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

In the third quarter, we opened 38 new Pizza Hut Casual Dining units and now have over 950 units in 242 cities, compared to the over 900 cities where KFC currently operates. Importantly, we have a strong economic model, leading to less than three-year cash paybacks on new units. With the terrific performance we’re seeing, we’re continuing to accelerate our new unit development and are aggressively expanding into lower-tier cities. We expect to have around 1,000 units by the end of the year, which would be up from about 500 units only three years ago. And we’re just getting started.

We’re also continuing to invest behind the development of our emerging brands. Pizza Hut Home Service, which is in the home delivery category, has 185 units in 22 cities. We have strong unit economics driven by best-in-class technology and everyday affordable value, and we’ll ultimately scale this brand across the country. We’re already a leader in ecommerce with over 60% of our Pizza Hut delivery sales now sourced through online channels. So with the strong foundation already in place, and with the enormous consumer demand for home meal replacement in China that will only grow, we expect our Pizza Hut Home Service business will contribute more meaningfully in the years ahead.

We also continue to make slow but steady progress with East Dawning, our Chinese fast food concept, but still have work to do before we have a scalable business model. And as I said before on Little Sheep, we’re committed to making this the number one casual dining restaurant chain in China and showing the true potential of the brand. We’ve had a clear setback, but our belief in what we can ultimately do with this brand remains intact.

So let me wrap up the China business. I’ve always said that our China business will have its ups and downs, and this year is clearly proving to be one of those downs. At the same time, I’ve also said there’s no market we’d rather lead in and invest in. Make no mistake, we love our overall position in China. We have complete confidence in a full recovery and long-term impressive growth at KFC. Pizza Hut Casual Dining is a growing powerhouse, and we have future growth engines with Pizza Hut Home Service and ultimately with Little Sheep and East Dawning.

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Outside of China, we expect generally on-target performance for Yum! Brands this year, and we’re well-positioned to deliver against our ongoing operating profit targets in 2014 and beyond.

At Yum! Restaurants International, 2013 is basically on track. We have an outstanding business portfolio with nearly 15,000 restaurants in over 120 countries and territories. We have tremendous development opportunities in emerging markets, and over 90% of our restaurants at YRI are franchised. This combination creates a steady stream of franchise fees and strong growth.

Now as you probably know, Yum! is a clear restaurant leader in emerging markets, and we expect to build upon this position in the years to come. Importantly, the bulk of our emerging market business will continue to be led by franchisees. The reasons our franchisees continue to accelerate development and invest their own capital behind our iconic brands is pretty clear. Payback periods for franchisees in many of these emerging markets are around three years, and we’re attacking our cost structure across the board to improve our overall investment model so that the pace of development will increase over time.

On the subject of international development, I’m pleased to report that we remain on track to open at least 1,000 new units in YRI this year, which is above the 950 units we were expecting at the beginning of the year and represents a new record for the division. Additionally, our development pipeline for new units in 2014 is very robust.

In summary, our international franchise base of about 1,000 franchisees has proven to be a high growth and extremely reliable source, and we expect growth will accelerate over time as more and more of our development occurs in emerging markets which benefit from faster growing local economies and more favorable cost structures.

Additionally, we expect our relatively new equity base in select emerging markets, such as Russia, South Africa, and most recently Turkey, will begin to deliver more profit growth in the future. We initially invested ahead of the growth curve in these markets, but are now positioned to leverage our early investments to achieve higher growth and higher returns in the years to come.

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In the United States, we’re having another solid year. With the completion of our refranchising program this year, and the second consecutive year of net new unit growth, we expect to continue consistent 5% profit growth in the years ahead.

Taco Bell, which represents about 60% of our U.S. profit, is set up for another solid year. In recognition of the extraordinary success of the Doritos Locos Tacos and Cantina Bell product platforms introduced in 2012, as well as leading the way with social media along with the launch of the much talked about LIVE MÁS advertising campaign earlier this year, Taco Bell was recently named by Advertising Age as Marketer of the Year for the entire consumer goods industry. The brand definitely has mojo, and congratulations to Greg Creed and the team.

Building on this brand strength, we now know we have a winning proposition with our breakfast platform. We have three destination products, great value, and an attractive investment proposition for our franchisees. And the good news is that based upon our extensive market test, 90% of the breakfast sales are incremental. And it looks like the breakfast advertising is also driving total brand sales.

I was in Orlando on Monday for the Taco Bell annual franchise convention, and I was pleased that the franchise leadership stood up on stage and enthusiastically endorsed the national breakfast launch. And it’s clear to me we have a unity of purpose across the entire franchise system to win.

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