UPDATE 2-Yum Brands posts 17 pct profit rise, boosts forecast

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ATLANTA, Oct 8 (Reuters) - Restaurant operator Yum Brands Inc (YUM.N) reported a higher-than-expected 17 percent rise in quarterly earnings on strong China results and boosted its full-year outlook on Monday. Its shares rose more than 3 percent in extended trading.

The parent of KFC, Pizza Hut and Taco Bell chains also said it would step up share repurchases by buying back up to $4 billion of stock over the next two years, reducing its share count by up to 20 percent, and would increase debt.

Third-quarter net income rose to $270 million, or 50 cents per share, up 17 percent from $230 million, or 42 cents per share, a year ago.

Wall Street analysts, on average, had been expecting a profit of 45 cents a share, according to Reuters Estimates. Yum Brands had 2 percent fewer shares outstanding in the quarter as a result of buybacks, it said.

Yum said strength in China and in other international markets offset softer results in the United States.

Total revenues rose 13 percent to $2.56 billion, better than the $2.46 billion analysts expected.

Sales at stores open at least a year rose 4 percent worldwide, including gains of 11 percent in mainland China, 7 percent in the international division and 1 percent in the United States.

In its fastest-growing China division, which includes mainland China, Thailand and KFC Taiwan, operating profit rose 28 percent to $135 million. But Yum added that restaurant profit margins decreased slightly because of higher food and labor costs in mainland China.

The company said its U.S. business improved from the first half, but added that sales and profit growth "remains below our target level" because of results at Taco Bell. Taco Bell has struggled in the wake of an E. coli outbreak in the U.S. Northeast linked to the chain last year.

U.S. operating profit rose 1 percent to $187 million but profit margin at company restaurants fell because of higher cheese and labor costs, partly offset by an increase in the average guest check as menu prices rose.

At the international division, which excludes China, operating profit rose 21 percent to $127 million.

Yum Brands, based in Louisville, Kentucky, said it now expects full-year per-share profit to rise 13 percent rather than the 12 percent it projected in July. The new forecast is $1.65 a share, up from $1.63 a share given in July.

Analysts currently expect a profit of $1.64 a share for the year, according to Reuters Estimates.

The company said its board approved the repurchase of up to an additional $1.25 billion of company stock in the next 12 months, as part of its overall plan to buy back up to $4 billion in shares over the next two years.

Debt-rating agency Moody's Investors Service changed its outlook to negative from stable on Yum, saying it was concerned with "a more aggressive financial policy with sizable share repurchases and increased dividend payouts, supported by higher debt levels and non-operating cash flows."

Shares of Yum rose 3.6 percent to $37.60 in extended trading on Monday, after rising to an all-time high of $36.48 during regular trading. The shares closed up $1.94 to $36.29 on the New York Stock Exchange.

The stock trades at about 19.8 times analysts' average 2008 earnings estimate, compared with a multiple of about 18 for rival McDonald's Corp (MCD.N). (Reporting by Karen Jacobs, editing by Jeffrey Benkoe, Richard Chang and Carol Bishopric)