This summary is based on the second quarter fiscal 2007 earnings call conducted by Yum! Brands, Inc. (YUM) on July 12, 2007.
IR, Treasurer: Tim Jerzyk
Chairman, CEO: David Novak
CFO: Rick Carucci
Key Investors Issues
- EPS were 39 cents per share compared to 34 cents per share last year.
- Net income was $214 million compared to $192 million a year ago.
- Revenue rose to $2.37 billion from $2.18 billion a year ago.
Second Quarter Highlights
Worldwide system-same-store sales grew by 2%, including 7% growth in mainland China, 5% growth in Yum! Restaurants International Division (YRI) and flat results in the U.S.
- There was strong double-digit system-sales growth from both international businesses: China Division 25%, YRI 15%.
- Mainland China restaurant unit growth was 19%.
- YRI unit growth was 4%, the eighteenth consecutive quarter was at least 3% year-over-year unit growth, ongoing growth target.
- There were double-digit operating-profit growths from international divisions: China 14%, and YRI 15%.
- Average shares outstanding were reduced by 3%, the twelfth consecutive quarter with year-over-year share reduction as a result of substantial share buybacks.
- An overall effective tax rate of 21.5%, which was 7.5 percentage points lower than last year''s.
- As announced December 5, 2006, the company doubled quarterly dividend with the second-quarter 2007 payment.
- The company purchased 7.2 million shares at an average split-adjusted purchase price of $31.97, or a total of $231 million.
- China Division operating-profit growth was 20%. This growth is driven largely by new-unit development in mainland China. Key metric for mainland China is system-sales growth with an annual target of 20% driven by at least 375 new-restaurant openings.
- YRI Division operating-profit growth was 10%. This growth is driven mainly by new-unit development measured by system-sales growth of at least 5% (at least 3% unit growth and 2% to 3% same-store-sales growth) including 750 new-restaurant openings.
- U.S. operating-profit growth was 5% with same-store-sales growth of 2% to 3% and leverage of the G&A infrastructure.
- EPS growth was at least 10%. This assumes operating profit performance from three lines of business as previously noted with additional benefit from reduction in shares outstanding due to substantial share buybacks.
China Division
- Results were driven by strong system-sales growth from continued broad development of brands in terms of both unit expansion and same-store-sales growth in mainland China. This is represented by 22% growth of system sales in local currency for the second quarter and 23% for the year to date. Same-store-sales growth in mainland China was a strong 7%.
- Operating profit for mainland China increased 20% with same-store-sales growth and continued new-unit development for both KFC and Pizza Hut as the key contributing factors.
- Reported operating profit for the China Division overall increased 14% versus last year, as weak performances in Thailand and KFC Taiwan markets impacted the division''s growth rate.
- Increased levels of commodity inflation for some food ingredients, including chicken and higher labor costs moderated the overall growth of operating profit and resulted in a decline in restaurant margin.
Yum! Restaurants International (YRI)
- System-sales increased 11% in local currency terms.
- The KFC brand delivered strong system-sales growth of 14% in local currency terms with strong performances across franchise markets as well as KFC U.K. business.
- Overall, the vast majority of YRI markets generated solid same-store-sales growth, 5% for the system, and the company is continuing to add new KFC and Pizza Hut restaurants around the world primarily through franchise development.
- YRI opened 178 new traditional restaurants and 322 year to date, of which 93% were opened by franchisees.
- Operating profit for YRI increased 15% including the positive impact of foreign currency translation.
- Restaurant margin declined primarily due to the inclusion of Pizza Hut U.K. business as a company-owned business this year.
- Excluding the impact of the acquisition of Pizza Hut U.K. business, restaurant and operating margins would have increased by 0.9 and 0.7 percentage points respectively.
United States Business
- U.S. system-same-store sales, which include franchisees'' sales, were flat versus prior year as positive franchise performance offset a 3% decline for company restaurants. The primary driver of the 3% decline in company same-store-sales was a decline of 7% at Taco Bell.
- Franchise sales and fees grew as a result of the expansion of franchise-restaurant base due to the sale of 492 company-owned restaurants to franchisees (refranchising) over the past four quarters.
- 42 U.S. restaurants were refranchised, resulting in a shift of revenues from company sales to Franchise Fees.
- Company sales decreased by 10%, with 8% of that reduction due to refranchising; commensurately, franchisee fees grew by 5%.
- U.S. operating profit decreased 2% versus last year due to a decline in restaurant margin. Furthermore, restaurant margin declined primarily due to higher commodity and labor costs, as well as operating deleverage from a drop in company same-store sales. These factors were partially offset by lower insurance expenses.
Current three-year U.S. refranchising plan, through 2008, is to sell approximately 1,500 company restaurants to franchisees, which will increase U.S. franchise ownership to approximately 83% of the system from 78%.
This will reduce the number of U.S. company-owned restaurants from over 4,686, at the start of this program in 2006, to approximately 3,200 by year-end 2008, a reduction of more than 30% in restaurant count. This is a result of regular review of company operations and ""Earn the Right to Own"" principle.
Since the beginning of 2006, a total of 599 company-owned U.S. restaurants were sold to franchisees, including 42 U.S. restaurants in the second quarter 2007.
Fiscal 2007 Outlook
- The company expects to continue generating substantial free cash flow in 2007, which allows returning to shareholders another $1 billion through share buybacks, which will reduce reported share count by at least 3%. The company is providing a meaningful dividend currently with a yield of nearly 2%. The key factor behind these consistent results is the undeniable strength of global portfolio. Shareholders should expect to build on strong global position by continuing to execute four key strategies:
