YUM! Brands 1Q16 Earnings Call Notes

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Yum! Brands (YUM) Greg Creed on Q1 2016 Results

Micky Pant – CEO-Yum! Restaurants China, Yum! Brands, Inc.

Seen a moderation in inflation from wage increases in China

“Well, it’s true that over the last five years labor has inflated in China on account of minimum wage increases by the government. But we’ve seen a moderation of that. I think the authorities recognize that the economy has to be supported, so I think we’re seeing a more reasonable picture there. What we did get in the quarter particularly was some good productivity gains on account of using more part-time and student labor, which is a phenomenon that did not exist in China in the long past, and that is making a difference. So looking forward, it’s always a risk, but I don’t see labor price inflation as being a significant risk.”

The Chinese team is feeling a lot more confident

“Like I said, I think the team and myself are feeling very much more confident. We just this week had all of our store managers, so we had a stadium in the city of Dalian with 8,000 people talking about the theme for the future, which is From Strength to Strength. And in particular, when the KFC section was discussed and we put out plans for the rest of the year and the positioning and the proposed marketing, there was just an unbounded confidence. So I feel that – I really feel the brand is making a lot of progress. It is much stronger. I think the positioning is very clear. ”

I think you always have to be cautious when it comes to China

“I think you always have to be cautious when you come to China, because there is economic volatility, and there is also unexpected twists and turns. So there is nothing hidden; it is not as though we are worried about some specific event or there is something happening that causes us to worry. But you just want to be cautious. We’ve had two years or three years of a lot of volatility.”

Infrastructure growth in China should lead to new store formats

“We are experimenting with multiple store formats to take into account the fact that there is still a very rapid build-out in infrastructure in China. So we’re expecting – very large number of malls are already under construction; the high-speed rail network is being expanded. And then in China, unlike the U.S., there is not the phenomenon at the moment of highways with drive-throughs or the rest stops, and all those are being developed.”

I’m always amazed at how advanced China is digitally

“I’m constantly amazed at how advanced China is digitally. It’s got twice the number of cell phones, smartphones, as the U.S. population. And even in our offices, people go up and down the elevator to go to lunch, they’re looking up where the offers are available and where they can book a table, et cetera. So the action is shifting very rapidly to mobile devices, and both the menu as well as digital marketing is becoming very significant. So we’re working on that. ”

David Eric Russell – Interim CFO, Vice President-Finance & Corporate Controller

China is moving to a more traditional VAT regime

“Okay. So, on the VAT, so currently, China is paying 5% of all their sales in the form of a business tax to the government. What’s happening now is China is moving to a more traditional VAT regime, which is similar to the regime in many other parts of the world, where we will pay 6% of those top-line sales to the government; but we’ll get a credit for some of the inputs that we have into our P&L, commodities, utilities, rent, against that 6% credit”