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    Tricon Reports 4Q Year 2000 Results

  • Industry News February 14, 2001
    Tricon Global Restaurants, Inc. (NYSE:YUM) reported ongoing operating earnings of $120 million, or $0.81 per share for the fourth quarter ended December 30, 2000. Full year, ongoing operating earnings were $444 million, or $2.98 per share, a 16% increase. Additionally, in the quarter, Tricon took unusual charges totaling $36 million, principally related to AmeriServe, wage and hour litigation, and costs related to joint venture formation. The fourth quarter and full year includes the benefit of an extra reporting week.

    "We were pleased to deliver on target fourth quarter profit results, reflecting solid performance by Pizza Hut and our International business along with strong restaurant margins,"says David Novak, Chairman and CEO. "For the full year 2000, we achieved 16% growth in ongoing operating earnings per share, despite a decline of 2% in U.S. blended same-store sales. Strong performance by our International business was a key driver, as were significant reductions in overhead, interest expense and the ongoing operating tax rate.

    "Our No. 1 challenge is to improve sales trends at Taco Bell and KFC in 2001. We have new leadership in place and are starting to execute new strategies, including an intensified focus on restaurant operations. For 2001, we continue to expect solid international growth, combined with sequential, quarterly sales improvement in our U.S. business, which will result in ongoing operating EPS of $3.18 to $3.22.

    "Going forward, we will continue to report on five key areas of our business that we believe are important in measuring our growth and progress in becoming a unique restaurant company. During 2000 we made substantial progress in all areas except for U.S. blended same-store sales growth.

    International Expansion was strong as we opened a record 929 traditional International restaurants led by our two global brands, KFC and Pizza Hut. U.S. Blended Same-store Sales declined 2%. Through our portfolio of three brands, the goal is to grow U.S. blended same-store sales 2% to 3% consistently each year. As previously communicated, we expect our first quarter 2001 U.S. blended same-store sales to be down 2% to 3%. We continue to expect progress each quarter thereafter, building towards 2% to 3% growth in the second half.

    Our progress, quarter-to-date, supports this expectation.

    Multibranded Restaurant Growth was significant, as we expanded multibranding to almost 1,200 restaurants worldwide by year-end from only 745 locations last year. The various combinations of our
    three leading brands now represent $1 billion in annual system sales and make Tricon the largest multibranded restaurant operator in the world.

    Franchise Fees increased to nearly $800 million, as our franchise partners continued to invest in expanding new restaurants worldwide. We expect to complete our refranchising program during 2001, which will further enhance this revenue stream. As previously communicated, we are proactively working with our Taco Bell franchisees who are experiencing varying degrees of financial difficulties.

    Cash Flow generated was about $850 million. This allowed us to invest in 370 new company restaurants, upgrade and remodel 289 company restaurants and purchase over $200 million of our shares. Our return on invested capital improved to better than 18%, which we believe leads the industry category and is up 10 percentage points since our spin-off in 1997.

    "In the three years since Tricon was spun-off, Operating EPS has more than doubled, net debt has been reduced by $2.1 billion, restaurant margin improved over 3 full points and system sales have increased by 8%.

    "As a result of Tricon's strong cash flow and financial condition, we are pleased to announce that the Board has authorized up to an additional $300 million share repurchase program to be executed over the next two years. The Board's action demonstrates their confidence in Tricon's business outlook for 2001 and beyond.''

    Repurchases of Tricon common stock under the program may be made from time to time in open market and/or privately negotiated transactions, and will be subject to market conditions and other factors.

    International Expansion and Business Performance

    A record 929 new traditional restaurants were opened during the year, including 702 new restaurants opened by our franchise and affiliated partners. The strong international expansion included significant openings in China, Japan, Korea, Mexico, New Zealand, Thailand and the U.K. The KFC and Pizza Hut brands were the key drivers of our international expansion as Tricon now has over 5,900 KFC restaurants and over 4,000 Pizza Hut restaurants outside the U.S. For 2001, the company expects comparable levels of new restaurant expansion.

    For the quarter, system sales were up 6% before a 5 percentage point reduction due to foreign currency translation. Same store sales growth was achieved in these key countries during the quarter: China, Korea, Mexico, and the U.K., as well as the KFC business in Australia. Ongoing operating profit, in U.S. dollars, increased by 14% on top of 29% growth last year, driven by system restaurant expansion and an extra reporting week.

    For the full year, the international business continued to deliver strong growth with system sales of $7.6 billion, up 8% for the year before a 2 percentage point reduction due to foreign currency translation. Same store sales growth and a strong 6% net increase in system restaurants fueled this growth. Ongoing operating profit, in U.S. dollars, increased 16% to $309 million for the year. Going forward, we continue to expect the international business to grow ongoing operating profits at about 15% per year, prior to any significant changes in foreign currency.

    U.S. Blended Same-store Sales and Business Performance

    For the fourth quarter, U.S. system sales increased 2%. Traditional restaurant growth and the benefit of an extra reporting week were partially offset by a 3% decline in U.S. company blended same-store sales. Pizza Hut's strong same-store sales performance in the fourth quarter was more than offset by lower sales at Taco Bell and KFC. In the fourth quarter, ongoing operating profit declined 9%, as additional expenses related to our Taco Bell franchise business and lower same-store sales more than offset favorable commodity costs and the benefit of an extra reporting week.

    For the full year, U.S. system sales of $14.5 billion were flat versus 1999, as net growth in traditional restaurant locations was offset by a 2% decline in same-store sales. During the year the system added 509 new traditional restaurants in the U.S. prior to closures. The growth in new restaurant locations was driven primarily by expansion of our KFC franchise partners, including new multibranded restaurants. The decline in same-store sales, additional expenses related to our Taco Bell franchise business, and the impact of refranchising during the year were key factors in the U.S. ongoing operating profit decline of 9% versus 1999.

    For 2001, the company expects U.S. blended same-store sales growth of about 2%, led by solid performance at Pizza Hut and improving results at Taco Bell and KFC. U.S. ongoing operating profit is expected to be down slightly versus 2000, including the negative impact from refranchising.

    Multibranded Restaurant Growth

    In 2000, the number of multibranded restaurant locations increased by 450, to almost 1,200 system-wide by year-end. Tricon's franchise partners are key investors in this concept as they now operate over 700 of the nearly 1,200 system-wide restaurants. Going forward, multibranding will be a key driver of U.S. restaurant growth. The company and its franchise and affiliated partners currently operate nearly 1,100 multibranded restaurants in the U.S. and over 100 outside the U.S. This includes over 600 KFC and Taco Bell combination restaurants, 400 Taco Bell and Pizza Hut combination restaurants and over 100 KFC and Pizza Hut combination restaurants. For 2001, Tricon expects continued rapid expansion of the multibranding concept, with an additional 450 to 500 new multibranded locations.

    Franchisee Business Growth

    For the full year, franchise fees increased 9% to $788 million from our three brands worldwide. Franchise restaurant growth, through a combination of new restaurant expansion and the company's refranchising program, fueled this growth. The company expects to substantially complete its refranchising program during 2001. For 2001, the company expects that its global franchise and affiliated partners will continue to expand with new restaurants at a rate comparable to 2000 and that global franchise fees will grow to over $835 million in 2001.

    Cash Flow and Returns

    Tricon generated about $850 million of cash flow prior to investment in 2000. The company invested in a number of areas, including 370 new restaurants; 227 international and 143 in the U.S. The company also invested significantly in upgrading and remodeling existing restaurants and the program continues to progress on plan. Additionally, Tricon repurchased over $200 million of its own shares and reduced net debt by $79 million. As previously disclosed, Tricon spent significant dollars to quickly resolve the AmeriServe situation and ensure the continuity of distribution to all U.S. restaurants. For 2001, the company expects cash flow generated to invest will exceed $900 million.

    The company's return on invested capital improved to over 18% in 2000. This measure has shown steady and consistent improvement from the 8% level at spin-off in 1997. It is now at a level which the company believes leads the QSR category.

    Financial Progress

    For the fourth quarter, ongoing restaurant margin increased to 15.0% from 14.4% a year ago. The negative impact from lower U.S. blended same-store sales was more than offset by favorable commodity costs. Additionally, the refranchising of restaurants continued to enhance the reported margin.

    Full year ongoing restaurant margin of 15.1% remained near the record level established last year. The benefit of favorable commodity costs was enhanced by solid restaurant controls, particularly in the fourth quarter, which nearly offset the entire unfavorable impact of lower U.S. blended same-store sales and higher wage rates. Additionally, the refranchising of restaurants benefited reported margin.

    For 2001, the company expects restaurant margin to be comparable with the level of the past two years as investments are made in store level operations in the U.S. and new restaurant development in our international business.

    Ongoing operating profit margin increased to a record 12.5% in 2000 from 11.3% a year ago.

    Tricon continued to make progress in improving its financial health and achieving a sound balance sheet during 2000. For 2000, EBIT covered interest by almost 5 times demonstrating significant ability to service our debt. Total net debt at year-end was $2.3 billion, down from $2.4 billion last year.

    Taco Bell Franchise Business

    As previously disclosed, certain of the company's Taco Bell franchise operators are experiencing varying degrees of financial difficulties with respect to their franchise operations. We believe that these issues are primarily attributable to declines in store sales in the Taco Bell system, which have been impacted by the grocery product recalls of taco corn shells (Starlink) in the fourth quarter of 2000.

    Taco Bell Corp. has established a $15 million loan program for those franchisees in need of short-term assistance due to the recent Starlink-impacted sales declines in the Taco Bell system. To date, this program has aided over 50 franchisees covering 1,200 Taco Bell restaurants. Additionally, Taco Bell Corp. is in various stages of discussions with a number of other Taco Bell franchisees and their lenders. The company believes that many of these franchisees will require various types of business and/or financial restructuring, which could include the purchase of some franchised restaurants by Taco Bell. Based on currently available information, the company believes that this group of franchisees represents approximately 1,000 Taco Bell restaurants.

    In the third and fourth quarters of 2000, Tricon charged approximately $26 million to ongoing operating profit for expenses related to the Taco Bell franchise situation. These expenses, which relate primarily to allowances for doubtful franchise and license fee receivables, were reported as general and administrative expenses. Tricon intends to continually evaluate the appropriateness of the estimated allowances, and assess the need for any additional charges related to ongoing fees and other related financial contingencies in 2001. In this regard, the company anticipates that some additional expenses related to this situation may be incurred in 2001. These possible, additional expenses, along with the financial effects resulting from any foreseeable purchases of franchised restaurants by Taco Bell, have been included in the company's ongoing operating EPS and cash flow estimates for 2001.

    Ongoing Results(a)

    • Before the impact of refranchising, ongoing operating profit was up 3% and 5%, for the quarter and year, respectively. Refranchising negatively impacted ongoing operating profit as the decrease in restaurant profit exceeded the benefits of increased franchise fees and lower general and administrative expenses. Additionally, refranchising proceeds reduced debt and lowered the year-over-year interest expense included in operating earnings.
    • Ongoing operating profit included a $19 million benefit, for both the quarter and full year, from the additional reporting week in 2000.
    • Tricon's revenues declined in 2000 and are expected to decline slightly in 2001, due to the company's refranchising program which should be substantially completed in 2001. The transfer of ownership of restaurants from the company to a franchisee reduces revenues for the full amount of a restaurant's sales. The royalty fee, representing a small percentage of the restaurant's sales, is added to revenue. System sales include sales of all Tricon restaurants, company-owned or franchise-operated and is another important indicator of growth.
    • Company restaurant margin as a percent of sales increased 60 basis points in the quarter. Portfolio actions benefited the reported margin by 60 basis points. Excluding the portfolio effect margins were flat versus year ago. Favorable commodity costs and the benefit of the 53rd week were offset by same-store sales declines in the U.S. and the negative impact of lapping favorable self-insurance adjustments in 1999.
    • For the full year, company restaurant margin as a percent of sales decreased by 10 basis points. Portfolio actions benefited reported margin by about 70 basis points. Excluding the portfolio effect margins were down 80 basis points as higher occupancy and other costs and the negative impact of same-store sales declines were partially offset by favorable commodity costs.
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