Yum! Brands, Inc. (YUM)

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Yum! Brands (YUM)

Q4 2011 Earnings Call

February 07, 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

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

David Palmer - UBS Investment Bank, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

John S. Glass - Morgan Stanley, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jason West - Deutsche Bank AG, Research Division

Mitchell J. Speiser - Buckingham Research Group, Inc.

Yang Huang

Andrew M. Barish - Jefferies & Company, Inc., Research Division

Larry Miller - RBC Capital Markets, LLC, Research Division

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

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

Presentation

Operator

Good morning, and welcome to Yum! Brands Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to introduce Tim Jerzyk, Senior Vice President of Investor Relations.

Tim Jerzyk

Thank you, Rachel, and good morning, everyone, and thanks for joining us on the call today. 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 from last night and the risk factors included in our filings with the SEC.

In addition, please refer to the Yum! Investor section at our website to find disclosures and reconciliations of non-GAAP financial measures that will be used on today's call.

Finally, we would like you to please be aware of a few 2012 Yum! IR events. These are save-the-date mentions for you. Wednesday, April 18, our first quarter earnings release will be after the market close. On September 12 and 13, hold the date, we will host an investor conference in China. As we get more details, we will definitely be communicating to you via our blast e-mail. And then finally, our Annual Investor Update meeting will take place on December 6 in New York City, on Thursday, December 6.

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 C. Novak

Okay, great, Tim, and thank you very much, and good morning, everyone. I'm pleased to announce we delivered 14% earnings per share growth in 2011, marking the 10th consecutive year we exceeded our annual target of at least 10%. Before I talk about our results, I'd like to start by thanking all of you who attended our Investor and Analyst Day this past December in New York. This meeting gives us the opportunity to go public with our goals and commitments, as well as showcase our management talent from around the world. The theme of our meeting, if you recall, was on the ground floor of global growth, China and a whole lot more. We highlighted our 10-year track record, but even more importantly, the future growth prospects of our company. The facts are we have a portfolio of brands with leadership positions in China and other emerging markets with a long, long runway for growth.

We have an asset base of over 37,000 restaurants, and we continue to make progress leveraging these assets further by building sales layers and expanding day parts. Additionally, our strong cash flow generation and disciplined approach to deploying capital allows us to invest in the future growth of our business, as well as return cash to shareholders through a meaningful and growing dividend and make significant share buybacks.

We have tremendous confidence in our business model, and we're confident the best is yet to come. Today, I'm going to highlight how some of Yum!'s unique strengths position our company for even more growth ahead.

First, our leadership position in China and in other emerging markets. Over half of our operating profit is now generated in China and the 72 other emerging countries in which we operate throughout the world. 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 view China as the best restaurant growth opportunity of the 21st century. Our brands further strengthened their category-leading positions with a record 656 new restaurants and extraordinary same-store sales growth of 19% this past year.

KFC now has 3,701 restaurants in over 700 cities throughout the country, and continues to expand into new cities, as well as increase its penetration levels in existing markets.

Pizza Hut Casual Dining now has 626 units and is successfully opening in lower-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. It's important to note that China new unit returns are the best in our business with cash paybacks within 3 years.

The macro environment continues to work in our favor in China. Rising incomes are making our brands even more affordable for an increasing number of people. In fact, the consuming class is expected to double over the next 10 years, going from 300 million to at least 600 million people, as significant urbanization continues. With this as our tailwind, our new unit development pace will continue at a high rate and we will continue to grow same-store sales.

Our strategy in China is to have leading brands in every significant category. KFC is the clear leader in Western QSR, Pizza Hut is far and away the Western casual dining leader and we're developing Pizza Hut Home Service to capture the growing off-premise market and now have 135 home service Pizza Huts.

We're also building East Dawning to be the premier mainstream Chinese food QSR concept. And I'm pleased to say on February 1, we acquired Little Sheep, the leading hot-pot brand in Chinese casual dining with approximately 450 system restaurants. This acquisition advances our strategy to have leading brands in every significant category.

We are looking forward to strengthening Little Sheep's operational 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.

As I mentioned earlier, we have China and a whole lot more. We made incredible progress in India, opening 101 new restaurants in 2011. 10 years ago, we were essentially just beginning with KFC in India. And now it's our second-leading country for new unit development. In fact, we're so excited about our prospects in India and its impact on the future growth of Yum!, that we're going to break it out as a separate division for 2012 reporting.

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