Yum! Brands Conference Call Highlights; All About China

Yum! Brands YUM reported its first quarter earnings on April 23, 2014. Shares of the company are down 0.86 percent or $.67 per share to $76.81. Below are some key takeaways from its conference call:

David Novak, Chairman and CEO:

• Based on first quarter results and current sales trends, we expect to deliver on the strong bounce-back year we promised of at least 20% full year EPS growth excluding special items. We had particularly strong results in China.

• Now if you've seen the release, we're obviously pleased to report our China division continues to steadily improve with both KFC and Pizza Hut producing strong sales and margin growth, driving our first quarter EPS growth of 24% prior to special items.

• Looking ahead, we expect to fare much better with competitive value, our national advertising of Wing Street and with product news like new garlic Parmesan pizza offering. We also intend to do a better job engaging the digital consumer where competitors are frankly doing a better job driving activation.

• As you may know, we have nearly 14,000 restaurants in over 110 countries around the world, 99% of which of these KFCs are franchised. Importantly, we have a strong track record in emerging markets and we continue to grow our presence with each passing year. In fact, 46% of KFC division sales outside of the U.S. in 2013 were generated in emerging markets compared to 40% in 2008.

• As you know, our U.S. business represents 97% of Taco Bell's global products.

• So let me wrap things up for Yum! Brands. On the whole, we're off to a strong start to the year. We're extremely pleased with our continued momentum in China and we had impressive results in a number of other markets. And as Pat will tell you on a new division basis, we had a solid quarter at KFC.

• All in all, we believe we're well positioned to deliver on the three things we know will drive shareholder value in retail, driving new unit development, building same-store sales growth and doing these in a way that generates high return.

• We're confident we will have a strong bounce-back year in 2014, growing EPS at least 20% and re-establish our track record of consistently
delivering double-digit earnings per share growth in years ahead. Now let me hand it over to Pat Grismer, our CFO.

Pat Grismer, CFO:

• We're pleased to report strong first quarter EPS growth for Yum! Brands led by outstanding performance at our China division. This, combined with current trends and balance of year initiatives for all our divisions, gives us confidence to reaffirm our full-year guidance of at least 20% EPS growth excluding special items.

• For the first quarter, we reported 24% EPS growth before special items. This increase was led by significant sales, margin and profit growth at our China division.
• When you add it all up, we expect at least 20% EPS growth in 2014.
• First, with the strong and steadily growing cash flow that we generate from our global franchise business and from our high return equity businesses, we reinvest a substantial portion, about 40% in new growth opportunities, largely new store openings.

• Second, we pay a dividend which we've grown at a double-digit rate every year since we first paid a dividend over nine years ago making us one of only 10 companies in the S&P 500 to do so. This is delivered an annual dividend yield of about 2%, which is very competitive for a company with our growth profile.

• Third, we don't horde cash. After covering our growth investments in dividends we return all available cash to our shareholders in the form of share repurchases.

• We're pleased with our strong first quarter results specifically at our China division. It's evident the actions we took in 2013 to strengthen our business coupled with our ongoing growth investments have set us up for a strong bounceback in 2014.

International:

• Novak: Emerging markets continue to have positive momentum and developed markets like KFC in the U.K. and Australia were strong. However like most retailers our U.S. business was soft, driven in part by poor weather.

• Novak: In total, our China division delivered consistent sales growth of 17% in the quarter as we opened 123 new units and grew same
store sales by 9%. The China team deserves special tribute as operating profit grew an impressive 80% prior to foreign currency translation. As predicted, productivity gains that began in 2013, now coupled with rebounding sales, are driving dramatic profit growth.

• Novak: Clearly the most significant driver of a strong bounce-back year for Yum! is a continued sales recovery at our KFC business in China, which delivered same store sales growth of 11% in the quarter. Remember this compares to a 4% same store sales decline during the fourth quarter.

• Novak: Our China division also achieved 23.4% restaurant margins in the first quarter. This compares to a full-year restaurant margin of 15.4% in 2013. Obviously, seasonality plays a role. But to put things into perspective, first quarter restaurant margin for our China division was
essentially in line with what we delivered in the first quarter of 2012.

• Novak: Any way you look at it, we're pleased with our progress in China.

• Novak: Now if you recall, we said last quarter that our focus at KFC China in 2014
was to bring more innovation and exciting news to our customers. And that's
exactly what we're doing.

• Novak: According to our research, we have regained consumer trust and are now beginning our journey to restage KFC as an even more youthful, contemporary and energetic brand that is innovating for a changing China. This is built on three pillar, taste, customer experience and digital.

• Novak: On March 26 we announced the debut of an exciting new menu at KFC in our more than 4,600 restaurants in over 950 cities across China.

• Novak: This initiative is unprecedented in KFC's 27-year history in China, and in fact, in the entire QSR industry, as we introduced 15 products simultaneously. These products are either new or the return of popular items previously offered on a limited time only basis. The breadth and variety of these products are expected to further strengthen KFC's leadership in four signature product platforms, sandwiches, rice dishes, snacks, as well as drinks and desserts.

• Novak: Simultaneously we are launching redesigned packaging, contemporary staff uniforms, new menu boards and branded service. On the technology front, we've begun rolling out WiFi and a number of other new digital initiatives. In fact, we will have free WiFi in over 2,000 restaurants by year end, making us what we believe to be the number one retailer on that front.

• Novak: So let me sum things up for KFC China. We're early in the year, but we're extremely pleased with the progress we're making with sales and margins, and we expect to build off our upward momentum balance of year.

• Novak: Now as I mentioned before, Pizza Hut casual dining is arguably one of the greatest success stories in our industry the past three years. We are clearly the number one western casual dining chain in China with hardly any multinational competition. We have 1,100 restaurants in over 290 cities, and we opened 43 new stores in the first quarter further strengthening our category-leading position. We are once again pleased with our same store sales growth, which was 8% in the first quarter.

• Novak: The other exciting thing about Pizza Hut is we have a distinct home service brand in China where we deliver an all meal replacement to home meal replacements to Chinese consumers. And in fact, around 40% of what we deliver is Chinese food. So not only are we delivering pizza, but we're delivering a full array of Chinese menu options. We now have over 200 units in 25 cities, and we're beginning to really scale this brand rapidly across the country.

• Novak: In 2014, we will be testing our Chinese concept, East Dawning, in lower tier cities, and we're working hard to turn around Little Sheep, which has clearly been a disappointment since we acquired it in 2012 and continues to be so. Now looking at the long term, China obviously has a large and growing consuming class which is expect to double from 300 million people to 600 million people by 2020.

• Novak: Outside the United States, we're accelerating new unit development especially across the delivery and express channels. This is a great example of why we decided to reorganize the business as Pizza Hut now has dedicated brand focus that will drive international expansion at each of these segments. To sum it up, our top goals for 2014 are to accelerate our pace of global development and to turn around our Pizza Hut U.S. business.

• Novak: We intend for Pizza Hut to ultimately become a double digit profit growth for Yum! in the years ahead. Finally at Taco Bell, both same store sales and margins declined in the first quarter while dealing with the challenging weather, higher commodity inflation and the overlap of 6% positive same store sales in 2013 which was our strongest quarter of last year.

• Grismer: Now I'd like to dig a little deeper into each division's first quarter results. In China, operating profit increased by an impressive 80% prior to foreign currency translation. This performance was driven by same store sales growth of 9% and nearly 7 points of restaurant margin improvement versus prior year.

• Grismer: Given the challenges that we experienced in 2013, the single most important driver of a strong bounce-back year for Yum! is continued sales improvement at our KFC business in China.

• Grismer: With 11% same store sales growth in the quarter, it's clear that we're building momentum with this business, and we're pleased with the overall progress we're making at KFC. Based on improving sales and the recovery we've seen in key consumer metrics at KFC,
we reaffirm our 2014 guidance of high single to low double-digit same store sales growth for the China division.
• Grismer: In the quarter, KFC opened 80 new restaurants including 77 new international units. Our franchisees continue to lead the way with development opening 88% of these new units. As a reminder, similar to previous years, we expect our new unit development will hold up significantly as the year progresses. Same-store sales grew 1% in the quarter