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Yum Brands foresees higher growth, less risk after China separation

Logos of KFC, owned by Yum Brands Inc, are seen on delivery bicycles in front of its restaurant in Beijing.

Kim Kyung-Hoon/Reuters

Yum Brands Inc. chief executive Greg Creed said the fast-food giant will have "higher growth and less risk" after separating its China business, the biggest shake-up at the company in almost two decades.

With the restaurants in China paying to license Yum's brands, the company will still benefit from the growth potential of the world's largest consumer market, Mr. Creed said at an annual investor conference in New York on Tuesday. Yet having the locations in a separate company will allow Yum to reduce costs and return more capital to shareholders, he said.

The comments signal that Yum – the owner of the KFC, Pizza Hut and Taco Bell restaurant chains – is on track to deliver on the promises it made when it announced the China split a year ago. The move came after Carl Icahn protegé Keith Meister's Corvex Management took a stake in the company and pressured Yum to hive off the business in a bid to boost its value to shareholders.

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Yum shares were the top performers in the Standard & Poor's 500 Index at the outset of trading on Tuesday, rising as much as 3.8 per cent to $90.68 (U.S.) in New York. The stock had already gained 20 per cent this year through Monday.

Yum said Tuesday in a statement that it plans to have at least 98 per cent of its locations run by franchisees by its fiscal year ending in 2018. That's up from 77 per cent now and a projected 93 per cent by the time of the China separation.

Handing more of its restaurants over to franchisees will allow the company to cut costs and return more capital to shareholders. Yum plans to reduce capital spending to $100-million in fiscal 2019 from about $500-million after the separation.

General and administrative expenses will fall by $300-million. That target will be achieved partly through job cuts, including the elimination of 600 corporate positions in the U.S. and internationally by the end of the year, Yum said in an e-mailed statement. An additional 1,500 corporate jobs will be eliminated by the end of 2018. Many of the cuts will come through refranchising, attrition and voluntary retirement, with a "small percentage" due to involuntary firings, the company said.

The company plans to return about $13.5-billion in cash, including dividends, to shareholders between the fourth quarter of 2015 and 2019.

The China split also will allow management to turn its attention to the U.S. business, which faces the challenges of sluggish spending by consumers and increased competition with fast-food rivals. Pizza Hut is grappling with an escalating battle of discounts and promotions with Domino's Pizza Inc. and Papa John's International Inc. Third-quarter sales at Pizza Hut chain dropped 1 per cent, trailing estimates.

"Making it easier to get a pizza is really critically important to us going forward," Mr. Creed said.

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Taco Bell, meanwhile, has found success by focusing on enticing diners with indulgent fare, such as beefy crunch burritos, along with a revamped one-dollar menu. The chain is also making a bigger push to open locations abroad and recently just added its first Brazil location. Same-store sales rose 3 per cent in the most recent quarter at the chain.

Yum had struggled to regain footing in China in recent years after a former supplier was accused of selling expired food. KFC and Pizza Hut are also facing more local competition and a tougher economy where consumers are less willing to spend. Last week, the company said the dispute over the South China Sea hurt last quarter's sales.

Yum China will begin trading Nov. 1 on the New York Stock Exchange under the YUMC ticker. The company will give one share of Yum China for each share of Yum Brands held.

Muktesh Pant, who will be CEO of Yum China, said the company could make strategic acquisitions, but has no specific plans to do so right now. The terms of Yum China's separation allow for takeovers, as long as they don't compete directly with its former parent company. Mr. Pant also said Yum China could double the number of locations for its Little Sheep chain to 500 in about five years and may expand the brand outside of China.

While the separation will allow Yum to focus more on its domestic operations – where it's trying to revamp brands and boost sales – Mr. Creed said Yum has remained involved with the business.

"We intend to continue that collaboration for the days, weeks and months ahead," Mr. Creed said.

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