Yum! Brands' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Yum! Brands (YUM)

Q3 2011 Earnings Call

October 05, 2011 9:15 am ET


Tim Jerzyk - Senior Vice President of Investor Relations and Treasurer

Richard T. Carucci - Chief Financial Officer

David C. Novak - Executive Chairman, Chief Executive Officer, President and Chairman of Executive/Finance Committee


Keith Siegner - Crédit Suisse AG, Research Division

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

David Palmer - UBS Investment Bank, Research Division

John S. Glass - Morgan Stanley, Research Division

Mitchell J. Speiser - Buckingham Research Group, Inc.

Michael Kelter - Goldman Sachs Group Inc., Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Larry Miller - RBC Capital Markets, LLC, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Unknown Analyst -

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Jason West - Deutsche Bank AG, Research Division



Good morning. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands Third Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Tim Jerzyk, Senior Vice President of Investor Relations. Sir, you may begin.

Tim Jerzyk

Thanks, David. Good morning, everyone, and thanks for joining us. This call is being recorded and will be available for playback. We are broadcasting the conference call via our website, www.yum.com. Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording.

I would also like to remind you that this conference call includes forward-looking statements. Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release last night and the risk factors included in our filings with the SEC. In addition, please refer to the Investors section of the Yum! Brands website to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call.

Finally, we would like you to be aware of a few upcoming Yum! investor events. Our Annual Investor and Analyst Conference in New York City will be Wednesday, December 7. Please register for that as soon as possible. Monday, February 6, 2012, fourth quarter earnings will be released. This was previously scheduled for February 1, so please adjust your calendars.

On our call today, you will hear from David Novak, Chairman and CEO; and Rick Carucci, our CFO. Following remarks from both, we will take your questions.

Now I'll turn the call over to David Novak.

David C. Novak

Okay. Thank you, Tim, and good morning, everyone. Before I talk about our third quarter performance, I think it's interesting to note that this Friday, October 7, is our Founder's Day and marks the 14th anniversary of our company. From the very beginning, our formula for success has been people capability first, satisfy customers and profitability follow. I'm proud of how we win together ownership culture we have developed and pleased with the strong returns we have generated for our shareholders, with our share price up well over 500% since our spinoff from PepsiCo. I'm even more pleased we continue to have tremendous optimism about the future growth of our company.

Our people know the 3 keys to driving shareholder value, and believe me, we are focused on them now more than ever: new unit development, same-store sales growth and return on invested capital. Our new unit opportunity in China is the best in retail, and our opportunity to expand is bigger than ever as we know India, Russia, Africa, France and Germany have all reached inflection points for growth. We are also laying a foundation for more substantial same-store sales growth in our 38,000 restaurants by developing breakfast, beverages and broader menu variety that will leverage existing assets and make our brands even more relevant. Meanwhile, our returns should continue to be among the best in retail, with return on invested capital of over 20%.

I often say the best thing about business is the unfinished business. Clearly, we are on the ground floor of global growth with decades of unfinished business ahead. Now onto our results.

I'm pleased to report 13% EPS growth for the third quarter, excluding special items and confidently reaffirm our full-year EPS growth forecast of at least 12%. We are proud that 2011 will mark the 10th consecutive year we exceed our annual target of at least 10% EPS growth. Our strong performance in China and other emerging markets continues to be the catalyst of our growth. We now expect to open about 1,500 new international units this year, which not only adds to earnings for 2011, but sets us up for an incremental growth in 2012.

We are particularly pleased with our China business, which reported record transaction growth and record expected new unit growth. There's no question China has powerful brand equity of both KFC and Pizza Hut with outstanding new unit returns. At Yum! Restaurants International, system sales grew 8%, including 13% system sales growth in emerging markets, both prior to foreign currency translation. In the U.S., we saw another quarter of poor results in what remains a tough environment.

Now let me take you through our key strategies and transfer each of our divisions. First, I'd like to thank all of you that attended our recent China Investor Conference in Shanghai and saw the leadership and tremendous operating team we have there. I'd like to thank Sam Su and the team for hosting our guests at this great event. I'm obviously very proud of our China team's continued strong performance. For the third quarter, units expanded 14%, and same-store sales grew 19%, driven by same-store transaction growth of 27%. Our China division's operating profit has grown 15% year-to-date, excluding the impact of foreign currency translation. Operating profit grew 7% this quarter, excluding foreign currency translation. Keep in mind that we are overlapping our participation in the World Expo in Shanghai, which added about $10 million of profit to last year's number. Excluding this overlap, our China team delivered another double-digit earnings growth quarter. New unit development continues to be the major driver of our growth, and we remain the largest U.S. retail developer in China. We've opened 329 new units through our first 3 quarters and expect to open a record 600 this year, which will be record development year for us in China. Our China new unit returns remain a key focus for us and continue to be the best in our business.

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