth: 11%  PE ratio: 14  Stock price declines compared to 2008  2006 has the same stock price Risk Factors  Operating results are closely tied to the success of the Concepts’ franchisees.  Nature and volatility of the foreign currency markets  Influence by commodity price Risk, but also OPPORTUNITY!  Foreign currency factor can be a great advantage for Yum! Brands  US Dollar depreciation relative to RMB  more of an opportunity than risk Questions?