For long-time Yum! Brands (YUM) executive and CEO Greg Creed, splitting up a global fast food empire into two separate companies wasn't exactly as easy as ordering a Crunchwrap from the drive-thru. But the harrowing year-long experience did manage to serve up some important life lessons to the 58-year-old Creed.
"I have learned patience, I have learned that it's all about teamwork and it's also about having great leaders -- you can't have people taking their eyes off the business," Creed told TheStreet. He discussed the process of splitting off Yum's China business from the mothership, which happened on Tuesday with Yum! China's (YUMC) listing on the New York Stock Exchange.
The process of Yum! Brands slicing off its China business kicked into high gear last year. For several quarters, KFC China's performance lagged due to multiple country-wide food safety scares, and Pizza Hut suffered in China amid the growing popularity of mobile ordering (Pizza Hut is mostly a sit-down restaurant in China). That pressured Yum! Brands' stock price as a result.
Activist investor Keith Meister of Corvex Capital took a stake in Yum! Brands in May 2015. Meister -- who was a vocal advocate of Yum! spinning off its China operations to unlock its value and instead have executives focus on the U.S. and other countries -- was added to Yum! Brands' board on Oct. 15. (He is still on the board, and according to Bloomberg data Corvex continues to own more than 5% of Yum! Brands' shares outstanding as of June 30.)
"When I originally saw Keith Meister's presentation, I thought he had stolen my slide deck. He even titled it "The Best of Both Worlds," which was the name of the presentation that I had given to the board of directors. We were fundamentally aligned from day one," recalled former Yum! Brands CEO David Novak in a May interview. Said Novak, "I think Keith Meister is a great guy and director, smart as hell. He hasn't come in and told us what to do."
From the point of Meister's addition to the board, it has been all systems go for Yum! Brands in setting up the leadership for both companies and taking care of the all the nuts and bolts to actually spin off a massive China fast food business.
Then, Creed and his team took to the stage and presented the final vision of the two companies to a packed room of Wall Street bankers and analysts earlier this month. It was pretty compelling.
Over time, Yum! China expects to have more than 20,000 restaurants in operation, up from more than 7,000 today. For 2016, Yum! China is expected to haul in $8 billion in sales, up from $4.7 billion generated so far this year. Operating profit is pegged at $1.1 billion for the year, an increase from $751 million for the year to date ended Sept. 3. The total restaurant count is expected to be 7,500 at the end of 2016. And importantly, the China outfit will have zero debt on the books as it becomes a public company, freeing it up to aggressively roll out new stores and potentially acquire upstart chains, pay out dividends or buy back stock.
As for the remaining Yum! Brands, led by Creed, it foresees some meaty profits in the years ahead in the wake of its operational overhaul.
Yum! Brands expects earnings of $3.75 a share by 2019, up from about $2.92 a share in 2015.
Yum's bottom line is expected to be boosted by several measures. The first is the separation of its China unit, which will help raise cash for share repurchases.
Yum! plans to return $13.5 billion to shareholders from the fourth quarter of 2015 through 2019 in the form of dividends and stock repurchases. So far, Yum! Brands has repurchased about $5.5 billion of its stock since its capital return program was launched last year.
Yum! Brands also expects to have about 98% of its restaurants under a franchise model by the end of 2018, up from 93% in 2016. By selling off thousands of restaurants, Yum! Brands will shed costs and expenses, which will prop up earnings per share. In turn, the lower cost base and increased free cash flow coming into the business may put the chain in the position of making acquisitions to boost growth.
Said Creed, "I had no idea what it was going to be like when we undertook it, and I think having done it once I would like to check the box and never have to do it again -- it's just a massive undertaking."