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Heard on the call: Yum! Brands Inc.

Heard on the call: Yum! Brands Inc.

Yum highlights overseas growth, plans for Taco Bell, Pizza Hut

Yum! Brands Inc. executives told investors Wednesday that continued robust sales growth in China and consistency in its international division would help it meet its earnings goals for the rest of the year.

The company also detailed plans to improve weak sales at its brands in the United States, including a breakfast menu and a new beverage program at Taco Bell and value-centric promotions at Pizza Hut.

Profit growth in all three divisions — U.S., international and China — for the June 12-ended second quarter led to a 17-percent increase in earnings per share before special items. Click here for more on Yum's second-quarter results.

“Quite simply, we’ve had a great first half of the year, with strong operating profit growth,” said David Novak, Yum's chairman and chief executive. “We are pleased with the profit growth in each of our business units, specifically our strong performance in China. We’re confident in delivering our raised target of 12-percent [full-year 2010] EPS growth.”

In China, Yum opened its 3,000th KFC this past June. Novak identified breakfast, delivery and 24-hour operations in about 1,000 KFCs as major profit-growth drivers for KFC in China. Meanwhile, Pizza Hut Casual Dining remains the largest Western brand in China’s casual-dining segment, Novak said, and Yum plans to open a total of 63 Pizza Huts there this year.

“Based on the success we’ve had in China, we are aggressively going after sales layers at Yum Restaurants International,” Novak said. “In particular, KFC, our largest concept in YRI, is making major progress on driving value. Value menus are in place in all our key markets, and we’ll be expanding further this year.”

He singled out India as a potentially hot growth market, as YRI has opened 70 KFCs and 160 Pizza Huts there to date. Taco Bell also recently entered that market, in addition to debuting in the United Kingdom and South Korea.

“In fact, we’ve opened Taco Bells in seven new countries over the past two years,” Novak added. “Early results are promising, and we are working very hard to make Taco Bell a global brand.”

Taco Bell also is performing well at home, growing transactions in the second quarter and posting a 1-percent increase in same-store sales in the United States.

Novak said Yum is very optimistic about Taco Bell’s breakfast program, now testing in Tucson, Ariz., and three other markets.

“McDonald’s threw everything in the kitchen sink at us in terms of price discounting, and we’re already at break-even in Tucson,” he said of the breakfast test. “We all know that the single biggest thing we can do at Taco Bell is to develop another $100,000 to $300,000 sales layer, because we’ve got the best unit economics outside of McDonald’s. … So, in our mind, breakfast is not a question of whether. It’s a question of when.”

Yum hopes to increase its sales eventually by 15 percent to 16 percent by upgrading all its units with the breakfast platform and a new beverage program preparing to launch systemwide.

“We continue to make progress, where we’re committed to these sales layers, because this is what’s going to really invigorate the brand,” Novak said. “We think we should have 8,000 Taco Bells in the U.S. I mean, why not? Burger King does, and you can’t tell me that Burger King has a more charismatic, more loved brand than Taco Bell.

“So we’ve got a great franchise, but we need $100,000 to $300,00 more in sales. So these big platforms are what we’re really committed to getting after.”

At Pizza Hut, which posted an 8-percent jump in U.S. same-store sales, the $10 large-pizza deal will remain on the menu in the near future, as the brand moves to solidify its value proposition around discounted pizzas and promotions like Tuscani Tuesdays and Wing Wednesdays, Novak said.

“We’ve had a dramatic turnaround in transactions and same-store sales growth since we launched the $10 anyway you want it, large pizzas,” Novak said. “So it’s been a great success for us, because what we’ve basically done by doing this is we addressed the single biggest problem that we’ve had, and frankly in our history we’ve always been perceived to be the most expensive pizza.

KFC sales are expected to remain soft after the brand posted a 7-percent decline in domestic same-store sales for the second quarter. However, Yum is confident in the long-term prospects for the brand’s focus on improving operations and promoting grilled chicken and portable products — all of which will take time, Novak said.

“In spite of this progress, [KFC’s] sales have been underperforming, and we expect continued weak sales in the third quarter,” Novak said. “That said, we are in the midst of a transformation to truly make KFC a more relevant and better-operated brand.”

Contact Mark Brandau at [email protected].

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