Yum! Brands, Inc. (YUM)

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Yum! Brands Inc. (YUM)

Q3 2012 Earnings Call

October 10, 2012, 09:15 am ET

Executives

Tim Jerzyk - SVP, Investor Relations

David Novak - Chairman & CEO

Rick Carucci - President

Pat Grismer - CFO

Analysts

David Palmer - UBS

Michael Kelter - Goldman Sachs

Jason West - Deutsche Bank

Brian Bittner - Oppenheimer

Andy Barish - Jefferies

Greg Badishkanian - Citigroup

Jeffrey Bernstein - Barclays

Bryan Elliott - Raymond James

John Glass - Morgan Stanley

Mitch Speiser - Buckingham Research

Joe Buckley - Bank of America

R. J. Hottovy - Morningstar

John Ivankoe - JPMorgan

Keith Siegner - Credit Suisse

Presentation

Operator

Good morning. My name is Ashley and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands third quarter 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session (Operator Instructions)

Thank you. Mr. Tim Jerzyk, Senior Vice President of Investor Relations, 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 that could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings released 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. Also we would like you to please be aware of a couple of Yum! investor events; Thursday, December 06, we will host our Annual Investor Update Meeting in New York City and then Monday, February 04, 2013, our fourth quarter earnings will be released.

On our call today, you will hear from David Novak, Chairman and CEO; Rick Carucci, President, and Pat Grismer, our CFO. Following remarks from each, 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. Before I talk about our third quarter performance, I think it’s important to note this past Sunday, October 7th marked our 15th anniversary as a company. From the very beginning, our formula for success has been people capability first, satisfied customers and profitability follow; I am proud of how we went to get our ownership culture we’ve developed and pleased with the strong returns we’ve generated for our shareholders.

As we look back over the past 15 years, we take satisfaction by what we’ve been able to accomplish, but as you’ll hear more about today, we’re even more excited about the unfinished business that lies ahead. When we started our company, we benchmarked high performing companies and all were known for their consistent double-digit annual EPS growth. As a result, we built our company around the objective of delivering dynasty like performance of at least 10% annual EPS growth. We just raised our guidance and we expect that 2012 will mark the 11th consecutive year we deliver at least 13% EPS growth before special items.

As you know, there are three keys to driving shareholder value in retail; new unit development, same-store sales growth and high returns. Our new unit opportunity in China is the best in retail and our opportunity to expand is now bigger than ever throughout the emerging markets. As I said before, Yum! Brands is about China and so much more.

As evidenced about 60% of our profit is generated in emerging markets which is where the real economic growth in the world is occurring today. This growth, combined with the facts that we have powerful global brands and only two restaurants per million people in emerging markets compared with 58 restaurants per million people in the U.S. gives us tremendous confidence in our ability to continue our aggressive expansion.

Further, I would not trade our opportunity to grow same-store sales with anyone. We have 38,000 restaurants with underutilized assets. We are laying the foundation for more substantial same-store sales growth by developing breakfast, beverages and broad and improved asset utilization overtime. Meanwhile, our returns continue to be among the best in the restaurant industry with return on invested capital over 22%.

These facts give us confidence that our business model deliver strong results in even the most challenging economic times; unlike most companies, we don't have to look for growth, it’s staring us right in the face everyday and we expect this opportunity will allow us to build on our track record of at least 10% earnings per share growth in 2013 and well into the future.

Now on to our results; I am pleased to report each of our divisions produced strong sales and profit results driving 19% EPS growth prior to special items. Given the strength of our year-to-date results, as I just mentioned, we are raising our full year EPS growth forecast to at least 13% excluding special items. We expect to open a record 1,750 plus new international units this year, including over 750 new units in China. That’s two new restaurants per day in China and nearly five new restaurants per day around the world.

Equally important, we have same-store sales growth across our divisions. This combination of record new unit development and strong same-store sales growths has delivered high quality earnings this year and gives us even more confidence in delivering a strong 2013 as well.

Now let me take you through our key strategies in China and India and then Rick will take you through our strategies at Yum! Restaurants International in the United States; Pat Grismer will then review our financial progress.

I am obviously very proud of our China team’s continued strong performance. For the third quarter, operating profit grew 22% prior to foreign currency translations. Units expanded 18% and system sales grew 22%. And importantly, and as we predicted, restaurant level margins improved dramatically compared to our second quarter.

Same-store sales grew at a healthy rate of 6% with transactions down 1%. Keep in mind this is overlapping 19% same-stores sales growth with transaction growth of 27% during the third quarter of last year. When you do the math, our two year same-store sales growth is an impressive 26% with two year same-stores transaction growth of 26% as well.

What makes this even more impressive is that we’re driving record new unit development at the same time. We’re excited that the China team is going to open over 750 new restaurants this year. Our new unit returns in China remained the best in our business. We know we are building shareholder value with cash paybacks less than three years.

However you should know that my number one challenge to the team is to never build faster than our people capabilities. Fortunately, as our scale grows in China, our people capability continues to get even stronger. We hired 10,000 new management trainees over the past year through our Whampoa Academy, and currently have 2,000 assistant managers in our system today who are ready to become restaurant general managers and continue to build on a reputation for operational excellence. Our focus on people capability first is alive and well in China.

Now let me share with you a few highlights from each of our leading brands in China. Let’s start with KFC, the largest western QSR concept in China. Our first KFC restaurant opened in China in 1987. So we’ve been in China for 25 years now. I am proud to say that we recently opened our 4,000 KFC restaurants.

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