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

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

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.

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.

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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.

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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The franchisees are also excited about the significant innovation we have planned for our core business. We know that for the U.S. to have a successful year, it’s important for our most profitable U.S. brand to do well, and we certainly have a lot going in our favor at Taco Bell.

We also expect 2014 to be a better year at Pizza Hut with the most significant news being our plan to nationally advertise WingStreet for the first time, which includes chicken strips and our award-winning wings. Virtually all the stores in our system are putting in the chicken operating platform so we can use network television next year to feature home delivery chicken products.

The industry-leading pizza innovation, consistent everyday value, and the chicken sales layer will be our focus throughout 2014. We’ve also changed advertising agencies to help us break through more aggressively in the category and leverage the power of our leading brand.

And finally, while the country macros and our recent results haven’t been as strong as we’d like, we’re continuing to invest in and develop a great business in India. We currently have 613 restaurants and we are full steam ahead with development as we expect to open up 150 new units this year. Although it’s still early days, we expect our India division will drive substantial growth for Yum! in the years ahead, and we are making the required investments to build a powerhouse there.

So, to sum things up, in spite of our short-term sales issue with KFC in China, the fundamentals of the Yum! growth model remain extremely compelling. As you know better than I, there are three keys to driving shareholder value in retail: New unit development, same-store sales growth, and high returns.

In terms of development, our new unit opportunity in emerging markets, including China, remains the best in the retail, and our opportunity to expand is huge. We have three iconic brands, and while we have 58 restaurants per million people in the United States today, we only have two restaurants per million in the emerging markets. That’s a long runway for growth and gives us tremendous confidence in our ability to continue our aggressive expansion for many years to come.

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