Yum! Brands, Inc. (YUM)

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Yum Brands Inc. (YUM)

Q2 2011 Earnings Call

February 03, 2011 9:00 AM ET

Executives

Tim Jerzyk – SVP, IR

David Novak – Chairman, CEO and President

Rick Carucci – CFO

Analysts

David Tarantino – Robert W. Baird

Jeff Omohundro – Wells Fargo

Michael Kelter – Goldman Sachs

Jeffrey Bernstein – Barclays Capital

Andrew Barish – Jefferies

Gregory Badishkanian – Citigroup

Joe Buckley – Bank of America

Mitch Speiser – Buckingham Research Group

Howard Penney – Hedgeye Risk Management

Keith Siegner – Credit Suisse

John Ivankoe – JPMorgan

Jason West – Deutsche Bank

John Glass – Morgan Stanley

Sara Senatore – Sanford Bernstein

Larry Miller – RBC Capital Markets

Presentation

Operator

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands Fourth Quarter 2010 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to introduce Tim Jerzyk, Senior Vice President, Investor Relations. My Jerzyk, you may begin your conference.

Tim Jerzyk

Thank you Nicole. 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 a 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 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 in today’s call.

Finally we’d like you to be please be aware of the upcoming investor events, Thursday February 17th, we will host the Taco Bell investor day in (inaudible) California. Wednesday April 20th, first quarter earnings will be released. 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 Novak

Thank you very much Tim and good morning everyone. I am especially pleased to announce that 2010 was one of our best years as a company. We reported 17% full year EPS growth, excluding special items marking the ninth straight year that we exceeded our annual target of at least 10%. In fact, 17% EPS growth is our best ever and what makes us even more impressive is that it was driven by a 15% increase in operating profit including gains across all three of our business divisions.

As I look back on the past year, I’m really proud of what we accomplished. We opened nearly 1,400 new restaurants outside the US while making steady progress building incremental day parts and sales layers in each of our business.

We improved worldwide restaurant margins by 1.3 percentage points. And I am pleased that over the past two years we’ve increased worldwide restaurant margins by threefold percentage points. Operating profit grew 15% prior to foreign currency translation and special items. And importantly, we maintained our return on invested capital of 20% plus and remain an industry leader.

Our strong cash flow generation combined with our disciplined approach with deploying capital allowed us to increase our dividend 19% to an annual rate of $1 per share.

We are particularly pleased with our China business which reported robust profit growth of 26% for the full year excluding the impact of foreign currency translation. At Yum Restaurant International YRI, we grew operating profits 11% excluding the impact of foreign currency translation in spite of positive but sluggish system sales growth. Our US business also grew operating profits, reporting a 3% increase for the year.

Before I take you through our key strategies of results for each division, let me start by thanking all of you who attended our investor and also grew operating margins reporting a 3% increase for the year.

Before I take you through our key strategies and results for each division, let me start by thanking all of you who attended our investor and annual day in past December in New York. I look forward to that meting every year because it set the tone for the coming year, more importantly its gives us the opportunity to go public with our goals and commitments as well as showcase our management talent from around the world. In case any of you miss this meeting, you can find the presentations on our website at yum.com.

Now onto our strategies, let me start with our China business, where our strategy is to build leading brands in every significant category. We grew profits by a whopping 26% in 2010 prior to our foreign currency translation. I am proud to report that in the last three years, our China business profit has more than doubled and we expected to become our first billion dollar profit business in the very near future. Our recipe for success is continued profitable new unit development and leveraging our existence assets with new day parts and sales layers to grow same-store sales.

In 2010, we once again opened over 500 restaurants in China including 262 in the fourth quarter. That is obviously an extremely impressive accomplishment. (Inaudible) and his world class are clearly delivering dynasty like performance for each of our brands.

Our KFC business has been absolutely rock solid. We now over 3,200 KFCs in China and continue to see cash paybacks in less than three years on new restaurants. KFC had 414 new locations in 2010 and made good progress leveraging its assets with 24 hour operations, delivery service and continued building, a solid breakfast business. Our growth in results were driven by increased traffic. We continue to be confident in the strength of the KFC brand in China.

Now on to Pizza Hut, Pizza Hut Casual Dining in China had a breakout year generating double-digit same-store sales growth in every quarter of 2010. We have more than 500 restaurants in over a 130 cities and we added 60 new locations in 2010. Additionally, operating profit grew 50% and Pizza Hut Casual Dining now generates well over $100 million in operating profit. Our strategy to revamp the menu every six months and continue to offer compelling value is truly paying dividends. Given our dramatic sales growth, the unit economics of the Pizza Hut Casual Dining concept in China are even more scalable setting us up for significant growth ahead.

We also continue to invest to behind development of our merging brands. Pizza Hut Home Service now has 120 units in 11 cities. East Dawning, our Chinese fast-food brand continued to make progress as we drive for scalable economics. Additionally, we own 27% of Little Sheep, the leading brand in the hot pot category, which is the largest casual dining category in China.

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