YUM BRANDS INC (YUM) Earnings Report: Q1 2016 Conference ... The following YUM BRANDS INC conference

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Transcript of YUM BRANDS INC (YUM) Earnings Report: Q1 2016 Conference ... The following YUM BRANDS INC conference

  • Company Name: Yum! Brands, Inc. Company Ticker: YUM Sector: N/A Industry: N/A

    Event Description: Q1 2016 Earnings Call Market Cap as of Event Date: 33.44B Price as of Event Date: 82.06

    © 2014 TheStreet, Inc. Al l R ights Reserved Page 1 of 23

    YUM BRANDS INC (YUM) Earnings Report: Q1 2016 Conference Call Transcript The following YUM BRANDS INC conference call took place on April 21, 2016, 09:15 AM ET. This is a transcript of that earnings call:

    Company Part icipants

    Steve Schmitt; Yum Brands; Investor Relations Greg Creed; Yum Brands; CEO Dave Russell; Yum Brands; Interim CFO Micky Pant; Yum Brands; CEO China Division Larry Gathof; Yum Brands; Treasurer

    Other Part icipants

    David Palmer; RBC; Analyst John Glass; Morgan Stanley; Analyst Joseph Buckley; BoA Merrill Lynch; Analyst John Ivankoe; JPMorgan; Analyst Keith Siegner; UBS; Analyst David Tarantino; R. W. Baird; Analyst Jeffrey Bernstein; Barclays Capital; Analyst Howard Penney; Hedgeye Risk Management; Analyst Brian Bittner; Oppenheimer; Analyst Andy Barish; Jefferies; Analyst Karen Holthouse; Goldman Sachs; Analyst Jason West; Credit Suisse; Analyst Andrew Charles; Cowen; Analyst Brett Levy; Deutsche Bank; Analyst

    MANAGEMENT DISCUSSION SECTION

    Operator :

    At this time I would like to welcome everyone to the Yum! Brands first-quarter 2016 earnings conference call.

    (Operator Instructions)

    Steve Schmitt, Vice President of Investor Relations and Corporate Strategy, you may begin your conference.

    Steve Schmitt (Investor Relations):

    Thanks, Operator. Good morning, everyone, and thank you for joining us.

    On our call today are Greg Creed, our CEO, and Dave Russell, our interim CFO. Also on today's call is Larry Gathof, Yum!'s Treasurer; and we're very pleased to have Mickey Pant, YUM China's CEO, on our call as well.

  • Company Name: Yum! Brands, Inc. Company Ticker: YUM Sector: N/A Industry: N/A

    Event Description: Q1 2016 Earnings Call Market Cap as of Event Date: 33.44B Price as of Event Date: 82.06

    © 2014 TheStreet, Inc. Al l R ights Reserved Page 2 of 23

    Following remarks from Greg and Dave, we'll open the call to questions from the entire team. Please keep in mind Micky is dialing in from Shanghai, so there could be a slight delay in some of his responses.

    Before we get started, I would 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 statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to the Investors section of the Yum! Brands website, www.Yum.com, to find disclosures and reconciliations of non- GAAP financial measures that may be used on today's call.

    We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. 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.

    We would like to make you aware of the following upcoming Yum! investor event. Our second-quarter 2016 earnings will be released on Wednesday, July 13.

    Now, before I turn the call over to Greg I would like to bring your attention to two items you may have noticed in yesterday's release. First is new terminology. We reported core operating profit growth of 21% for the first quarter 2016. Core operating profit growth is our operating profit growth year-over-year excluding foreign currency translation and special items.

    Second, as previously announced, effective January of this year the Company's India business integrated its three brands into our global brand divisions. Prior-year figures have been restated in the release.

    Now it's my pleasure to hand the call over to Mr. Greg Creed.

    Greg Creed (CEO):

    Thank you, Steve. Good morning, everyone.

    I'm pleased we're off to a strong start in 2016, with better than expected core operating profit growth of 21% in the first quarter.

    This includes 42% growth in our China business, due to outstanding Chinese New Year results at KFC, underscoring the power of the KFC brand in China when we deliver insight-driven marketing that resonates with our customers. Companywide, all four of our divisions posted positive same-store sales and operating profit growth in constant currency.

    Furthermore, we are on track to finalize the spinoff of our China business by year-end, creating two powerful, independent, focused growth companies.

    As you saw in our release, we're raising full-year core operating profit growth guidance for Yum! Brands to 12% from 10% previously. Even though it is still early in the year, we are confident about the revised guidance and will update you as the year progresses.

    Today, I'll give you an overview of each of our operating divisions, and then Dave Russell, our interim CFO, will walk you through the financials.

    So first, China. For the China Division, same-store sales grew 6%, led by 12% same-store sales growth at KFC. Our KFC business, as a reminder, represents about 75% of our operating profit in China.

    We saw particular success at KFC during the Chinese New Year with Bucket Meals, which we tailored

  • Company Name: Yum! Brands, Inc. Company Ticker: YUM Sector: N/A Industry: N/A

    Event Description: Q1 2016 Earnings Call Market Cap as of Event Date: 33.44B Price as of Event Date: 82.06

    © 2014 TheStreet, Inc. Al l R ights Reserved Page 3 of 23

    across four customer groups ranging from kids buckets to larger group meals. As a result, buckets mix had a much higher percentage than normally. This lifted average ticket as we focused more on group locations; and we gained even more consumer insights this year, which will help our business both going forward as well as next New Year.

    Pizza Hut Casual Dining, which represents about 25% of our operating profit in China, remained challenging. System sales declined 1%, and same-store sales declined 12% in the quarter.

    A tough macro environment and competitive landscape continued to weigh on performance. We're addressing this with urgency, but realize a recovery will take time.

    So wrapping up on China, we're pleased with our first quarter's overall operating profit growth, which came in well ahead of our expectations. The strong margin performance reinforces our confidence in the future earnings power of this business. When we generate sales growth, profit flow-through is impressive.

    As Steve mentioned, Micky Pant, our China Division CEO, is on the call today and will be happy to assist in answering questions you may have on the China business.

    Now, turning to our three global brand divisions. In our KFC Division, same-store sales grew 1% in the first quarter, or 5% on a two-year stack. Operating profit grew 7% in constant currency when adjusting for incremental advertising spend in the US.

    The division opened 79 new international restaurants in 32 countries. 77% of these units were opened by franchisees, and 71% of our new international openings were in emerging markets. I'm encouraged by our ability to generate growth in both emerging and developed markets.

    System sales in international developed markets grew 5%, and in international emerging markets grew 8%. I recently visited with the team in Canada and was thrilled to see the assets being upgraded and the marketing positioned around Always Original. With 6% same-store sales growth in the quarter, I'd say it's working.

    I'm also pleased to see success in emerging markets, which are a key contributor to KFC's growth story. KFC is a franchise-led, emerging powerhouse, and I'm confident the brand is getting even stronger and will produce strong growth this year and for many years to come.

    Pizza Hut grew same-store sales 3% in the quarter and was led by 5% same-store sales growth in the US, which makes up approximately 60% of total sales. Our $5 Flavor menu helped drive system transactions, with Company stores leading the way, up 8% in the quarter.

    Our discipline around making it easier to get a better pizza is holistic and driving traffic. We are focused on the entire customer experience from ordering, payment, and delivery tracking to our assets and menu. And I believe this quarter's results are further testament to our maniacal emphasis on this way of thinking.

    We are on track to replace over 1,300 US ovens in 2016. For those stores replacing older ovens, this should result in average energy savings of 25% in ongoing operational costs and a faster cook time.

    From a marketing calendar perspective, we are focusing on balancing premium price innovation, such as Stuffed Garlic Knots Pizza, to protect and improve unit-level economics with compelling value offerings such as our ongoing $6.99 ANY pairs deal. All of this will enable us to provide our customers with a better pizza at great value.

    Our international business at Pizza Hut saw systems sales growth of 3% in constant currency and a 1% decline in same-store sales in the quarter. Sales were especially strong in Latin America and Canada, but offset by weaknesses in Korea, Australia, and India.

  • Company Name: Yum! Brands, Inc. Company Ticker: YUM Sector: N/A Industry: N/A

    Event Description: Q1 2016 Earnings Call Market Cap as of Event Date: 33.44B Price as of Event Date: 82.06

    © 2014 TheStreet, Inc. Al l R ights Reserved Page 4