During its annual December investors conference, executives with Yum! Brands Inc. laid out some of their expectations for a spun-off Yum! China company and tried to allay any fears investors might have.
Yum announced plans to separate its China division from the rest of the company in October — something stock analysts and others had been calling for since the company’s revenues took a hit as a result of bird flu fears in China during the past few years and a supplier chain scandal last year. Yum spent about a year reviewing its entire business.
“We were very thorough. We looked at a number of alternatives, and it was very clear that the best solution is what we already announced,” Yum CEO Greg Creed told investors during the conference in Plano, Texas.
Before the split is complete next year, Yum also announced it will return $6.2 billion in capital to shareholders, “reflecting our ongoing commitment to generate increased returns for shareholders while underscoring our confidence in Yum’s long-term growth prospects and strong financial position,” Creed said in a news release sent out prior to the conference.
In addition to confidentially made statements about building two powerful, independent and growing companies, executives offered some concrete predictions regarding the performance of Yum China and New Yum — how they referred to Yum minus its China division.
In 2017, China’s first year as a separate company, Yum China’s earnings per share is predicted to grow 15 percent. New Yum’s EPS growth for the same year is estimated to grow 13 percent.
Yum plans to split its shares evenly between New Yum and Yum China. Yum China will remain domiciled in the United States, but Yum China leaders will look at a possible listing on the Hong Kong Stock Exchange.
“It’s going to be a Chinese company with Western roots,” Creed said.
Investors will then be able to buy stock in the less volatile New Yum operations, or bet on the growing and more volatile Chinese market.
Yum China will pay a 3 percent licensing fee — that is 3 percent of its system sales — to New Yum each year.
One of the biggest changes for Yum’s operations in China will be a move toward franchising. Currently, 95 percent of stores in China are company-owned. However, they want to flip that number to have the vast majority of Chinese stores be franchisee-owned.
Yum only has five restaurants per million people in China; it has 57 per million people in the United States. Yum executives believe they can triple the number of units in China in the future.
“We’ve got nothing but runway (in China),” said Steve Schmitt, Yum’s vice president of investor relations and corporate strategy.
Yum China won’t have any substantial external debt, putting Yum China in a better position to grow, executives said.
Currently, two Yum restaurants open in China every day, according to Micky Pant, CEO of Yum’s China division.
“Those two stores make a lot of money,” Pant said. KFC China locations earn their investment back in about three years, while Pizza Hut Casual Dining does so in less than three years.
As its own company, 76 percent of Yum China’s operating profit will come from its KFC operations, with the remainder coming from Pizza Hut Casual Dining.
KFC’s operations in the United States and about 125 other countries will make up about 38 percent of New Yum’s operating profits, according to predictions. Taco Bell will make up about 32 percent of its operating profit.
As separate entities, Yum China and New Yum will excel, said Pat Grismer, Yum’s outgoing chief financial officer.
“Both have the capacity to drive significant growth and return significant cash.”