THE POWER OF 4,800,000,000 transactions 1,900,000,000 dollars in franchise fees 1,500,000 associates 40,000 restaurants 1,952 new international restaurants 128 countries 3 powerful brands ON THE GROUND FLOOR OF GLOBAL GROWTH Yum! Brands 2013 Customer Mania Report Financial Highlights (In millions, except for per share amounts) Year-end 2013 2012 % B/(W) change Company sales $ 11,184 $ 11,833 (5) Franchise and license fees and income 1,900 1,800 6 Total revenues $ 13,084 $ 13,633 (4) Operating Profit $ 1,798 $ 2,294 (22) Net Income – Yum! Brands, Inc. $ 1,091 $ 1,597 (32) Diluted Earnings Per Common Share before Special Items (a) $ 2.97 $ 3.25 (9) Special Items Earnings Per Common Share (a) (0.61) 0.13 NM Reported Diluted Earnings Per Common Share $ 2.36 $ 3.38 (30) Cash Flows Provided by Operating Activities $ 2,139 $ 2,294 (7) (a) See CR 23 of our 2013 Form 10-K for further discussion of Special Items. Contents Dear Partners.....................................................................................1 China ............................................................................................... 2–6 India ..................................................................................................7 Yum! Restaurants International ..................................................... 8-9 U.S. .....................................................................................................10-11 Summary ...........................................................................................12-13 Company with a Huge Heart .............................................................14 Yum! Future Back Vision .....................................................................15 Yum! Dynasty Growth Model ............................................................16 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). The cover and first 16 pages of this report were printed using FSC-certified paper made with 50% recycled content including 24% post-consumer waste. www.yum.com/annualreport Amounts set forth on the prior page are system-wide numbers, which include company and franchisee transactions, restaurants and associates. Dear Partners, 2013 was clearly a challenging year, as full-year EPS declined 9% to $2.97 per share, excluding special items. While these results were driven by the underperformance of our KFC China business, the rest of Yum! delivered essentially on-target results. If you’ve followed us over the years, you know one of the things we’re most proud of as a company is our ability to drive what we call dynasty-like performance, which is generating at least 10% growth in earnings per share year after year. As you know, when a company does that, its’ stock price takes care of itself. And we achieved at least 13% EPS growth, excluding special items, for 11 consecutive years until 2013. Though our 2013 results were well below our own high standards for performance, we used the year as an opportunity – I’d say imperative – to take a step back, re-evaluate and strengthen all aspects of the business so that we come out stronger and better prepared to win going forward, not just in China but all around the world. I’d go as far to say that we did some of our very best work in 2013 readying for the future. I want to highlight the work we did last year to set us up for a strong bounce-back year in 2014, and re-establish our track record of consistent double-digit EPS growth in the years ahead. Let me start with our decision to reorganize the business. As of January 1, 2014, we combined our Yum! Restaurants International and U.S. divisions into three global brand divisions: KFC, Pizza Hut and Taco Bell. China and India will remain separate divisions given their strategic importance and tremendous growth potential. Going forward, our three new divisions will define and drive the strategic positioning and operating models for KFC, Pizza Hut and Taco Bell, and will work closely with our China and India teams to ensure tight integration on brand initiatives. We believe having 100% focused brand teams will enable us to more aggressively accelerate growth in a way that generates higher returns and enhances D avid C. Novak shareholder value. We also believe know how sharing will be more Chairman & Chief Executive Officer, powerful by bringing the U.S. and international businesses together. Yum! Brands, Inc. 1 FOREIGN BRAND # IN CHINA* 2 KFC 1 CHINA Let me now address KFC China, which was obviously our biggest challenge last year. Specifically, we are in the process of overcoming two 4,600 issues that significantly impacted KFC sales in 2013: negative publicity KFCs IN OVER 900 from the poultry supply incident in late December 2012 and subsequent news of Avian Flu. Here are some of the major actions we took in 2013 to CITIES IN CHINA strengthen our KFC business in China. First, in an effort to build and reinforce positive consumer perceptions around the safety of our food, our ongoing “Operation Thunder” initiatives strengthened our poultry supply chain. I assure you, we are 8,000 always in the process of improving our supply chain. We also introduced MANAGEMENT a powerful quality assurance campaign called “I Commit.” NEW RECRUITS As a result, we are happy to see significant progress in rebuilding trust at KFC, with our key brand attribute scores now nearly back to where they were in 2012. While we experienced significant sales deleverage at KFC, the China team deserves a lot of credit for doing an excellent job managing costs. We sharpened our ability in the areas of sales forecasting, labor scheduling and how best to optimize service levels with fewer labor hours. This capability will help us drive profitability going forward. Now, as I’ve always said, the bedrock of our success in China has been our outstanding restaurant operations, which are getting stronger and stronger. In 2013, we hired over 8,000 new management recruits into our Whampoa Management Training Academy because we’ll be opening thousands of new restaurants in the years ahead. Nearly 100% of our restaurant managers have a college degree, and about 50% of our restaurant team members are university students. With world-class operations as our foundation, we opened 428 new KFCs this past year and now have almost 4,600 KFCs in over 900 cities in China…that’s more than twice the size of our nearest competitor. KFC also has the largest home delivery business in China, with 70% of our orders being placed online. As a testament to our success, we were FOREIGN BRAND named the #1 foreign brand in China in a 2013 report published by the BBC. There’s no doubt KFC has been, and continues to be, a power brand. IN CHINA *2013 Report published by the BBC. 3 Our focus now is to bring more innovation and energetic news to our customers. In fact, we have an aggressive and comprehensive plan to restage the KFC brand in the second quarter, which includes breakthrough innovations in our products, menu management, marketing calendar, advertising and the digital customer experience. Overall at KFC China, we know we still have work to do but we’re confident we are making progress rebuilding trust with consumers and improving same-store sales. PIZZA HUT CASUAL DINING CHINA For Pizza Hut Casual Dining, 2013 was a strong year as we grew same-store sales by 4% and opened 247 new restaurants, surpassing the 1,000 unit milestone. With over 1,000 units in 277 cities, we are clearly the number one western casual dining chain, with a 6:1 lead over our nearest competitor. Pizza Hut Casual Dining is arguably one of the greatest success stories in our industry. In the last three years, we have more than doubled our store count, grown average unit volumes by 30% and achieved home-run economics with restaurant margins above 20%. Pizza Hut Casual Dining goes well beyond pizza as almost two-thirds 1,000 of sales are non-pizza items. We also continue to leverage our assets PIZZA HUT throughout the day and have expanded our breakfast offering into over CASUAL DINING 120 restaurants. This is a huge opportunity for us as our long-term goal is to create and own the midscale casual dining breakfast occasion in China UNITS IN on a scale that matches what exists in the U.S. today. In fact, we will be 277 CITIES expanding breakfast into an additional 200 units in 2014. All this is leading to an amazingly strong economic model that generates two-year cash paybacks on new unit openings, so it’s full speed ahead for our Pizza Hut 30% Casual Dining new unit development AVERAGE UNIT and expanding into lower-tier cities. VOLUME GROWTH PIZZA HUT HOME SERVICE CHINA Now, the other thing that’s exciting about China is our Pizza Hut Home Service business, or home delivery. Pizza Hut Home Service now has over 200 units in 25 cities and is the only “All Meal” replacement delivery brand in China. Forty percent of our menu consists of Chinese food. So not only are we delivering pizza, but we’re also delivering a full array of Chinese menu options. We now have a proven economic model which positions us to begin to scale this brand rapidly across the country. 4 OVER NEAREST 6:1 CASUAL DINING LEAD COMPETITOR } 5 EAST DAWNING AND LITTLE SHEEP 2014 with plans to open at least 700 new units as we continue to deploy capital into these high- Along with Pizza Hut Home Service, we have two return investments. other emerging Chinese food concepts in China that give us the confidence we will eventually become a dominant player in the massive Chinese food category. We are developing our own Chinese fast food concept, East Dawning, and are now testing it in lower-tier cities.