Yum! Brands 2014 Annual Report

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Transcript of Yum! Brands 2014 Annual Report

  • Yum! Brands 2014 Annual Report

  • CONTENTSDEAR PARTNERS | 1

    CHINA DIVISION | 25

    KFC DIVISION | 6

    PIZZA HUT DIVISION | 7

    TACO BELL DIVISION | 8

    INDIA DIVISION | 9

    ON THE GROUND FLOOR OF GLOBAL GROWTH | 10-13

    HUGE HEART | 14

    YUM! FUTURE BACK VISION | 15

    YUM! DYNASTY GROWTH MODEL | 16

    Since our company was spun off from PepsiCo in 1997, I have had the privilege of leading our quest to become the Defining Global Company that Feeds the World. Over this time, our compound annual shareholder return has been 16% and we have been recognized among elite global companies for our leadership capability, recognition culture and ability to perform across the globe.

    Growth opportunities outlined in this report abound at Yum! Brands. Although 2014 results fell short of our expectations, Im confident our growth model is intact and we are well positioned to deliver at least 10% annual EPS growth on a sustainable basis.

    On January 1, I stepped down as CEO and will serve as Executive Chairman and Im pleased and proud that Greg Creed will be my successor.

    Greg has everything it takes to be an outstanding CEO and take our company to the next level. First and foremost, he walks the talk of our culture and will continue to grow and develop it further. Next, he is a visionary business leader with a 20-year track record of success at Yum!. Over the past 9 years, Greg has transformed Taco Bell into an industry leader, elevating its esteem and establishing top-tier customer service levels. He is a breakthrough thinker, launching day parts like Fourth Meal and breakfast, and introducing major product lines such as Doritos Locos Taco and Cantina Bell. Importantly, Greg has a passion for our global business, with deep international experiences at Unilever and at KFC and Pizza Hut in Australia and New Zealand. He is a well-rounded executive, having previously served as Yum! Brands Chief Operations Officer. There is no doubt in my mind that he is fully qualified and equipped with the knowledge, experience and positive energy we need to lead the company going forward.

    In this Annual Report, Greg will share his perspectives on the business and his vision for the company.

    DEAR PARTNERS

    David C. Novak Executive Chairman of the Board, Yum! Brands, Inc.

  • ...and grateful for the opportunity to lead Yum! Brands. As CEO, I am privileged to lead a phenomenal business with three iconic brands, vast global infrastructure and the franchise capability necessary to facilitate growth.

    In 2014 we grew full-year EPS 4% to $3.09 per share, excluding Special Items. This was well below our 2014 full-year target of at least 20%. These results were heavily skewed by the challenges handed to our biggest division as we suffered two highly publicized supplier incidents in two years in China. However, we know our brands are resilient and continue to believe this setback is temporary. After our first supplier incident, which negatively impacted 2013, we recovered and delivered strong results in the first half of 2014. Specifically, our China Division operating profit increased 116% and Yum! EPS grew 27% through our first two quarters, prior to Special Items. We were convinced 2014 would be a year of at least 20% EPS growth. The July Shanghai Husi supplier incident changed all that. However, we are fully committed to achieving at least 10% EPS growth in 2015 and I'm confident we have the people and plans in place to deliver double-digit growth going forward.

    I AM TRULY HONORED...

    Greg Creed Chief Executive Officer, Yum! Brands, Inc.

    1

  • CHINA DIVISIONGiven our long-term positive outlook for Chinaand our continued belief that our current sales issues are temporarywe opened 737 new restaurants across the country in 2014. We continued our disciplined approach to development, shifting our new-unit program toward higher return investments. In 2015, we plan to open 700 more new units in China. In addition to the massive new-unit opportunity we have with KFC and Pizza Hut Casual Dining, we will continue to expand Pizza Hut Home Service as well.

    I want to assure you our recovery in China is my top priority and all hands are on deck to get the business back on track as soon as possible.

    We have a tremendous sales-leverage opportunity as China sales recover and we fully expect to realize this over time. I have great confidence in Sam Su, our Vice Chairman and China division CEO, and his ability to capture this enormous upside and win with even stronger brands in the worlds fastest growing economy.

    KFC CHINA

    KFC is a beloved brand in China with a huge advantage not only in scale, but also in innovation, quality and people capability. As the #1 foreign brand in China, KFC has 4,800 units in 1,000 cities. This is more than twice the size of our nearest competitor. Although 2014 average unit volumes were 20% off their peak levels, restaurant level margins were a respectable 15%. These fundamentals, even in a challenging year, demonstrate we can open new units with attractive returns for our shareholders. We know we have work to do to regain consumers trust, and we're making progress. Once we do, the opportunities are tremendous. I have no doubt KFC will be an even stronger leading brand as we evolve our strategy for the changing Chinese consumer, making KFC more contemporary, engaged and connected.

    737 New Restaurants

    in 2014

    KFC has

    4,800 Units in

    1,000 Cities

    2

  • Weve learned from other setbacks that we must innovate our way out, and thats what were doing at KFC China. Our successful menu revamp in the first half of 2014 reinforced the fact that our customers love food innovation. Were going to build on this success and launch two menu revamps in 2015, introducing new products across our menubreakfast, lunch, dinner and beverages. And as always, well continue to offer compelling value. In December, we also started our initial rollout of premium coffee in Shanghai KFC restaurants. The initial results are encouraging and our freshly ground coffee has contributed solidly to our breakfast and afternoon day parts.

    Finally, digital customer engagement and mobile ordering innovation will be central to KFCs sales recovery in China. We are applying our know-how across Yum! to elevate KFCs digital offerings. I am excited by the opportunities we have to further enhance how we connect with our customers through these platforms.

    PIZZA HUT CHINA

    Pizza Hut Casual Dining is recovering more quickly, as it was not as severely impacted by the supplier event as KFC. With 1,300 restaurants in 350 cities, we are the number one western casual dining chain in China, with a lead around 6:1 over our nearest competitor. We offer an extensive menu across many categories and five-star service at a three-star price. This translates to extreme value for our customers and an experience they cannot get anywhere else in China. In 2015, we intend to grow same-store sales through constant innovation of our core offerings while we grow our breakfast and late night business.

    Pizza Hut Home Service now has 250 restaurants in 35 cities and is the only All Meal replacement delivery brand in China. Forty percent of our menu consists of Chinese food. So not only are we delivering pizza, were also delivering a full array of Chinese menu options.

    6:1 Lead Over Nearest

    Casual Dining Competitor

    Pizza Hut Casual Dining has

    1,300 Units in

    350 Cities

    3

  • In 2015, we will invest heavily in digital and mobile innovation to further enhance the Pizza Hut Home Service customer experience and grow same-store sales.

    Before I move on to our other divisions, I want to provide some details around a further write-down of our investment in Little Sheep. We recorded a non-cash Special Item net charge of $361 million in the fourth quarter of 2014. Acquired in 2012, Little Sheep has clearly fallen well below our expectations and has not yet achieved unit-level economics necessary to justify the expansion we had envisioned for this concept. We have a small, dedicated team focused on improving this businessand pending the outcome of these efforts, we will evaluate our options with Little Sheep later this year.

    Despite our recent challenges, we wouldnt trade our position in China with any other restaurant company. Our category-leading brands, combined with a rapidly expanding consuming class, lead us to believe we remain on the ground floor of growth in the worlds fastest growing economy.

    As of January 1, 2014, we combined our Yum! Restaurants International and U.S. divisions into three global brand divisions: KFC, Pizza Hut and Taco Bell. China and India remain separate divisions given their strategic importance and enormous growth potential.

    4

  • 5

  • Globally our KFC business model is incredibly strong. I love the combination of being the emerging markets leader, being franchise led and having a line of sight to double-digit operating profit growth well into the future. KFC delivered a strong year of system sales growth led by emerging markets like Russia, Africa and Thailand and international developed markets like the UK, Continental Europe and Australia. Demonstrating its global power as an iconic brand, KFC set a new record for international development, opening nearly 670 restaurants. The new news for KFC is the U.S. business is performing much better. The KFC U.S. business grew same-store sales 6% in the 4th quarter and is poised for its best year in some time. All of this sets up the KFC division for a solid 2015.

    As strong as the global business is, I know it can be even better. Our assets are underleveraged. Were going to remedy this by expandi