Yum Brands 2012 Second Quarter Earnings- China Highlights

Source: Yum

Louisville, KY (July 18, 2012) - Yum! Brands Inc. (NYSE: YUM) today reported results for the second quarter ended June 16, 2012

David C. Novak, Chairman and CEO, said, Yum! China, our largest profit-contributing division, reported strong system sales growth of 27%, prior to foreign currency translation. However, operating profit declined 4%, prior to foreign currency translation, as high inflation drove restaurant margins down 4 percentage points versus last year. We expect this to be shortlived, returning to double-digit profit growth in the second half of the year. Our outstanding China team now expects to open a record of at least 700 new units this year.

• China Division system sales increased 27%, prior to foreign currency translation. Same-store sales increased 10%, overlapping prior year same-store sales growth of 18%.
• Same-store sales growth was driven by a 6% increase in same-store transactions.
• Same-store sales growth was 9% at KFC and 10% at Pizza Hut Casual Dining, overlapping prior year same-store sales growth of 17% and 22%, respectively.
• China opened 160 new units and now projects record new-unit development of at least 700 units this year.

China Units Q2 2012

Traditional Restaurants (1)-  4,785
KFC-  3,917
Pizza Hut Casual Dining- 696

(1)         Total includes Pizza Hut Home Service and East Dawning; excludes Little Sheep units

• Restaurant margin decreased 4.1 percentage points to 15.6%, driven primarily by wage rate inflation of 13% and commodity inflation of 6%, and higher start-up costs from an increased pace of development.
• Foreign currency translation positively impacted operating profit by $6 million.
• The Little Sheep acquisition had a positive impact of 4 percentage points on system sales growth, a negative impact of 0.3 percentage points on restaurant margin, and no impact on operating profit.

Notes to the Condensed Consolidated Summary of Results, Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows (amounts in millions, except per share amounts) (unaudited)

• Other (income) expense for the China Division primarily consists of equity income from investments in unconsolidated affiliates. The year to date ended June 16, 2012 also includes costs related to the acquisition of Little Sheep Group Limited ("Little Sheep") (see note (e) for further explanation).
• On February 1, 2012 we acquired an additional 66% interest in Little Sheep for $540 million, net of cash acquired of $44 million, increasing our ownership to 93%. The acquisition was driven by our strategy to build leading brands across China in every significant category. Prior to our acquisition of this additional interest, our 27% interest in Little Sheep was accounted for under the equity method of accounting. As a result of the acquisition we obtained voting control of Little Sheep, and thus we began consolidating Little Sheep upon acquisition. As required by GAAP, we remeasured our previously held 27% ownership in Little Sheep, which had a recorded value of $107 million at the date of acquisition, at fair value and recognized a non-cash gain of $74 million. This gain, which resulted in no related income tax expense, was recorded in Other (income) expense on our Condensed Consolidated Statement of Income during the quarter ended March 24, 2012, was not allocated for segment reporting purposes and is reflected as a Special Item for certain performance measures (see accompanying reconciliation to reported results).
  
  Consolidated Little Sheep results are included in the China Division from the beginning of the second quarter of 2012. Little Sheep impacted China Division revenues by 4% and 2% for the quarter and year to date ended June 16, 2012, respectively. Other than the $74 million gain discussed above, Little Sheep did not have a significant impact on China Division's Operating Profit or Net Income - YUM! Brands, Inc. for the quarter and year to date ended June 16, 2012. China Division and Worldwide system sales include sales from Little Sheep's company-owned restaurants but exclude sales from Little Sheep's franchise restaurants. Our Condensed Consolidated Balance Sheet at June 16, 2012 reflects the consolidation of this entity, including approximately $300 million of goodwill, $500 million of other intangible assets and a $45 million redeemable noncontrolling interest. Also, in the quarter ended March 24, 2012, we released from escrow $300 million of cash that was deemed restricted prior to our acquisition of Little Sheep.