TEXT-Fitch affirms YUM! Brands ratings

Tue Jul 24, 2012 10:03am EDT

July 24 - Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and
issue level ratings of YUM! Brands, Inc. (NYSE: YUM) as follows:

--Long-term IDR at 'BBB';
--Senior unsecured notes at 'BBB';
--Bank credit facility at 'BBB';
--Short-term IDR at 'F2'.

The Rating Outlook is Stable. At June 16, 2012, Yum had approximately $3.3 
billion of total debt.

Rating Rationale:

YUM's ratings reflect its strong operating cash flow, significant free cash flow
(FCF), extensive exposure to faster growing emerging markets, and scale with 
nearly 38,000 system-wide units. On a worldwide basis, approximately 80% of 
YUM's core Kentucky Fried Chicken (KFC), Pizza Hut, and Taco Bell restaurants 
are managed by franchisees or affiliates while 20% are company-owned and 
operated. 

Cash flow from operations has grown by a compound annual growth rate of 9% to 
approximately $2.2 billion for the year ended Dec. 31, 2011 and FCF has averaged
over $500 million annually since 2007. During 2011, 70% of YUM's revenue and 73%
of its operating income (before corporate expenses) was derived from 
international markets, up from 41% and 48%, respectively, in 2006. More than 50%
of 2011 operating income was from emerging markets.

China is YUM's largest geographic market representing 44% of sales and 42% of 
operating profit during the latest fiscal year. YUM had nearly 4,500 units in 
China at Dec. 31, 2011, of which over 80% are company-operated. International 
expansion remains the primary growth engine for YUM. In 2012 the company plans 
to open a record 1,700 new units outside of the U.S., with 700 opening in China 
and the rest across YUM Restaurants International (YRI) and India. Key growth 
markets other than China include Africa, France, Germany, and Russia.

Fitch remains concerned about YUM's significant exposure to China, due to 
slowing economic growth. However, concerns have been partially mitigated by the 
fact that new unit growth is being funded with internally generated cash. YUM 
has also demonstrated its ability to operate effectively and profitably in 
China. The China division has reported 10 consecutive quarters of positive 
same-store sales (SSS) growth and a restaurant margin averaging more than 20% 
since 2001. Fitch rates China 'A+' with a Stable Outlook on a foreign currency 
long-term IDR basis and 'AA-' with a Negative Outlook on a local currency IDR 
basis and is forecasting GDP growth of 8% in 2012, down from 9.2% in 2011.

For the latest 12 months (LTM) ended June 16, 2012, rent-adjusted leverage 
(defined as total debt plus eight times gross rents-to-operating EBITDA plus 
rents) was approximately 2.8x, operating EBITDAR-to-gross interest expense plus 
rent was about 3.5x, funds from operation (FFO) fixed-charge coverage was an 
estimated 3.1x, and FCF was $646 million. Fitch expects rent-adjusted leverage 
to approximate current levels and annual FCF of around $500 million in 2012 and 
2013.

Liquidity, Maturities, and Financial Covenants:

YUM's liquidity at June 16, 2012 consisted of $984 million of cash and $1.2 
billion of availability under its undrawn revolving credit facility, net of $88 
million of letters of credit. YUM's $1.3 billion revolving facility expires due 
March 22, 2017. Following the repayment of $263 million of 7.7% notes due July 
1, 2012, YUM does not have any material maturities until Sept. 15, 2015 when 
$250 million of 4.25% notes come due. 

Financial maintenance covenants in YUM's bank agreements include a maximum 
leverage ratio (defined as consolidated net debt including 
securitizations-to-EBITDA adjusted for acquisitions and divestitures) of 2.75x. 
The company is also subject to a minimum fixed-charge coverage ratio (defined as
EBITDAR less capital expenditures-to-interest plus rent) of 1.4x. Based on 
Fitch's estimates, YUM had substantial room under these covenants at June 16, 
2012. The company's unsecured notes do not contain financial covenants but most 
tranches contain a Change of Control Triggering Event clause. 

Operating Performance:

For the quarter ended June 16, 2012, consolidated revenue grew 12% to $3.2 
billion. SSS increased 10% in China, 4% at YRI, and 7% on a blended basis in the
U.S. Brand-level SSS growth in the U.S. was 13% at Taco Bell, 4% at Pizza Hut, 
and 1% at KFC. Worldwide operating profit, excluding gains and losses from 
refranchising, and other special items, increased 8% to $459 million. Currency 
provided a 1% benefit to operating profit. 

YUM's worldwide company-operated restaurant margin declined 0.6% to 15.2% during
the latest quarter as a 5.8 percentage point increase in the U.S. was offset by 
a 4.1 percentage point decline in China and a 1.1 percentage point decline in 
YRI. The restaurant margin in the U.S., China and YRI was 17.5%, 15.6%, and 
11.8%, respectively. Margin improvement in the U.S. was due to improved sales 
and continued efforts around efficiency while the decline at YRI was due to 
higher costs in Thailand and SSS declines at KFC in France.

China's restaurant profitability was negatively affected by 13% labor, 6% 
commodity cost inflation, and higher start-up costs from an increased pace of 
new unit development. Additionally, due to YUM's focus on delivering value to 
the consumer, the company implemented a more phased-in targeted approach to 
pricing. The full benefit of these price increases will take effect later in 
2012. 

Fitch views YUM's expectation of mid-single-digit SSS growth and improved 
restaurant margins for China during the second half of 2012 as achievable. 
Despite a slowing Chinese economy, transactions increased 6% in China during the
most recent quarter and management should have good visibility on food cost for 
the rest of the year. KFC China's focus on breakfast, delivery service and 
24-hour service along with Pizza Hut Casual Dining's strategy of offering 
variety and every-day value continues to produce results.

Fitch also believes YUM's multi-year transformation plan for its U.S. business 
has gained traction. YUM expects restaurant margins to improve to the mid-teens 
level from 12.1% last year due mainly to Taco Bell and Pizza Hut and believes 
its KFC business has stabilized. The company also continues to make progress 
with refranchising closing in on its goal of less than 10% company-operated 
units. Over the past couple of years, YUM's U.S. business has also launched a 
number of well-received new menu items including its Doritos Locos Taco, KFC 
Grilled Chicken, and Tuscani Pasta and Wings at Pizza Hut. 

What Could Trigger A Rating Action

Future developments that may, individually or collectively, lead to a positive 
rating action include:

--Materially reduced rent-adjusted leverage due to a combination of good SSS 
performance, cash flow growth and/or debt reduction;

--Continued generation of meaningful discretionary FCF and the ability to 
self-fund new unit development. 

Future developments that may, individually or collectively, lead to a negative 
rating action include:

--A sustained increase in rent-adjusted leverage due to SSS weakness and 
declining operating cash flow growth, particularly due to significantly reduced 
profitability in China;

--Material increases in debt due to a more aggressive financial strategy related
to dividends or share repurchases or the inability to fund new unit growth with 
internally generated cash flow.
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