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Yum! Brands, Inc. 2016 Annual Report

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Yum! Brands, Inc. 2016 Annual Report YUM! BRANDS 2016 ANNUAL REPORT FINANCIAL HIGHLIGHTS (In millions, except for per share amounts) Year-end 2016 % : FKDQJH Company sales $ 4,200 $ 4,356 (4) Franchise and license fees and income 2,166 4 Total revenues $ 6,366 Operating Profit $ 1,625 Income from Continuing Operations $ 994 $ 936 6 Reported Diluted Earnings Per Common Share from Continuing Operations $ 2.48 Special Items Earnings Per Common Share (a) 0.03 10 Diluted Earnings Per Common Share from Continuing Operations before Special Items (a) $ 2.45 $ 2.33 5 Cash Flows Provided by Operating Activities from Continuing Operations $ 1,204 D 6HHRXU)RUP.IRUIXUWKHUGLVFXVVLRQRI6SHFLDO,WHPV ABOUT THE PAPER USED FOR THIS REPORT The inks used in the printing of this report contain an average of 25% - 35% vegetable oils from plant derivatives, a renewable resource. They replace petroleum based inks as an effort to also reduce volatile organic compounds (VOCs). 7KHFRYHUDQGŵUVWSDJHRIWKLVUHSRUWZHUHSULQWHGXVLQJ)6&FHUWLŵHGSDSHUPDGHZLWKSRVWFRQVXPHUZDVWH www.yum.com/annualreport REVOLUTIONIZING OUR Dear Fellow Stakeholders: 2016 was truly a landmark year. On October 31st we completed the spin-off of the China business into a powerful, Greg Creed, independent, publicly-traded company positioned for long-term Chief Executive Officer Yum! Brands Inc. growth. This marked the largest strategic initiative undertaken by Yum! since our spin-off from Pepsi 20 years ago. Yum China Holdings, Inc. (NYSE: YUMC) is now our largest franchisee and pays us a 3% license fee on system sales of our brands in mainland China. I’d like to recognize the work, effort and diligence across the organization that enabled us to complete the spin-off on time and with great success. The China spin-off and return of $6.2 billion of capital to shareholders through dividends and share repurchases in 2016 concluded step one of Yum!’s transformation. Step two, which we announced in October 2016, includes executing a multi-year strategy to accelerate growth, further reduce volatility in our results and increase capital returns. This transformation will result in a company that is more focused, more franchised and more efficient, all of which will ultimately enable us to deliver more growth. The lynchpin in our transformation is the power of more focus, which will enable us to deliver sustainable, long-term results. With this in mind we defined four growth capabilities outlined below. These are the key drivers of same-store sales growth and net-new unit growth, and will govern every decision and action we undertake. 1. Distinctive, relevant brands. We will innovate and elevate iconic restaurant brands people trust and champion. 2. Unmatched franchise operating capability. We will recruit and equip the best restaurant operators in the world to deliver great customer experiences. 3. Bold restaurant development. We will drive market and franchise unit expansion with strong economics and value. 4. Unrivaled culture & talent. We will leverage culture and people capability to fuel brand performance and franchisee success. As we announced in October we are on a path to become more franchised, increasing our franchise mix to at least 98% by the end of 2018. This will increase our franchise fees significantly as a percentage of operating profit, producing a more stable and predictable cash flow stream. We intend to own no more than 2% of our restaurants with an “Own to Learn” mindset. Our leaders will completely dedicate themselves to our four growth capabilities. Finally, we will run a more efficientt business it. Going forward KFC will continue this focus model, whereby we intend to limit G&A to on the basics, coupled with a big push on the 1.7% of system sales and reduce annual capital digital front and delivery. expenditures to about $100 million by the end of 2019. This will allow us to simultaneously Pizza Hut’s mantra of “Making it Easier to maximize the potential of our brands and to get a Better Pizza” is relevant for both our aggressively grow our global footprint but in a U.S. and International businesses, which are productive manner. In combination, our more in distinctly different business circumstances focused, more franchised and more efficient today. Our U.S. business is in turnaround business model will enable us to deliver more mode, with a focus on improving the digital growth and consistent shareholder returns. experience, delivery times, point-of-sale simplification and asset optimization, to name With all of this change underway at Yum! I was a few. Our international business is laying pleased we delivered a strong year in 2016, the groundwork for prolonged growth with highlights of which are below: a focus on repeatable models to spread best practices around the world, and driving Worldwide system sales* grew 5%, expansion through development agreements. excluding foreign currency translation. This was led by 7% growth at KFC, followed by 6% Taco Bell through “Live Más” succeeds with at Taco Bell and 2% at Pizza Hut. its value-driven, innovation-focused model. I’m pleased with the team’s ability to deliver solid GAAP operating profit increased 16%, results despite difficult industry conditions in with growth across all three brands. 2016 and am energized by the high-low value strategy and innovative marketing calendar Net-new units grew 3%, with 2,316 total the team has put in place for 2017. On the new openings. international front Taco Bell continues to We completed $6.9 billion of debt build momentum and we are thrilled with the financing at very attractive rates, the enthusiasm the brand receives on a proceeds of which were largely used to fund global basis. the shareholder returns mentioned above. We In conclusion, while there is always more work to are now managing a capital structure which is do, we are on the right path. We are taking the levered in-line with our target of 5x EBITDA, necessary steps to establish the foundation for and which we believe provides an attractive sustainable, long-term growth that will translate balance between optimized interest rates, to strong returns for our shareholders. We are duration and flexibility. committed to building the world’s most loved, We declared our first quarterly dividend trusted and fastest growing restaurant brands and since we spun-off our China business I am confident this will result in value creation as and announced we would continue with a we build on our momentum and move into target payout ratio of roughly 45-50% of the future. annual net income. Each one of our three brands is committed to delivering on our key enterprise priorities and is working together on our journey towards building a world with more Yum! Ultimately this is driven by each brand’s individual True North, or positioning. Greg Creed, CEO KFC with “Always Original” has returned to the basics with clear value at memorable price points and innovation close to the core. Just look at Nashville Hot, which started in the U.S. and is now rolling out in international markets. We did not change the form of our product – only the flavor profile, and our customers love *System sales include the impact of the 53rd week. YUM! Brands, Inc. 1441 Gardiner Lane Louisville, Kentucky 40213 April 7, 2017 Dear Fellow Shareholders: On behalf of your Board of Directors, we are pleased to invite you to attend the 2017 Annual Meeting of Shareholders of YUM! Brands, Inc. The Annual Meeting will be held Friday, May 19, 2017, at 9:00 a.m., local time, in the YUM! Conference Center at 1900 Colonel Sanders Lane in Louisville, Kentucky. Once again, we encourage you to take advantage of the Securities and Exchange Commission rule allowing companies to furnish proxy materials to their shareholders over the Internet. We believe that this e-proxy process expedites shareholders’ receipt of proxy materials, lowers the costs of delivery and helps reduce the Company’s environmental impact. Proxy Statement Your vote is important. We encourage you to vote promptly whether or not you plan to attend the meeting. You may vote your shares via a toll-free telephone number or over the Internet. If you received a paper copy of the proxy card by mail, you may sign, date and mail the proxy card in the envelope provided. Instructions regarding the three methods of voting are contained on the notice or proxy card. If you plan to attend the meeting, please bring your notice, admission ticket from your proxy card or proof of your ownership of YUM common stock as of March 21, 2017 as well as a valid picture identification. Whether or not you attend the meeting, we encourage you to consider the matters presented in the proxy statement and vote as soon as possible. Sincerely, Greg Creed Chief Executive Officer Important Notice Regarding the Availability of Proxy Materials for the Shareholders Meeting to Be Held on May 19, 2017—this notice and the proxy statement are available at www.yum.com/investors/investor_materials.asp.The Annual Report on Form 10-K is available at www.yum.com/annualreport. YUM! Brands, Inc. 1441 Gardiner Lane Louisville, Kentucky 40213 Notice of Annual Meeting of Shareholders Friday, May 19, 2017 9:00 a.m. YUM! Conference Center, 1900 Colonel Sanders Lane, Louisville, Kentucky 40213 ITEMS OF BUSINESS: (1) To elect ten (10) directors to serve until the 2018 Annual Meeting of Shareholders and until their respective successors are duly elected and qualified. (2) To ratify the selection of KPMG LLP as our independent auditors for the fiscal year ending December 31, 2017. (3) To consider and hold an advisory vote on executive compensation. (4) To consider and hold an advisory vote on the frequency of votes on executive compensation.
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