Highlights from YUM's Q4 Conference Call: U.S. Same-Store Sales Highest for Year, But Strong Growth Came Internationally

Last night (after the close), Yum! Brands (NYSE: YUM) reported Q4 EPS of $0.75, $0.01 better than estimates. Revenue were $4.11 billion vs the consensus estimate of $4.03 billion. Shares are up 2.72% in afternoon trading

Highlights from YUM's Q4 Conference Call:

• (David C. Novak) I'm pleased to announce we delivered 14% earnings per share growth in 2011, marking the 10th consecutive year we reached our annual target of at least 10%.
  
• The portfolio brands we have with leadership positions in China and other emerging markets with a long, long runway for growth.
  
• We have an asset base of over 37,000 restaurants and we continue to make progress leveraging the assets further by building alleges layers and banding day parts.
  
• Additionally, our strong cash flow generation and disciplined approach to the deploying of capital allows us to invest in the future growth of our business as well as return cash to shareholders through a meaningful and growing dividend. And make significant share buybacks.
  
• Over half our operating profit is now generated in China and the 72 other emerging countries in which we operate throughout the world.
  
• Yum!'s strongest businesses are located where the highest growth is expected to occur in the years ahead. This is a very powerful combination. We view China as the best restaurant growth opportunity of the 21st century. Our brands further strengthen their category leading positions with a record 656 new restaurants, and extraordinary same-store sales growth of 19% this past year.
  
• KFC now has 3,000 -- in 700 cities throughout the country. And continues to expand into new cities as well as increase its penetration levels in existing markets.
  
• Pizza and casual dining now has 626 units and is successfully opening in lower tier cities strategy to offer tremendous variety, everyday value and refresh 25% of its menu twice per year has consistently driven sales and profit growth.
  
• Rising incomes are making our brands even more affordable for an increasing number of people. In fact, the consuming class is expected to double over the next 10 years going from 300 to at least 600 million people. As significant urbanization continues.
  
• We're building east to the premier mainstream China food concept. And I'm pleased to say on February 1st, we acquired Little Sheep, the leading brand in Chinese casual dining with approximately 450 system restaurants.
  
• Ten years ago, we were essentially just beginning with KFC in India. And now it's our second leading country for new unit development. In fact, we're so excited about our prospects in India and it's impact on future growth of Yum!, that we're going to break it out as a separate division for 2012 reporting.
  
• We also made stellar progress in Russia where we're rebranding KFC to stand alone KFCs and same store sales growth in Russia is the best in our business. We know our primary competitor makes over $300 million in Russia we're just getting started and have plans to build a strong business in Russia as well as we build off of our base of nearly 150 restaurants.
  
• We are also driving major growth in the continent of Africa. Building off our 656 stores in South Africa. We entered Zambia -- and Kenya in 2011 and plan to enter 7 new countries in 2012.
  
• In all, we plan to have restaurants in about 20 countries by the end of this year. With over a billion people throughout the continent of Africa, we know we're just getting started.
  
• As a point of reference, we have about 60 restaurants per million people in the United States. We have fewer than two restaurants per million people in the top 10 emerging markets.
  
• We have 133 KFCs in France and 76 in Germany today. Our challenge going forward is to secure great sites as fast as our people capability allows. While France and Germany are certainly developed countries, they're clearly emerging businesses for Yum! brand.
  
• Today, we make less than $50 million in France and Germany, while our primary competitor makes well over a billion in these two countries alone. Clearly, we are on the ground floor in continental Europe.
  
• We have tremendous potential with the 37,000 restaurants we currently have in our portfolio. We've been very successful in China, leveraging our assets throughout the day with breakfast, 24-hour service delivery and innovative beverages. We're making progress in several other countries as well. In Yum! Restaurants International, we have nearly 4,000 restaurants with grilled ovens which innovative nonfried practice and 3700 serving crush's line of frozen beverages, these numbers will continue to expand further in 2020.
  
• Taco Bell just launched breakfast in 800 restaurants in the west coast with its first meal strategy. Taco Bell built an incredible late night business by gradually staying open longer and longer. We're taking that same strategy and applying it to breakfast. We'll be opening for breakfast about 8:00 a.m.
  
• Our success in executing these strategies has driven our return on invested capital to over 22%. Which is among industry leaders and we continue to be disciplined with our capital allocation.
  
• We generated over $2 billion of cash from operations in 2011. We're fortunate to have many high return global opportunities to invest in for future growth.
  
• We will also continue to return cash to shareholders. 2011 marked the 7th consecutive year we raised our ditch denied at a double-digit rate. Our dividend now has an annual rate of $1.14 per share. We also repurchased $733 million of our stock in 2011, and expect to repurchase about 800 million in 2012.
  
• I'm encouraged by the positive momentum we have in our business. We are well positioned to meet our -- meet or exceed our annual target of at least 10% earnings per share growth in 2012 and beyond.
  
• (Richard T. Carucci - Chief Financial Officer) During Q4, operating profit grew 14% prior to the foreign exchange benefit.
  
• In the U.S, the 53rd week had an $18 million benefit to operating profit. Without the benefit of the 53rd week, U.S. operating profit would have been flat versus prior year.
  
• For Yum! Restaurants International, the 53rd week had an $8 million benefit to operating profit. For Yum! overall in the fourth quarter, operating profit grew 8% excluding the benefits of both the 53rd week and foreign currency exchange.
  
• Sales improved in the fourth quarter through much of Yum!. China same store sales increase bid over 20% in the quarter when we added 327 restaurants. At YRI, after seeing same store sales growth of 2% in the first and second quarters, we had 3% sales growth in the 3rd and 4th quarters.
  
• The fourth quarter also represented the highest quarter of same store sales results for our U.S. business. All three U.S. brands had higher same store sales in the fourth quarter than they did in the third quarter.
  
• Our China business simply had an exceptional year. Record development of 656 new units combined with 19% same store sales growth on a business of our scale is quite a an accomplishment.
  
• We ended 2011 with full year restaurant margins of 19.7%. This was in line with our recent expectations. During our third quarter earnings call, we stated that we expected restaurant margins to decline in the fourth quarter due to high inflation, but for full year margins to be about 20%.
  
• We expect to make progress closing the gap between inflation and our menu pricing and to see positive year over year restaurant margins in the second half of 2012.
  
• In fact, in U.S. dollar terms, China earned about $600 million in 2009. By 2011, China operating profit exceeded $900 million. This represents a 50% increase in profit over just a two-year period.
  
• In the U.S, results were disappointing in 2011, with full year profits down 12%. We had a solid year of Pizza Hut, but weak sales and profit results at Taco Bell and KFC. As we said in New York, given our product news and cost management, we believe we are well positioned to to have sales and profit growth in the U.S. in 2012.
  
• Yum! posted 2011 earnings per share of $2.87 before special items. On a similar basis, our EPS is over 3.5 times what it was 10 years ago. During the same decade, our ROIC has increased 4 percentage points to over 22% in 2011.
  
• (For 2012) We expect to again add 1500 new units outside the U.S. in 2012. At least 600 new units in China, about 800 new units in Yum! Restaurants International, and 100 new units in Yum! restaurants India.
  
• For the first quarter of 2012, given strong sales over the Chinese new year, and keeping in mind that our first quarter consists of only January and February, we expect solid double-digit same store sales growth. As the year progresses, and the overlaps become more challenging, we do expect same store sales to moderate.
  
• Our overall outlook for Yum! has not changed significantly from the December meeting. We are confident that 2012 will be another year of double-digit EPS growth for Yum! Brands.
  
• Today, over 70% of our operating profit is generated by international businesses. We ended 2011 with over $1.5 billion in operating profit in China and YRI. Ten years ago, we made only about 315 million in these businesses combined, which represented 30% of our profit at that time. The vast majority of this growth has been in emerging markets.
  
• We continue to reduce our footprint in highly penetrated markets in December of 2011, we completed the sale of long John silver and A and W, all-American restaurants.
  
• The larger of these concepts, Long John Silver has about 97% of their restaurants in the U.S. Second, we continue our review refranchising program. Our plan is to retain about 5% ownership in KFC and Pizza Hut. We are currently at 8% ownership with Pizza Hut and plan to be at 5% of KFC by the end of 2012. We announced our investor conference our plan to reduce Taco Bell U.S. ownership from 23% to about 16% over the next two years.
  
• Net income was down for the year, continuing the trend in the first 6 months. Same store sales were negative in the back half of 2011. Besides sales deleveraging, margins were also negatively impacted by significant commodity and labor inflation. We will share more information with you regarding the expected profit impact of this acquisition for Yum! in 2012 at a later date. However, when you take into account transaction and transition costs, we expect only a modest profit impact in 2012.
  
• (Q&A) My question is really about the pace of unit openings in China that. Business is showing a lot of top line momentum, and great returns on capital. And you exceeded at least the low end of your guidance, fairly significantly in terms of unit openings for 2011. So the question is, you know, what are your thoughts on being able to sustain that higher level of openings and potentially even move it higher as you look into 2012 and beyond? (A) Well, you know, as you mention, the China team has had an amazing track record for getting unit growth. And also getting this growth through all tier cities. We continue to expand aggressively in Tier 3-6 cities, and especially expanding our lead in those areas. So we feel very good about what's occurred. You know, as a reminder of what we said in New York, David, was that we ended up increasing the new unit growth, because of a couple of factors. One has been the -- even faster infrastructure growth of the China government has taken on. And lily took us through that they're building these city clusters, and what that's doing is allowing new trade zones in places like train stations, bus stations, et cetera. But it's also developing new trade zones as they're building new apartments in some of these cities as well that has led that growth. And the other piece that has increased our numbers in 2011, was really Pizza Hut development. And Pizza Hut, you know, a while back we struggled in Tier 3 cities, our second unit in Tier 3 cities. We're having good success in Tier 3 and Tier 4 cities with Pizza Hut as we have more variety and better value in those restaurants. So I don't expect any of that to change in the next year or so. So you know, we still have our guidance of at least 600 units, and you know, I think it's safe to say we'll hit that 600 units. Regarding further out, it's always been hard to predict when the next layer of unit growth has occurred. You know, we were stuck on only 500 for about a 4-year period before we got to the 600. So I still have said historically that I expect the absolute number to grow over time while the percentage continued to decline. And that's still my personal best guess at this point in time. (A) I agree with everything Rick just said and let me give you a little bit more color on why we're very bullish about the development opportunities in China. You know, I think the biggest tail wind, as I mentioned earlier, is just the growing consumer class. You know, going from 300 to 600 million people in the next 10 years or at least that. But then I think our whole formula for success in ina has been geared on great local management team with phenomenal local operating capability. And you know, we've always had one rule, we never want to expand any further -- or faster than our people capability, because we have these brands that are so good, we want to keep polishing the diamond. Having said, that you look at our operating capabilities, the best we have in the world, 90% of our restaurant managers in China have at least a college education. When I talked to Mark Chu, the President of China, he'll tell you every one of our KFCs we have two assistants ready to open new stores when we're ready. We have the people capability and we know there are lots of people there that need jobs, want jobs and we're creating all kinds of jobs there. So we have a tremendous environment that's set up for operating capability. In fact, our operating capability is so good there, we really see ourself as the training ground for retail development and retail managers in China. We have what we call the WAMP OA, academy, we're really developing tall don't not only grow our business but we think we'll help other retailers as that country emerges by providing talent. Which is fine. We basically tell people in four years they can run a restaurant at KFC or if they want to start their own business, they'll be ready. Or they can go work for another retailer. Or they can become a franchisee, but we're like the Proctor & Gamble, the King of marketing talent in the United States, we see ourselves as the leaders in operating talent in China. The second big thing on people capability is just our development operations. Our development team, we have 700 people in our development team. We have the best retail management base in China. This is a huge competitive advantage as we go forward. And what I always say is that, you know, when you go into any of these new cities, we're going to have the flagship location and or locations before our primary competitor even gets there. So we're we have a huge competitive advantage there. So I think underpinning everything that we're doing in China is the operating capability we have. And I think it's really true the formula success in this business, you have the people capability right, you get that right, then you satisfy more customers, then you make more money. We're basically delivering that in spades. The only other thing I would say, what we're talking about now in terms of our development engine is KFC, leader in QSR, Pizza Hut, leader in casual dining. We're obviously developing pizza at home service. East awning for Chinese quick service opportunities as we go forward. And we just bought Little Sheep because we want to have the leading brands in every significant category.
  So our goal, obviously, is to keep this development engine primed and pumped and take advantage of the significant opportunity we have to provide great brands in China, create lots of job sin China, and make our business even bigger.
  
• (Q&A) A few -- just a quick question here. Can you -- could you describe or maybe give us numbers around how much of that company margin decline in the quarter in China was due to the higher new opens in -- that were year over year in that quarter? My suspicion is there's some sort of preopening cost in there. And then secondly, reimaging for Taco Bell in the U.S, can you give us an update there and refranchising for KFC in the U.S. (A) Regarding the margins in China, by far the biggest impact that we had, which we expected coming into it, was food installation and labor inflation. There is an impact to your point on new openings as they went up versus prior year. We always had an lot of new openings in the fourth quarter. We think the impact of that is a bit over a point. Regarding KFC, refranchising, I feel very good with the progress we made. As I mentioned in early 2011, we had spent some is time working on a fairly large transaction that after we sort of turned our attention to smaller deals, we think we made a lot of progress. So I feel good with how we ended the year. I believe we're very well poised to therefore deliver on what we said as finishing the KFC refranchising in 2012. And I think the final numbers which is in our release for the refranchising of KFC was 160 units in the fourth quarter.

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