YUM! BRANDS 2015 ANNUAL REPORT
01
DEAR STAKEHOLDERS,
2015
was a landmark year for Yum! Brands. Late in the year we announced our
intention to spin-off our China business into an independent, publicly-traded company.
Our decision to create two powerful, independent, focused growth companies is a
classic example of one plus one being greater than two. Yum! China will be China’s
largest independent restaurant company, with no meaningful external debt. New Yum!
will be a global, diversified, franchise company with an optimized capital structure. The
separation of these two distinctly different businesses will give shareholders the best of
both worlds. Yum! China will be a focused China investment with strong national appeal and
major growth potential and will target annual ongoing EPS growth of approximately 15%.
This company will have tremendous new-unit potential in China’s growing consumer economy
and inherent value from improving unit economics. Yum! China will also have a self-sufficient
business model, funding all of its capital needs, while having the potential for stock buybacks in
year one. New Yum! will be an even more highly franchised
company with three leading global brands, leadership in
emerging markets, clear average-unit volume and newunit growth opportunities, less volatile cash and earnings
streams, and high shareholder cash returns. New Yum! will
ANNUAL ONGOING
target approximately 15% annual ongoing shareholder
return, defined as EPS growth plus dividend yield.
EPS GROWTH IN CHINA
In addition, we intend to return approximately $6.2 billion
in capital to our shareholders prior to the completion
of the spin-off. This is an incremental return of capital
beyond our regularly planned dividend.
15%
CONTENTS
Needless to say, 2016 will be a transformational year for
Yum! as we complete this spin-off. The fundamental
goal of Yum!, however, is unchanged. We are 100%
dedicated to building and strengthening KFC, Pizza
Hut and Taco Bell all around the world as strong
brands are critical to delivering sustained growth
and creating long-term shareholder value.
$6.2 BILLION
OF INCREMENTAL CAPITAL RETURN PRIOR TO
CHINA BUSINESS SPIN-OFF COMPLETION
Please see our Safe Harbor Statement
in the back following the Form 10-K.
02
02 DEAR STAKEHOLDERS
04 CHINA DIVISION
06 KFC DIVISION
07 PIZZA HUT DIVISION
08 TACO BELL DIVISION
09 HUGE HEART
10 CONCLUSION
In 2015 EPS excluding Special Items grew to $3.18 per share,
or 3%, despite a 7% decline in the first half of the year.
With restaurants in over 130 countries and territories we have
foreign exchange exposure from the impact of translating our
foreign profits from local currencies into U.S. dollars. In 2015
we had six percentage points of foreign currency headwinds.
Excluding these currency headwinds full-year EPS grew 9%
despite lower than expected sales in our China division.
While 2015 EPS was below our initial expectations, I was
pleased with the sales momentum we generated across
the majority of Yum! in the fourth quarter and look
GREG
forward to building on this in 2016.
YUM! CHINA
ONE PLUS
ONE IS GREATER
THAN TWO
FOCUSED CHINA INVESTMENT
CREED
CHIEF EXECUTIVE OFFICER
YUM! BRANDS, INC.
NEW YUM!
FOCUSED, HIGH MARGIN,
GLOBAL FRANCHISE COMPANY
STRONG NATIONAL APPEAL
MAJOR GROWTH POTENTIAL
TARGET APPROXIMATELY 15%
ANNUAL ONGOING EPS GROWTH
MAJOR GLOBAL GROWTH
TARGET APPROXIMATELY
15% ANNUAL ONGOING
SHAREHOLDER RETURN
For the full year our brand divisions collectively grew operating profit 8% in constant currency, which is
in-line with our ongoing growth model target. This was led by 12% operating profit growth at Taco Bell – a
remarkable result given the significant investments we made in the fourth quarter to position the brand for
continued momentum and category leadership for years to come. Operating profit grew 8% in constant
currency in China, with impressive cost management partially offsetting weaker than originally anticipated
sales results.
In 2015 worldwide system sales grew 5% in constant currency, which included increases of 8% at Taco Bell,
7% at KFC, 2% at Pizza Hut and 2% in China. Same-store sales growth was positive across all three of our
brand divisions, with Taco Bell at 5%, KFC at 3% and Pizza Hut at 1%. China’s same-store sales declined 4%
in 2015 but we have plans to return both KFC China and Pizza Hut Casual Dining to positive growth in 2016.
We opened 2,365 new restaurants globally in 2015. This year we expect to open nearly 2,400 new restaurants,
which means we’re opening over 6 new restaurants a day, laying the groundwork for future growth. Given
the plans we have laid out for each of the divisions, we’re confident in our ability to deliver 10% operating
profit growth in constant currency in 2016, which includes the benefit of a 53rd operating week for part of our
brand divisions.
03
In China we opened 743 new restaurants in 2015. Our disciplined
approach to development balances our continued, strong belief in China’s
long-term growth potential and strong cash paybacks on new restaurants
with current market realities. In 2016 we plan to open 600 more restaurants
in China. This reflects the opportunities we see across our brands
to enter new trade zones and expand our presence in existing ones.
Our net-new unit growth in 2016 will
be similar to 2015 as we expect fewer
closures this year. We expect 2016
to be another year of sequential
operating profit improvement with
NEW RESTAURANT
growth of 10%.
OPENINGS IN 2015
743
KFC CHINA
KFC, which represents about 75% of China’s operating profit,
grew same-store sales 6% in the fourth quarter, continuing
the sequential improvement we saw throughout the
year. While same-store sales declined 4% for the year,
total system sales in constant currency were even as
we added 175 net-new units, surpassing the 5,000
unit mark. KFC has more than twice the number of
restaurants of our nearest Western QSR competitor
and is in about five times more cities. This beloved
brand reported restaurant-level margins of 16%, a
full percentage point higher than 2014, despite a
decline in same-store sales. These fundamentals
demonstrate our progress in productivity
initiatives and the tremendous operating
leverage the brand should realize as sales
continue to improve.
KFC BOX MEAL
04
We know we still have work to do at KFC and I’m thrilled the
China team is applying global best practices, fresh thinking and
new insights to revitalize the brand and achieve traction with
consumers. Early test results of proven, global, sales-driving
tactics are encouraging and the implementation of these
programs should drive transactions and benefit the division
later this year. One example is box meals, which have proven
successful globally and which we expect to be similarly well
received in China. I can assure you we are taking the right
steps to grow this business – and the momentum we are
seeing makes me confident we will.
PIZZA HUT CASUAL DINING CHINA
259
Pizza Hut Casual Dining, which represents about
25% of China’s operating profit, is the Western Casual
Dining category leader with nearly 1,600 restaurants in
over 400 cities. This is a lead of around 6:1 over our nearest
Western Casual Dining competitor. In 2015 system sales
in constant currency grew 10% as we added 259 net-new
units, but same-store sales declined 5%. The macroeconomic
environment and volatile stock market impacted the casual
dining segment and we know we must generate more exciting
news and value to counter this headwind. We’ll be more
focused on value going forward with workday lunch specials
and value pizzas – as well as other initiatives to drive traffic.
We have our work cut out for us here, but the China team has a
number of strategies and concepts in test that we expect to improve
results. We know there
is substantial runway for
PIZZA HUT CASUAL
new units and same-store
DINING’S LEAD IN
sales growth for China’s
RESTAURANT COUNT OVER NEAREST
leading Western Casual
WESTERN CASUAL DINING COMPETITOR
Dining brand.
NET-NEW PIZZA HUT CASUAL
DINING UNITS IN 2015
6:1
05
NEARLY
15,000
RESTAURANTS WORLDWIDE
KFC is a franchise-led, emerging-market powerhouse.
MELBOURNE, AUSTRALIA
With nearly 15,000 restaurants in 120 countries and
territories, the brand generated $16 billion in annual system sales and has grown operating profit over the last
three years at a 9% compound annual growth rate in constant currency. I’m thrilled to see KFC’s “Always
Original” positioning gaining momentum and being adopted globally, which I believe will lend further
strength to the brand.
Franchisees opened 85% of our 705 new international restaurants in 2015. Total system sales grew 11% in
emerging markets for the year, with particular strength in Russia and Central and Eastern Europe. In fact,
Russia has generated system-sales growth of at least 40% in each of the last four years. We have tremendous
potential in emerging markets, where we have a significant lead over the competition. I’m also encouraged
by our recent performance in developed markets, such as Australia, the U.S., and Japan. International
developed markets’ system sales grew 6% in 2015 and U.S. system sales grew 2%. These results reinforce my
confidence in the brand’s ability to drive sales going forward. We have an unbelievable ability to generate
meaningful growth in mature markets, where we have a long established presence. We are taking our global
brand identity and unifying that with local cultural insights to expand and grow our business all around the
world. We are 100% focused on our real, authentic and freshly prepared food and merging that with value
and innovation to drive results. On the international front we’ve enjoyed success with lunch and dinner box
meals. In the U.S. we recently introduced Nashville Hot Chicken. This is a spicy version of our crispy chicken,
inspired by one of Nashville’s most famous dishes. We’re excited about the possibility of this innovative
product finding its way into the system outside of the U.S.
NASHVILLE HOT CHICKEN
06
The new-unit pipeline at KFC remains impressive. In KFC’s top 12
emerging markets, excluding China, we only have one restaurant
per million people today. With an aggregate population of 3 billion
people in these markets, think of the potential. Across the world
we have plans in place to grow sales and to build on the division’s
consistent operating profit growth performance. This year we expect at
least 675 new international restaurant openings and to grow operating
profit 11%, which includes a one percentage point benefit from the 53rd
operating week. I am confident KFC will continue to excel and reward
shareholders in the years to come.
STUFFED GARLIC KNOTS PIZZA
525
NEW INTERNATIONAL
RESTAURANT OPENINGS
PROJECTED IN 2016
At Pizza Hut
U.S., which generates
about 60% of the division’s operating profit,
we are starting to turn the corner with our
focused emphasis on “making it easier to
get a better pizza.” This runs the gamut from
improved operations and insight-driven food
innovation to digital enhancements and consistent
value. While we recognize there is a lot more work
to do, we’re now generating positive momentum
with same-store sales growth.
Equally significant, we reached an important agreement
with our U.S. franchisees. Starting in January, we and
our franchisees began an overhaul of Pizza Hut’s assets,
replacing ovens and upgrading in-store technology. From a
marketing calendar perspective, we are focused on a balanced
approach. You may have seen the launch of our $5 Flavor Menu,
the most compelling value menu in the pizza business. In conjunction with our ongoing $6.99 Any Pairs deal
it provides our customers with great value on an ongoing basis. Simultaneously, we are offering premiumpriced innovation, such as our recent launch of the Stuffed Garlic Knots Pizza, to protect and improve
unit-level economics.
Our international business at Pizza Hut is led by strength
in emerging markets but offset by weakness in some
developed markets. We believe we can apply best
practices from the U.S. business to drive growth in
these developed markets going forward. In 2016
we expect to open at least 525 new international
restaurants. We also expect to grow operating
profit 7% in constant currency, which includes
a two percentage point benefit from the 53rd
operating week.
NEW PIZZA HUT U.S. DESIGN
07
Taco Bell delivered a fantastic 2015, surpassing $9 billion in system sales, and we expect a solid year in
2016 as well. Taco Bell is on the cutting edge of QSR and is the industry gold standard for social engagement,
product development, brand positioning and advertising. The brand’s Live
QUESALUPA
Más positioning is an example of how strong brand identity can drive
success across the spectrum. We have several new, exciting products
launching this year, including the Quesalupa, which we introduced
during Super Bowl 50. Our innovation focus extends beyond just
food. We are encouraged by early results of our delivery program
and are developing expansion plans for additional cities. The addition
of our loyalty program in November builds on our
mobile app and will increase brand affinity as it rewards social
behavior. Furthermore, we are focused on our core value messaging to
drive transactions. We continue to build our breakfast day-part where
sales are growing at twice the rate of the business as a whole. In fact,
we grew breakfast transactions 6% in the fourth quarter.
SYSTEM SALES
OF MORE THAN
$9 BILLION
Given the brand’s strong economics and broad franchisee appeal,
we continue to accelerate new-unit openings both domestically
and internationally. We had a record number of U.S. openings
in 2015 and expect to build upon this in 2016. I’m particularly
excited that we’re starting to get some traction expanding
this great brand internationally. We know this process will
take time, but we’re making real progress here. In 2016 we
expect to open at least 300 global new restaurants and
to grow operating profit in constant currency 9%, which
includes a three percentage point benefit from the 53rd
operating week. Our growth plans both domestically
and internationally will lay the groundwork for higher
operating profit growth in the years to come.
TOKYO, JAPAN
08
HUGE HEART Last but not least,
I want you to know I am proud of the way
our three iconic brands come together
to show we’re a company with a Huge
Heart – opening doors, growing people
and truly caring about the world. Making
responsible decisions as we build brands
people trust and champion is core to us being
a good corporate citizen. This includes leading
the world’s largest private sector hunger relief
effort, where we set the bar high every year in
support of World Hunger Relief and raised more
than $35 million in cash and food donations in 2015.
Since 2007, our efforts have raised $640 million in
cash and food donations resulting in 2.6 billion meals
going to people in need. Together we are making a
meaningful difference in peoples’ lives.
GRADUATES FOR MÁS
FEED THE WORLD AMBASSADOR PROGRAM
I am equally pleased that all of our divisions have
meaningful community engagement efforts that
positively impact the local communities where
they live and work. And trust me, we are going
to get better and more courageous every
day at delivering the high quality, high
integrity contributions our consumers most
care about in our food, people, communities
and environment. I invite you to view our
progress in our online Corporate Social
Responsibility report.
LIFE UNBOXED
ADD HOPE
09
With all this progress you can see why I am very excited about what’s happening at our company. We are
undertaking the biggest strategic move in the history of Yum! with the planned spin-off of our China business.
We’re confident this will create two powerful, optimally-structured, independent companies with unique
investment profiles. And, I want to assure you that while the spin-off transaction is critically important we’re
not going to let it distract us from running the business in China or anywhere else.
“We have three iconic
brands and are making
them even stronger. “
All three of our brands have significant opportunities for growth as
they progress along the journey to brand excellence. We expect
to achieve 10% growth in operating profit in constant currency
this year, which includes the benefit of the 53rd operating week,
and are setting up two separate companies that will lead the
restaurant industry going forward. Yum! is in a unique position. We have three iconic brands and are making
them even stronger. As you’ve heard me say before, my goal as CEO is to build three global, iconic brands
that people trust and champion. We are well on our way to achieving this, led by our brand positionings,
courageous leadership and committed team members and franchisees. Needless to say, there is a lot to be
excited about at Yum! and I could not be more pleased to lead this company into its next phase.
Finally, I want to take the opportunity to thank several senior executives who are retiring from Yum!, each
of whom made significant contributions to the company for many years. First and foremost, David Novak,
who will step down as Executive Chairman in May, completing his retirement plan. As co-founder, Executive
Chairman and former CEO, David’s contributions to this company are far too many to put into words.
He has created a world-class company, renowned recognition culture and high-performance orientation that
will stand the test of time. As a result, our shareholders were well-rewarded during his
tenure. David served as a caring and inspirational coach and mentor to many, including
me. I thank him for his visionary leadership and for entrusting our company to the next
generation of leaders. I’d also like to thank Sam Su, who retired in August from Yum!
China as Chairman and CEO, and as Vice Chairman of Yum! Brands. Sam is a true
pioneer who led the tremendous growth of our China business, creating one of the
finest restaurant companies in the world. Lastly, I’d like to recognize Massimo Ferragamo, who also will be
stepping off the Board. He joined the company at its inception and has been an invaluable Director since
that time. We owe each of them a debt of gratitude and wish them continued success and happiness.
And of course, I thank our Board of Directors, employees and franchisees around the globe, whose
contributions are truly inspiring and who are helping Yum! Feed The World.
FEED
THE
WORLD
Cheers,
GREG CREED
10
CHIEF EXECUTIVE OFFICER
YUM! BRANDS, INC.