This summary is based on the third quarter fiscal 2007 earnings call conducted by Yum! Brands, Inc. (YUM) on October 9, 2007.
Management:
Senior Vice President, Investor Relations/Treasurer: Tim Jerzyk
Chairman of the Board, President, Chief Executive Officer: David Novak
Chief Financial Officer: Richard T. Carucci
Key Investors Issues
- EPS were 50 cents a share compared to 42 cents a share last year.
- Net income was $270 million compared to $230 million for the same period a year ago.
- Sales were $2.56 billion vs. last year''s $2.28 billion.
Second Quarter Highlights
Worldwide system-same-store-sales growth was 4%, including 11% growth in mainland China, 7% growth in Yum! Restaurants International Division (YRI), and 1% growth in the U.S.
- Strong double-digit system-sales growth from mainland China improved 33%, and YRI improved 16%.
- There was continued strong international restaurant unit growth: mainland China improved 20%. YRI improved 4%, the nineteenth consecutive quarter of at least 3% year-over-year YRI unit growth, ongoing growth target.
- Strong worldwide operating-profit growth increased 16% led by international divisions: China improved 28%, and YRI improved 21%.
- Worldwide operating margin improved by 0.5 percentage point to 15.6%.
- Average shares outstanding reduced by 2%, the thirteenth consecutive quarter with year-over-year share reduction as a result of substantial share buybacks. Over the past three years, the company''s regular share-repurchase program has reduced share count by a net 12%.
- Favorable foreign currency conversion impact was about 2 EPS.
Strong unit expansion and same-store-sales growth led to system-sales growth well above ongoing target for both mainland China business and YRI. U.S. business performance improved versus the first half of the year.
However, sales and profit growth remains below target level due to results at Taco Bell.
The company believes the strong free cash flow generated by all three of businesses enables the company to increase leverage while achieving target of remaining an investment-grade company. As a result, the company intends to increase debt level in the near term and dramatically increase already strong pace of share buybacks. The company expects to increase shareholder value by investing up to $4 billion in share repurchases by the end of 2009. This will substantially reduce the number of shares outstanding, potentially by up to 20%, adding to the 12% reduction achieved during the past three years.
China Division results were driven by strong system-sales growth from continued development of brands in terms of both unit expansion and same-store-sales growth in mainland China.
Mainland China business generated 26% growth of system sales for the third quarter and 24% year to date, both in local currency terms.
Operating profit for China Division increased 28%, led by 29% growth in mainland China, including the favorable impact of foreign currency conversion for both measures. Strong top-line growth as noted above was the key factor. Restaurant margin declined due to increased levels of inflation for key food ingredients and labor costs in mainland China. The company expects these inflation factors to be more significant for the fourth quarter, resulting in up to a two-percentage-point decline in restaurant margin versus last year for the fourth quarter.
System-sales increased 11% in local currency terms.
In particular, the KFC brand performed well with system-sales growth of 15% in local currency terms led by strong performances around the globe. Overall for YRI, system-same-store-sales growth increased 7%. The company is continuing to add new KFC and Pizza Hut restaurants around the world primarily through franchise development. YRI opened 193 new traditional restaurants during the third quarter 2007 and 515 year to date, of which 92% were opened by franchisees.
- Operating profit for YRI increased 21% including the positive impact of foreign currency translation. Restaurant margin declined primarily due to the inclusion of Pizza Hut U.K. as a company-owned business this year.
- Excluding the impact of the acquisition of Pizza Hut U.K., restaurant and operating margins would have increased by 0.7 and 1.4 percentage points respectively.
- System-same-store sales, which include franchisees'' sales, grew by 1% versus prior year as growth in franchise performance offset a 1% decline for company restaurants. The primary driver of the 1% decline in company same-store sales was a decline of 6% at Taco Bell.
Franchise sales and fees grew primarily as a result of the expansion of franchise-restaurant base due to the sale of 479 company-owned restaurants to franchisees (refranchising) over the past four quarters.
- In the third quarter, 71 U.S. restaurants were refranchised, resulting in a shift of revenues from company sales to franchise fees.
- Company sales decreased by 8%, primarily due to refranchising.
- Commensurately, franchise fees grew by 6%.
