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CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
YUMBrands(YUM)EarningsReport:Q22015ConferenceCallTranscriptThefollowingYUMBrandsconferencecalltookplaceonJuly15,2015,09:15AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
SteveSchmitt;Yum!Brands;VP-IR&CorporateStrategyGregCreed;Yum!Brands;CEOPatGrismer;Yum!Brands;CFO
OtherPart icipants
DavidTarantino;RobertW.Baird;AnalystJohnIvankoe;JPMorgan;AnalystJohnGlass;MorganStanley;AnalystDianeGeissler;CLSALimited;AnalystDavidPalmer;RBCCapitalMarkets;AnalystJosephBuckley;BankofAmerica-MerrillLynch;AnalystBrianBittner;Oppenheimer;AnalystJasonWest;CreditSuisse;AnalystKarenShort;DeutscheBank;AnalystJeffreyBernstein;BarclaysCapital;AnalystSaraSenatore;Bernstein;AnalystKeithSiegner;UBS;AnalystKarenHolthouse;GoldmanSachs;AnalystAndrewCharles;Cowen&Company;AnalystJeffFarmer;WellsFargoSecurities;AnalystR.J.Hottovy;Morningstar;AnalystPaulWestra;StifelNicolaus;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Goodmorning.MynameisJanaandIwillbeyourconferenceoperatortoday.Atthistime,IwouldliketowelcomeeveryonetotheYUM!Brandssecond-quarter2015earningsandconferencecall.
Alllineshavebeenplacedonmutetopreventanybackgroundnoise.Afterthespeakers'remarks,therewillbeaquestion-and-answersession.
(OperatorInstructions).
Thankyou.SteveSchmitt,youmaybeginyourconference.
SteveSchmitt (VP-IR&CorporateStrategy):
ThanksJana.Goodmorningeveryoneandthankyouforjoiningus.OnourcalltodayareGregCreed,ourCEO,andPatGrismer,ourCFO.FollowingremarksfromGregandPat,wewilltakeyourquestions.
CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
Beforewegetstarted,Iwouldliketoremindyouthatthisconferencecallincludesforward-lookingstatements.Forward-lookingstatementsaresubjecttofutureeventsanduncertaintiesthatcouldcauseouractualresultstodiffermateriallyfromthesestatements.Allforward-lookingstatementsshouldbeconsideredinconjunctionwiththecautionarystatementsinourearningsreleaseandtheriskfactorsincludedinourfilingswiththeSEC.
Inaddition,pleaserefertotheinvestorsectionoftheYUM!BrandswebsiteatYUM.comtofinddisclosuresandreconciliationsofnon-GAAPfinancialmeasuresthatmaybeusedontoday'scall.
Wearebroadcastingthisconferencecallviaourwebsite.Thiscallisalsobeingrecordedandwillbeavailableforplayback.Pleasebeadvisedthatifyouaskaquestion,itwillbeincludedinbothourliveconferenceandinanyfutureuseofthisrecording.
Finally,wewouldliketomakeyouawareofthefollowingupcomingYUMinvestorevents.Ourthird-quarterearningswillbereleasedonTuesday,October6.
Andwiththat,I'dliketoturnthecallovertoMr.GregCreed.
GregCreed (CEO):
Thankyou,Steve,andgoodmorningeveryone.Asyousawinourreleaseyesterday,EPSinthesecondquarter,whilebelowprioryear,exceededouroriginalexpectations.Iamencouragedbytheprogresswehavemadeandhaveeveryreasontobelievewewilldeliverastrongsecondhalfandfull-yearEPSofatleast10%.
Overall,Iwouldsummarizeoursecond-quarterperformanceasverysimilartoourfirst-quarterresults.TacoBellisfiringonallcylinders.KFCdeliveredanothersolidquarter.Chinacontinuestoimprove.Andwhilewearemakingprogress,thereisstillmuchworktobedoneatPizzaHut.
Let'sstarttoday'sdiscussionwithChina.Same-storesalescontinuedtoshowsteadybutslowerthanexpectedprogress.Thisquarter's10%declinemarkedanimprovementfromthe12%declinelastquarterdespiteamoredifficultoverlap.Thereisnodoubtinmymindthatwewillmakeafullrecoveryoverthelongtermandreturntohistoricaverageunitvolumes.
WehavethetwostrongestbrandsinChinabyawidemarginbut,frankly,therecoveryistakinglongerthanwewouldlike.Weneedtobemoreaggressive,moreinnovativeandmuchmoredisruptivetostepchangethebusiness.IhavechallengedtheChinateamtodoallthesethingswithasenseofurgencybecauseweknowthat,whenwestepupourperformanceinChina,ourbrandsperform.
Sotobeclear,weare100%committedtonotonlyrecoveringbutgrowingourunitvolumesinChina.Withoverallcustomermetricstrendingup,weknowwecanachievethis.Wearesharpeningourcommunicationsandbringingnewexcitementtoourmenu.We'velearnedfromexperiencethatwemustinnovateourwaytorecovery,andthat'sjustwhatwearegoingtodo.
Tothispoint,inthesecondquarter,welaunchedthefirstoftwomenurevampsatKFC.Thisconsistedofeightnewproductsfocusedonlunchanddinner.InadditiontothetraditionalKFCofferings,thisrevampincludedproductsaimedatconsumersinterestedinhealthieralternativessuchasherbalteaandseafood.
Wealsorecentlylaunchedoursecondmenurevampfocusedonbreakfast.WeknowbreakfastisanunderdevelopeddaypartforusinChina,comprisingabout7%ofsales.Thesetwomenurevampsprovidenewproductsthroughoutthedayandgiveusaone-twopunchofinnovationweknowourcustomerswilllove.
CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1
©2014TheStreet,Inc.Al l R ightsReserved Page3of21
Additionally,wecontinuetorolloutourpremiumcoffee.Asofquarterend,weofferedupcoffeeinover2,000stores,providinganincrementalsaleslistofabout1pointforthestoresofferingcoffee.Thekeytosuccessinthisbusinessistogrowexistingorcreatenewsaleslayerstobuildon.Weareexcitedthatpremiumcoffeeisalreadydrivingsalesandprofitswhilegivingusanotherplatformtogrowfromgoingforward.
We'realsomakingprogresswithdigitalmarketingandouronlinedeliveryplatform.WebelievetheseinitiativesmakeKFCevenmorecontemporary,maintainingahighdegreeofrelevancetotheChineseconsumer.
Inshort,theyKFCbusinesswearebuildingbackwillbebasedonnewproductinnovationandbalancednicelywitheverydayvalueanchors.WearecontinuingdownthepathtomakeKFCevenmoreyouthfulandcontemporary.AllofthisispartofmakingChina'snumberoneforeignbrandevenmorerelevantgoingforwardinanincreasinglycompetitivemarket.
AtpeakofourcasualdininginChina,wecontinuetoexpandunitsatahighpacewithgreatreturns.Same-storesalesdeclined4%inthequarter,butthismarkedanimprovementfromourfirst-quarterperformanceandthebrandispositionedforastrongsecondhalf.Wecontinuetoleveragetheassetthroughoutthedaywiththerolloutofbreakfastandourexpansionintolate-night.
WearealsoexcitedaboutPizzaHutpremiumserviceofferingwherewehavenearly300unitsinChina.Anywayyoulookatit,PizzaHutinChinahasalongrunwayforgrowthahead.
Inconclusion,we'remakingcontinuedprogressinChinaandweremainbullishonourlong-termprospectsthere.Withcashpaybacksofaboutthreeyears,we'reconfidentlyinvestinginnewunitexpansion.Wehaveleadingbrandsinanenviablecompetitivepositionintheworld'sfastest-growingeconomy.Weexpecttoopen700newunitsinChinathisyearandbelievewecansubstantiallyexpandourfootprintovertime.
MovingontoourKFCdivision,Iampleasedtoreportthedivisioncontinuedtoproducesolidresults.Same-storesalesgrew3%andthedivisionopened122newinternationalrestaurantsin39countries.Nearly75%ofthesenewrestaurantswereopenedinemergingmarkets.
IamparticularlypleasedwiththeimpressivegrowthwecontinuetoseeoutofRussia,wheresame-storesalesgrew14%.ItraveledtoRussiainMay,andIhavetotellyouthisisoneofthemostimpressiveteamswehaveanywhereintheworld.Theircombinationofbrandpositioning,operationalexcellenceandproductinnovationgivesmeconfidencethatwewillcontinuetowininthisimportantmarket.
Indevelopedmarkets,theUKandAustraliaonceagainpostedimpressiveresultswithexcellentsame-storesalesgrowth.ThisisevidencethatourKFCbrandcandeliverremarkableresultsinbothemergingaswellasdevelopedmarkets.
Ibelievewecanapplythesamestrategysuchasbreakthroughproductinnovation,compellingvalueandworld-classoperations,whicharepropellingthesebusinessestootherdevelopedmarkets.JustthinkhowourresultswouldbetransformedifwecouldachieveAustralia's2.3millionaverageunitvolumesinallofourmarkets.
NowturningtothePizzaHutdivision,same-storesaleswereeveninthequarterbuttrendsintheUSsalesimprovedacrossthequarter.Wecomplementedourinnovationfocuswithcompellingvalueofferingssuchasanymediumpairsfor$6.99,andthe$12.99BigDipperpizza,whichprovidedmomentum.
Alsocontinuetomakestridesarounddigital--arounddrivingmoredigitalsales.Forexample,ourmeal
CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1
©2014TheStreet,Inc.Al l R ightsReserved Page4of21
replacementdigitalorderswere42%,up10percentagepointsfromthesecondquarterof2014.Aswediscussedlastquarter,weareworkingtoattractnewmillennialcustomerswithourFlavorofNowmenuwhilealsoprovidingourloyalmainstreamcustomerswiththeirfavorites.
IfirmlybelievePizzaHuthasenormouspotentialthatrecentresultsdonotreflect.Weareintentlyworkingtobecomemorecompetitive.Turningaroundtheseresultswillnothappenovernight,butthroughourfocusonvalue,ourassets,digitalandmessaging,wearerelentlesslyworkingonrealizingthefullpotentialofourbrand.WeareencouragedthatPizzaHutInternationalcontinuestodevelopatahighrateandweexpectrecordinternationalexpansionthisyear,layingthegroundworkforfuturegrowth.
Lastbutnotleast,TacoBell.Iamverypleasedwiththeresultsoutofthedivisionthisquarter.Same-storesalesgrew6%,operatingprofitincreased29%,andweopened58newrestaurants.
KeepinmindwelaunchedbreakfastatTacoBellinthesecondquarterof2014,sothisMarksthefirstquarterwearelappingbreakfast.Withbreakfastat7%ofmix,restaurantmarginexceeding20%andaflourishinginnovationpipeline,Iamconfidentthatwewillseecontinuedpositivemomentumgoingforward.
TacoBell'sgoalistobeAmerica'sfavoritemillennialbrandandwearemakingsubstantialstridestodeliveronthataspiration.Forexample,wejustannouncedweareexpandingourdeliverytestingwithDoorDashinselectlocations.I'mdelightedwiththestronginitialtestresults.AndthisisjustanotherexampleofTacoBellprovingitisonthecuttingedgeofQSR.
TacoBellInternationalcontinuedtobuildawarenessandimproveitseconomicmodel.Same-storesalesgrew7%inthequarterwithparticularlystrongperformanceinLatinAmericaandCanada.Wehavenowopened80newrestaurantsthisyear,includingfourwithopenkitchenformats.We'restillinthefirstinningsofinternationalexpansionforTacoBell,butIknowthatthisonedaywillbecomeourthirdglobalbrand.
Soinconclusion,wehavemultipleopportunitiesforgrowthacrosseachYUMdivision.WearemakingcontinuedprogressinChina.TacoBellisgoingfromstrengthtostrength.KFCcontinuestobuildonitsmomentumandPizzaHutisinturnaroundmode.
Icouldnotbemorethrilledtoleadthiscompanyintonextphaseofgrowth.Ourbrandbuildingagendaledbyconsumerinsightsisunderwayanddrivingourbrandandproductpositioning.
AsImentionedlastcall,werecentlyacquiredKaleidaLabtohelpelevatethisagenda.I'mespeciallywithhowKaleidahasintegratingthisthinkingintoeachbrandtoimproveourinside-drivenmarketing.
I'malsopleasedthePizzaHutteamhasaddedexpertiseinbigdataanalytics.Thisisallowingthebrandtosegmentcustomersinwayswe'venotdonebeforethatshouldleadtomoreeffectivemarketinggoingforward.AndintrueYUMfashion,weareplanningtospreadthisknow-howthroughouttheorganization.
Sinceassumingmycurrentrole,Ihavebeenontheroadvisitingmanyofourinternationalmarkets.TosayIlikewhatIhaveseenwouldbeanunderstatement.I'vewalkedawayfromeachvisitgratefulthatIhaveinheritedsuchastrongbusinesswithgreatfranchisepartners,fantasticleaders,andthepotentialforenormousgrowth.
Ofcourse,everywhereIgo,Iseeopportunitiestoimproveourcompany.ButI'mconfidentthatourbrandbuildingfocuscombinedwiththetechnology,innovation,marketing,andoperationeffortsunderwaywillhelpunlockthispotential.
Now,someofyoumaywanttoasktodayaboutourviewsaroundcorporatestructuringrelatedtoour
CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1
©2014TheStreet,Inc.Al l R ightsReserved Page5of21
Chinadivision,includingashareholdersuggestionthatwaswell-publicizedthisquarter.Wedon'tplantodiscussthatanddistractfromoursecond-quarterresults.Butwewantyoutoknowthis.
TheYUMBoardofDirectorsregularlyreviewstrategicoptionstooptimizinglong-termshareholdervalue,includingthoseinvolvingcorporatestructure.Weroutinelydialoguewithshareholders,listentotheirideasandthoroughlyevaluatethosewhichmaybeinourshareholders'bestinterests.
Inanyevent,ourtoppriorityistogetourChinabusinessbackontrackandwearemakingsteadyprogress,asevidencedbyourfirstandsecondquarterresults.Aswehavediscussed,weexpecttohaveastrongsecondhalftheyearbasedoncontinuedprogressinChinaandfullyexpectYUMtodeliveratleast10%EPSgrowthin2015.
Insummary,weareinauniquepositionatYUMwiththreedistinctbrandsthatwewillstrengthenandgrowintothreeiconicglobalbrandsthatpeopletrustandchampion.Weremainfocusedonthethreekeystodrivingshareholdervalue--same-storesalesgrowth,newunitdevelopment,andgeneratinghighreturnsoninvestedcapital.Ibelievethiscombinationofeffortswillenableustoreestablishourtrackrecordofconsistentlydeliveringdouble-digitEPSgrowthin2015andtheyearsahead.
Andwiththat,I'llnowturnthingsovertoPat.
PatGrismer (CFO):
Thankyou,Greg,andgoodmorningeveryone.Today,I'lldiscussoursecond-quarterresultsandshareperspectiveonourfull-yearoutlook.
Forthesecondquarter,asGregmentioned,ourresultswereverysimilartoQ1.Earningspershare,excludingspecialitems,decreased5%.Thiswassubstantiallybetterthanthedeclinewehadoriginallyestimated.Iampleasedwiththequalityofthisupsideasitwasledbybetter-than-expectedrestaurantmarginsatKFCChinaandoutstandingsalesandmarginperformanceatTacoBell.WiththecontinuedprogressweareexpectinginChina,weremainconfidentthatwewillhaveastrongsecondhalfanddeliveratleast10%EPSgrowththisyear.
ReportedEPSdeclined28%inthequarter.Thisincludesa$68millionnon-cashspecialitemchargerelatedtoourdecisiontosellMexicorealestate,negativelyimpactingreportedEPSby$0.13inthequarter.Thisitemreducedourex-specialtaxratebyapproximately2percentagepoints,benefitingex-specialEPSgrowthby3percentagepointsthisquarter.
NowI'dliketoprovidesomecoloronoursecond-quarterresultsbydivision.InChina,operatingprofitdeclined25%priortoforeigncurrencytranslationledbyasame-storesalesdecreaseof10%,whichwassequentiallybetterthanQ1'sperformancedespiteamorechallenginglap.
Restaurantmarginswere14.6%inaseasonallylowquarter.Thiswas2.2percentagepointslowerthanlastyear'sQ2,yetitwasasignificantimprovementfromthe4.5percentagepointdeclinewesawinthefirstquarter,demonstratingcontinuedprogress.Themargindeclineresultedfromtransactiondeleverageandinflation,partiallyoffsetbypricingandlaborproductivity.
OurteaminChinacontinuedtodoanoutstandingjobofdrivingrestaurantoperatingefficiencythroughimprovedstorelevelsalesforecastingandbetterlaborscheduling.Importantly,theyaccomplishedthiswhilemaintainingourhighstandardsofcustomerservice.ThiscontinuestobolsterourbeliefthatChinadivisionrestaurantmarginswillreturntothe20%rangeassalesrecoverandthatthisrecoveryhasthepotentialtounlockapproximately$600millionofoperatingprofitfromourexistingstorebasealone.
Inadditiontotheprofitleveragewewillrealizeassalesrecover,wecontinuetoopennewunitswithconfidence,whichisakeydriveroffuturegrowth.Weopened80newrestaurantsinthesecondquarter,
CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1
©2014TheStreet,Inc.Al l R ightsReserved Page6of21
bringingourfirst-halftotalto251newunitsinChina.Wecontinuetoshiftournewunitdevelopmenttowardhigherreturninvestmentsaswearemoreselectiveintier1andtier2citiesandcontinuetoupweightdevelopmentintier3throughtier6cities.
Similarly,wecontinuetoshiftmoreofournewunitdevelopmenttoPizzaHutcasualdining,whichgeneratesourstrongestreturnsinChina.Basedontheresultsweareseeinginthesenewrestaurants,weareconfidentthattheseinvestmentswillyieldstrongreturnsandweremainontargettoopen700newrestaurantsthisyear.
NowmovingtoourKFCglobaldivision,whichpostedanothersolidquarterwithgrowthinsales,marginandprofit.Systemsalesgrowthwasespeciallystronginemergingmarkets,up12%beforeforeignexchange,ledbyRussia,AfricaandCentralandEasternEurope.Internationaldevelopedmarketsalsodeliveredsolidsystemssalesgrowth,up5%beforeforeignexchange,ledbyAustralia,UKandWesternEurope.AndKFCintheUSdelivereditsfourthconsecutivequarterofsolidsame-storesalesgrowthwithcompsup3%.
Divisionoperatingmarginincreased1.3percentagepointsinthequarterto21.9%,drivenbysame-storesalesgrowth,franchise-lednewunitdevelopment,andstrongerrestaurantlevelmarginsacrosstheboard.AndwhileincreasedadvertisingexpenserelatedtoourongoingUSturnaroundprogramimpactedthedivision'sprofitby2percentagepointsinthequarter,KFCGlobal'soperatingprofitstillgrew10%excludingtheimpactofforeignexchange.Animportantelementofthisisrobustfranchise-ledinternationaldevelopmentasKFCopened122newinternationalrestaurantsinthequarter,andisonpacetosetanewrecordthisyear,opening700newinternationalrestaurantsoutsideofChinaandIndia,includingarecentnewmarketopeninginMyanmar,demonstratingthestrengthandbroadappealofthisiconicglobalbrand.
Same-storesaleswereevenforourPizzaHutglobaldivisionwithgrowthof2%inemergingmarketsand1%intheUSandadeclineof2%ininternationaldevelopedmarkets.Divisionoperatingmargindecreased90basispointsto22.6%asstrategicgrowthininvestmentsininternationalG&Aoffsetimprovedrestaurantmargins,whichbenefitedfromlowercheesecosts.
Whilesaleswereevenwithlastyearandshortofexpectations,weareconfidentwearemakingtherightinvestmentstoimprovePizzaHut'soverallbrandposition,operations,anddigitalexperienceglobally.
NewunitdevelopmentcontinuestobeabrightspotforPizzaHutasthedivisionopened101newrestaurantsinthesecondquarter,including66newinternationalrestaurants.Franchiseesopened92%ofthesenewinternationalunits,underscoringtheirconfidenceinthebrand.Weareconfidentwewillhaveanotheryearofrecorddevelopmentwithabout550newinternationalrestaurantsin2015.
Andfinally,TacoBellpostedanotherexceptionallystrongquarterwithsame-storesalesgrowthof6%andrestaurantmarginof23%,whichismorethan5pointsbetterthanQ2oflastyear.Asaresult,operatingmarginincreased4.7percentagepointsto29.5%,liftingoperatingprofitby29%versusprioryear.
WecouldnotbemorepleasedwiththeperformanceofourTacoBellteamandtheircontinuedfocusoncategoryleadinginnovationacrosseveryaspectoftheirbusiness.Thisobviouslyincludesournewbreakfastlayer,whichincreasedtoaveryhealthy7%salesmix.
Additionally,weopened58newrestaurantsinthesecondquarterwithnearly90%openedbyfranchiseesandarewellonourwaytoopeningatleast150netnewrestaurantsthisyearwithinternationaldevelopmentacceleratingintheyearstocome.Anywayyoulookatit,TacoBellisapowerhousebrandwithoutstandingmomentum.
CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1
©2014TheStreet,Inc.Al l R ightsReserved Page7of21
NowI'dliketoshiftgearsandtalkaboutourfull-yearoutlook.WefullyexpecttodeliverEPSgrowthofatleast10%thisyear.Givenourfirst-halfEPSdeclineof7%,wewillneednearly30%EPSgrowthinthesecondhalfoftheyeartoreachthistarget.Webelievethisisachievable.
ThekeytothisEPSbouncebackisasalesrecoveryinChina,andweareconfidentwewilldeliversolidlypositivesalesnumbersgoingforward,especiallyaswelapthesupplierincidentfromJuly20oflastyear.Iamextremelyconfidentthat,assalesreturn,profitswillflowthroughnicely,giventhecontinuouscostmanagementinitiativeswe'veseenthroughourfirsthalf.Withfirst-halfChinarestaurantmarginalreadyover16%,wenowexpectfull-yearrestaurantmargintobecloserto17%.Asareminder,60%ofChina'soperatingprofithistoricallyisearnedinthesecondhalfoftheirfiscalyear,whichincludessevenof12months.
OutsideofChina,weexpectKFCtohaveanothersolidyearandPizzaHuttofallwellshortofitsongoinggrowthtargetdespitetheimprovingresultsweexpectbalanceofyear.ForTacoBell,althoughweexpectsolidperformancebalanceofyear,weexpectmuchmoremoderateprofitgrowthasweoverlapstrongersalesandmarginperformancefromlastyear.
Idowanttopointoutforeigncurrencytranslationremainsastrongheadwindaswecontinuetoexpectthistoimpactfull-yearEPSbyabout5percentagepoints.However,thisimpactisincludedinourEPSforecastofatleast10%growth.Tobeclear,thisexposureisoneofprofittranslationanddoesnotimpactourabilitytopriceourproductscompetitivelyaroundtheworld.
So,ifyoustepbackandthinkabouthow2015isdeveloping,it'sveryconsistentwithourexpectationcomingintotheyear,whichisanegativefirsthalffollowedbyaverystrongsecondhalf,drivenbyChina.Andimportantly,wecontinuetoinvestbehindthebusiness,opening2,100newinternationalrestaurantsin2015.OutsideofChina,approximately90%ofournewunitswillbeopenedbyourfranchisepartners.
Soletmewrapthingsup.Wearepleasedthatoursecond-quarterresultswerestrongerthanexpectedduetorobustperformanceatTacoBellaswellasthecontinuedrecoveryinChina.Weexpectatleast10%EPSgrowththisyearwithaverystrongsecondhalf.
Andwiththat,I'llopenitupthelinetoQ&A.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions).
DavidTarantino,RWBaird.
DavidT arantino (Analyst-RobertW.Baird):
Hi,goodmorning.MyquestionisontheChinasalesrecovery.AndIguessthefirstpartishowwouldyouframeupyourcurrentexpectationforcompsfortheyearnow?Ithinklastquarteryouwerepointingtowardsthelowendofyour3%to7%guidance.SoIjustwantedtounderstandwhereyouarethinkingnow.
Andthenspecifically,youmentionedthattherecoveryisgoingIguessslowerthanexpected.Socouldyoutalkaboutmaybewhyyouthinkthat'sthecaseandwhetheryouthinkit'smacro-relatedormorespecifictothebrandmetricsthatyouareseeing.
PatGrismer (CFO):
ThisisPat.I'lltakethefirstpartofyourquestionandGregwillresponsetothesecondpart.
CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1
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Soastoourexpectationsforfull-yearsame-storesalesgrowthinChina,atthisstageoftheyear,itstillremainsdifficulttocall.Wewillcertainlykeepyouupdatedastheyearprogresses,butcertainlybasedoneverythingwe'veseentodateandourforecastbalancefortheyear,full-yearsame-storesalesgrowthinChinacouldbeinthelowsingledigits.
WedoexpectbothKFCandPizzaHutsame-storesalesgrowthtoturnstronglypositiveaswelaptheinitialimpactoftheOSIpublicitylaterthismonth.ThiswillfuelastrongsecondhalfforChinaandenableustodeliverEPSgrowthofatleast10%fortheyear.
Iwouldalsopointoutthat,fromaprofitperspective,stronger-than-expectedmarginperformancehasoffsettheimpactofalower-than-expectedsalesrecoveryinChina,andweexpectthiswillcontinuebalanceofyear,therebypreservingouroverallprofitoutlook.
GregCreed (CEO):
Letmeanswerthesecondpartofthatquestion.Ithinkthegoodnewsisthatsalesarerecovering.Wewentfromminus12%tominus10%despiteamoredifficultlapofplus15%.Thegoodnewsisthattheconsumermetricsareimproving,trendingintherightdirection.
Asalways,theseareneverlinear,unfortunately,butwedoknowthatwhenwecomparethistopreviousrecoverieswe'regoingintherightdirection,makingprogressacrosstheboard.SoIfeelgoodandweremainobviouslybullishonChina.
WecontinuetoinvestinChina.AndIthinkasyouknow,thesecustomermetricsaretheharbingeroffuturesalesperformance.SoIthink,withallthatsaid,weremainverybullishandconfidentandcontinuetoinvest.
Operator :
JohnIvankoe,JPMorgan.
JohnIvankoe (Analyst-JPMorgan):
Thankyouverymuch.Afollow-uponthatandmaybeanadditionaswell.CouldyoudiagnosewhyspecificallyyouthinkChinawasbelowyourownexpectationsinthesecondquarter,especiallygiventhecustomermetricswhichhavebeentrendingupthroughouttheyear?
Andsecondly,itisclearthatwithitbeingalittlebitbelowyourexpectationsandperhapsatweakdowninthecompsinChinafor2015,itisinterestingtojuxtaposethatwiththeChinamarginnumbersgoingup.Sojustaphilosophicalquestioniswhynotreinvestsomeofthatmargintoregainthetraffic?Orinotherwords,howconfidentareyouthatthefocusonmarginisnotareasoninandofitselfwhycompsmightbeslightlybelowexpectations?
GregCreed (CEO):
Ithinktheslower-than-expectedrecovery--rememberwe'vehadtosafetyissueswhichwe'veneverhadbefore.Wehaveneverbeenonthemodeltwosafetyissues,andthere'sobviouslysomeslownessinrecoveringthat.
Buttherehasbeennoimpactonourcustomermetricsaswemeasurefromanoperatingpointofview,andsoIthink,inthatsense,wearegoingtocontinuetopushaggressively.Weneedtobemoreinnovative.AndthewayIlookatitiswithwherewearetoday,Pathasgivenyoutherightguidance,butwe'vestillgotsixmonthsoftheyeartogo.
Andrightnow,whatIamtryingtodoisaggressivelybringoutsideideasfromYUMintoChina.Aswesaid
CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1
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earlier,we'vegotreallyanumberofourKFCbusinessesonfire,whetherthat'sRussia,theUK,Australia,orSouthAfrica,andIthinkthere'sanumberofproductinnovations,there'sanumberofvalueplaysthatthosemarketshaveplayed.
AndI'mveryconfidentthatwecanbringthosetobear.Andthatsaid,IstillexpectastrongsecondhalfinChina.Saleswillgopositive,wewillcontinuetomakeprogressandIthinkwecanbringthepowerofYUMtobearbytakingtheseideasfromthosepowerhousecountriesandhaveChinatestthose.
PatGrismer (CFO):
ThisisPat.I'lljustaddacoupleofothercommentswhichisthatwefeelverygoodabouttheproductivitygaintheteamhasmadeinChina.Webelievethattheyaresustainable,asGregmentioned.Theyhavenotimpactedcustomerservicelevels.
Andfranklywhatthey'veeffectivelydoneisstrengthenunderlyingunitleveleconomicswhichnotonlygivesuscontinuedconfidencetoinvestattheratethatwearebehindnewunitdevelopmentbutalsoreinforcesourbeliefthat,assalesrecover,thatwewillseesignificantprofitleverageinthebusiness.
GregCreed (CEO):
IfIwastomakeonelastcomment,Iwouldsayweneedtobalancevaluewithinnovation.There'snodoubtinnovatingourwayoutofthisisthebestwaytodoit,andthat'swhatwe'regoingtostayfocusedon.
Operator :
JohnGlass,MorganStanley.
JohnGlass (Analyst-MorganStanley):
Thanks.Goodmorning.First,onChinacomps,hastherecentdeclineintheChinesestockmarkethadanyimpactonsales?Doyounoticeacorrelationthereatall?
PatGrismer (CFO):
Wedon't.ThisisPat.Wedon'tseeacorrelation.Wethinkactuallyaverysmallpercentageofcustomershavebeenimpactedbythat.Astowhetherornotithasimpactedbroaderconsumerconfidence,wehavenoreasontobelieveatthisstagethatthatisthecase.
JohnGlass (Analyst-MorganStanley):
Greg,ifIcouldaskonemore.YoudidopenupthatyoutalkedaboutthepossibilityofthisChinaspinnotion.Iknowyoudon'twantittobeadistraction.DoyouviewthatasadistractioninandofitselffortherecoveryofChinasothatyoumightwanttowaituntilChinarecoversbeforeentertainingthatidea?
GregCreed (CEO):
Ithink,asIsaidinmypreparedremarks,wedon'twanttotalkaboutit.Obviously,wereviewourshareholderproposals.ButIcanassureyoutheChinateamisfocusedononething.TheirnumberonepriorityandmynumberonepriorityisgettingChinasalesbackintosortofstrongergrowth.
Operator :
DianeGeissler,CLSA.
DianeGeissler (Analyst-CLSALimited):
CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
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Goodmorning.Isitsafetoassumethatyoukeptyourguidanceforthefullyearatatleast10%EPSgrowthbecauseoftheuncertaintyaroundtheChinacomp?Isthatthebiggestholdbackdespitethefactthatthemarginissomuchbetterthanyouexpected?AndthenIalso--maybeI'llletyouanswerthatfirst.
PatGrismer (CFO):
ThisisPat.Happytorespondtothatquestion.Ithinkwhatyouareimplyingisthatmaybethefull-yearguidanceisconservative.AndIwouldsayabsolutelynot.AndIdowanttoputitinperspectivebecauseyouhavetobearinmindthatwearethemidpointofouryear.
EPSisdown7%andasIsaidinmypreparedremarksearlier,toachievefull-yeargrowthofatleast10%,EPSneedstogrownearly30%inthesecondhalfoftheyear.AndIdon'tthinkofthatasanoverlyconservativenumber.
Obviously,it'sheavilydependentontheresultsofourChinadivisionwhereprofitsweredownabout30%inthefirsthalfoftheyear.AndinorderforChinatodeliveronitsexpectedshareofsecond-halfEPSgrowth,second-halfprofitsthereneedtobemorethandoublewhattheywerelastyear.
ButweareconfidentChinacandeliverthisresult,butwith60%oftheirprofitsbeinggeneratedinthesecondhalf,Idon'tthinkit'sprudenttoadoptamoreaggressivestanceandleaninonthis.
Additionally,asImentioned,foreign-exchangeheadwindsaremuchstrongerthanwehadoriginallyestimated,butthisisfactoredintoouroverallEPSguidance.SoIjustwanttomakeveryclearweexpecttohaveastrongsecondhalfbasedonthecontinuedprogressinChinaandwefullyexpecttodeliveratleast10%EPSgrowthfortheyear.
DianeGeissler (Analyst-CLSALimited):
Okay,thankyou.AndthenIwantedtoaskonthecommentsaboutthenewunitmixleaningmoreheavilyonlowertiercitiesandalsointothePizzaHutfranchiseandhomedelivery.
CanyoutalkalittlebitaboutyourdevelopmentexpectationsforthisyearandevenintonextyearintermsofwhatweshouldbethinkingaboutKFCversusPizzaHutorversusPizzaHuthomedeliveryandthenhighertiercitiesversuslowertiercities?Justtryingtoframethatup.
PatGrismer (CFO):
Certainly.AsImentioned,ourcapitalinvestmentfollowsreturns.Sowherewegeneratethehigherreturnsiswherewearedirectingmoreofourcapitalspending.Thathasbeenthecaseforthelastfewyears.
Andjusttoputitinperspective,forthequarter,60%or62%ofKFCnewunitopeningswereintier3andbelowcities.Backin2012,thatnumberwas53%.Soyou'veseenaprettysignificantshiftthere.
AndthenasitrelatestoPizzaHutcasualdiningforthequarter,thatbusinessaccountedfor35%oftotaldivisionnewunitopenings.In2012,thatnumberwas24%.Youcanexpectthosetrendswillcontinuebecause,again,that'swhereweseethestrongerreturnsandourcapitalinvestmentwillfollowthereturns.
I'mnotgoingtogivepreliminaryguidancefor2016asitrelatestoeithernumberofunitsorthemixofunits,butIwilltellyouthatwewillcontinuetodirectmoreofourcapitalinvestmentmoneytowardthehigherreturnopportunities,whichatthemomentarewithPizzaHutcasualdiningandfortheKFCbusinessinthelowertiercities.
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Operator :
DavidPalmer,RBCCapitalMarkets.
DavidPalmer (Analyst-RBCCapitalMarkets):
Thanks.CouldwetalkalittlebitaboutthemarketingandmenunewsfromChina?Inparticular,howdothinkthatnewmenuisperformingatKFCChina?Andanydatapointswouldbehelpfulwiththeimpacttoyourmarketing,evenaswelookinto3Q.Thanks.
GregCreed (CEO):
Ithink,aswesaid,obviouslywesawsequentialimprovementfromminus12%tominus10%.Thenewmenuitemsareaccountingforabout15%ofsales,sotheycertainlyhavegottractionwiththecustomers.Ithinkthat'salsoanothergooddatapoint.AndIthinktheconsumermetricscontinuetoshowimprovement.
SoIthink,ifyoulookatourcontinuousimprovement,youlookatthepercentageofmixfromthesenewitemsandyoulookatthecontinuedimprovementinourconsumermetrics.AndIthinkthatallbodeswell,asPathassaid,thatwewillhaveastrongsecondhalf,wewillgointopositivesame-storesalesgrowth.AndIthinkIremaincompletelyconfident.
Now,canwetakeideasfromaroundtheworldbetweennowandtheendoftheyearandtestthose?Yes.DoIstillhaveasenseofurgency?Yes.Couldwedothingsmorespeedy?Yes.Soasyouprobablyexpect,that'soccurring.That'swhyweareatthehalf-yearmarkandthere'sstillplentyoftimeforustostillevolveandtinkerwiththecalendarbetweennowandtheendoftheyear.
DavidPalmer (Analyst-RBCCapitalMarkets):
Isthereanythingspecificthatyoulearnedthatyouthinkwarrantstweakingthatyoucouldcalloutfromfirsthalf,thingsthatworkedanddidn'twork?
GregCreed (CEO):
TheotherwayIlookatit,therearesomegreatproductsoutsideofChinathataredoingverywellwhetherit'stheUK,Australia,SouthAfricaorRussia.SowhatIhavedoneisIhaveputtheChinateamobviouslyindirectcontactwiththosebusinesses.AndIknowthatanumberofthoseideasarecurrentlybeingconcepttestedinChinaaswespeak.
Soit'sbeenmorethatI'veseensomereallypowerfulideasoutsideofChinathatIthinkhaverelevanceinChina,andthenIreallyaskedtheChinateamtoconcepttestthose.Andifnecessary,wewillmakechangestothecalendarinthebackhalfoftheyear.
DavidPalmer (Analyst-RBCCapitalMarkets):
Thankyou.
Operator :
JosephBuckley,BankofAmerica.
JosephBuckley(Analyst-BankofAmerica-MerrillLynch):
Thankyou.AcoupleofquestionsonChinaaswell.Doyouthinkthattheslower-than-expectedsalestrendisstillrelatedtotheShanghaiHusiincident,ordoyouthinkit'srelatedtobroaderthingshappeninginChina,whethercompetitivelyorjustsomewhatslowergrowth?
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PatGrismer (CFO):
ThisisPat.Ithinkitisfairtosaythatwhatthebrandorthebrandsarerecoveringfromistheincidentfromlastyear,becausethat'swhathadthedramaticimpacttosalestartinginthemiddleoflastyear.Andwearecontinuingtorecoverfromthat.
Ithinkit'salsofairtosay,aswehavesaidonpreviouscallsandatourinvestorconference,thattheenvironmentinChinahaschangedintermsofbecomingmorecompetitive,andsoconsumersdohavemorechoice.Thathasraisedthebaronustoinnovatemorethanwehaveinthepast,tokeeppacewithachangingChineseconsumer,andtocontinuetomoveevenmoreaggressivelyonthingslikedigital.SoIthinkitisfairtosaythattheenvironmenthaschanged,butthatwearechanginginresponsetothat.
GregCreed (CEO):
IfIcanbuildonthat,Joe,wehavemarketsthataremuchmorecompetitiveinChinathatwecompeteinandwecompeteverysuccessfullyin.Again,wecanuseYUMnow,haveasharewherewe'vebeenverysuccessfulinmarketsthathaveevenprobablytwoorthreetimestheamountofcompetition.WecanbringthatknowhowtobeartohelptheChinateamastheyobviouslymovetomorerapidlyimprovethesellerperformance.
JosephBuckley(Analyst-BankofAmerica-MerrillLynch):
DoyouhaveasenseofwhattheChineserestaurantmarketasawholeisdoing?Hasthatslowedsignificantlyalso?
GregCreed (CEO):
Idon't.That's--no,Idon't.
PatGrismer (CFO):
Ithinkgenerallytheeconomyisgrowingataslowerpace,soit'sfairtosaythatandthatthatisputtingpressureonretailgenerally.ButIthinkwealsoneedtobearinmindthatwithGDPgrowingthisyearataround7%,itremainsthefastest-growinglargeeconomyintheworld.
Operator :
BrianBittner,Oppenheimer.
BrianBittner (Analyst-Oppenheimer):
Thanksverymuch.MyquestionisIthinkI'mjustalittleconfusedonwhythere'skindofatonechangeinthewayyou'retalkingabouthowsalesaretrackingversusyourexpectations,justbecausetheguidanceforthesecondquarterwasforsequentialimprovement.Youdidthat.
Wehaven'tevenstartedlappingtheJuly20falloffinthebusinessyet.Thatcomesinaweek.Istheresomethingthat'shappened,sayinJunesincethequarterend,that'scausingthetonechangeorwereyourexpectations(technicaldifficulty)significantsequentialimprovementrelativetowhatoccurred?
PatGrismer (CFO):
ThisisPat.Nothingspecificthathaschangedtodrivethat.Justaswestepbackandwelookattheperformanceinthefirsthalfoftheyear,it'sfairtosaythatsame-storesales,whilerecovering,haven'tbeenrecoveringatthepacethatwehadoriginallyanticipated.
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Thankfully,weareseeingthatoffsetthroughimprovedproductivityinthestoresandthosemargingainsarethereforemutingtheprofitimpactofaslower-than-expectedsalesrecovery.
Butmakenomistake.Thesalesrecoveryishappeningnotonlybasedonwhatweseeintermsofsame-storesalesandthefactthatinthesecondquarterwelappedahardercomp,sowegotsequentialimprovementontopoflappingahardercomp,butalsobasedonwhatweseeinourkeyconsumermetrics,which,asGregmentioned,arealeadingindicatorofwheresaleswillgo.
Butwefeltthatitwasimportanttoacknowledgethatsalesareprogressingataslower-than-expectedpace,andthatisfactoredintoourfull-yearEPSguidanceofatleast10%.
GregCreed (CEO):
IthinkIwanttomakesureeveryoneunderstandswestillexpectaverystrongsecondhalfandthatwewilldeliveratleast10%forthefullyear.
BrianBittner (Analyst-Oppenheimer):
Andyoualsomentioned--amIstillherewithyouguys?Youalsomentionedthatsame-storesalesinChinacouldbelowsinglesfortheyear,whichwouldstillimplydouble-digitcompsinthesecondhalf.Istheconfidencebehindthatjustthewaythecoretrendacceleratedfromthefirstorsecondquarter,likeonatwo-andthree-yearbasis?
Isthatwhatultimatelygivesyouthemostconfidenceindouble-digitone-yearcompsinthesecondhalf?
PatGrismer (CFO):
Youarerightthatwedoexpectaverystrongsame-storesalesgrowthinthesecondhalf,particularlyaswelaplastyear'sOSIincident.Andtherearemultipleindicatorsthatsubstantiatethisview,one-year,two-year,three-year,four-yearcompsforKFC.Welookatabsolutetransactionvolumesonade-seasonalizedbasis.
Welookatkeyconsumermetrics,which,again,areallmovingintherightdirection.Soallofthattogethergivingusconfidencethatwe'llgetthesecond-halfbouncebacknecessarytoachievetheprofitgrowthobjectivesinChina,whichunderpinatleast10%EPSgrowthfortheyear.
Operator :
JasonWest,CreditSuisse.
JasonWest (Analyst-CreditSuisse):
Yes,thanksguys.I'mnotsurehowmuchyouarewillingtotalkaboutotherstructuralideas,buttheideaofrecapitalizingthebalancesheethascomeup,particularlygiventhesubstantialfranchiseassetsyouguyshave.I'mjustwonderingifyoucouldgiveyourupdatedthoughtsonthat,particularlyasyoumovetowardssortofthe95%franchisemixoutsideofChina.Doesthatstarttochangeyourthinkingaroundthecapitalstructure?Andthenalsolookingatwhat'shappenedacrosssomeofyourfranchisepeers.Thanks.
PatGrismer (CFO):
ThisisPat.Nochangetoourpolicy,whichistooptimizeourcapitalstructurebasedonwhatwebelieveisinthebestinterestofshareholders,whichistomaintainthatlowinvestment-gradecreditrating.Andsoourpolicyhasn'tchanged.Andnospecificguidanceastowhatthatcapitalstructuremightlooklikewhenwecompletethethree-yearre-franchisingprogramweannouncedinDecember.
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JasonWest (Analyst-CreditSuisse):
Okay.Butevenasamorefranchisedbusiness,youwouldstillliketokeepthatininvestmentgrade?
PatGrismer (CFO):
Welookatourcapitalstructurefromanenterpriseperspective.Wedon'tsegmentourbalancesheetaccordingtoonepartofthebusinessversusanother.Sowehavetobearinmind,inourChinabusiness,wehaveasubstantialequitypresencewithalloftheoperatingleaseswhichfunctionasvirtualdebt,ifyouwill,whichplaysintohowweoptimizeouroverallcapitalstructureforourshareholders.
Operator :
KarenShort,DeutscheBank.
KarenShort (Analyst-DeutscheBank):
JustacoupleofquestionsonPizzaHut.SoIguessyouhavetakensomeaggressivestanceswithyourvaluepositioningmorerecently,butIguessitdoesn'tseemtoberesonatingwiththecustomer.Ormaybeaskedanotherway,doyouthinkit'savalueissue,atrialissue,afrequencyissueoranythingelse?Becauseobviouslyyourpeersaregenerallydoingextremelywell.
GregCreed (CEO):
Thankyouforaskinganon-Chinaquestion.Inallseriousness,yes,ourpeersareclearlyoutperformingus.Ithinkthere'snoonesilverbullettothesolution.Yousawusinthequarterplayinginmorestrongervalue,whichactuallyoverthequarterdidshowimprovementacrossthequarter'sperformance.AndIexpectthattocontinuegoingintothesecondhalftheyear.
Butthisisasortoftotalre-lookwhichiswehavetobe--wehavetohave--assetshavetobeupgraded,wehavetohaveacompellingvalue.Wehavetohavecompellinginnovation.Wehavetodeliverasuperiorexperience.WehavetoimproveoureCommercedigitalexperience.Sothere'salotofworkthat'sgottogetdone.I'mveryconfidentintheteamthat'sinplacetomakethathappen.
We'vebroughtsomenewpeopleontotheteaminPizzaHut,sowehaveinvestedinareaslikedigitalmarketing,foodinnovation,eCommerce.Aswesaidonthecall,we'reactuallyaregettingintobigdataanalyticsandwearereallystartingtoseesomeearlysignsofIthinkthatwillhelpuspositionthebrandbetterandactuallyreallyunderstandwherethebusinesshasgoneto.
Soit'sholistic.We'reonit.We'vebroughtpeopleintoit.I'mverycomfortableandhappywiththeleadershipthatwe'vegotinplacetodeliveronit.Wearenothappywiththeprogress,butwearemakingprogressandIthinkyou'llseeuscontinuetomakemoreprogressastheyearunfolds.
Operator :
JeffreyBernstein,Barclays.
Jef f reyBernstein (Analyst-BarclaysCapital):
Great.Thankyouverymuch.Justunfortunately,IwantedtohitbackonChinaforasecond.Twothings,onejustonthecomp.I'mwondering,asyoulookatitperhapsslightlybelowexpectation,whetheryouseeitmaybeasperformancebymarketordaypartorweekend,weekday.I'mjustwondering.Asyouslicethedown10%whichwecan'tdo,isthereanyparticularareaofconcern?
Andmyotherquestionwasjustbroadlyonthepositioningofthebrand.Ithink,mostrecently,youkindof
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werefocusedalittlebitmoreonpremiumwithpromotionsandwhatnot.I'mjustwonderingwhethertherecentchallengeleadyoutoonceagainmaybebroadenthatout,focusalittlebitmoreonvaluetoretainthatlowerincomeconsumer.Thanks.
PatGrismer (CFO):
ThisisPat.I'llrespondtoyourfirstquestionandGregwilltacklethesecond.First,withrespecttowhatweareseeinginthecompsandwhetherwhenyoulookatvariouswaysofsegmentingitweareseeingmaterialdifferences,theonlythingIwouldhighlightisthatweareseeingstrongerperformanceinourTier1citiesatbothbrands.ItseemsthattheTier1consumersarelessfazedbythesupplierpublicitythistimearound.
AndIwouldsaythat'sespeciallyencouragingbecausethat'swherewehaveahigherconcentrationofstores,andalsofacethestrongestcompetition.So,Ithinkthat'sfurtherevidenceofourbrand'songoingrecoveryandresilience.
Therearesomeregionaleconomiesthataremoredependentonindustrialproductionandtheyarefeelingmorepressurefromslowereconomicgrowthandweareseeingtheeffectsofthatinweakersalesperformanceinthoseregions,particularlyinsomelowertiercities.
Andinresponsetothat,KFChasrecentlylaunchedregionalpromotionswith10RandBBurgertohelpstimulatetraffic.Butthat'stheonlythingthatreallybearsmentioningintermsofanyvariationsincompsacrosstheentiremarket.
GregCreed (CEO):
Justtotalkaboutthepositioning,Ithink,yes,weprobablyhavetofindabetterbalancebetweeninnovationandvalue.
Again,ifIgobacktotheKFCmarketsthatarereallyoutperforming,whetherit'sasIsaidRussia,Australia,SouthAfrica,theUK,whatyouwillseeinthosemarketsiswehavegreatentrypricepoints,wehavegreatvalueformoney,wehavereallychicken-focusedinnovation,andwearereallydoingdisruptivethingsinthemarketplace.
So,Ithink--andthenwehave--Iguessitalsogoeswithoutsayingwehavegreatleadersrunningthosebusinessesaswell.Ithinkthatwearegoingtohavetofindmorebalance,butI'mveryconfidentthatwecanfindthatbalanceandI'mveryconfidentthatwehavegottheideaandtheresourcesaroundYUMinordertoaccomplishthat.
Operator :
SaraSenatore,Bernstein.
SaraSenatore (Analyst-Bernstein):
Thankyou.Ihavetwofollow-upquestions.OneisaboutPizzaHutandone,nottobelaborthepoint,alsoaboutChina.SoonPizzaHut,couldyoujusttalkaboutthedevelopedmarketsoutsidetheUS,andinparticulardiagnosemaybe?Aretheissuesthesameoutthere?Andisitstepped-upcompetition,digital,value,marketing?JustsoIkindofunderstandbecauseitfeelslikebroadlythebrandsortofsteppedbackalittlebitinthelastcoupleofquarters.
Andthenthefollow-uponChinaisreallyoneabouttiming.AndIguessyoulaidoutsortof$600millioninEBITDA,whichisabignumber,butit'slessimpressiveifittakesfiveyearstomaterialize.Andsodoyouhaveinternallyasenseofatwhatpointyoudecide,okay,thisbusinessmaynotgobacktopeak
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volumes?Andlikewisehowlongdoyoudecide,whenyou'relookingatstrategicalternatives,howlongdoyougiveyourselvestomakedecisions?I'mjusttryingtoframetimingfrombothfundamentalandstrategicstandpoints.
GregCreed (CEO):
Letmeanswerthefirstpartofthequestion.IthinkwithourPizzaHutbusiness,astrongUShelpsastrongglobalbusiness.There'snodoubtaboutthat.So,havingsaidthat,Ithink,outsideoftheUnitedStates,ourassetsareinmuchbettershapethantheyareintheUnitedStates.
ButIdothinkintermsofthingslikevalue,eCommerceanddigital,weneedtoaccelerateourprogressinthoseareas.So,Ithinkourassetsareingreatshape.Ithinkourfoodqualityisingreatshape.Ithinkthefoodinnovationisingreatshape,butthere'snodoubtthatIthinkvalueaswellasthewholecustomerexperienceineCommerceareareasthatweneedtomakesureweremaincompetitiveinasleadersinthoseplaces.
PatGrismer (CFO):
ThisisPat.I'llrespondtoyoursecondquestionastothetimingaroundrecoveringthe$600millioninEBITDA.Wehaveneverbeenspecificastoatimeframeforthat.WhatIwanttoletyouknow,however,isweareabsolutelyconfidentthatthebusinesswillreturntothose2012peakaverageunitvolumes.Andweareabsolutelyconfident,basedontheprogresstheteamhasmadetoimproveunitleveleconomicsthat,asthesalesrecover,therewillbesignificantprofitflow-throughonthesales.
Astothetimingofthat,it'stoughtocall.AndI'mnotgoingtomakeapredictionbasedonthat,noramIgoingtotalkabouthowthatmayplayintothetimingofanystructuralmoves,becauseourtoppriority,regardlessofwhatwedostructurally,istobringthatbusinessbackintermsofsalesandprofits.Andsothat'swhythefocusis,asGregmentionedearlier,onmoredisruptiveinnovation,continuedstrongvalueoffers,allthethingsthatweneedtodotomakeourbrandpositionsevenstrongerinanenvironmentthathas,overtime,becomemorecompetitive.
Operator :
KeithSiegner,UBS.
KeithSiegner (Analyst-UBS):
Pat,I'mgoingtoapologizebutI'mgoingtofollowupalittlebitonthat.Look,marginsinChinahavecomeinmuchbetterthanyouexpected.Youreiteratethe20%--theconfidenceinthe20%long-term.Wetalkaboutthe$600millionandit'snotsurewhenthere'stiming,orwhenthetimingwouldhappen.
Butletmeaskitadifferentway.Giventhesuccessintheproductivityinitiativesandwhatyou'veachievedonthemargins,itwouldseemtomethatyoushouldbeabletorecoverthe20%longbeforeyourecoverthepeakAUVs.Isthereanyreasonwhythatwouldn'tbethecase?
PatGrismer (CFO):
No,Ithinkthat'safairstatement,becausetheunderlyingeconomicshavegottenstronger.Soasthesalescomeback,theflow-throughwillbeatamuchhigherrate.
KeithSiegner (Analyst-UBS):
That'sitforme.Thanks.
Operator :
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KarenHolthouse,GoldmanSachs.
KarenHolthouse (Analyst-GoldmanSachs):
Hi.I'mactuallygoingtonotaskaquestionaboutChina,butinsteadlookattheTacoBellbusinessintheUSwheretwo-yeartrendscontinuetoaccelerate.Justintermsofthemovingpiecesofthat,couldyouhelpusunderstandhowmuchofthatmightbecomingfromstillcontinuedgrowthinthebreakfastdaypartversusvalueversusanyotherspecificproductinnovation?
GregCreed (CEO):
IthinkthegoodnewsistheTacoBellperformanceintheUSisholistic,whichis--ithasgreatentrypricepointvalue.Theyhavehadgrowthinbreakfastfrom6%to7%mix,whichIthinktakesittolike$90,000.IntheWestCoast,itmakesusnowover10%.Theinnovationthatwasruninthequarterwascompelling,disruptive,andtheassetsareingreatshape.Thecustomerexperienceisimproving.It'sholistic.
It'sallthethings.Andatsametimeobviouslythey'restartingtoexperimentwiththingslikedeliveryandonthecuttingedgeofthat,themobileapp.Ithinkeverywhereyouturn,thisbrandissorelevanttoitstargetaudienceandIthinksoclearlypositionedwithproductsthataredrivenoutofrealconsumerinsights.
Ithinkthat'swhythey'vehadagreatfirsthalfandthat'swhyweremainconfidenttheywillhaveagreatsecondhalf,andobviously2016andbeyond.
KarenHolthouse (Analyst-GoldmanSachs):
Great.Thankyou.
Operator :
AndrewCharles,Cowen&Company.
AndrewCharles (Analyst-Cowen&Company):
Thanks.Twoquestionsforme.First,ifthekeytotheChinatermwillbeinnovationandbreakfastonlyrepresent7%ofsalesandseemstobeperformingwellalready,whynotdoubledowneffortsonlunchanddinnerinthebackhalfoftheyearandcontinueinnovatingaroundthesedaypartstoturnChinafaster?
GregCreed (CEO):
IthinkmyanswerwouldbehavingdonethismyselfwhenIwasrunningTacoBell,you'vegottobalancethisout,whichisyou'vegotallthesedaypartswe'regoingtotrytogetgrowthfrom.
Andwhatwe'veseeninthepast,evenifwesortofoverinvestincertainareas,it'sbettertohaveabalancedspendbehindbreakfast,lunch,anddinnerandthenevenifyou'vegotenoughmoney,thedaypartslikelate-nightandsnacking.SoIthinkthatthisyearwe'vegotgreatproducts.
They'reputtingalotofmenandresourcebehindit.We'vegotthecurrentpromotional,thewingbucket,whichisofftoanicestart,andIthinkthatthereisbalancedinvestmentbehindallthedaypartsistherightwayforustoinvestinthebusiness.
PatGrismer (CFO):
ThisisPat.IwouldjustbuildonGreg'scommentsbyhighlightingtheimportantrolethatcoffeewillplayinbuildingmultipledayparts.Sowhileit'sanimportantpartofourbreakfastdaypart,italsocontributestoafternoonteatimeanditcontributestolate-night.
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Andweareveryexcitedwiththeresultsweareseeingfromcoffeeandhowithasliftedsalesatthe2,000unitsthathavealreadygottenthepremiumcoffeeprogram,andwewillbeexpandingthattomoreunitsbytheendoftheyear.
AndrewCharles (Analyst-Cowen&Company):
Sofarthisyear,there'sbeenaseasonallyhighamountofKFCChinastoreclosures.Arethesestores--howwouldyoucategorizethem?AretheyprimarilylocatedinTier1tier2?Again,what'sdrivingthedecisiontoclosethesestoresratherthanrefranchisethem?
PatGrismer (CFO):
ThisisPat.Wemakethoseclosuredecisionsoneunitatthetime.It'snotalwaysafunctionofunderperformance.Theremaybeforcedclosuresdueto--comeupupontheendofaleaseandweren'tabletorenewonfavorableterms.Sotherecouldbeavarietyofthingsdrivingthat.
Butwedon'texpectasubstantialincreaseinKFCclosuresforthefullyearversuslastyear.Andinfact,weexpecttotalclosurestobeslightlydownversuslastyearbecauselastyear'snumberwasproppedupbysubstantialconsolidationoftheLittleSheepestate.
Operator :
JeffFarmer,WellsFargo.
Jef f Farmer (Analyst-WellsFargoSecurities):
Thankyou.Sorry,Greg,tokeephittingyouonChina.ButthelasttimeKFCChinasawarapidsame-storesalesrecovery,theconcepthadasizablemixandmenupricingtailwindwithitlookslikemixalonerepresentedmorethanhalfofthat21%same-storesalesgrowth.
Theconceptisstillinthesecondquarterof2014.Sowiththat,howshouldwethinkingabouttherolemixandmenupricingareexpectedtoplayintheChinasame-storesalesrecoveryincomingquarters?Andtothatpoint,haveyoualreadybeguntoseethereturnofthehigheraveragecheckfamilyvisitsthatwereabigbenefitayearagointherecoveryprocess?
PatGrismer (CFO):
ThisisPat.I'llrespondtoyourquestionandGregmayaddsomethings.Butfromasalesrecoverystandpoint,ourfocusisprimarilyontraffic.It'srebuildingtraffic.
Fromapricingperspective,ourpolicyisunchanged,whichiswegenerallylooktopricingtoworkwithproductivitytooffsetinflation.Weareveryconsciousoftheimportantrolethatvalueplaysinbuildingtrafficovertime,sowewouldn'texpectmixtobeanoutsizedcontributortosalesgrowthgoingforward.Theemphasiswillbemoreontrafficdriventhroughacombinationofvalueandinnovation.
GregCreed (CEO):
Iwouldjustechothat,whichisthisisgoingtobeabalanceofdisruptiveinnovationandvalue,andIthinkthecombinationofthoseisexactlywhatweneedtofocuson.
Jef f Farmer (Analyst-WellsFargoSecurities):
Justaquickfollow-up,wheredoespricingstandrightnow,menupricing,oractuallyheadingintothebackhalfof2015?
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SteveSchmitt (VP-IR&CorporateStrategy):
ThisisSteve.Pricingisabout3%andthatshouldbeprettyconsistentthroughtheyear.Andjustanotherdatapointonyourquestion,thequarter,thecheckwasrelativelyflat.Itwasupabout2pointsbutitwasprimarilydrivenbytransactions.
Operator :
R.J.Hottovy,Morningstar.
R.J.Hottovy(Analyst-Morningstar):
Thanks.IactuallyhadaquestiononIndia.Obviously,it'sasmallpartofthebusinesstodaybutonethatyou'vespokenaboutinthepasthavingagreatlong-termpotential.You'venowhadthreequartersofdouble-digitcompdeclinesintheregion.Justcuriouswhat'sdrivingthat,andifthat'schangingsomeofyourthinkingaboutlong-termunitpotentialintheregion.Thanks.
GregCreed (CEO):
IthinkweremainverybullishonIndiainthelong-term.There'snoreasonnotto.There'smassivepopulationandurbanizationofthatpopulation,andthere'sobviouslyunderlyingeconomicgrowth.
Ithinkthatwedidexpect--IthinkwiththeModigovernmentchange,theremayhavebeenasortofperceptiblechangeinconsumerperception.AndlikeIguessthatprobablyhasn'thad--wehaven'tseenthat.
WhatIlikeisthatwehaveanincrediblystrongteaminIndia,andIhavetosaytheyareprobablythebestteamwehaveatbuildingknow-how.TheIndianteamdonotsufferfromnon-embeddedhere.
Andtheyareveryaggressivelylearningwhatwe'vegotandwhatisworking,asIsaid,incountrieslikeAustralia,SouthAfrica,theUKandRussia.Andtheyarealreadyconcepttesting,andtheyrecognizethatvalueremainsanissue,entrypricepointvalueremainsanissue,andobviouslyinnovation,sothesamethingswekeeptalkingabout.
ButwhatIwanttogivethemcreditforisreallyreachingouttothelistofYUM,buildingknow-how,takingtheadvicebackintoIndiaandwitharealsenseofurgencyactuallypullingthemintothemarketplace.SoIamlong-termbullish.IlovetheteamandIthinktheyaredoingalltherightthingsinordertoacceleratethesortofimprovementmomentuminsame-storesales.
Operator :
PaulWestra,Stifel.
PaulWestra(Analyst-StifelNicolaus):
Great.Thankyouverymuch.JustforsomeclarityonChina,maybehelpherewiththelastquestion,whenyousaythecompperformanceisalittlebitbelowexpectations,youmeanbelowyouroriginalpositive3%to7%,soyourcommentstodaysayingcompscouldbeinthelowsingledigitpositives.Second-halfcompsarestilllookingtobemorepositivethanthefirsthalfwasnegative.Ijustwanttomakesurethat'sclear.
GregCreed (CEO):
Thatiscorrect,absolutelycorrect,Paul.
PaulWestra(Analyst-StifelNicolaus):
CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure
EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1
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Great.AndthenwhenyoumentionedyourtransactiontrendsonaDClinebasiscontinuetosequentiallyimprove,youareseeingsequential,again,month-to-monthtrafficrecoveryversus--yes.
PatGrismer (CFO):
Iwouldn'tsaymonth-to-month.Certainlyquarter-to-quarter.Weneversaidthattherecoverywasgoingtobelinear,andsothere'snaturalchoppinessfrommonthtomonth.Butaswestepbackandlookathowtraffichasrebuiltsincetheincidentlastsummer,weareseeinganice,steadyimprovementinthatcurve.
PaulWestra(Analyst-StifelNicolaus):
Okay.Iguessthenmylastsortofnewrealquestion,IguessgobacktothecoloronyourChinaaveragecheckstrategyIguessmaybebeforethedualcrises,myunderstandingandIknowpartoftherenovationprogramwasifanythingdesignedtoenhanceKFC'ssortofpremiumbrandposition,maybemovethecheckup,allthingsbeingequal,movepeopleupthemenu.
Wecertainlycanunderstandthefocusontraffichere.Isthatstillasortoflatentopportunityintermediate-termorhowdoesthatplayinIguessthenewmenuhere.
GregCreed (CEO):
Ithinkthere'sacoupleofthings.One,theamountofremodelinggoingoninChinaisaccelerating,enjoywhat'scomingandIthinkfoundawayforustobemuchmorefocusedonourremodelingoftheassets.Sothegoodnewsiswearesortofdoublingthenumberofassetsthataregettingremodeled.Sothatisagreatwayofkeepingourassetsrelevant.
AndthenIthinkit'sjustbacktothepointwe'vebeenmakingalsoaboutbalance.WeactuallyhavetobalancepayingmenuwithwhatIcalldisruptiveinnovationandwowvalue.AndIthinkourabilitytodothataswellasimprovetheassetsandobviouslydeliverasuperiorcustomerexperience,allofthosecombinedwillbewhatsortofmakesuslong-termsuccessful.Andaswekeepsaying,yes,wewillhaveastrongsecondhalf,wewillgopositive.Weremainveryconfidentinthelong-termofChina.
SteveSchmitt (VP-IR&CorporateStrategy):
ThanksPaul,andthankyouallforjoiningustoday.Thisconcludesourcall.Thankyou.
GregCreed (CEO):
Thankseverybody.
Operator :
Thisconcludestoday'sconferencecall.
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