Yum Brands Earnings Call Insights: Food Safety and Rebuilding Consumer Trust in China

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

Food Safety

John Ivankoe – JPMorgan: The sense of what you really could have done differently in this case in terms of the antibiotics ever entering into your chicken supply at all and what prevents that in the future? In other words, are you being asked to do inspection at the farmer level, which I can’t imagine? I mean are you responsible for inspection at the supplier level, which quite frankly I thought was the responsibility of different authorities? Or is it just a process to where you and the government need to communicate more? In other words, what really is the process of remediation that prevent this from happening in the foreseeable future?

Timothy P. Jerzyk – SVP, IR: I think the beginning of your question got cut off on our end. Can you – sorry that I ask you to redo that, but if you could restate your question, that will be helpful to us, the first part.

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John Ivankoe – JPMorgan: Apologies. The question really centers around what you could have done differently to prevent this? David, you made a comment about learning from history and is it, gosh, if we had more people in the field from an inspection point of view, you are doing inspection at the farmer level, which I have a hard time believing that’s your responsibility. Was it your responsibility to do more inspections at the supply level, which I thought was responsibility of different authorities. SO, the question that I have is what is changing specifically within Yum! For an issue like this, whether it’s chicken related to anything else in your supply chain for not occurring again?

David C. Novak – Chairman and CEO: Well, I think first of all, I want to make it really clear that food safety is our top priority and we do everything we can to make sure our food is safe and is of the highest quality. We have a global protocol for (indiscernible) suppliers on food safety and quality assurance. And if issues are identified in any case we always take appropriate measures to require our suppliers to immediately rectify the problem. If a supplier does not meet our strict QA standards, we simply will not do business with them. What we are doing is we are continuing to invest in QA around the world and work with suppliers in world renowned outside QA experts to improve our practices. And we are doing this all around the world and what we are doing in China is we are going to take our processes to an even higher level and strengthen our QA processes going forward.

John Ivankoe – JPMorgan: And I’m sure you can appreciate it, you need pressing on this. I mean that was I think everyone’s understanding and belief and I thought it was fact that, that was already done in China. And the fact what you are doing at China was considered to be best-in-class at Yum! or best-in-class quite frankly relative to anyone. So, what prevents us from happening in the future, just doing more of what you have been doing or are you being asked to do some of the job but quite frankly what I thought was the responsibility of the authorities.

David C. Novak – Chairman and CEO: What we are doing is first of all, KFC is the leader in China as you say, we have been the leader in food safety protocols and practices in the past. And that’s a high responsibility and one that we take very seriously as we go forward. Our objective in China is to strengthen our poultry supply chain practices and this will include improved voluntary self-testing procedures. We do self-testing. We are going to improve that and doing even better. This is above and beyond anything that’s required by any laws or regulations. We are going to improve our reporting processes and communications and we’re going to enhance our supplier management. What we are working on right now with our suppliers is a comprehensive QA program that will be even better than what we think is with the world class process and the bottom line is we will focus on making sure we do everything, we can that would be the very best in this area. So, we’ll be announcing that shortly after Chinese New Year, the comprehensive QA program and a marketing campaign that will also supplement it.

Rebuilding Consumer Trust in China

Jeffrey Omohundro – Davenport and Company: My question relates to the branding efforts to rebuild consumer trust in China. You’ve mentioned a couple of times, you’ve dealt with a similar issues both in China and U.S. Could you talk a little bit further about the specifics around the efforts, around the spending against these efforts and how broad these efforts might be a quick for example social media and other avenues?

Patrick Grismer – CFO: Well, first of all, it starts with the basis that we have a powerful brand that’s extremely popular and people love our food and they love the experience and we’ve got a great strength to build on. I think as far as the marketing goes, one of the things we have to realize is that in any case, regardless of how strong your brand it, it’s going to take time. Because consumers have lots of options that they can go to, and I think what we have right now, we literally have to weather the storm of a lot of adverse publicity that is clearly top-of-mind with customers. So I don’t think there is any marketing we can do today that is going to change what’s going on right now, because we do need the gift of time. Having said that, we’re working very aggressively to develop a superior program with our suppliers on the quality assurance front and we’re working on an advertising and marketing approach that will communicate this to the customer, from everything, the tray liners to ways that we – social media, everything that you can basically imagine. One of the things we do have with KFC is we have a big budget. Last year we opened up 900 more restaurants. So we have lots of media, we have all the capability we need to continue to build the brand the right way, and we will do that. So we will be launching a new program around quality and what we’re doing with our suppliers, communicating the press, communicating on all the social media, and we’ll launch that shortly after the Chinese New Year. But in terms of marketing clout, we go in with more marketing clout just simply by the nature of we do have 900 more stores as we go forward and we have all the marketing clout to make us one of the top advertisers in China and we have every capability to be able to get our message out. But I do think what we need more than anything and Sam Su and I have looked at lots of different options and we’ve talked about this daily as we really need the gift of time. And I think over time we will come back because this is a powerful brand that’s loved by consumers, and we will prevail in the end.

A Closer Look: Yum! Brands Earnings Cheat Sheet>>