The company's objective is at least 10 percent annualized EPS growth. Yum is raising guidance and expects it will have at least 13 percent EPS growth in fiscal year 2012 and it expects to maintain at least 10 percent EPS growth well into the future.
In terms of new unit development, 60 percent of Yum's profit is now from emerging markets. There is ample room to expand; there are only 2 restaurants per million people in emerging markets, compared to 58 restaurants per million people in the United States. Yum plans to open more than 1,750 new international units in 2012, including 750 in China.
New unit growth in China was 18 percent this year. Yum hired 10,000 new management trainees in China in the last year through its Whampoa Academy. It recently opened its 4000th KFC restaurant in China and has now been in China for 25 years. It has over 700 units of Pizza Casual Dining in China. Its new Pizza Casual Dining division, new units are returning at least as much as its KFC restaurants. In February, Yum acquired Little Sheep, China's hot pot concept. It believes Little Sheep has the potential for thousands of restaurants and it has completed management integration into Yum's China team. Although China's economy is slowing, Yum is still optimistic long term. China is still growing, although at a slower pace. The middle class in China is expanding and personal incomes are rising. Bcause Yum is expanding so fast in China, it is less reliant on same store sales to meet its goals of 15 percent profit growth.
In India, Yum has 495 restaurants and expects to open 100 more this year. Yum is taking the strategies that made it successful in China and applying them to India.
Yum International expects to build 900 new units in 2012. It believes it has tremendous room for growth in France, Germany and Russia. In France and Germany, Yum is using a business rental program similar to the one used by McDonalds in France. In the past 2 years, Russia had the highest KFC same store sales growth in the world. Yum has 650 KFCs in South Africa and is the market leader there. It expects to be in 17 other African countries by the end of 2012, though it does not expect the units in these countries to add meaningfully to profit for several years. Overall, France, Germany, Russia and South Africa have the potential to generate half of Yum's 10 percent EPS growth in the next 4 years.
In the United States, Yum has reduced the number of company owned restaurants from 3,900 to less than 1,700 since 2008. It has completed its re-franchising of KFC and Pizza Hut. It began one modest re-franching of Taco Bell last year and expects to reach its target company ownership by the end of 2013. Taco Bell had strong sales in Q3, with new product introductions such as the Doritos and Locos Tacos and Cantina Bell, which have appealed to more upscale and female customers. Yum expects sales to continue to be strong in 2013 as it will be adding new flavor varieties of line extensions. Pizza Hut added a smaller and less expensive delivery system called Delco Lite. Yum has experienced commodity deflation in the United States since Q2 and expects 1 percent commodity deflation for Q4. It has also benefited from supply chain efficiencies.
In terms of growth in same store sales, Yum has 38,000 restaurants with underutilized assets. It is making changes to increase same stores sales growth by developing breakfast, beverages and broad asset utilization overtime.
Yum's returns on invested capital are already over 22 percent, which is among the best in the restaurant industry.
Financials.
Yum had same store sales growth across all divisions. Same store sales in China increased by 6 percent with transactions down 1 percent. Q3 overlapped with a very strong same store sales number in Q3/2011. Same stores sales for Yum International increased by 2 percent, which includes a 5 percent gain in emerging markets. Due to the shift of Ramadan to the third quarter, same store sales for Yum International were negatively impacted by 1 point. Same store sales in the United States increased by 6 percent in Q3.
Yum expects same store sales in China to be flat to low single digits, same store sales for Yum International to improve since Ramadam was in the third quarter this year, and weaker same store sales performance in the United States. The low expectations is due to the fact that there was an extra week in Q4 in 2011 and the 2011 comps from China and the United States are high. Additionally, in the United States, some of the refranchising will temporarily impact profits.
Operating profit in China increased by 22 percent in constant currency. Operating profit in the United States increased by 13 percent in Q3. Yum expects modest improvement in China in Q4 and projects double digit profit growth there in Q4.
Restaurant margins in China, which had been declining, improved dramatically due to pricing actions and lower inflation. The inflation rate for labor in China in Q3 was 8 percent, while commodity inflation rate in China was 2 percent. The company expects commodity deflation in China in Q4. Yum believes its restaurants in China can maintain a 20 percent margin for the long term.
EPS prior to special items increased by 19 percent in Q3 and Yum is raising its guidance for full year EPS growth to 13 percent.
Yum recently increased its dividend by 18 percent and has doubled its dividend in the last five years. In Q3, it spent $700 million in share repurchases and intends to spend $800 on repurchases for the full year.
The transcript of the earnings conference call can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/916301-yum-brands-ceo-discusses-q3-2012-results-earnings-call-transcript?part=single
Copyright 2012 Jaygo's Earnings Conference Call Summaries
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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