Yum Brands Earnings Call Insights: China Macroeconomics and Wage Growth Inflation

Yum Brands (NYSE:YUM) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

China Macroeconomics

John Ivankoe – JPMorgan: Obviously when we talk about China, we talk a lot about the Yum specific issues that have affected the first half of ’13, but I was hoping we could maybe talk about the China macro; and to the best of your ability and your knowledge, separate what’s happened specifically to you guys in chicken. And talk about how the China macro may have potentially affected your (raised) development and the development opportunities this year, pricing and perhaps even overall traffic to Western QSR. If there’s any comments that you can make from a bigger picture perspective?

David C. Novak – Chairman and CEO: I think John, when we step back and we look at what’s going on in China and as I mentioned in my remarks earlier, I think the biggest thing we see going on in China continues to go on. And that’s that the consuming class continues to grow. Its $300 million today, it’s expected to be $600 million by – 600 million people by 2020 and this is backed up from a number of different sources. As Pat just mentioned, you also see disposable income growing as well. The economy itself is growing 7% which still makes it the fastest growing economy in the world. So those are things that I think bode well for brands that are consumer oriented. When you look at just the infrastructure of what’s going on in China, it continues to expand at a rapid rate. I think China is building over 90 airports, six of which will be at least as big as O’Hare airport, train stations are expanding, subway lines. All these really represent fantastic opportunities for our brand. I think what’s happening in China today is still unprecedented. It’s the largest urbanization effort in the history of the world; and I think that Yum! Brands and our position is comparatively is stronger than any restaurant company in this world. I think what we’re seeing in pizza it’s great evidence of this, is that if you have innovation and you have value in an economy like China has today; you can have very strong same-store sales growth and you can open up new units very profitably and move into lower tier cities and expand very aggressively. That’s what we are seeing with the Pizza Hut Casual Dining in spite of all the, I guess, you could say headwinds that might exist in the market. So at the end of the day, we continue to be very bullish on China. When you look at the long-term, we wouldn’t trade places with anyone. I think that this country is going to continue to grow very rapidly; and we’re seeing it today. There’s a bit of a slowdown, but their slowdown is, of pretty rapid rate when you compare to what’s going on everywhere else in the world. So again, we find this true to be everywhere in the world. When you have powerful brands, you innovate, you provide everyday affordable value, you operate your business well with good service. You can win. So, what we are focused on doing in China is, continuing to innovate, continuing to work on value equation, continue to upgrade our assets, continue to open into the new trade areas, because we think it’s a winning proposition over the long-term.

Wage Growth Inflation

Keith Siegner – Credit Suisse: Just a follow-up on John’s question a little and maybe try to get a little bit more specific. When you think about even if we’re decelerating to what’s still in absolute terms a great pace of growth for the economy, what could this do to that mid-teens wage inflation outlook you’ve talked about? I mean, this quarter came in a little bit lighter. Is it still a mid-teens wage growth inflation outlook that you’re looking for or could we end up seeing something slightly slower?

David C. Novak – Chairman and CEO: Keith, you’re right. We did see the inflation on labor moderate a bit in the quarter, but that was more due to some productivity initiatives that helped to mitigate what would have otherwise been a rate of inflation consistent with the guidance we provided which over the long-term is driven by what the government’s policies are around driving an increase in disposable incomes which continues to be in the mid-teens range.

Keith Siegner – Credit Suisse: So, then one follow-up question. As we think about pricing and how fiscal ’12′s price increases kind of roll off mid-third quarter, how do you think about your ability to raise pricing in an environment we just talked about has fairly meaningfully cost inflation. How do you think about is it the macro factors that most influence this, do you need to see traffic back to a certain level, do you plan to take pricing, anything around those plans for the back half and into next year would be very helpful.

David C. Novak – Chairman and CEO: At present, we have no new pricing actions planned. Our number one goal is to regain the traffic that we’ve lost over the last few months and we are confident we can do that based on the trends we’ve seen to-date. We know that it’s important to provide consumers with innovation and compelling value and so it’s not our expectation that we would be taking more pricing later this year. Now, obviously, the situation is very different at Pizza Hut where we remain in position of significant strengths with our brand and we have taken some pricing this year and consistent with our growth model for that business, we may take pricing later this year. But in the case of KFC, given where we are at today with the brand and our goal to rebuild the brand for the long-term, we’re not expecting to take additional pricing.

A Closer Look: Yum Brands Earnings Cheat Sheet>>