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

So in November, our plans are to launch what we are calling our [I Commit] campaign. We expect this to be a powerful new quality assurance campaign featuring actual representatives of our over 300,000 KFC employees, suppliers and poultry farmers in China. Our quality assurance message will be delivered in an authentic manner and will be centered on the theme that KFC is safe for my family, friends and me and hence, safe for you.

We are also leveraging our massive network of employees and suppliers through social media. The goal is to leverage the fact that KFC brand is part of the of fabric of China and of course, all of this is on top of the Operation Thunder actions we initiated earlier this year to strengthen our poultry supply chain.

On the marketing calendar front, we’ll be following up the recent new product introduction of our beef burger with promotions featuring chicken on the bone, wings and beverages. At the same time, our China team will remain very focused on operating efficiency. We were really pleased to see a nearly 20% restaurant margin despite the decline in sales. I want to recognize the team for really buffing down at the store level. Pat will share more details on this in his remarks.

In short, I’m confident we’re doing the right things to rebuild consumer trust at KFC China and we expect to have momentum heading into 2014. The good news is we’ll begin overlapping very weak same-store sales in December and we’ll have this unfortunate benefit across most of next year. And we plan a number of major menu and value innovations to ignite the sales growth in 2014. Sam Su will share more details of our initiatives during our December meeting in New York.

Now the obvious question is why do you think sales momentum stalled in China? I’ve always said that no two crises are the same. And we always said that we would need to get to time and that it would take at least nine to 12 months. So far, it’s nine months and counting and not happening as fast as we had hoped.

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Now, as I just mentioned trust scores are improving significantly, but still below 2012 levels. We believe this is because KFC’s leadership in size has grown exponentially over the years, and our customers’ expectations of the KFC brand have grown along with it. Social media has also exacerbated the issue and kept the dialogue alive. And macros haven’t helped.

While we’ve announced process improvements, communicated a trust message, and we’ve had value promotions, frankly, we haven’t had the kind of major innovation that could turn the tide. And like I said, we are working hard to get back on track, and we are confident that we will.

On the China development front, we continue to expect at least 700 new units in 2013. This means we will have opened around 1,600 new units in a two-year period, and we expect another strong year of development in 2014, all of which will provide substantial momentum for our China division as sales continue to recover at KFC.

Whether it was Sudan Red, avian flu, or SARS, we experienced temporary setbacks to sales and profits, but we stayed the course and kept building units, and I’m glad we did. KFC is a power brand in China today and will be for many, many years to come. In fact, even with our recent challenges at KFCs, we wouldn’t trade places with anyone else in China.

Today, we have nearly 4,500 KFC restaurants in over 900 cities in China. That’s more than twice the size of our nearest competitor in the QSR category. Additionally, we serve about 60 million customers at KFC every week or so, which is almost the entire population of the UK. That may be one reason why the BBC recently published a report naming KFC as the number one foreign brand in China. Any way you look at it, our KFC brand is deeply ingrained in the hearts, minds, and lives of the Chinese customer.

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Additionally, China is undeniably the number one retail opportunity in the world. The country continues to experience the fastest pace of urbanization the world has ever seen, and the macro trend we remain most enthusiastic about is the growing consuming class, which is expected to increase from 300 million people today to over 600 million people by 2020.

So, with the number one brand in the restaurant category situated in what will soon be the largest consumer economy in the world, and supported by the people capabilities that are the envy of our industry, we believe KFC is undoubtedly in a very powerful position to bounce back strongly. Clearly, we still have work to do, but we know we’re doing the right things to regain consumer trust, and we remain confident that our best days for KFC in China are yet to come.

Moving to our second brand in China, Pizza Hut Casual Dining clearly has momentum, delivering solid same-store sales growth in the quarter, up 5% on top of 8% in the third quarter of last year. So far this year, we’ve grown same-store sales at Pizza Hut Casual Dining by 4% and unit growth of 29%. That’s pretty good performance by any standard.

Pizza Hut Casual Dining goes well beyond pizza and is unquestionably the leading western casual dining concept in China. Pizza Hut continues to lead with menu innovation and everyday affordable value. 20% of Pizza Hut’s menu is revamped twice a year, and we recently launched a major new product with Stone Pan Sizzling Steak that we know our customers love.

We’re also continuing to leverage our assets by expanding our breakfast menu into more and more cities. With this new sales layer, our long-term goal is to create and own the mid-scale casual dining breakfast occasion in China on a scale that matches what exists in the United States today. This is a huge opportunity, and we’re very well-positioned to capture it.

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