This summary is based on the first quarter fiscal 2008 earnings call conducted by Yum! Brands, Inc. (YUM) on April 23, 2008.
Management:
Senior Vice President, Investor Relations: Tim Jerzyk
Chairman of the Board, President, Chief Executive Officer: David C. Novak
Chief Financial Officer: Richard T. Carucci
Key Investors Issues
- EPS were 52 cents per share compared to 36 cents per share last year.
- Net income rose to $254 million from $194 million a year earlier.
- Revenue increased to $2.4 billion from $2.2 billion.
First Quarter Highlights
Earnings per share of 50 cents included the benefit of a one-time gain from the sale of minority interest in KFC Japan, and charges related to long-term plan for U.S. brands transformation, including refranchising losses and charges related to business restructuring.
Excluding these special items, EPS was 42 cents per share or 19% growth, which the company believes is a better indication of the underlying first-quarter performance.
The company has strong system-sales growth of 40% in mainland China and 15% in Yum! Restaurants International (YRI), fueled by same-store-sales growth, strong unit development, and favorable foreign currency translation.
- The company had worldwide same-store-sales growth of 4%, including 12% in mainland China, 5% in YRI, and 3% in the U.S.
- Operating profit growth was 33% in China Division and 18% in YRI. Worldwide operating profit growth was 13% excluding the benefit of special items.
- Special items of 8 cents per share include $100 million pre-tax gain from the sale of minority interest in KFC Japan, $26 million of U.S. refranchising pre-tax losses, and $6 million of pre-tax charges related to U.S. restructuring.
- The company returned a record $1.1 billion to shareholders. Share repurchases alone were nearly $1 billion. The average price of share repurchases was $35.39.
China division top line growth was led by strong same-store sales growth of 12% in Mainland China and impressive new unit growth.
- In fact, in Mainland China alone, the company opened 88 new units, which is ahead of last year’s record pace for the same time period.
- While restaurant margins declined by 1.6 points from prior year due to unusually high commodity inflation, they were still maintained at healthy 21.3%. This led to 23% constant currency profit growth, lapping comparable growth of 26% last year. This profit growth was achieved while also increasing P&L investments in future growth engines like Pizza Hut home service and East Dawning.
- The company realized a first quarter profit benefit of $8 million due to favorable foreign currency conversion.
Yum! Restaurant International profits were up 11% on a constant currency basis, lapping 23% growth in 2007.
- Like China, YRI generated strong top line results through 5% same-store sales growth and through opening 158 restaurants in the quarter.
- Given the strong development start in China and YRI, it is possible that Yum! will exceed the record for new unit openings set last year. YRI results are good considering the impact of losing value-added tax exemption in Mexico. Absent this impact, YRI would have delivered profit growth of approximately 15% on a constant currency basis.
- Additionally, due to favorable impact of foreign currency conversion, the company realized a profit upside of $7 million in the quarter.
U.S. results were challenged by cost inflation.
- System same-store sales growth of 3% was in line with full year targets. However, this level of sales could not offset the impact of record level commodity inflation, which along eroded restaurant margins by 2.5 points.
- Commodity inflation, combined with the lap of Hurricane Katrina related insurance benefits from last year, led to a profit decline of 5% in quarter one.
The company has segmented its EPS reporting into reported EPS and EPS excluding special items.
- EPS excluding special items is a better indication of Yum!''s underlying performance. These special items include U.S. refranchising gains and losses, cost of transformational investment to reposition brands with new sales layers, and cost of restructuring business.
- The category of special items included $32 million of U.S. refranchising pretax losses and charges related to U.S. restructuring, partially offsetting a $1 million pretax gain from the sale of minority interest in KFC Japan.
- When exclude the resulting 8 cents of EPS net gain from reported EPS of 50 cents, the company arrives at adjusted EPS of 42 cents, or 19% growth on a comparable basis versus last year.
- The company announced in December that it intends to reduce U.S. ownership to potentially reach below 10% by the end of 2010. First quarter refranchising was slow and recent tightening in the credit markets may challenge the 2008 pace of this activity.
Second Quarter 2008 Outlook
