Yum! Brands Symbol: YUM Jiawei Chen & Tianran Chen Revised by: Ryan Comisky March 31 2009

Yum! Brands

Symbol: YUMJiawei 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 scalelow 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$441

04518 4952

YRI$237

52507 1826

China$205

82075 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.

2008 2007 2006 2005China division

system sales growth31% 31% 26% 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 activities

1521 1551 1257

Repayments of long-term debt             

(268) (24)  (211)

Capital spending             

(935)  (726) (572)

Cash and Cash Equivalents

$216 $789  $319

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?