Yum! Brands, Inc. (YUM)

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Yum! Brands (YUM)

Q1 2011 Earnings Call

April 21, 2011 9:15 am ET


Tim Jerzyk - Senior Vice President of Investor Relations and Treasurer

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

Richard Carucci - Chief Financial Officer


Keith Siegner - Crédit Suisse AG

Jeffrey Omohundro - Wells Fargo Securities, LLC

Larry Miller - RBC Capital Markets, LLC

John Glass - Morgan Stanley

Michael Kelter - Goldman Sachs Group Inc.

Andrew Barish - Jefferies & Company, Inc.

David Tarantino - Robert W. Baird & Co. Incorporated

Jason West - Deutsche Bank AG

Sara Senatore - Sanford C. Bernstein & Co., Inc.

John Ivankoe - JP Morgan Chase & Co

Mitchell Speiser - Buckingham Research Group, Inc.

Jeffrey Bernstein - Barclays Capital

Steve West

Joseph Buckley - BofA Merrill Lynch

Gregory Badishkanian - Citigroup Inc

David Palmer - UBS Investment Bank



Good morning. My name is Tina, and I will be your

conference operator today. At this time, I would like to welcome everyone to the Yum! Brands First Quarter 2011 Earnings Conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Tim Jerzyk, Senior Vice President of Investor Relations.

Please go ahead, sir.

Tim Jerzyk

Thanks, Tina. Good morning, everyone, and thanks for joining us this morning. 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


We'd 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 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 completely aware of 2 upcoming Yum! investor events. Wednesday, July 13, our second quarter earnings will be released and will follow with a call in the next morning. Wednesday, August 3, we will host a YRI Investor Day in Dallas, Texas. Thursday, September 8, we will host our China Investor Conference in Shanghai.

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 Novak

Thank you very much, Tim, and good morning, everyone. Let me first start by addressing the tragic events that continue to impact people in Japan. We're relieved that our people are safe and that none of our team members were among the thousands who lost their lives during the earthquake and the devastating tsunami that followed. Our thoughts and our prayers are with our Japanese partners as our people recover from this tragedy, and a special thanks to our Japanese partners there who just have been working round the clock to make this be as least of an issue as possible for our people, and they've done a great job.

Now if you recall in 2010, when we said that it was perhaps our best year ever as a public company and as a result, we entered 2011 with a solid momentum. I'm pleased to announce that our 2 major growth engines, China and Yum! Restaurants International continued to produce strong results in the first quarter. In fact, China's results were simply outstanding. These results have -- were dampened by U.S. profits driven primarily by negative publicity from false claims against the quality food we have at Taco Bell. Otherwise, we would have had a double-digit EPS growth quarter excluding special items.

Now on to our strategies. Let me start with our China business where our strategy is to build leading brands in every significant category. Rick Carucci and I just met with the team in Shanghai and believe me, we are making it happen.

Operating profits grew 18% prior to foreign currency translation benefit and same-store sales jumped a remarkable 13%. Combined with the 12% increase in units, system sales grew 24% for the quarter. Even more impressive, same-store transactions increased 15%, which is our largest increase in transactions since 2004. This exceptional increase in traffic gives us even more confidence that our category leading brands are stronger than ever and well positioned for a sustained growth ahead.

Our KFC business just keeps getting stronger. Same-store sales grew 14% in the quarter, and we continue to make good progress growing average unit volumes with 24-hour operations, delivery service, and we're building a solid Breakfast business. We added 78 units in the first quarter and now have over 3,300 KFCs in China, which is 2,000 more restaurants than our nearest competitor.

Our business continues to expand deep into China, striking a balance between KFC classics and menu offerings unique to the Chinese taste like congee for breakfast and rice-based entrées. We had breakfast at KFC, and I tell you, the products are just fantastic. Continuous product innovation and operational excellence keeps the brand vibrant. It's growing and extremely profitable.

Now onto Pizza Hut. Pizza Hut Casual Dining in China continues to be a huge success story. We had another fantastic quarter, delivering 12% same-store sales growth. This marks our fifth consecutive quarter of double-digit same-store sales growth at Pizza Hut Casual Dining. Our Pizza and more positioning, backed by our strategy to refresh the menu every 6 months, as well as offering compelling value is resonating with our consumers in driving results.

We have more than 530 restaurants in over 130 cities, and we added 13 new locations in the first quarter. Clearly, Pizza Hut is well positioned for a sustained growth ahead. We also continue to make progress developing our emerging brands. Pizza

Hut Home Service now has 120 units in 11 cities and East Dawning, our Chinese fastfood brand, has 21 units in 4 cities. Angela Loh, our East Dawning General Manager and her team, are working hard in improving unit economics with the goal of developing a successful national brand.

Additionally, we own 27% of Little Sheep, the leading brand in the Hot Pot category, which is the largest casual dining category in China.

In summary, our China business continues to fire on all cylinders. We've never been more confident in the strength and growth prospects of our business. Hats off to Sam Su and his world-class team who are clearly delivering dynasty-like performance for each of our brands. I don't know a lot of Chinese, but I do know the phrase, [Chinese], which means build more.

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