Dear Fellow Stakeholders:
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.
- Distinctive, relevant brands. We will innovate and elevate iconic restaurant brands people trust and champion.
- Unmatched franchise operating capability. We will recruit and equip the best restaurant operators in the world to deliver great customer experiences.
- Bold restaurant development. We will drive market and franchise unit expansion with strong economics and value.
- 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 efficient business model, whereby we intend to limit G&A to 1.7% of system sales and reduce annual capital expenditures to about $100 million by the end of 2019. This will allow us to simultaneously maximize the potential of our brands and to aggressively grow our global footprint but in a productive manner. In combination, our more focused, more franchised and more efficient business model will enable us to deliver more growth and consistent shareholder returns.
With all of this change underway at Yum! I was pleased we delivered a strong year in 2016, highlights of which are below:
- Worldwide system sales* grew 5%, excluding foreign currency translation. This was led by 7% growth at KFC, followed by 6% at Taco Bell and 2% at Pizza Hut.
- GAAP operating profit increased 16%, with growth across all three brands.
- Net-new units grew 3%, with 2,316 total new openings.
- We completed $6.9 billion of debt financing at very attractive rates, the proceeds of which were largely used to fund the shareholder returns mentioned above. We are now managing a capital structure which is levered in-line with our target of 5x EBITDA, and which we believe provides an attractive balance between optimized interest rates, duration and flexibility.
- We declared our first quarterly dividend since we spun-off our China business and announced we would continue with a target payout ratio of roughly 45-50% of 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.
- 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 it. Going forward KFC will continue this focus on the basics, coupled with a big push on the digital front and delivery.
- Pizza Hut’s mantra of “Making it Easier to get a Better Pizza” is relevant for both our U.S. and International businesses, which are in distinctly different business circumstances today. Our U.S. business is in turnaround mode, with a focus on improving the digital experience, delivery times, point-of-sale simplification and asset optimization, to name a few. Our international business is laying the groundwork for prolonged growth with a focus on repeatable models to spread best practices around the world, and driving expansion through development agreements.
- Taco Bell through “Live Más” succeeds with its value-driven, innovation-focused model. I’m pleased with the team’s ability to deliver solid results despite difficult industry conditions in 2016 and am energized by the high-low value strategy and innovative marketing calendar the team has put in place for 2017. On the international front Taco Bell continues to build momentum and we are thrilled with the enthusiasm the brand receives on a global basis.
In conclusion, while there is always more work to do, we are on the right path. We are taking the necessary steps to establish the foundation for sustainable, long-term growth that will translate to strong returns for our shareholders. We are committed to building the world’s most loved, trusted and fastest growing restaurant brands and I am confident this will result in value creation as we build on our momentum and move into the future.
Greg Creed, CEO
*System sales include the impact of the 53rd week.