Yum! Brands (YUM)
Recommendation: Buy
TFG Consumer & Retail Group
Summary
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Global leader in the restaurant industry
!  Explosive growth and established presence in China
!  Adds a healthy EM exposure to the Alpha Fund
History of sustained EPS growth
Dividend as a source of income in a volatile market
East Dawning
Business overview
World's largest
restaurant company in
terms of system
restaurants
!  Global leaders of the
chicken, pizza, and
Mexican-style food
categories under:
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KFC
Pizza Hut
Taco Bell
Business overview
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Three operating segments
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Focus on international expansion
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U.S.
International
China
14,330 restaurants outside the U.S.
1,400 new restaurants opened outside the U.S. in 2010
More than 500 in China alone
Restaurants are operated by the firm, or by independent
franchisees or licensees!
Supply and distribution of food and other products is
standardized for all restaurants
Revenue and earnings breakdown
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2010 Year End Revenue: $11.343 billion
2010 EPS Growth: 17%, 9th straight year of >13% growth
Q3 2011: Reaffirmed guidance for 13% year end growth
Chinese economic outlook
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9.1 % annual GDP growth vs. 1.6% in the US
Continued strengthening of CNY vs. USD
Sheer size:!Over 160 cities with 1 million+ people
Middle!class population of!300 million
Yum! has taken advantage: Operating Profit has!more than
doubled from $375 million!in 2007 to $755 million in
2010
Industry overview
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One of the largest segments of food industry
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Since late 2006, growth in the industry has slowed
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200,000 restaurants and $120 Bn in sales for U.S. alone, the
world's largest fast food market
Soaring food and energy prices
Strain on consumer spending and company margins
U.S. restaurant spending is down
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High commodity prices
Housing slump
Weakening job market
Industry overview
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Yum! weathering the storm
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High international exposure
Explosive growth in EM has offset rising costs and U.S.
slowdown
Industry overview
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McDonald's (MCD) is Yum's largest competitor
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Popeye's is KFC's closest competitor in the chicken QSR
segment
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Leader in the US QSR segment
Yum dominant QSR company in China: twice as many
restaurants as McDonald's
KFC more expansion than Popeye's in China
Expand into continental Europe, Russia, and India
Fiercest competition in US
US market is saturated with QSR's
Industry overview
Industry overview
Management team
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CEO: David C. Novak
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President of Yum! since October 21, 1997 after serving as
COO of Pepsi-Cola
Became CEO of Yum! on January 1, 2000 and Chairman of the
Board on January 1, 2001
Structure
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CEO Yum! China, CEO Yum! International
CEO Pizza Hut US, CEO Taco Bell, CEO KFC US
Management team
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Focus
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Specialize talent on one aspect of company
Either specific brand or specific location
Goals
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Build leading brands across China
Drive aggressive international expansion
Dramatically improve U.S. brand positions
Drive industry-leading, long-term shareholder and franchisee
value
Business growth
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Aggressive international
expansion
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Currently in 123 countries
and territories
Net international unit
growth from 06’-10’
approximately 2,400 units
vs. McD’s 1,100 additional
units
Business growth
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Shift capital to high-growth markets
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Planned direct investment in Africa
Increasing EM exposure
Investing in local teams for long-term success
Tighter alignment of brands fueled by improved
organizational strategies
Deploy extra cash to PH and KFC
Business growth
Business growth
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Yum! is currently East Dawning, the company’s Chinese
quick-service restaurant brand
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Aim to provide affordable and authentic Chinese food to the
customer
Menu is 100% Chinese food offering breakfast, lunch and
dinner options
More than 20 East Dawning test restaurants in China
CEO David Novak: "East Dawning is attacking the
Chinese equivalent to the hamburger category in the US,
so who knows how high is up?”
Business risks
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Increasing commodity prices
Political risks
Currency markets
Aggressive development could cannibalize existing sales
Dividend
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Current dividend yield of 2.18%
Dividend has increased every year since 2004
Valuation
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Target Price: $61.10 by year end 2012 based on our DCF
valuation
EV/EBITDA multiple of 11.5x
17% upside