Yum! Brands' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Yum! Brands (YUM)

Q1 2012 Earnings Call

April 19, 2012 9:15 am ET

Executives

Tim Jerzyk - Senior Vice President of Investor Relations and Treasurer

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

Richard T. Carucci - Chief Financial Officer

Analysts

John W. Ivankoe - JP Morgan Chase & Co, Research Division

David Palmer - UBS Investment Bank, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division

Howard W. Penney - Hedgeye Risk Management LLC

John S. Glass - Morgan Stanley, Research Division

Jason West - Deutsche Bank AG, Research Division

Unknown Analyst

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

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Gregory R. Badishkanian - Citigroup Inc, Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Presentation

Operator

Good morning, my name is Rashay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands First Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Jerzyk, Senior Vice President of Investor Relations, you may begin your conference.

Tim Jerzyk

Thank you, Rashay. Good morning, everyone, and thanks for joining us on the call this morning. The call is being recorded and will be available for playback. We are broadcasting the conference call via our website at 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 earning 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 will be used on today's call.

Also, we would like you to please be aware of few 2012 Yum! investor events. The next earnings release will be Wednesday, July 18, that will be second quarter earnings when we will release. August 22, we will host a YRI investor conference in Plano, Texas. We would love to have you. And then the big event is on September 12 and 13, we will host an investor conference in China. We will be going to Xi'an this year, one of the 4 ancient capitals of China, a 2-hour flight west of Shanghai. This will be followed by an event in Vietnam on that 2 days later on September 15. We have a great event for you in September in China and in Vietnam. Finally, our investor update meeting will take place on December 6 in New York City.

On our call today, we 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

Thank you, Tim. And good morning, everyone. I'm please to report each of our divisions produced impressive sales and proper results driving 21% first quarter EPS growth excluding special items. This performance leads us to raise our full year EPS growth forecast to at least 12% from our initial guidance of at least 10%. Our international business is clearly the growth engine that drives our company and comprises over 70% of our operating profit. Importantly, over 55% of our operating profit comes from high growth emerging markets. Yum!'s strongest businesses are located where the highest growth is expected to occur in the years ahead. This is a very powerful combination. We also continue to be optimistic about our ability to dramatically improve our U.S. brand positions, consistency and returns. While there is still much work to do, we expect significant progress with our U.S. business this year.

Now let me take you through our key strategies. Let's start with China, where our strategy is to build leading brands in every significant category. Operating profit in China grew 14% prior to foreign currency translation. System sales increased 28%, driven by a 17% increase in units and same-store sales growth of 14%. These fantastic results give us even more confidence our category-leading brands are as strong as ever and well positioned for sustained profitable growth ahead.

KFC now has 3,819 restaurants, with averaging volumes of $1.7 million in 800 cities throughout the country and continues to expand into new cities, as well as increase its penetration levels in existing markets. KFC is deeply rooted in China with its localized menu and broad appeal. Virtually all KFCs in China serves breakfast, which accounts for about 6% of sales. Nearly half our KFC restaurants offer delivery service and over half have 24-hour operations. These service and day part extensions are all in the early phases of development and provide tremendous growth potential for years to come, as we further leverage our restaurant assets. This is all made possible through world-class operations and is a testament to the tremendous people capability we have in China.

Pizza Hut Casual Dining now has 662 restaurants and is opening successfully across multiple tier cities. Its strategy to offer tremendous variety, everyday value and refresh 25% of its menu twice per year has consistently driven sales and profit growth. Our brand positioning as Happy Restaurants with the Western casual dining experience is resonating with consumers and driving success. Pizza Hut is, without a doubt, the #1 Western casual dining brand in China. It's important to note that new unit returns for our 2 leading brands in China, both KFC and Pizza Hut, are the best in our business with cash paybacks within 3 years. We also continue to make progress developing our emerging brands in China. Pizza Hut Home Service now has 136 units in 15 cities; and East Dawning, our Chinese fast food brand, has 29 restaurants in 8 cities.

We're also happy to bring Little Sheep, the leading hot-pot casual dining concept based in China, into the Yum! China portfolio. We acquired Little Sheep in February, and we're looking forward to strengthening its operating model and increasing its market leadership position. We're very excited about the long-term potential of this brand, and we'll make the necessary investments required to ensure its success.

Now as you are surely aware, long-term economic trends are also working in our favor in China. Rising incomes are making our brands even more affordable for an increasing number of people, and the consuming class is expected to double over the next 10 years to well over 600 million consumers. With this as an overwhelming macro tailwind, our new unit development will continue at a high rate, and we expect to continue to grow same-store sales. As you know, our long-term model is to grow same-store sales at least 5% as we continue to drive record new unit development.

Now moving on to Yum! Restaurants International where our strategy is to drive aggressive international expansion and build strong brands everywhere. In the first quarter, we grew operating profit 9% in constant currency. System sales increased 8%, it's driven by net new unit development of 3% and same-store sales growth of 5%. Importantly, 91% of our new units were opened by franchisees. We simply love the franchise business because we generate a steady flow of operating profit growth from franchise fees while our franchisees capitalize the business, which translates to phenomenal returns for Yum! shareholders. We also continue to have strong results in high-growth emerging markets. System sales in emerging markets at Yum! Restaurants International grew 13% and over 60% of our new restaurants were opened in emerging markets.

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