Yum! Brands, Inc. (YUM)

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Yum! Brands (YUM)

Q2 2011 Earnings Call

July 14, 2011 9:15 am ET

Executives

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

Analysts

Keith Siegner - Crédit Suisse AG

Jeffrey Omohundro - Wells Fargo Securities, LLC

Larry Miller - RBC Capital Markets, LLC

Michael Kelter - Goldman Sachs Group Inc.

John Glass - Morgan Stanley

Jake Bartlett - Susquehanna Financial Group, LLLP

Jason West - Deutsche Bank AG

David Tarantino - Robert W. Baird & Co. Incorporated

Jeffrey Bernstein - Barclays Capital

John Ivankoe - JP Morgan Chase & Co

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

Mitchell Speiser - Buckingham Research Group, Inc.

Steve West

Joseph Buckley - BofA Merrill Lynch

Gregory Badishkanian - Citigroup Inc

Unknown Analyst -

Howard Penney - Prudential Equity Group

David Palmer - UBS Investment Bank

Presentation

Operator

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

Tim Jerzyk

Thank you, Ashley. Good morning, everyone, and thanks for joining us today. 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, and 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 may be used on today's call.

Finally, we would like you to be aware of a few upcoming Yum! investor events. Wednesday, August 3, we will host a YRI, Yum! Restaurants International Investor Conference in Dallas, Texas. Thursday, September 8, we will host our China Investor Conference in Shanghai. Both of these events are close to being closed out in terms of the number of attendees, so please get to us quickly. Tuesday, October 4, third quarter earnings will be released. And finally, 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. And now I'll turn the call over to David Novak.

David Novak

Thank you, Tim, and good morning, everyone. I'm pleased to report we raised our full year EPS growth forecast to at least 12% from our initial guidance of at least 10%. We take satisfaction that 2011 will mark our 10th consecutive year of double-digit EPS growth. Our China business continues to deliver dynasty-like performance as our category leading brands just keep getting stronger.

Yum! Restaurants International continues to capitalize on explosive emerging-market growth and produced solid returns. And while we would normally be thrilled with this fantastic international performance, our obviously very disappointing year-to-date U.S. results have frankly taken some of the luster away from what otherwise would be a great year. It's time like these that make us appreciate the consistent EPS performance our global portfolio generates.

Our International business is clearly the growth engine that drives our company. Through the first half of this year, nearly 75% of our operating profit has come from China and Yum! Restaurants International. Our development pipeline is as strong as ever, and we continue to expect about 1,400 new units outside the United States this year. There is no question our China business is thriving and Yum! Restaurants International is producing solid gains. The good news is our International businesses are delivering these results while investing for strong growth ahead. We also expect U.S. performance to improve in the fourth quarter.

Now let me take you through each of our businesses. Let's start with China, where our strategy is to build leading brands in every significant category. Based on our second quarter results, I think it's safe to say we are making it happen. Operating profit grew 25% prior to foreign currency translation benefit, as same-store sales jumped an impressive 18%. Combined with a 13% increase in units, system sales grew 28% for the quarter. Same-store transactions increased 21%. This exceptional increase in traffic gives us even more confidence that our category leading brands are stronger than ever and well positioned for sustained profitable growth ahead.

Our KFC China business is on a roll. Same-store sales grew 17% in the quarter and we continue to make good progress, growing average unit volumes with 24-hour operations, delivery service and building a solid breakfast business. We have breakfast in nearly all our KFCs in China, generating 13% of total transactions. We have delivery service in 1,600 restaurants, and 24-hour operations now on over 1,300 units. While there is tremendous excitement around these initiatives, we also know we're in the very early days. We are building a solid foundation for leveraging our assets, which will provide tremendous growth opportunities going forward for increased sales and even higher unit volumes.

The new news is that we built upon the strength of our brands and are now providing even better everyday value, making our brands and competitive positions even stronger. We continued our RMB 6 breakfast, which is under $1, from the first quarter, and began offering a strong value option at lunch, including a RMB 15 offer for weekday lunch, which is a little over $2. These value initiatives are unique in the market as we can offer variety like vegetables, rice and soup as side dishes, in addition to popular KFC staples like the chicken Zinger burger.

We're extremely pleased that in an environment where the consumer is keenly aware of inflation, we continue to drive even more customers into our Chinese restaurants. Importantly, we continue to aggressively expand our KFC brand and we've opened 157 units in the first half of this year. We now have nearly 3,400 KFCs in China, and we're growing more than twice as fast as our nearest competitor.

Now on to Pizza Hut. Pizza Hut Casual Dining in China is absolutely on fire. We had another fantastic quarter delivering 22% same-store sales growth. This marks our sixth consecutive quarter of double-digit same-store sales growth at Pizza Hut Casual Dining. Leveraging an expanded-variety platform and a semiannual menu refresh, we continue to drive results. We have 544 restaurants in over 140 cities, and we opened 17 new locations in the second quarter. Pizza Hut is finding success as it expands deeper into lower-tier cities. It is the #1 western casual dining brand in China, and now in position to expand even more rapidly. Here again, our variety with everyday value has never been stronger, as we embrace our "eat like a rich man, eat like a poor man" strategy with compelling entrée prices and half-off daily specials.

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