Yum! Brands, Inc. (YUM)

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YUM! Brands, Inc. (YUM)

December 07, 2011 8:45 am ET


Ivan Schofield -

Tim Jerzyk - Senior Vice President of Investor Relations and Treasurer

David Gibbs -

Niren Chaudhary - President of The New Standalone

Lily Hsieh -

Martin Shuker -

Angela Loh -

Richard T. Carucci - Chief Financial Officer

Samuel Su -

Mark Chu - President of Yum! China and Chief Operating Officer of Yum! China

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

Greg Creed - Chief Executive Officer of Taco Bell

Muktesh Pant - Chief Executive Officer


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

David Palmer - UBS Investment Bank, Research Division

Gregory R. Badishkanian - Citigroup Inc, Research Division

Unknown Analyst

John S. Glass - Morgan Stanley, Research Division

Jeffrey F. Omohundro - Wells Fargo Securities, LLC, Research Division

Mitchell J. Speiser - Buckingham Research Group, Inc.

Michael Kelter - Goldman Sachs Group Inc., Research Division

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

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

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


Tim Jerzyk

Senior Investor Update Meeting. I'm Tim Jerzyk, Senior VP of Investor Relations, for those of you who do not know me. Welcome to the -- to those of you attending our event on the webcast, we appreciate you attending and coming to listen to our story. For those who are not normally used to this, we will incorporate our Safe Harbor statement. There will be forward-looking statements in the management's presentations today, and they are obviously subject to variability due to all the possibilities that we list in the Safe Harbor statement in our 10-K and 10-Qs. So please incorporate that into your thinking as we go today. If you would look at the agenda just for a moment, I want to walk you through some of the logistics of the day. It's right on the front in your books. We have 10 presenters today, so it is a full day of presentations. We will have Q&A after all the main sections, so we'll give you plenty of chances to ask the presenters questions that you'd like to ask them. We will have one break. After Rick Carucci's presentation, you'll have a 15-minute break and then we'll be back for about another 2 hours. So please take advantage of the break. When we're done, there will be box lunches available, and we'll have about a 15-minute break after the main event. And for those of you who would like to stay for our financial modeling session, you're welcome to stay. That will be where we address and cover all your questions relative to the details for next year guidance or anything -- any question that you have on the financial aspect of the company.

And so a frequently asked question as we go around and meet with investors, what is our policy on free cash flow? As you know, we generate a lot of free cash flow. It's a great important question. And we put a lot of thought behind that as we do with anything related to cash, to the shareholder's cash. First of all, we pay a very good dividend, and we've established a very good track record of annual dividend increases. In fact, all of our annual dividend increases have been on the double-digit range and when you look at that, how that stacks up against other S&P 500 Companies, we're an elite group. We feel very good about that. And then the rest -- so after we invest in the business and all the tremendous opportunities we have for growth around the world and pay shareholders a dividend, we return the rest of the cash to shareholders through share repurchases. And I'm proud to say we have a great track record of that. This goes back to 2004. You can see our record there and how we eliminated and reduced, basically reduce our diluted share comp by well over 100 million shares.

And also I'm pleased to say that if you take a look at the average share price over that time frame of what we paid is an average of $30. The range is $20 to $50, which includes this year. So when you stack it all up, the total return of cash to shareholders, we are definitely a leader in that realm. And this basically looks at the last 5 years. If you look at, you can see the definition is across the bottom of the page, we're basically at 42% payout over that 5-year time frame, and we compare ourselves to like companies, global consumer name companies, that's what we call the Global Moguls which is the bar in the middle. You can see we're exceeding that group by 10 points. And then versus the market, we're almost doubling up on the market in terms of cash returned to shareholders.

Now one important slide that we always cover in this event every year, how we view the value of our company in terms of per share price. And I know you all look forward to this. Let me walk you through it quickly. We've got 2 different approaches on here. First is -- at the top in the chart is basically some of the parts in the way we look at it and then across the bottom, we also look at it from a -- this kind of cash flow model perspective in a number of different ways. And we have several different really top-notch people looking at this. So let me take you through the chart on the top first.

Basically those are all cash flow multiples, and we're looking at pro forma EBITDA. So effectively, what it is, is EBITDA by each of these segments with G&A allocated where -- unallocated and corporate G&A allocated to each segment. So the first is China, and the China business is basically that China standalone with G&A allocated to it. It's about $1 billion in EBITDA, net of the G&A allocation. Our view of the multiple is in 18 to 20 range. We posted that last year, and I know that some of you in the hallways and the rest of year asking me more about that and why we thought it was a 20. We feel very good about that today, because we feel it was vindicated. There's another growth company out there that's basically right in that range. So we feel very good about that today, even more so than we did a year ago. And where else can you get a business like that, that has a 5-year stock comp in the mid-40s, growing units at double digits, and the territory that they are developing is still expanding. Cities are expanding. Cities are still popping up. It's a great opportunity to grow.

So next one is our -- basically our global franchise fees. By this time next year, we'll be approaching $1 billion in franchise fees. Tremendously diversified in their source from a geography perspective and by brand. It's pretty unmatched when you look at the types of businesses out there that generate royalties. That's about $700 million when you have to allocate G&A. Our view on the multiple on that is 12 to 15x. There's -- our view on this one is there's -- definitely the market is telling us there's upward pressure. Last year, we used a 12 multiple. So this year we've ranged to 12 to 15 because there's comps out in the marketplace that the market is assigning in the range of 15. So again, our view on that franchise fee royalty stream is 12 to 15 valuation, $9 billion to $12 billion in value. And then our company stores both U.S. and YRI. We assigned a 6 to 7 multiple, a value of $4 billion to $6 billion. The interesting thing about this, and I think you'll see this today in some of the presentations, the quality and the growth opportunities in that segment are only going to get better. You're going to see India, a presentation on India today, which has company restaurants and we'll have more into the future. You also see France, presentation on France where we have great, great business there and there's company stores there. There's also Thailand in that. So there's definitely growth in that segment.

So altogether, when you put those 3 segments together with those multiples, the value per share is $66 to $78. And as I said, with this kind of cash flow, we're in the $65 to $75 range. And again as I've said last year, you got to keep in mind we're adding value every day. China, YRI new stores, we're opening those every day, and there's tremendous shareholder value as we open those restaurants. Okay. So let's get started. I hope you're all warmed up. We got some stretching done. If you haven't, you will be now.

Let me introduce David Novak, our Chairman and CEO.

David C. Novak

Thanks, Tim. Okay. All right, I know you guys love this every year, but it's an annual tradition. So on your feet, we've got to do a Yum! cheer. Come on, stop the whining. Up. God, you guys need to get a life. Come on. All right. Give me a Y, give me a U, give me an M. What's that spell? What's that spell? What's that spell? God, you guys are absolutely pathetic. Worst ever. Worst ever. I want to thank all of you for being here this morning with us. In particular, I want to thank all of our shareholders who have put your trust in us, and I'm here today and to speak on behalf of the team to tell you that we've never really been more confident about the future that we have at Yum! Brands. In fact, the theme in this conference is on the ground floor of global growth, China and a whole lot more. And as we've gone through the presentations and more importantly seen the business around the world, I think this is a story that is getting stronger and stronger at Yum! Brands, and I'm confident that you'll walk away with the same impression after hearing the presentations today.

Now we have 4 major strategies that we've been pursuing over the years. And those continue to exist. Basically, it's to build leading brands in every significant category in China, expand aggressively around the world outside of China, improve our business in the U.S. and continue to drive industry-leading shareholder and franchisee value. So we're pursuing these strategies with a lot of passion. And I was thinking about what can I do -- what's the best way for me to really share with you the progress that we're making against these 4 strategies. And I thought about a lot of the conversations that I've had with many of you in my offices or here in New York or in your offices. And one of the questions I often get from investors is what do you see on the inside? What do you see on the inside that's happening in your company that we may not see? What do you see that maybe the numbers don't tell you? And I thought what's the best way to really answer that question for you, and I thought about what I do when I go out into the marketplace, going on all my trips. One of the things I do is I publish an internal blog. And I take pictures with my Blackberry. I capture the observations that I have, and I share with everybody internally. And today, for example, I'll take a picture of all of you and talk about the analyst meeting that we had in New York. So I thought why don't I go back to the blog and pick up some of the highlights? Now, why do I do this? There's 2 reasons why I do this. One of the things that I've learned in every company, you get your teams more motivated with the basic notion: The more you know, the more you care. So people in our company are intensely interested what's going on around the world. They want to learn more about the business. So this is the way for me to tell people what I'm seeing, what I'm learning, share best practices, talk about the know-how that I see that's being built all around the world.

The other reason why I do it is it makes a big company small. When you have that constant daily interaction with the CEO of the company, it makes the company smaller no matter how big you get, and this company is getting bigger and bigger and bigger, as the numbers clearly indicate. So let me talk about what I'm seeing is we build the leading brands in China in every significant way. Now this is a -- one of my favorite pictures. This is me walking with Sam Su, the Chairman and CEO of our China business at Happy Valley Amusement Park on the way to the RGM conference that we have every year. Every year, we bring all of our RGMs together and talk about the future. So Sam and I, we're on our way to the auditorium. Sam and I are walking down the main drag of Happy Valley Amusement Park. There's a Pizza Hut right there. We passed by, go and talk to people. On the right there, on my left, there's an East Dawning which we've opened up which is our Chinese fast food concept that we've been developing and as you can see there, I'm actually taking a picture of the KFC with my blackberry, which isn't shown on the slide.

Now all of these is within one block. You're seeing 3 brands which really demonstrates the total ubiquitous nature of our business. We are literally everywhere. And we have tremendous opportunity to go going forward. Then I had the opportunity to go in and address all the now 4,000 restaurant general managers, and it was quite a sight. Now I don't know a lot of Chinese, so I have Sam Su as my interpreter. I do know ni hao, which means hello. I know that xie xie means thank you. And then I also know this very important phrase called Dor Gaishe, which means build more. And I say that wherever I go, build more, build more, Dor Gaishe. And then I got the opportunity to go and to speak to this group. Now this group, unlike you, they did not give a pathetic Yum! cheer. This group is fired up. And I did my very best. I did my very best to motivate the troops. I always do wherever I go. But I have to tell you, I came away inspired by them, and I always do when I go to China. Because we have such an incredible caliber of leadership there. We have -- over 90% of our restaurant managers have at least a college education. They run big businesses. They're passionate. They're avid learners. They're customer maniacs. I have team members literally line up when I go into stores to tell me their customer mania stories, in English that they've memorized. But you can't really capture that kind of passion and conviction that these people have about growing their brands, growing the business and, just as importantly as it's all linked together, growing themselves. Now this kind of passion and this kind of RGM capability is our -- is absolutely our secret weapon. It's why I can stand up here today and say that we're going to open up over 600 restaurants in 2011.

And that is why we believe that, that number will continue to grow over time, because you have that RGM capability. Now speaking of RGM capability, I want to talk about just one experience that I had in my most recent trip a couple of months ago to China, I went to -- well, first of all I want to talk about this. Forgot this, I got a little carried away. But one of the things we're doing with our restaurant general managers is we are -- we think that we're in a very unique position to really have branded, employee -- branded employment. And in China, one of the things in China that -- there's this famous institution called Whampoa, which is like the same thing as the military U.S. Naval Academy, U.S. West Point here in the United States. So what we're doing in China to continue to bring in great RGMs like you just saw there and build capabilities, we created the Whampoa -- Yum! Whampoa Academy, where literally our employed promise is that you can come into our Chinese business at any one of our brands, within 4 years you can become a restaurant general manager out of university. You can either become a restaurant general manager or become a franchisee or we will prepare you to go run any retail business in the world.

And so basically what we are doing is we're really -- Procter & Gamble is a place where you develop marketing talent in the United States. What we are doing is we're building a reputation, and we have the training program to back it up with Whampoa Academy that we're really building the retail industry in China. We are the place to go if you really want to learn how to be a general manager and to run a business, and this is very, very powerful. And this gives me even more confidence about the RGM capability that we're building in China that's going to allow us to open up over 600 restaurants a year. And here's a great example of a great RGM. This is Lou Ming. Now, Lou runs this restaurant, the KFC, which is down in the lower left-hand corner here. This does -- and [indiscernible] train station. It does $40,000 a week. Then he goes upstairs and takes food upstairs to the KFC Select, which is a limited menu which does $60,000 because there's more foot traffic in that area. So this restaurant manager has 100 employees and he does $5.2 million of sales a year going upstairs, downstairs. Unbelievable. And we have -- these high-speed rail stations are growing rapidly. It's just an example of the kind of places we're going into now that we really didn't even have as real opportunities to add the units as we go forward.

So clearly we have tremendous RGM capability, and we're penetrating new places and this gives us an incredible capability to keep growing very rapidly as we not only open up KFCs, we open up Pizza Huts, East Dawnings, Pizza Hut Home Service and ultimately, Little Sheep. Now what's the biggest change I've seen? The biggest change that I've seen is that when I went to China in 1998, the thing that struck me was how parents and grandparents would line up to go buy some Kentucky Fried Chicken for their child. And then they would watch them eat, because they couldn't afford it. True. Literally, they would -- they couldn't afford to eat themselves, but KFC was such a hot and upcoming concept and kids love it. They wanted to give their kids the opportunity to eat at KFC. But now when you go to KFC today, this is what you see. It's typical KFC lunch. I mean, if you've been to China, you've seen it. We have a broad, ubiquitous, consuming, buying class today that didn't exist. We are totally becoming more and more accessible by more and more people.

And there's going to be a lot of challenges that we'll have in China in the coming years. The inflation, food cost, there'll be lot of challenges that we'll have. But the one tailwind that we have that I think is absolutely undeniable and unassailable is that we've got a growing consuming class today, the express sell is $300 million, within the next decade it'll be $600 million. And that is a tailwind that gives me enormous confidence that we're going to be able to build leading brands in every significant category, and you'll hear more about how we're doing that a little bit later on today. But our story is much more than China now. We are driving aggressive international expansion and building strong brands everywhere. And someone asked me earlier, what am I most excited about? Obviously, I can't -- we're still in the ground-floor growth with China, but I'm extremely excited about the fact that we are really -- we've made tremendous progress up against our strategic initiatives to get the table set for much more growth around the globe.

And the first place I want to talk about is what's going on in India. Niren Chaudhary and the team in India have done such a phenomenal job of making our brand relevant in India, that we have really improved our business model dramatically. We're opening up in many different locations across India, and we are definitely in the expansion mode. And I am so confident that India is going to be a great story for Yum! Brands and our shareholders that recently we made a decision to make India -- break India out as a separate division, just to showcase the opportunity we have into -- in terms of driving new units and ultimately more and more profitability as we go forward. But the brand is very relevant. We have veg and non-veg products. We give kitchen tours to show people how we give you the opportunity -- vegan -- vegetarian if you want or you can have chicken if you want, which really eliminated some of the vita votes that might exist out there and broaden the appeal.

You got 60% of the population is under 30 in India, and beverages are very, very popular. So we have a frozen beverage line called Krushers. It's 8% of our mix in India. We're also building these Krusher kiosks in high street, great flagship locations where we can really showcase our full line of products that we have. My favorite product is the Choco Peanut Krusher. I mean, it's absolutely sensational. And also by the way, I love the veg Zinger. It's a spicy vegetarian sandwich that absolutely blows away competition. But what we have right now in India is a KFC brand that is broadly relevant and is a brand that has tremendous upside as we go into the future.

Now, let's talk a little bit about Africa, a continent of 1 billion people. We have a beachhead in Africa and in South Africa with 600 restaurants. We're in the top brands period in South Africa. And our team is doing an outstanding job growing the business in South Africa. In fact, what we recently did is we took some equity in South Africa because we wanted to have a -- an operating capability that would help us expand across the continent. And in the last year, we've gone into 5 new countries in Africa, and this is a shot right here of a new unit that we just opened up in Ghana. And as you can see, it's packed. We did over $15,000 a day in our opening week and people absolutely love our products all across Africa. And like most emerging countries, our products and our brands are very, very aspirational.

In fact, true story, in Nigeria, this is a picture of where we recently had a wedding reception. And this couple called up our team there and asked if they could have a wedding reception because the restaurant is so nice and people love the brand so much, and we promised that we would let you use the upstairs if you promise that the wedding couple would share a bucket of original recipe till death do them part. Okay. And -- but this is a kind of aspiration that you see in these emerging markets and just the kind of broad appeal that we have.

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