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|Tricon Global Restaurants Reports a 26 Percent Increase In Ongoing Operating Earnings To $0.76 Per Share For The Second Quarter|
|» International and Pizza Hut performance remains strong|
» Records an unusual charge for AmeriServe expenses
» Provides new guidance for balance of the year
LOUISVILLE, KY (July 18, 2000) – Tricon Global Restaurants, Inc. (NYSE:YUM) reported second quarter ongoing operating earnings of $113 million, or $0.76 per share, a 26 percent increase for the quarter ended June 10, 2000. Year-to-date ongoing operating earnings increased 27 percent to $1.39 per share. Additionally, Tricon took an unusual charge of $72 million, $0.31 per share, almost entirely due to the AmeriServe bankruptcy.
“I recognized that fundamental change at Taco Bell was necessary, and today we separately announced significant actions unanimously supported by our Board of Directors designed to regain sales momentum at Taco Bell, including both new leadership and a change in our advertising agency.
“Importantly, the underlying consumer dynamics of the Taco Bell brand are solid. While we lead the QSR category in providing unique, great tasting food at a superior value, the burger chains have improved their value positions and narrowed the gap versus Taco Bell. We are bringing fresh, new thinking to the brand to better leverage Taco Bell’s unique market strengths and will continue to invest in the brand to make this happen. Additionally, we are implementing aggressive strategies for the balance of the year that will drive product news and value differentiation, which we are hopeful will improve sales performance versus current trends.
“However, given Taco Bell’s current trends it is prudent that we now reduce our full-year performance expectations to mid-teens growth in ongoing operating EPS, which is below our prior forecast but consistent with our stated long-term growth objectives. And our full year forecast for U.S. blended same store sales is now negative 1% to 2%. Of course, we will strive to beat these marks, and will continue to take every required action to reinvigorate the Taco Bell business and drive consistent same store sales growth at all of our brands.”
2nd QUARTER RESULTS
Tricon’s international business continues to deliver excellent results with ongoing operating profits up 20%, on top of 59% growth last year. This is the eighth straight quarter of 20% or better growth in operating profits. Ongoing operating profits were driven by solid sales growth and 695 new unit openings over the past year, including 430 KFC’s, 240 Pizza Huts and 25 Taco Bells. Franchise fees were up 14% and ongoing restaurant level margins improved by 100 basis points. Same store sales growth continues to be solid in key countries, including Australia, China, Korea, Mexico and the United Kingdom.
In the U.S., Pizza Hut continues to deliver strong results. For the quarter, same store sales were up 1%, while lapping very strong prior year growth of 9%. Pizza Hut continues to leverage its leadership position in innovation and variety with great products including The Edge Pizza, which drove sales in the quarter. Pizza Hut has solid momentum going forward, and we expect same store sales to show 3% to 4% growth for the second half of the year.
Taco Bell’s same store sales were down 6%. We expect these trends to continue through at least the third quarter. To address this, the Company earlier today announced the appointment of Emil Brolick, a 12-year veteran of Wendy’s International, Inc., as Taco Bell’s new president. Brolick has been credited as one of the architects of Wendy’s consistent same store sales growth and new product introductions. The Company also announced it is assigning its $200+ million advertising account to Foote Cone & Belding on an interim basis until Brolick has had an opportunity to fully review the situation.
As expected, KFC’s same store sales were down 3%. KFC is repositioning its business to focus more on the high growth segments of the chicken business, while maintaining its leadership position in home meal replacement. KFC’s recent investment targeted at successfully launching into the chicken sandwich category has led to some erosion in the chicken strips and chicken on the bone segments. Going forward, a more balanced approach is expected to rebuild the momentum in these segments while continuing to grow the sandwich business. We expect same store sales trends to improve from the second quarter to the third quarter, which we expect to be flat to down slightly.
Operational and Financial Progress
Tricon continued to make operational progress in the quarter. Ongoing operating profit increased 6%, driven by an 11% reduction in ongoing G&A and an 8% increase in franchise fees. Ongoing restaurant level margins were up 40 basis points driven by portfolio benefits. This was partially offset by the impact of sales deleverage in the U.S. and higher U.S. labor rates.
Tricon continued to make substantial progress executing its financial strategies, refranchising 248 restaurants in the quarter for a year-to-date total of 431 restaurants. In addition, Tricon repurchased 2.5 million shares of its stock for $79 million in the quarter. This completed the $350 million share repurchase program announced in September 1999. A total of 9.8 million shares were repurchased under this program.
Dave Deno, Chief Financial Officer, said, “We are very pleased with the strong execution of our financial strategies despite the reduction in our operating forecast. We continue to realize significant savings by reducing our ongoing general and administrative expenses, which were down about $25 million for the quarter and over $60 million year-to-date. For the balance of the year we anticipate modest additional improvement in reducing these costs. During the quarter, we aggressively repurchased our stock and completed our $350 million authorized program reducing our outstanding shares by almost 10 million since the program began. This year’s free cash flow performance will be adversely affected by the weak performance at Taco Bell and, more significantly, the one-time cash costs related to the AmeriServe situation. However, we do expect to reduce debt slightly for the year along with repurchasing $216 million of our stock and funding the AmeriServe situation. We are doing everything possible to ensure cash is invested in only the highest return opportunities. Along those lines we are pleased to confirm our refranchising program is on track to sell at least 600 units during 2000 delivering in excess of $200 million in free cash flow. Finally, we expect our returns on invested capital to show continued improvement for the year.”
As previously disclosed, we have been advancing funds to AmeriServe during its bankruptcy proceedings under a debtor-in-possession revolving credit facility. In connection with the facility and other costs and obligations of the AmeriServe bankruptcy, we have recorded a $70 million unusual charge in our second quarter.
Tricon continues to work closely with AmeriServe, its suppliers and the purchasing cooperative for the Tricon system to ensure that Tricon system restaurants receive supplies in a timely and cost effective manner. To date, Tricon has not experienced any significant service interruptions. Tricon is purchasing restaurant level inventory for the U.S. system directly from suppliers, while AmeriServe continues to distribute products to stores and provide ordering, inventory, billing and collection services for the same fee in effect prior to the bankruptcy filing.
AmeriServe recently confirmed that it is exploring a number of strategic alternatives, including the potential sale of substantially all of its assets to another distribution company. AmeriServe also announced that it has entered into preliminary discussions with several parties, including McLane Company, Inc. (a subsidiary of Wal-Mart Stores, Inc.), concerning these strategies. As part of these discussions, Tricon may be asked to modify certain terms and conditions of its existing contract with AmeriServe, including payment terms, the length of the agreement and the amount of the distribution fee. Tricon does not expect that such changes, if any, would have a material effect on ongoing operations. In any event, Tricon intends to continue to work closely with AmeriServe to facilitate a sale of the AmeriServe business to a buyer, or the consummation of another strategic alternative that, in either case, is acceptable to the Tricon system.
Tricon remains committed to AmeriServe as it is reorganized through the bankruptcy process – whether through the sale of the business to one or more acceptable distributors or another strategic alternative. However, Tricon has also undertaken contingency planning and believes that sufficient capacity exists at competitive rates with alternative distributors in the event AmeriServe is no longer able to meet the distribution needs of the Tricon system.
The term “ongoing” in the following section excludes the impact of facility actions net gain, unusual items, and last year’s accounting changes.
Note: The second quarter consists of Periods 4, 5, and 6.
*These results should be read in conjunction with the attached financial summary.