This summary is based on the first quarter fiscal 2007 earnings call conducted by Yum! Brands Inc. (YUM) on May 1, 2007.
Chairman and Chief Executive Officer: David Novak
Chief Financial Officer: Richard Carucci
Vice President, Investor Relations: Tim Jerzyk
Key Investors Issues
- Earnings per share rose to 70 cents from 59 cents in the prior year quarter.
- Quarterly sales rose 7% over last year to $2.22 billion.
- The company expects EPS of $3.23 for fiscal 2007.
First Quarter Fiscal 2007 Financial Highlights
The firs quarter result was one of the best quarters every in terms of combined growth from the two international businesses.
- Worldwide operating profit growth was 12%.
- The EPS was 70 cents, up 19% versus last year.
- The firm continues to benefit from its substantial share repurchases with an additional 4% decline in diluted shares outstanding.
- The tax rate was slightly lower than last year, which helped offset a slight increase in interest expense.
- The firm had a $1 million gain from all of its refranchising transactions, versus a $4 million loss a year ago. This added slightly to the year-over-year EPS growth.
Performance Analysis of Segments
China Division
For the first quarter 2007, company sales for the China Division increased 18% in local-currency terms due to continued strong unit expansion of KFC and Pizza Hut in mainland China as well as strong same-store-sales growth in mainland China of 9%.
The operating profit increased 31% versus last year including the positive impact of foreign exchange. The key contributing factors were sales growth and continued development in mainland China for both KFC and Pizza Hut. Additionally, with this strong performance, the restaurant margin improved 1.1 percentage points.
G&A increased 31%, which included five points of growth from foreign currency translation. This increase is primarily driven by continued growth in the business and the people needed for the development of the firm’s portfolio of brands. The firm expects this level of year-over-year growth will moderate as the year progresses
The company’s growth in China will be driven by rapid and continued substantial development of multiple brands in Mainland China.
As to the latest count, the company is now in 402 cities in Mainland China with KFC and over 60 cities with Pizza Hut casual dining. No other brands have this level of penetration and the firm does not see this picture changing any time soon. It is great for the company as the economy continues to grow 10% per year because obviously more consumers can buy the food.
For KFC, the firm expects to add 300 new restaurants in Mainland China, which will continue to widen its lead over its nearest competitor. The company now has 1,000 more units than McDonald’s after having only 100-unit advantage five years ago. The brand majors and returns remain very strong and KFC will continue to strengthen its leading position in 2007. This year the company is celebrating its 20th anniversary in China with KFC. The company has a great plan for the year with exciting new products, drinks and desserts and it is very effectively targeting the young adult market that now has money to spend. For its 20th anniversary, the company has targeted advertising, which features what the firm is doing to enrich the life for its Chinese customers in addition to all the new products that it is advertising this year.
In the Pizza Hut casual dining business, the firm is continuing to build on its leading position.
The company now has over 250 restaurants and growing rapidly. The company is now moving into Tier 3 cities, which provides further growth and is a great testament to the strength and reach of the brand. The firm expects to open as many as 70 new restaurants in 2007, which would make the Pizza Hut casual dining concept in Mainland China one of the fastest growing casual dining concepts in the world. For Pizza Hut Home Service, the company will begin expansion in more cities to build scale after the successful test in Shanghai that was conducted in 2006. The company expects to add about 20 new Pizza Hut Home Service units in 2007.
The company expects to expand its East Dawning concept in Shanghai later this year to gain scale for TV testing.
The company remains very focused against its number one strategy of building dominant brands in China in every significant category. The firm has a huge strategic advantage with its team in place in Shanghai, its own distribution system, and development team which is producing results that are unmatched by anyone in Mainland China. The management continues to expect that its China division will be the lead growth business with 20% growth in operating profit.
