Home » Yum! Brands, Inc. (NYSE:YUM) Q3 2013 Earnings Conference Call Transcript

Yum! Brands, Inc. (NYSE:YUM) Q3 2013 Earnings Conference Call Transcript


Your next question comes from Howard Penney with Hedgeye Risk Management.

Howard Penney – Analyst, Hedgeye Risk Management

I have two questions. My first one is about the asset light model. You bought two assets in the last year. You bought the assets in China, and then you bought Turkey, which kind of moves you away from the asset light model. And I understand that the returns are high in the emerging markets, but the returns are even greater in an asset light model. Is there a slight shift towards, away from the asset light model, with your acquiring Little Sheep in Turkey in particular? And then I have another question.

Pat Grismer – CFO

Not at all. We believe that one of the strengths of our business is that we are as heavily franchised as we are, which drives extraordinary return on invested capital for us. So we’re not moving away from that strategy. What we are doing is we’re shifting where we place our equity. So don’t forget that we’ve done some significant refranchisings in recent years, and we’ve taken that capital and we’ve put it into the high-growth emerging markets where we know we can get much stronger returns.

Howard Penney – Analyst, Hedgeye Risk Management

And then the second question is you alluded to, David, in the beginning, that each crisis is different. And Taco Bell’s recovery in the United States was not an easy one, but you didn’t have the capacity increases in the store base that you had, so you were just fixing existing assets.

And then in China, each situation is different, or each crisis has been different, and each year you’re facing increased capacity as you’re adding 700 stores this year. So you’re trying to turn around a base when your capacity is increasing significantly, and I know you were asked about the growth rate in China, but I was hoping you could maybe reiterate your confidence in the growth rate in China and that you’re actually seeing the returns in the tier one cities. And you don’t know what you don’t know, but is 13% the right number of what your unit growth should be in those tier one cities? So there’s a lot of questions around sort of development and growth, and I would just, I guess, like to hear you, again, say with confidence that your growth rate is appropriate, and that we’re not going to be hearing in December or six months or 12 months from now that you’re going to be slowing it down.

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David Novak – Chairman and CEO

Well, I think the exact growth rate we’ll need to get to you on, get back to you on, and we’ll be able to talk, I think, more about that in December. We’re always evaluating our growth rate. We have our new unit tracking model, and making adjustments where we need to make adjustments. And Pat’s already talked about many of those. I think when we look at China, we think the big macro that is a positive is the 300 million to 600 million consuming class. And so when you look at the long term and what we think we can do in China, I think that nothing has really changed. We’re going to grow at the right rate to take advantage of the fact that we have the leading position in the dominant consumer market in the world, soon to be the fastest growing economy. So that’s really our strategy. We’ll only grow as fast as our people allow us to do it, and our returns justify it.

And as we look to next year, we see opening up at least 700 more restaurants next year. And we think that the investments we’re making in our restaurants and restaurant development will pay off for us as we go forward. Because we still only have a thousand Pizza Huts and 4,500 KFCs, in a business where we think you could take it times four or five. So we’ll get there the right way. That’s what I would tell our shareholders.

Howard Penney – Analyst, Hedgeye Risk Management

So I understand that you have a huge opportunity in China, and it’s a 10-year, 20-year, 30-year opportunity, but it’s the return on the incremental capital that you’re putting in the ground. And how do we know that 700 is the right number, and it shouldn’t be 500, or maybe it should be 900? And I guess I’m spinning my wheels here, but I just want to push a little bit harder on the rate of growth versus the absolute opportunity.

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Pat Grismer – CFO

Well, Howard, as I mentioned before, we make these investment decisions one at a time. And we bring to bear unparalleled expertise and intelligence around retail development in China. We’re not chasing a number per se. We’re capturing an opportunity where we know we can create a lot of value for our shareholders.

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