KrauseFundResearch Spring2012

ConsumerDiscretionary
Recommendation:BUY
Analysts
Dongfang Qi dongfang-qi@uiowa.edu Ziyi Wang ziyi-wang@uiowa.edu Austin K Dean austin-dean@uiowa.edu Christopher Speer christopher-speer@uiowa.edu

Yum! Brands, Inc. (NYSE: YUM)

April15th,2012
CurrentPrice$72.69 PriceRange$79.7882.92

The Yum World

Company overview: Yum! Brands, Inc., founded in 1977 and headquartered in Louisville, Kentucky, operates franchises and licenses several chains of restaurants including KFC, Pizza Hut, Taco Bell, Long John Silvers (LJS) and All America Food (A&W). The company is a leader in the restaurant industry with approximately 37000 stores operating in 110 countries. The company put LSJ and A& W for sale in March of 2011 in order to focus on its global expansion. Stock Performance Highlights
52 week High 52 week Low Beta Value Average Volume (3m) $73.7 $47.15 0.79 3.42M

The 1.3 billion population and the particular tastes of the food in China will ensure that Yum China will continue to grow substantially in the next few years. The Yum International division also serves as catalyst for the revenue growth for the upcoming years. Yum is expanding its business in five major countries including India, Germany, France, Russia, and Africa. The U.S. division has seen growth in the recent quarter, and a menu change has proven a successful strategy in bringing back customers from its competitors. The relatively stable earnings prospect is another factor as to why our group recommends this stock to investors. This company will have stable earnings whether in financial downturns or in financial expansion periods because of the affordable prices that the restaurants offer.

Share Highlights
Market Capitalization Shares Outstanding Book Value per share EPS 2011 P/E Ratio Dividend Yield Dividend Payout Ratio $33.55 B 460.41 M $3.96 $2.81 20.11 1.6% 31.47%

One Year Stock Performance

Company Performance Highlights

ROA ROE Sales 14.93% 68.84% $12.626 B

Financial Ratios
Current Ratio Debt to Equity 0.95 3.61

Source:Yahoofinance

Investment Thesis
Our investment recommendation regarding YUM Brands is to buy. Our valuation models predict a stock price range of $79.78 to $82.92, so the current price of $72.69 is undervalued. Based on our economic outlook and company-specific analysis, YUM will keep growing at a relatively high rate during the next 7 years. Specifically, the expansion of YUM in the Chinese market will generate increasingly higher revenues, which grant steady returns to shareholders.

Figure 1

Economic Outlook
Real Gross Domestic Product (GDP) Real Gross Domestic Product, the value of all goods and services produced in the U.S., when factoring for inflation, is the most widely cited statistic in business and economic discussions. The growth rate for real GDP is a common barometer for the overall health of the domestic economy, although it is a lagging indicator, often influences other economic factors such as consumer confidence and commodity prices. The most recent statistic regarding GDP which was released March 29, 2012 shows a 3.0%1 fourth quarter increase in annualized GDP in 2011 where as the third quarter real GDP increased 1.8%. The restaurant industry within the consumer discretionary sector is a major factor in GDP because consumption makes up a large part of GDP calculations especially within developed countries such as the United States. Other increases in real GDP in the fourth quarter reflect private inventory investment, personal consumption expenditures, exports, and nonresidential fixed investments. Given the increase in GDP reported at the end of 2011, it will benefit consumer discretionary industry. The GDP is heading in an upward direction and we foresee that the GDP of the first quarter of 2012 should increase between 2.5% and 3.5%. As the labor force progresses closer to full employment, consumer spending will increase and real GDP will be boosted. As a result, YUM will benefit from the increase in consumer spending as more consumers will likely spend more money at quickservice restaurants rather than dining at home.

Source: Net Advantage Unemployment The restaurant industry is significantly affected by the unemployment rate in the United States. The number one expense in the restaurants industry is workers wages. Having a low unemployment rate in the restaurant industry entails higher wages in order to keep workers. Having a turnover rate of 200%, it is important for restaurants to have a steady amount of available workers to ensure restaurant efficiency.2 The unemployment rate significantly increased from April 2007 to October 2009 when it reached a high of 10.0%. The unemployment rate has steadily decreased since the end of October 2009, but nowhere near the low of 4.2% in January, 2001. The latest unemployment rate released for March 2012 is currently at 8.2%. 3 After analyzing the steady decrease from figure 2 below, unemployment will steadily stay around 8.2% in the next six months. We believe in the next two-three years the unemployment rate will reach near 7.0% as more individuals begin to find more job opportunities and we begin to witness our economy gradually recover. YUM Brands! is insulated from unemployment rates because lower unemployment rates mean more individuals are working and as a result are earning more income and are more likely to spend more dining out at restaurants. Even though low unemployment is valuable to the general public, a higher unemployment rate for YUM would also be beneficial because it would cause consumers to switch from luxury restaurants to a more casual dining.

Figure 2

Figure 3

Source: Net Advantage Disposable Income Disposable personal income is classified as the amount of money individuals have designated for spending after subtracting taxes and adjusting for inflation. 4 This is important to the restaurant industry because the higher disposable income individuals have; the more willing they are to spend on dining out at restaurants. Having a higher disposable income means people are not necessarily worried about price, and have the leverage to choose where to eat based on cost. On the other hand, people that have low disposable income will most likely shift their dining habits to a less-expensive restaurant, fast-food restaurant, or cook at home. Since the recession in 2008, disposable income has risen 3.6% in 2010 after falling by 2.1% in 2009. 5 The disposable personal income in January 2012 rose $5.0 billion or less than 0.1% while in February increased $18.9 billion, or 0.2%. Since 2010, the percentage change for disposable personal income has stayed relatively constant above 0.0%. Due to historical records, we believe in the next six months, disposable personal income will remain steady at around 1%. In the next two-three years, we project that with a healthy economy, disposable income will experience a gain of up to 4.5%. Based on our prediction, the restaurant industry will significantly benefit from an increase in disposable income due to consumers having more freedom and flexibility to spend money on quick-service restaurants.

Source: Federal Reserve Bank of St. Louis Commodity Prices (PPI) Within almost any industry corporations must be able to predict and control their input prices to maintain a healthy and profitable outlook. The restaurant industry within the consumer discretionary sector is exposed to fluctuations in commodity prices as much as any industry. The companies within the industry face the challenges of absorbing rapidly increasing commodity prices and reflecting those prices in the prices of their products without incurring unreasonable changeover costs or producing unstable menu price options. To provide stability most companies engage in futures contracts to hedge against the risk of price fluctuations. Figure 4 below shows the prices of the Commodity Food and Beverage Price Index over 2011. The figure depicts how prices have steadily declined since they hit a peak in early spring. It is expected that prices will increase again in the coming spring, but variables such as crop yield and weather cannot yet be accurately predicted. The long term outlook depends on additional variables but given interest rates as low as they are, and futures prices trending upwards it is likely commodity prices will rise consistent with inflation.

Figure 4

CommodityFoodand BeveragePriceIndex
200 190 180 170 160 150 140 Jun!11 Mar!11 May!11 Aug!11 Apr!11 Jul!11 Sep!11 Nov!11 Dec!10 Dec!11 Feb!11 Oct!11 Jan!11

as well as energy prices. Corporations that operate with large distribution chains could be exposed to a spike in these costs which could eat into profits. Also, the disposable income of consumers poses a double-edged sword for companies because if disposable income increases over the next year, consumers may feel more confident and therefore may choose more expensive, higher end restaurants over the cheaper and less healthy fast food options.

Industry Analysis
The restaurant industry was projected to have $604 Billion sales in 2011, which is approximately 4 percent of the projected total Gross Domestic Product of the United States according to the estimate from National Restaurant Association. 6 The industry has been expanding since the 1960s, mainly due to the boom of quick service restaurants such as Yum! Brands Inc. and McDonalds. The long term expansion of the restaurant industry is expected to continue as the major players in this industry are focusing on providing healthier and less expensive food for both Americans and customers abroad. Figure 5

Source: Index Mundi Capital Markets Outlook The consumer discretionary sector is exposed to economic conditions more directly than many other sectors because it operates within a relatively more demanding economic climate. However, consumers will quickly adapt their activities within this sector. If consumers are not confident in future prospects both on a macroeconomic level and a personal financial basis, they are more likely to cut spending. Despite the slow growth of the U.S. economy over the past years, the restaurant sector has fared better than expected, especially in limited-service or fast food restaurants. This is likely a result of steady, if not decreasing, input prices both in food inputs and other indirect inputs such as energy costs. As a result, people are foregoing more expensive full-service restaurants in favor of fast food when they choose to go out to eat. Given the industrys success during the recent economic slowdown the overall outlook of capital markets for the industry is positive. It is a good time to invest in the restaurant industry because public firms have consistently proven themselves to be leaders in emerging markets and that ability has allowed these firms to prosper even when the domestic economy is lagging. Moreover, as the U.S. economy begins to regain its footing and unemployment decreases while consumer disposable income rises, these companies will continue to see increased traffic in their stores. The future prospect of the restaurant industry depends largely on the future prices of food and beverage inputs

Source: Nations Restaurant News The restaurant industry provides two categories of services: fast food and full-service restaurant. The fast food restaurants mainly serve products including sandwiches, and pizza. Those restaurants attract customers by offering convenient, inexpensive and appealing foods. Fast food restaurants will still perform comparatively well during financial downturn, because customers will switch from full-service restaurant to the cheaper fast food restaurants. The major players in fast

food restaurants include McDonalds, Yum! Brands Inc. and Burger King Holdings Inc. Full service restaurants typically offer table ordering services, and their price range varies greatly depending on the location and variety of food being served. Casual dining, family restaurants, and coffee and snack shops are three categories that full service restaurants belong to. Casual dining restaurants serve food including seafood, Asian, and Italian. The major companies in full service restaurants showed both increases and declines in sales for the year of 2010. Family restaurants tend to offer foods that attract both adults and children. The leaders in this category are IHOP and Dennys. Coffee and Snack shops serve a variety of breakfast items and snacks but mainly focus on serving coffee to its customers. Starbucks Corporation is the most prevalent example in the coffee and snack shop category. Business Cycle and Its Impacts on Restaurant Industry Restaurants in this industry are cyclical firms which follow the business cycle. Even though the restaurant industry has improved slightly improved during the last few years in the slowly recovering United States economy, the growth in this industry is slow. Despite the recession in 2008, many restaurants and fast food chains in this industry have further expanded to global markets. For instance, Yum! Brands Inc. has focused its attention on international expansion and has sold two of its brands, A & W restaurants and Long John Silvers that are not currently operating globally. During financial downturns, customers have switched their selections within the restaurant industry. For the past few years, quick service restaurants have been able to outperform more expensive casual restaurants by promoting cheaper prices to its customers.

menus to add healthier options. For example, McDonalds has been successful in leading this reformation by adding healthier options to their menus. For example, it has added coffee and fruit and maple oatmeal to its menu, and it is also offers chicken nuggets containing less sodium. Fast food restaurants have also shifted from offering dinner to breakfast and lunch. According to a survey from Morning MealScape 2011, 10% of Americans skip their breakfast every day. 7 This allows fast food restaurants to expand in the breakfast business in the next few years. McDonalds has been expanding its breakfast with a complete new menu and more nutritious foods. Global Market Many restaurants are competing globally to gain a competitive advantage by trying to increase market shares. Yum! Brand Inc. is the leader in this strategy. The company currently owns three restaurants, KFC, Pizza Hut, and Taco Bell. Most of the revenue generated from KFC and Pizza Hut comes from global markets especially China. Also, Yum! Brands are acquiring the most famous hotpot chain in China called Little Sheep. As the U.S. economy has slowed down in recent years, so has the growth in the restaurant industry. Therefore, restaurant operators have been looking for opportunities to expand their brands in to other countries such as: China, India, and Brazil. Major restaurant operators like YUM Brands and McDonalds have already acquired essential market share of fast food service in China. Porters 5-Forces Analysis Potential Entrants The Restaurant industry has limited potential entrants. Since the major players have already shared the market, it is difficult for a new business to get established. Major players have also accumulated their advantages against new entrants by building new restaurants, franchising, and expanding globally. Suppliers (Bargaining Power of Suppliers) The bargaining power of suppliers shapes the restaurant industry by determining the food commodity costs. Restaurant operators usually negotiate on their purchases through futures contracts; however volatility in the food commodity costs can constrain the power to price their products.

ExternalFactors
Governments One regulation that the industry may be concerned with is the requirement for labeling the nutrition facts for the foods served in the restaurants. This can significantly affect fast food restaurants since their foods tend to contain higher calories and fat. Social Habits Another force that is shaping this industry is customer tastes and social habits. Customers are paying more attention to their health now than any time before. Many foods in the fast food restaurant industry are considered unhealthy by many customers. In order to respond to this situation, the restaurants industry is changing their

Customers (Bargaining Power of Customers) Price is a key factor for customers in choosing restaurants. Consumers compare the values of food and what they pay for the food. For instance, when the food of one restaurant is irrationally priced compared to its competitors, the restaurant loses customers. Substitutes One reason for high competition in the restaurant industry is similar menus among the players in the fast food service industry. Most of the restaurant operators focus on burgers, pizzas, tacos, and chicken wings. Few restaurants have successfully differentiated menus from others. Rivalry among Existing Firms The rivalry in the restaurant industry gives firms more incentive to differentiate themselves from its competitors and meet customers needs. Figure 6

margin. The D/E ratio of Bob Evans implies that the company faces small risk to pay back debts. We believe that there will be an increase in full service given the economic and industry outlook. Both casual dining (Texas Roadhouse Inc.) and family restaurants (Bob Evans) will benefit from the general increase in full service.

Company-Specific Analysis
Company Strategy8 The crucial business strategy that the company is undertaking is to build leading brands across China in every single category. And this strategy clearly is working. The company added a record of 656 restaurants in China in 2011 alone. The operating gross profit rose 15% in China in the fourth quarter of 2011 while the same store sales rose 21% compared to data from the previous year. Even though there are doubts that China can continue to grow at this phenomenal rate, we expect Yum! Brands will still further expand its business in China given the large population and demand in China. Another corporate strategy is to drive aggressive international expansion and build brands everywhere. In 2011, Yum! Brands announced its decision to separate its Indian division to operate as an independent entity. This showed that Yum! Brands are considering expanding its business in India as it did in China. Furthermore, this expansion can further diversify the risks that the company faces, especially if the business in China slows down. The third strategy that the company has is to domestically improve US brands position, consistency, and return. The companys performance has been sluggish in the U.S. It reported revenues of $1.74 billion in the fourth quarter of 2011, a four percent decrease from the previous year. Also, the same store sales data only showed a 1 percent increase mainly driven by the brand Pizza Hut. The mediocre performance in the U.S. is a result of both the sluggish economy and the shift of tastes of customers. Two of its major operating units KFC and Taco Bell are serving food that is considered unhealthy by many, and customers are choosing food that is more nutritious. The same store sales data in these two stores decreased 1 and 2 percent respectively. This area can show potential growth in the future if the company transforms its products to match the tastes of customers. The last company strategy that Yum! Brands has is to drive long term value for its investors. The company has

Source: Bing Finance We use several variables to determine which companies are best positioned in the restaurant industry. The table in Figure 6 is sorted by the size of market capitalization. Gross profit margin, net income, revenue, and EPS indicate the profitability of a company. D/E ratio indicates the risk that a company pays back its debts. A lower P/E ratio is preferred since it indicates potential bargain. Analysts are looking for companies with higher profitability and lower risk. Texas Roadhouse, Inc. has relatively higher profitability in regard to gross profit margin compared to other companies while having a quite low P/E ratio. Also, Texas Roadhouse, Inc. has a really low debt level which ensures the companys safety. Bob Evans Inc. also has a relatively higher profitability indicated by gross profit

long been able to maintain a 10% increase in EPS for the last ten years. Financial Summary The companys total revenue of $356 million or $0.74 per share for the fourth quarter of 2011, which was a 33% increase compared to its revenue of the same quarter last year.9 The increased revenue was mainly driven by the substantial growth in its China division. Products and Markets Yum Brands is the one of the largest quick service restaurants in the world. It mainly serves chicken, mashed potatoes, pizzas, tacos, salads, burgers, hot dogs and many others through the its three brands: KFC, Pizza Hut and Taco Bell. The company is operating in over 110 countries all over the world. As the data indicates, Asia is the largest market for the company, and this is mainly driven by the profit generated in China. Figure 7

China alone. This could pose a potential threat to the supply of foods since it is harder to manage.

S.W.O.T. Analysis
Figure 8

Source: Data monitor Strengths One of the major strengths that Yum! Brands has is its scale in the global market and the recognition of its brands. The brand names KFC and Pizza Hut can be recognized by most people in this world. And the diversification of its business allows it to reduce its business risks and have substantial growth even in financial downturns. Opportunities The company still shows great upside potential for its Chinese division and its further expansion in the global market. KFC has been successful in China in changing its menu to fit the tastes of Chinese people. And it is mixing KFC in China with traditional Chinese food along with its famous fried chicken. This enables the company to continue to grow in that region and build customer loyalty. The likely acquisition of Little Sheep fuels the company with substantial growth in the future. The domestic market can also be improved by changing its menu and offering better services. Weaknesses The beef quality lawsuit for Taco Bell shown in Figure 7 previously is a possible financial weakness for Yum Brands. We also believe that the slipping of market share in the U.S is another weakness of this company. Brand image can also be improved. For instance, the brand KFC is usually associated with unhealthy food that is

Source: J.P. Morgan Estimates By the end of 2011, Yum Brands still owns 27.2% of the China based hot pot concept restaurant Little Sheep, and it has obtained approval from the minister of commerce of China to acquire another 66% of the shares of this company.10 Little Sheep is a famous restaurant in China. And we expect that once the acquisition is complete, Yum Brands can produce even higher revenue growth. Production and Distribution: The brands within the U.S share one purchasing unit called Unified Foodservice Purchasing Co-op, LLC, which was solely created to locate the lowest price supply for those companies. The brands operating outside the U.S. use decentralized distribution systems, and Yum Brands has over 500 distribution centers in

cheap and low quality. The company can turn this around by providing better services, differentiating the menu and advertising. Threats One of the major threats comes from other competitors in the restaurant industry, such as McDonalds. McDonalds has been successfully shifting its focus from lunch and dinner to breakfast, and it has also begun offering more nutritious options on its menu. However, many of KFCs products are considered unhealthy by many customers, such as fried chicken. Another threat that KFC is facing is its exchange risk, since it is conducting more transactions globally.

potential to this company if the strategy they implement works as planned. Our assumption for Yum international is around 3% growth rate for the future. Operating Margin We expect the operating margin to increase slightly, due to higher efficiency of the operation of the company, and then stay relatively stable over time since most of the costs are estimated as a certain percentage of revenue; therefore, as revenue grows the operating costs grow at the same time. Weighted Average Cost of Capital We estimated the WACC of Yum by using the Capital Asset Pricing Model and the debt information specific to this company. We used a beta of 0.79 calculated with two years of weekly data, and a risk free rate of 3.2%, which is the yield on the 30-year Treasury bond. We also used a geometric average risk premium of 5.34% calculated with data over several decades. The before tax cost of debt, 6.88%, is the yield on the bond issued by Yum with the longest maturity date so that it better matches our forecast. Discounted Cash Flow and Economic Profit Models The projected stock price of $82.92 is derived from both the discounted cash flow (DCF) and economic profit (EP) models. This forecasted stock price is based on a continuing value growth rate of 2.4%, which is close to our estimate for the GPD growth range of 2.5-3.5%. The results of these two models suggest that Yums stock is currently undervalued given the potential growth prospect of this company in the international division and the China division. Given a steady growth rate of the international economy Yum will continue to expand over the next 5 to eight years and then reach its steady state. This forecast strongly suggests Yums stock is worth buying. Fundamental P/E We calculated our Fundamental P/E with our forecasted continuing value and expected dividends. We obtained 2.4% percent CV growth rate after completing our calculation, and we see this growth rate as reasonable since it is close to the growth rate of the GDP. Our model showed a price of $79.78, which is close to the current price, after adjusting for the partial year elapsed. Our group believes that the real price of the stock should be slightly higher since we made somewhat conservative estimates and the dividend payout ratio will be higher as the company reaches its maturity.

Valuation Analysis
Our group used several models, including Discounted Cash flow, Economic Profit, Fundamental P/E, and Relative P/E, to estimate the target price of Yum! Brands, Inc. The Discounted Cash flow and the Economic Profit models resulted in a price of $82.92, which is 14% premium over the current price of $72.69. Our Fundamental P/E showed the target price should be $79.78. The Relative P/E model yielded a target price of 87.85, a 21% premium over the current price. Given our conservative assumptions and our target price for Yum! Brands, Inc, along with the fact that the company is expanding both domestically and globally and yielded consistent returns to its investors, we recommend buying shares of Yum.

Key Assumptions
Revenue Decomposition We analyzed Yums revenue by average restaurant unit sales in the United States, China, and Yum International. The sales revenue and the number of stores in the United States have been decreasing for the last few years, and we expect this trend to continue for a few years. However, we expect that Yum can definitely turn declining business into a strong source of revenue as the economy recovers. Thus, we estimate that Yums business in the United States will grow again and reach the average GDP level. 2011 has been a phenomenal year for Yums China division because its sales revenue grew by 34% and 687 stores were added in 2011 alone. We do believe that the companys profit will keep rising in China but at a slightly declining rate. Furthermore, no business can grow forever; therefore, we forecasted the revenue in the steady state to be the same as the GDP growth rate. Yum International is where the uncertainty of the company lies; it may provide substantial growth

Relative P/E and PEG Ratios For these two models, we compared the ratios of Yum to a group of companies that are in the same business as Yum. Both Relative P/E and PEG Ratio models yielded higher target price, 87.85 and 74.06 respectively, while the current price is trading around $72, indicating that Yum is trading at a below average multiple. This result agrees with our decision to recommend buying this stock, because if a stock is trading at a low multiple that means the stock might be undervalued for the current price. And this contrarian strategy might prevent stock investors from incurring substantial losses when unexpected events take place.

$136.43. In our model the stock price is sensitive to changes in WACC but slightly less sensitive to changes in CV ROIC. Labor Cost and Capital Expenditures Growth Our last sensitivity test addresses labor cost and capital expenditures growth rate. With the capital expenditures growth held consistent, the stock price is from $72.40 to $93.81 when adjusting labor cost. An increase in total labor cost would result in a decrease in stock price. When labor cost is consistent, the stock price range is from $70.64 to $110.05. In our model the stock price is sensitive to both total revenue and capital expenditures growth.

Sensitivity Analysis
Our model is based on many essential assumptions. The following sensitivity test is constructed to acquire better understandings of how different assumptions affect the projected stock price. Beta and Risk-free Rate The beta used in our model is acquired from Bloombergs 2-year weekly data. The sensitivity analysis for Beta and Risk-free rate shows that the stock price of YUM brands is very sensitive to changes in both of these variables. If the yield on the 30 year treasury were to increase to 4.7% then our predictions would price YUMs stock at $60.81, however, if the risk free rate fell to 1.70% then stock price would increase to $120.32. From these tests, it can be inferred that smaller fluctuations in treasury rates will have direct effects on stock price. Beta for the stock also has significant direct effects on stock price. If beta were at 1.089 instead of .789 then our model would predict a price of $59.63, if it fell to .489 then the stock price would be $123.83. Beta and CV Growth To test for fluctuations in the stock price as it relates to Beta and continue value growth rate we did a sensitivity test for both of the inputs. Given a very limited range for CV growth of between 2.24% and 2.54% the stock price could fluctuate around $5 per share when all other inputs are held constant. When CV growth is at the predicted 2.39% and beta is shifted within a range between .639 and .939 then the stock price would rise to as much as $100.12 and fall to as little as $69.87. CV ROIC and WACC Both WACC and CV ROIC are significant assumptions within our model. This sensitivity test assesses how volatile the stock price is with the two assumptions. When WACC is held constant, the stock price range is from $81.90 to $83.73. Holding CV ROIC consistent, we achieve a stock price range between $55.91 and

Important Disclaimer
This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

Sources
1 Bloomberg http://www.bloomberg.com/markets/economic-calendar/
2

Net Advantage. http://www.netadvantage.standardandpoors.com/NASAp p/NetAdvantage/showIndustrySurvey.do?code=rst

Bureau of Labor Statistics. http://data.bls.gov/timeseries/LNS14000000 Investopedia-Disposable Income. http://www.investopedia.com/terms/d/disposableincome. asp#axzz1sGSH91oW Net Advantage. http://www.netadvantage.standardandpoors.com/NASAp p/NetAdvantage/showIndustrySurvey.do?code=rst National Restaurant Association http://www.restaurant.org/research/facts/

NPD Group https://www.npd.com/wps/portal/npd/us/news/pressrelea ses/pr_111011b

Yum! http://www.yum.com/investors/vision_strategy.asp The Wall Street Journal http://online.wsj.com/article/SB10001424052970204136 404577207491303765570.html?mod=WSJ_qtoverview_ wsjlatest Business First http://www.bizjournals.com/louisville/news/2012/01/06/ yum-one-step-closer-to-privatization.html

10

10

Yum! Brands Inc Revenue Decomposition Millions except for percentage Fiscal Years Ending Dec. 31
United States

2009

2010

2011

2012E

2013E

2014E

2015E

2016E

2017E CV2018

Company Owned Beginning of Year Units End of Year Units % Change in Units Average Units Sales % Change in Sales Sales per Unit (in thousands) % Change in Sales per Unit % of Total Revenue Franchise & Liscense Beginning of Year Units End of Year Units % Change in Units Average Units Franchise and Liscense Fees %Change Fees per Unit (in thousands) % Change % of Total Revenue
YUM Restaurants China

3,314 2,800 2,484 2,800 2,484 2,139 -15.51% -11.29% -13.89% 3,057 2,642 2,312 3,738 3,355 3,000 -15.24% -10.25% -10.58% 1,223 1,270 1,298 -0.04% 3.85% 2.20% 34.39% 29.58% 23.76% 14,482 14,819 2.33% 14,651 735 2.80% 50 0.21% 6.76% 14,819 14,977 1.07% 14,898 765 4.08% 51 2.35% 6.74% 14,977 13,867 -7.41% 14,422 786 2.75% 55 6.14% 6.23%

2,139 2,353 2,353 2,518 10.00% 7.00% 2,246 2,435 2,820 2,685 -6.00% -4.80% 1,256 1,102 -3.26% -12.20% 20.30% 17.65% 13,867 14,179 2.25% 14,023 806 2.61% 58 5.53% 5.81% 14,179 14,498 2.25% 14,339 826 2.48% 58 0.22% 5.43%

2,518 2,623 4.20% 2,570 2,594 -3.36% 1,009 -8.44% 15.68% 14,498 14,824 2.25% 14,661 846 2.35% 58 0.10% 5.11%

2,623 2,678 2.10% 2,651 2,542 -2.02% 959 -4.99% 14.30% 14,824 15,158 2.25% 14,991 865 2.24% 58 -0.01% 4.87%

2,678 2,701 0.84% 2,690 2,517 -1.01% 936 -2.44% 13.40% 15,158 15,499 2.25% 15,328 883 2.12% 58 -0.12% 4.70%

2,701 2,708 0.25% 2,704 2,542 1.00% 940 0.45% 12.99% 15,499 15,848 2.25% 15,673 901 2.02% 57 -0.23% 4.60%

2,708 2,736 1.05% 2,722 2,605 2.50% 957 1.84% 12.93% 15,848 16,204 2.25% 16,026 918 1.92% 57 -0.33% 4.56%

Company Owned Beginning of Year Units End of Year Units % Change in Units Average Units Sales % Change in Sales Sales per Unit (in thousands) % Change in Sales per Unit % of Total Revenue Franchise & Liscense Beginning of Year Units End of Year Units % Change in Units Average Units Franchise and Liscense Fees %Change Fees per Unit (in thousands) % Change % of Total Revenue
YUM Restaurants International

2,272 2,866 26.14% 2,569 3,352 9.61% 1,305 1.38% 30.84%

2,866 3,228 12.63% 3,047 4,081 21.75% 1,339 2.65% 35.98%

3,228 3,705 14.78% 3,467 5,487 34.45% 1,583 18.18% 43.46% 153 201 31.37% 177 79 46.30% 446 12.00% 0.63%

3,705 4,170 12.56% 3,938 6,667 21.50% 1,693 6.96% 47.99% 201 267 32.94% 234 117 48.61% 501 12.36% 0.85%

4,170 4,589 10.05% 4,380 7,813 17.20% 1,784 5.37% 51.36% 267 360 34.59% 313 177 51.04% 566 12.82% 1.17%

4,589 4,958 8.04% 4,774 8,888 13.76% 1,862 4.37% 53.73% 360 465 29.40% 413 254 43.39% 616 8.95% 1.54%

4,958 5,257 6.03% 5,108 9,806 10.32% 1,920 3.11% 55.17% 465 575 23.52% 520 343 34.71% 659 6.84% 1.93%

5,257 5,479 4.22% 5,368 10,514 7.22% 1,959 2.02% 55.98% 575 676 17.64% 626 432 26.03% 690 4.79% 2.30%

5,479 5,629 2.74% 5,554 11,008 4.70% 1,982 1.19% 56.25% 676 760 12.35% 718 510 18.22% 711 3.00% 2.61%

5,629 5,722 1.65% 5,676 11,318 2.82% 1,994 0.62% 56.16% 760 821 8.03% 790 571 11.84% 722 1.62% 2.83%

96 118 118 153 22.92% 29.66% 107 136 55 54 -21.43% -1.82% 514 399 28.14% -22.47% 0.51% 0.48%

Company Owned Beginning of Year Units End of Year Units % Change in Units Average Units Sales % Change in Sales Sales per Unit (in thousands) % Change in Sales per Unit % of Total Revenue Franchise & Liscense Beginning of Year Units End of Year Units % Change in Units Average Units Franchise and Liscense Fees %Change Fees per Unit (in thousands) % Change % of Total Revenue Company Sales
Franchise & license fees & income

1,982 2,000 2,000 1,559 0.91% -22.05% 1,991 1,780 2,323 2,347 -2.19% 1.03% 1,167 1,319 -10.98% 13.04% 21.37% 20.69% 11,333 11,808 4.19% 11571 665 2.15% 57 -5.99% 6.12% 9,413 1,455 10,868 11,808 12,722 7.74% 12265 741 11.43% 60 5.12% 6.53% 9,783 1,560 11,343

1,559 1,593 2.18% 1,576 2,406 2.51% 1,527 15.75% 19.06% 12,722 12,860 1.08% 12791 868 17.14% 68 12.32% 6.87% 10,893 1,733 12,626

1,593 1,628 2.20% 1,611 2,478 3.00% 1,539 0.79% 17.84% 12,860 13,149 2.25% 13005 1,002 15.43% 77 13.53% 7.21% 11,965 1,926 13,891

1,628 1,664 2.20% 1,646 2,577 4.00% 1,566 1.76% 16.94% 13,149 13,445 2.25% 13297 1,133 13.11% 85 10.62% 7.45% 13,075 2,137 15,212

1,664 1,700 2.20% 1,682 2,706 5.00% 1,609 2.74% 16.36% 13,445 13,748 2.25% 13596 1,252 10.49% 92 8.06% 7.57% 14,189 2,352 16,541

1,700 1,738 2.20% 1,719 2,869 6.00% 1,669 3.72% 16.14% 13,748 14,057 2.25% 13902 1,351 7.87% 97 5.49% 7.60% 15,216 2,558 17,774

1,738 1,776 2.20% 1,757 3,012 5.00% 1,714 2.74% 16.04% 14,057 14,373 2.25% 14215 1,425 5.51% 100 3.19% 7.59% 16,043 2,740 18,783

1,776 1,815 2.20% 1,796 3,132 4.00% 1,744 1.76% 16.01% 14,373 14,697 2.25% 14535 1,476 3.58% 102 1.30% 7.54% 16,682 2,887 19,569

1,815 1,855 2.20% 1,835 3,226 3.00% 1,758 0.78% 16.01% 14,697 15,027 2.25% 14862 1,513 2.51% 102 0.25% 7.51% 17,150 3,002 20,152

Total Revenues

Yum! Brands Inc Income Statement In millions except for per share Fiscal Years Ending Dec. 31 Company sales Franchise & license fees & income Total revenues
Company restaurants - food & paper Company restaurants - payroll & employee benefits Company restaurants - occupancy & other operating expenses Company restaurants expenses General & administrative expenses Franchise & license expenses Closures & impairment expenses (income) Refranchising gain (loss) Other expense (income) Total costs & expenses, net Operating profit Interest Expense, Net Income tax provision Net income (loss) - including noncontrolling interest Net income (loss) - noncontrolling interest Net income - YUM! Brands, Inc.

2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E CV2018 9,413 9,783 10,893 11,965 13,075 14,189 15,216 16,043 16,682 17,150 1,423 1,560 1,733 1,926 2,137 2,352 2,558 2,740 2,887 3,002 10,836 11,343 12,626 13,891 15,212 16,541 17,774 18,783 19,569 20,152
3,003 2,154 2,777 7,934 1,221 118 103 26 -104

3,633 3,837 4,202 4,569 4,910 5,188 5,406 2,418 2,914 3,192 3,470 3,729 3,941 4,106 3,089 3,086 3,374 3,659 3,925 4,148 4,331 9,140 9,838 10,767 11,699 12,564 13,277 13,842 1,372 1,636 1,792 1,949 2,094 2,212 2,305 145 104 115 126 138 147 155 135 70 72 78 84 81 87 72 31 13 6 2 1 0 -53 64 61 77 78 69 64 9,298 9,573 10,811 11,615 12,698 13,780 14,803 15,651 16,326 1,538 1,770 1,815 2,276 2,514 2,761 2,971 3,132 3,243
3,091 2,172 2,857 8,120 1,277 110 47 62 -43

5,567 4,228 4,476 14,271 2,374 161 79 0 67 16,818 3,334 224 733 2,376 0 2,376 409 5.80 1.88

194
313 1,083 -12 1,071 469 2.28 0.80

175
416 1,178 -20 1,158 469 2.44 0.92

SharesOutstanding
Net earnings (loss) per common share - basic Dividends declared per common share

156 324 1,335 16 1,319 460 2.81 1.04

174 501 1,601 0 1,601 455 3.52 1.14

177 553 1,784 0 1,784 447 3.99 1.29

187 607 1,966 0 1,966 439 4.48 1.45

197 654 2,120 0 2,120 431 4.92 1.60

207 689 2,236 0 2,236 423 5.28 1.71

216 714 2,314 0 2,314 416 5.56 1.80

Yum! Brands Inc Balance Sheet Millions Fiscal Years Ending Dec. 31 Cash & cash equivalents Accounts & notes receivable, net Inventories Prepaid expenses & other current assets Deferred income taxes Restricted Cash Advertising cooperative assets, restricted Total current assets Property, plant & equipment, net Goodwill Intangible assets, net Investments in unconsolidated affiliates Other assets Deferred income taxes Total Long term Assets Total assets Accounts payable & other current liabilities Income taxes payable Short-term borrowings Advertising cooperative liabilities Total current liabilities Long-term debt Other liabilities & deferred credits Total liabilities Common stock Treasury stock Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total shareholders' equity (deficit) - YUM! Brands, Inc. Noncontrolling interest Total shareholders' equity (deficit) Total Liabilities and Shareholder's Equity

2009 353 239 122 314 81 0 99 1,208 3,899 640 462 144 544 251 5,940 7,148 1,413 82 59 99 1,653 3,207 1,174 6,034 253 0 996 -224 1,025 89 1,114 7,148

2010 1,426 256 189 269 61 0 112 2,313 3,830 659 475 154 519 366 6,003 8,316 1,602 61 673 112 2,448 2,915 1,284 6,647 86 0 1,717 -224 1,576 93 1,669 8,316

2011 2012E 2013E 2014E 2015E 2016E 2017E CV2018 1,198 2,320 2,685 3,299 3,978 4,671 5,344 5,989 286 278 304 331 355 376 391 403 273 306 335 364 391 413 431 443 338 389 426 463 498 526 548 564 112 132 154 181 213 250 294 345 300 0 0 0 0 0 0 0 114 128 142 157 171 183 193 200 2,321 3,552 4,047 4,795 5,606 6,418 7,200 7,945 4,042 4,448 4,825 5,180 5,516 5,837 6,146 6,446 681 681 681 681 681 681 681 681 299 273 248 222 197 171 146 120 167 169 170 172 174 176 177 179 475 480 485 489 494 499 504 509 549 505 465 427 393 362 333 306 6,213 6,556 6,873 7,172 7,455 7,726 7,987 8,241 8,834 10,108 10,920 11,967 13,061 14,144 15,187 16,186 1,874 142 320 114 2,450 2,997 1,471 6,918 2,098 125 549 128 2,900 3,540 1,353 7,793 2,297 138 601 142 3,179 3,610 1,353 8,143 2,498 152 653 157 3,460 3,818 1,353 8,631 2,684 163 702 171 3,720 4,018 1,353 9,092 2,837 172 742 183 3,933 4,211 1,353 9,497 2,955 178 773 193 4,099 4,392 1,353 9,844 3,043 183 796 200 4,223 4,563 1,353 10,139 290 -6,107 11,705 -224 5,664 383 6,047 16,186

18 48 80 115 153 195 240 0 -750 -1,538 -2,364 -3,233 -4,144 -5,101 2,052 3,129 4,324 5,641 7,062 8,560 10,112 -224 -224 -224 -224 -224 -224 -224 1,823 2,202 2,642 3,167 3,758 4,387 5,026 93 112 135 169 211 260 317 1,916 2,315 2,777 3,336 3,969 4,647 5,343 8,834 10,108 10,920 11,967 13,061 14,144 15,187

Yum! Brands Inc Cash Flow Statement Millions Fiscal Years Ending Dec. 31
CF from Operating Activities Net income (loss) Reconciliation to Cash Flow: Adjustment for depreciation Change in defered income taxes

2012E 2013E 2014E 2015E 2016E 2017E CV2018 1,601 562 20 0 8 0 -20 -51 224 -17 300 -118 2,510 1,784 620 23 0 -26 0 -23 -37 200 13 0 0 2,553 1,966 673 27 0 -27 0 -27 -37 201 14 0 0 2,789 2,120 722 32 0 -25 0 -32 -35 186 12 0 0 2,981 2,236 769 37 0 -20 0 -37 -28 152 9 0 0 3,118 2,314 813 44 0 -16 0 -44 -22 119 6 0 0 3,215 2,376 856 51 0 -12 0 -51 -16 88 5 0 0 3,298

Accumulated other comprehensive income (loss)

Changes in Operating Working Capital: Change in accounts receivable Change in advertising assets Change in inventory Change in prepaid assets and other current assets Change in accounts payable and other liabilities Change in income taxes payable Change in Restricted Cash Change in other liabilities Net Cash Provided by Operating Activities: CF from Investing Activities investments in unaffiliated associates Capital expenditures Change in Intangible Assets Net Cash Provided by Investing Activities CF from Financing Activities Common Stock Change in Shortterm Borrowing Proceeds (repayment) of LT Debt Dividends paid from common stock Repurchases of shares of Common Stock Employee Stock Option Proceeds and Tax Benefits Net Cash Provided from Financing Change in Cash and Equivalents Cash & cash equivalents - beginning of year Cash & cash equivalents - end of year

-2 -968 26 -944

-2 -2 -2 -2 -2 -997 -1,027 -1,058 -1,090 -1,122 26 26 26 26 26 -999 -1,029 -1,060 -1,091 -1,124

-2 -1,156 26 -1,158

30 32 35 38 42 45 229 52 52 49 40 31 543 70 207 201 192 181 -524 -589 -649 -700 -737 -763 -750 -788 -827 -868 -912 -957 30 32 35 38 42 45 -444 -1,190 -1,146 -1,242 -1,334 -1,417

50 23 171 -783 -1,005 50 -1,495

1,198 2,320

2,320 2,685

2,685 3,299

3,299 3,978

3,978 4,671

4,671 5,344

5,344 5,989

Yum! Brands Inc Income Statement Fiscal Years Ending Dec. 31 Company sales Franchise & license fees & income Total revenues
Company restaurants - food & paper Company restaurants - payroll & employee benefits Company restaurants - occupancy & other operating expenses Company restaurants expenses General & administrative expenses Franchise & license expenses Closures & impairment expenses (income) Refranchising gain (loss) Other expense (income) Total costs & expenses, net Operating profit Interest Expense, Net Income tax provision Net income (loss) - including noncontrolling interest Net income (loss) - noncontrolling interest Net income - YUM! Brands, Inc.

2009

2010

2011

2012E

2013E

2014E

2015E

2016E

2017E

2018E

86.87% 86.25% 86.27% 86.14% 85.95% 85.78% 85.61% 85.41% 85.25% 85.10% 13.13% 13.75% 13.73% 13.86% 14.05% 14.22% 14.39% 14.59% 14.75% 14.90% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 27.71% 19.88% 25.63% 73.22% 11.27% 1.09% 0.95% 0.24% -0.96% 85.81% 14.19% 1.79% 2.89% 9.99% -0.11% 9.88% 27.25% 19.15% 25.19% 71.59% 11.26% 0.97% 0.41% 0.55% -0.38% 84.40% 15.60% 1.54% 3.67% 10.39% -0.18% 10.21% 28.77% 19.15% 24.47% 72.39% 10.87% 1.15% 1.07% 0.57% -0.42% 85.62% 14.38% 1.24% 2.57% 10.57% 0.13% 10.45% 27.62% 20.98% 22.22% 70.82% 11.78% 0.75% 0.51% 0.22% -0.46% 83.62% 16.38% 1.25% 3.60% 11.53% 0.00% 11.53% 27.62% 20.98% 22.18% 70.78% 11.78% 0.76% 0.47% 0.09% -0.40% 83.47% 16.53% 1.17% 3.64% 11.73% 0.00% 11.73% 27.62% 20.98% 22.12% 70.72% 11.78% 0.76% 0.47% 0.03% -0.47% 83.31% 16.69% 1.13% 3.67% 11.89% 0.00% 11.89% 27.62% 20.98% 22.08% 70.68% 11.78% 0.77% 0.47% 0.01% -0.44% 83.28% 16.72% 1.11% 3.68% 11.93% 0.00% 11.93% 27.62% 20.98% 22.09% 70.69% 11.78% 0.78% 0.43% 0.01% -0.37% 83.33% 16.67% 1.10% 3.67% 11.91% 0.00% 11.91% 27.62% 20.98% 22.13% 70.73% 11.78% 0.79% 0.44% 0.00% -0.33% 83.43% 16.57% 1.10% 3.65% 11.83% 0.00% 11.83% 27.62% 20.98% 22.21% 70.82% 11.78% 0.80% 0.39% 0.00% -0.33% 83.46% 16.54% 1.11% 3.64% 11.79% 0.00% 11.79%

Yum! Brands Inc Balance Sheet Fiscal Years Ending Dec. 31 Cash & cash equivalents Accounts & notes receivable, net Inventories Prepaid expenses & other current assets Deferred income taxes Restricted Cash Advertising cooperative assets, restricted Total current assets Property, plant & equipment, net Goodwill Intangible assets, net Investments in unconsolidated affiliates Other assets Deferred income taxes Total Long term Assets Total assets Accounts payable & other current liabilities Income taxes payable Short-term borrowings Advertising cooperative liabilities Total current liabilities Long-term debt Other liabilities & deferred credits Total liabilities Common stock Treasury stock Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total shareholders' equity (deficit) - YUM! Brands, Inc. Noncontrolling interest Total shareholders' equity (deficit) Total Liabilities and Shareholder's Equity 2009
3.26% 2.21% 1.13% 2.90% 0.75% 0.00% 0.91% 11.15% 35.98% 5.91% 4.26% 1.33% 5.02% 2.32% 54.82% 65.97% 13.04% 0.76% 0.54% 0.91% 15.25% 29.60% 10.83% 55.68% 2.33% 0.00% 9.19% -2.07% 9.46% 0.82% 10.28% 65.97%

2010
12.57% 2.26% 1.67% 2.37% 0.54% 0.00% 0.99% 20.39% 33.77% 5.81% 4.19% 1.36% 4.58% 3.23% 52.92% 73.31% 14.12% 0.54% 5.93% 0.99% 21.58% 25.70% 11.32% 58.60% 0.76% 0.00% 15.14% -1.97% 13.89% 0.82% 14.71% 73.31%

2011 2012E 2013E 2014E 2015E 2016E 2017E 2018CV

9.49% 2.27% 2.16% 2.68% 0.89% 2.38% 0.90% 18.38% 32.01% 5.39% 2.37% 1.32% 3.76% 4.35% 49.21% 69.97% 14.84% 1.12% 2.53% 0.90% 19.40% 23.74% 11.65% 54.79% 0.14% 0.00% 16.25% -1.77% 14.44% 0.74% 15.18% 69.97% 16.70% 2.00% 2.20% 2.80% 0.95% 0.00% 0.92% 25.57% 32.02% 4.90% 1.97% 1.21% 3.45% 3.64% 47.20% 72.77% 15.10% 0.90% 3.95% 0.92% 20.88% 25.48% 9.74% 56.10% 0.34% -5.40% 22.53% -1.61% 15.86% 0.81% 16.67% 72.77% 17.65% 2.00% 2.20% 2.80% 1.02% 0.00% 0.94% 26.60% 31.72% 4.48% 1.63% 1.12% 3.19% 3.05% 45.18% 71.78% 15.10% 0.91% 3.95% 0.94% 20.90% 23.73% 8.90% 53.53% 0.52% -10.11% 28.42% -1.47% 17.37% 0.89% 18.26% 71.78% 19.95% 2.00% 2.20% 2.80% 1.10% 0.00% 0.95% 28.99% 31.31% 4.12% 1.34% 1.04% 2.96% 2.58% 43.36% 72.35% 15.10% 0.92% 3.95% 0.95% 20.92% 23.08% 8.18% 52.18% 0.69% -14.29% 34.10% -1.35% 19.15% 1.02% 20.17% 72.35% 22.38% 2.00% 2.20% 2.80% 1.20% 0.00% 0.96% 31.54% 31.03% 3.83% 1.11% 0.98% 2.78% 2.21% 41.94% 73.48% 15.10% 0.92% 3.95% 0.96% 20.93% 22.61% 7.61% 51.15% 0.86% -18.19% 39.73% -1.26% 21.14% 1.19% 22.33% 73.48% 24.87% 2.00% 2.20% 2.80% 1.33% 0.00% 0.97% 34.17% 31.08% 3.63% 0.91% 0.93% 2.66% 1.93% 41.13% 75.30% 15.10% 0.92% 3.95% 0.97% 20.94% 22.42% 7.21% 50.56% 1.04% -22.06% 45.58% -1.19% 23.36% 1.38% 24.74% 75.30% 27.31% 2.00% 2.20% 2.80% 1.50% 0.00% 0.98% 36.79% 31.41% 3.48% 0.74% 0.91% 2.58% 1.70% 40.81% 77.61% 15.10% 0.91% 3.95% 0.98% 20.95% 22.44% 6.92% 50.30% 29.72% 2.00% 2.20% 2.80% 1.71% 0.00% 0.99% 39.42% 31.99% 3.38% 0.60% 0.89% 2.53% 1.52% 40.90% 80.32% 15.10% 0.91% 3.95% 0.99% 20.95% 22.64% 6.72% 50.31%

1.23% 1.44% -26.07% -30.30% 51.67% 58.08% -1.14% -1.11% 25.69% 28.11% 1.62% 1.90% 27.30% 30.01% 77.61% 80.32%

Yum! Brands Inc Value Driver Estimation Millions Fiscal Years Ending Dec. 31 Revenue Less: Total Expense Implied Lease Interest EBITA Less: Adjusted Taxes Total Income Tax Provision Marginal Tax Rate Interest Expense Tax Shield on Interest Expense Tax Shield on lease Interest Adusted Taxes Change in Deffered Tax Liability NOPLAT Operating Current Assets: Normal Cash Accounts Recevable Inventory Prepaid Expense Advertising cooperative assets, restricted Total Operating Current Assets Accounts Payable Income Taxes payable Total Current Liabilities Net operating Working Capital Net Property, Plant, and Equipment Operating Lease Invested Capital ROIC Noplat Beginning Invested Capital ROIC FCF Noplat Change in Capital Expenditure FCF Economic Profit Beginning Invested Capital ROIC WACC Economic Profit

2009 10,836 9,298 230 1,768

2010 11,343 9,573 246 2,016

2011 12,626 10,811 265 2,080

2012E 13,891 11,615 276 2,552

2013E 15,212 12,698 302 2,816

2014E 16,541 13,780 327 3,089

2015E 17,774 14,803 351 3,322

2016E 18,783 15,651 370 3,502

2017E 19,569 16,326 385 3,628

CV2018 20,152 16,818 396 3,729

313 22.00% 194 43 51 406 -126 1,236

416 22.00% 175 39 54 509 -5 1,502

324 22.00% 156 34 58 417 4 1,668

501 22.00% 174 38 61 600 -74 1,878

553 22.00% 177 39 66 659 40 2,198

607 22.00% 187 41 72 721 37 2,405

654 22.00% 197 43 77 774 34 2,582

689 22.00% 207 45 81 816 31 2,718

714 22.00% 216 47 85 846 29 2,811

733 22.00% 224 49 87 870 27 2,886

21 239 122 314 99 795 1,413 82 1,495 -700 3,899 3,347 6,546

86 256 189 269 112 912 1,602 61 1,663 -751 3,830 3,579 6,657

72 286 273 338 114 1,083 1,874 142 2,016 -933 4,042 3,858 6,967

139 278 306 389 128 1,240 2,098 125 2,223 -983 4,448 4,015 7,480

161 304 335 426 142 1,368 2,297 138 2,436 -1,067 4,825 4,388 8,146

198 331 364 463 157 1,513 2,498 152 2,650 -1,137 5,180 4,762 8,804

239 355 391 498 171 1,653 2,684 163 2,848 -1,194 5,516 5,106 9,428

280 376 413 526 183 1,778 2,837 172 3,009 -1,231 5,837 5,384 9,990

321 391 431 548 193 1,883 2,955 178 3,134 -1,251 6,146 5,598 10,494

359 403 443 564 165 1,770 3,043 183 3,227 -1,457 6,446 5,755 10,744

1,236 6,014 20.55%

1,502 6,546 22.95%

1,668 6,657 25.05%

1,878 6,967 26.96%

2,198 7,480 29.38%

2,405 8,146 29.53%

2,582 8,804 29.33%

2,718 9,428 28.82%

2,811 9,990 28.14%

2,886 10,494 27.51%

1,236 531 704

1,502 111 1,391

1,668 310 1,357

1,878 513 1,366

2,198 666 1,532

2,405 658 1,747

2,582 624 1,958

2,718 561 2,156

2,811 504 2,307

2,886 251 2,636

6,014 20.55% 6.97% 817

6,546 22.95% 6.97% 1,046

6,657 25.05% 6.97% 1,204

6,967 26.96% 6.97% 1,393

7,480 29.38% 6.97% 1,677

8,146 29.53% 6.97% 1,837

8,804 29.33% 6.97% 1,969

9,428 28.82% 6.97% 2,060

9,990 28.14% 6.97% 2,115

10,494 27.51% 6.97% 2,155

Yum! Brands Inc Weighted Average Cost of Capital (WACC) Estimation Cost of Equity: Risk-free Rate Risk Premium Beta Cost of Equity Cost of Debt: Pre-tax Cost of Debt Marginal Tax Rate Cost of Debt Target Weights: Total Debt Shares Outstanding Current Price Equity Total

3.20% 5.34% 0.789 7.41%

6.88% 22.00% 5.36%

9,389,370,110 464,100,000 73.19 33,967,479,000 43,356,849,110

Weight of Equity Weight of Debt WACC

78.34% 21.66% 6.97%

Yum! Brands Inc Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth CV ROIC WACC Cost of Equity Fiscal Years Ending Dec. 31 DCF Model FCF PV of FCF Plus Non-operating Assets Excess Cash Investments in Unconsolidated affiliates Value (Non-Oerating) Less: Non Equity Claims ESOP PV of Operating Lease Short-term borrowings Purchase Obligation Capital Lease Long-term debt PV of Equity Shares Outstanding Intrinsic Value Price as of 4/15/2012 Fiscal Years Ending Dec. 31 EP Model Economic Profit PV of EP Plus: Invested Capital PV (Operating) Plus: Non-operating Assets Excess Cash Investments in Unconsolidated affiliates Value (Non-Oerating) Less: Non Equity Claims ESOP PV of Operating Lease Short-term borrowings Purchase Obligation Capital Lease Long-term debt PV of Equity Shares Outstanding Intrinsic Value Price as of 4/15/2012

2.39% 27.18% 6.97% 7.41% 2011 2012E 1,366 1,277 2013E 1,532 1,339 2014E 1,747 1,427 2015E 1,958 1,496 2016E 2,156 1,539 2017E 2,307 1,540 2018E CV 57,472 38,360

46,978 945 167 1,112 444 3,858 320 797 437 4,774 37,460 460 81.44 82.92 2011

2012E 1,393 1,302

2013E 1,677 1,465

2014E 1,837 1,501

2015E 1,969 1,503

2016E 2,060 1,471

2017E 2,115 1,412

2018E CV 46,978 31,356

40,011 6,967 46,978 945 167 1,112 444 3,858 320 797 437 4,774 37,460 460 81.44 82.92

Yum! Brands Inc Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 EPS Key Assumptions CV growth CV ROE Cost of Equity Future Cash Flows P/E Multiple EPS(next period) Future Stock Price Dividends Per Share Future Cash Flows Discounted Cash Flows

2011E 2012E 2013E 2014E 2015E 2016E 2017E 3.52 3.99 4.48 4.92 5.28 5.56

CV 2018 5.80

2.39% 44.47% 7.41%

18.84 5.80 109.33 1.14 1.14 1.06 1.29 1.29 1.12 1.45 1.45 1.17 1.60 1.60 1.20 1.71 1.71 1.20 1.80 1.80 1.17 109.33 71.19

Intrinsic Value Price as of 4/15/2012

78.11 79.78

Yum! Brands Inc Relative P/E Valuation Model Ticker MCD DRI SBUX DPZ EAT CMG Company McDonald's Corp. Darden Restaurants, Inc. Starbucks Corporation Domino's Pizza, Inc. Brinker International Inc. Chipotle Mexican Grill, Inc. Price EPS 2012E 5.72 3.60 1.85 1.97 1.87 8.73 EPS 2013E 6.31 4.10 2.30 2.26 2.17 10.86 Average $3.99 P/E 12 17.38 19.64 30.76 18.78 14.91 48.37 25.0 20.8 P/E 13 15.75 17.25 24.74 16.37 12.85 38.88 21.0 18.3 Est. 5yr Gr. 9.97 12.16 18.93 13.18 13.33 21.57 14.86 12.93 PEG 12 1.74 1.62 1.63 1.42 1.12 2.24 1.6 1.6 PEG 13 1.58 1.42 1.31 1.24 0.96 1.80 1.4 1.4

99.40
70.71 56.91 36.99 27.89 422.26

Brands

yum

73.19

$3.52

Implied Value: Relative P/E (EPS12) Relative P/E (EPS13) PEG Ratio (EPS12) PEG Ratio (EPS13)

$ $ $ $

87.85 83.76 74.06 71.55

Yum! Brands Inc Key Management Ratios

Fiscal Years Ending Dec. 31 Liquidity Ratios Current Ratio Current Assets/Current Liabilities Quick Ratio (Current Assets-Inventory)/Current Liabilities Activity or Asset-Management Ratios Inventory Turnover Ratio Sales/Inventory Receivable Turnover Sales/Account Receivable PPE Turnover Net Sales/Net PPE Financial Leverage Ratios Debt To Equity Total Liabilities/Shareholders Equity Interest Coverage EBITA/Interest Expense Profitability Ratios Profit Margin Net Profits/Sales Return On Assets Net Income/Total Assets Return On Equity Net Income/Shareholders Equity Payout Policy Ratios Payout Ratio Dividend per share/EPS Total Payout Ratio (Dividend+Repurchase)/Net Income

2009

2010

2011

2012E

2013E

2014E

2015E

2016E

2017E

2018E

0.73 0.43

0.94 0.76

0.95 0.72

1.22 1.00

1.27 1.05

1.39 1.15

1.51 1.27

1.63 1.39

1.76 1.50

1.88 1.62

88.82 45.34 2.78

60.02 44.31 2.96

46.25 44.15 3.12

45.45 50.00 3.12

45.45 50.00 3.15

45.45 50.00 3.19

45.45 50.00 3.22

45.45 50.00 3.22

45.45 50.00 3.18

45.45 50.00 3.13

5.42 9.11

3.98 11.52

3.61 13.34

3.37 14.68

2.93 15.88

2.59 16.48

2.29 16.84

2.04 16.94

1.84 16.82

1.68 16.64

14.19% 15.60% 14.38% 16.38% 16.53% 16.69% 16.72% 16.67% 16.57% 16.54% 14.98% 13.92% 14.93% 15.84% 16.34% 16.43% 16.23% 15.81% 15.24% 14.68% 96.14% 69.38% 68.84% 69.17% 64.23% 58.94% 53.42% 48.12% 43.31% 39.30%

35.09% 37.70% 37.01% 32.41% 32.41% 32.41% 32.41% 32.41% 32.41% 32.41% 33.80% 67.62% 93.48% 79.58% 77.17% 75.06% 73.94% 73.75% 74.33% 75.24%

R(f)

82.92 1.70% 2.20% 2.70% 3.20% 3.70% 4.20% 4.70%

0.489 205.49 169.87 143.77 123.83 108.09 95.36 84.84

0.589 167.85 142.25 122.64 107.14 94.58 84.19 75.47

0.689 140.75 121.47 106.20 93.81 83.55 74.92 67.56

Beta 0.789 120.32 105.28 93.05 82.92 74.39 67.10 60.81 Beta 0.789 80.72 81.44 82.17 82.92 83.68 84.46 85.26

0.889 104.37 92.30 82.29 73.85 66.64 60.41 54.98

0.989 91.56 81.67 73.33 66.19 60.02 54.63 49.88

1.089 81.06 72.81 65.74 59.63 54.29 49.58 45.40

CV g

82.92 2.24% 2.29% 2.34% 2.39% 2.44% 2.49% 2.54%

0.639 97.00 98.01 99.05 100.12 101.22 102.34 103.49

0.689 91.05 91.95 92.87 93.81 94.78 95.77 96.78

0.739 85.65 86.45 87.27 88.10 88.96 89.84 90.74

0.839 76.22 76.86 77.52 78.19 78.87 79.57 80.28

0.889 72.08 72.66 73.25 73.85 74.47 75.10 75.73

0.939 68.27 68.79 69.33 69.87 70.42 70.99 71.56

WACC

82.92 5.47% 5.97% 6.47% 6.97% 7.47% 7.97% 8.47%

24.18% 134.79 112.22 95.20 81.90 71.24 62.50 55.21

25.18% 135.38 112.71 95.62 82.27 71.56 62.79 55.46

26.18% 135.93 113.17 96.01 82.61 71.86 63.05 55.70

CV ROIC 27.18% 28.18% 136.43 136.90 113.59 113.99 96.37 96.70 82.92 83.21 72.13 72.39 63.29 63.52 55.91 56.12

29.18% 137.34 114.35 97.02 83.48 72.62 63.73 56.30

30.18% 137.75 114.69 97.31 83.73 72.85 63.92 56.48

Labor Cost

82.92 19.48% 19.98% 20.48% 20.98% 21.48% 21.98% 22.48%

0.00% 79.70 76.65 73.64 70.64 67.68 64.74 61.82

1.00% 83.40 80.19 77.01 73.86 70.75 67.66 64.60

Cap Exp Growth 2.00% 3.00% 4.00% 88.00 93.81 101.32 84.58 90.14 97.31 81.21 86.51 93.35 77.87 82.92 89.44 74.56 79.37 85.59 71.28 75.87 81.78 68.04 72.40 78.01

5.00% 111.32 106.85 102.45 98.11 93.83 89.61 85.45

6.00% 125.16 120.04 115.01 110.05 105.18 100.39 95.68