This summary is based on the second quarter fiscal 2008 earnings call conducted by Yum! Brands Inc. (YUM) on July 17, 2008.
Management:
President, CEO and Chairman: David C. Novak
CFO: Richard T. Carucci
SVP, IR: Tim Jerzyk
Key Investor Issues:
- Year-to-date total revenues were $5.1 billion versus $4.6 billion in the same period last year.
- The Q2 net income increased $10 million from $214 million to $224 million.
- The company repurchased 300,000 shares in Q2 at an average price of $37.19.
Second-Quarter Financial Highlights:
- The company recorded very strong system-sales growth of plus 43% in mainland China and plus 15% in Yum! Restaurants International (YRI).
- The growth was fueled by broad-based unit development, same-store sales growth and favorable foreign currency translation.
- The worldwide same-store sales growth was plus 4%, including plus 14% in mainland China, plus 4% in YRI and plus 2% in the U.S.
- The second quarter operating profit growth was plus 38% in China Division and plus 18% in YRI, with a 12% decline in the U.S.
- The management increased the quarterly dividend by 27% with the yield now about 2%.
- The corporate and unallocated G&A rose by $14 million or 27% which was higher than anticipated due to legal expenses, project timing and incentive compensation accruals.
China Division:
- Mainland China delivered outstanding same-store sales growth of 14%, lapping plus 7% from 2007.
- Mainland China traditional units firmed 20% versus the prior year with 95 new units opened during the quarter.
- Year-to-date, mainland China is exceeding the pace of last year’s record development which further strengthens the company’s leadership position in the rapidly growing restaurant industry.
- According to the management, the restaurant margin declined due to continued high food cost inflation. The commodity inflation was approximately $16 million for Q2 and $27 million year-to-date.
- Foreign currency conversion benefited operating profit by $8 million in the second quarter and $16 million year-to-date.
- The China results were negatively impacted by unforeseen expenses related to the devastating earthquake in May and meaningful charitable contributions to support the recovery effort.
YRI:
- YRI achieved same-store sales growth of 4%, lapping plus 5% from 2007.
- Traditional units were up 4% versus prior year with 160 new units opened in more than 20 countries during the quarter. An estimated 97% of these were opened by franchisees. The year-to-date new unit openings equal the record pace of 2007.
- The franchisee fees were a key driver of the high return business. The fees grew by 22% and are expected to reach approximately $675 million for the full year.
- The strength of foreign currencies versus the U.S. dollar benefited operating profit by $9 million for the quarter and $16 million year-to-date.
- The loss of a VAT exemption in the Mexico business adversely impacted restaurant margin percentage by more than one percentage point and operating profit by $9 million during the second quarter.
- This loss is expected to negatively impact restaurant margin percentage by more than one percentage and operating profit by more than $30 million for the full year 2008.
U.S. Business:
- The business delivered system same-store sales growth of 2% led by company same-store sales growth of 4%.
- The restaurant margin and operating profit declined largely due to significant commodity inflation, weak sales and profit results at KFC, and lapping the 2007 insurance cost favorability of $18 million.
- The overall commodity costs increased $30 million compared with the prior year.
- The management expects full year commodity inflation of more than $100 million.
During the quarter, the company purchased 300,000 shares at an average price of $37.19 or a total of $11 million.
- Year-to-date, the company has purchased 28 million shares at an average price of $35.41 or a total of $992 million.
- In May, the company increased the quarterly dividend to 19 cents per share.
- As a result, the company has nearly quadrupled its dividend since initiation four years back.
