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CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
EventDescription:Q12016EarningsCallMarketCapasofEventDate:33.44BPriceasofEventDate:82.06
©2014TheStreet,Inc.Al l R ightsReserved Page1of23
YUMBRANDSINC(YUM)EarningsReport:Q12016ConferenceCallTranscriptThefollowingYUMBRANDSINCconferencecalltookplaceonApril21,2016,09:15AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
SteveSchmitt;YumBrands;InvestorRelationsGregCreed;YumBrands;CEODaveRussell;YumBrands;InterimCFOMickyPant;YumBrands;CEOChinaDivisionLarryGathof;YumBrands;Treasurer
OtherPart icipants
DavidPalmer;RBC;AnalystJohnGlass;MorganStanley;AnalystJosephBuckley;BoAMerrillLynch;AnalystJohnIvankoe;JPMorgan;AnalystKeithSiegner;UBS;AnalystDavidTarantino;R.W.Baird;AnalystJeffreyBernstein;BarclaysCapital;AnalystHowardPenney;HedgeyeRiskManagement;AnalystBrianBittner;Oppenheimer;AnalystAndyBarish;Jefferies;AnalystKarenHolthouse;GoldmanSachs;AnalystJasonWest;CreditSuisse;AnalystAndrewCharles;Cowen;AnalystBrettLevy;DeutscheBank;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
AtthistimeIwouldliketowelcomeeveryonetotheYum!Brandsfirst-quarter2016earningsconferencecall.
(OperatorInstructions)
SteveSchmitt,VicePresidentofInvestorRelationsandCorporateStrategy,youmaybeginyourconference.
SteveSchmitt (InvestorRelations):
Thanks,Operator.Goodmorning,everyone,andthankyouforjoiningus.
OnourcalltodayareGregCreed,ourCEO,andDaveRussell,ourinterimCFO.Alsoontoday'scallisLarryGathof,Yum!'sTreasurer;andwe'reverypleasedtohaveMickeyPant,YUMChina'sCEO,onourcallaswell.
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
EventDescription:Q12016EarningsCallMarketCapasofEventDate:33.44BPriceasofEventDate:82.06
©2014TheStreet,Inc.Al l R ightsReserved Page2of23
FollowingremarksfromGregandDave,we'llopenthecalltoquestionsfromtheentireteam.PleasekeepinmindMickyisdialinginfromShanghai,sotherecouldbeaslightdelayinsomeofhisresponses.
Beforewegetstarted,Iwouldliketoremindyouthatthisconferencecallincludesforward-lookingstatements.Forward-lookingstatementsaresubjecttofutureeventsanduncertaintiesthatcouldcauseouractualresultstodiffermateriallyfromthesestatements.
Allforward-lookingstatementsshouldbeconsideredinconjunctionwiththecautionarystatementsinourearningsreleaseandtheriskfactorsincludedinourfilingswiththeSEC.Inaddition,pleaserefertotheInvestorssectionoftheYum!Brandswebsite,www.Yum.com,tofinddisclosuresandreconciliationsofnon-GAAPfinancialmeasuresthatmaybeusedontoday'scall.
Wearebroadcastingthisconferencecallviaourwebsite.Thiscallisalsobeingrecordedandwillbeavailableforplayback.Pleasebeadvisedthatifyouaskaquestion,itwillbeincludedinbothourliveconferenceandinanyfutureuseoftherecording.
WewouldliketomakeyouawareofthefollowingupcomingYum!investorevent.Oursecond-quarter2016earningswillbereleasedonWednesday,July13.
Now,beforeIturnthecallovertoGregIwouldliketobringyourattentiontotwoitemsyoumayhavenoticedinyesterday'srelease.Firstisnewterminology.Wereportedcoreoperatingprofitgrowthof21%forthefirstquarter2016.Coreoperatingprofitgrowthisouroperatingprofitgrowthyear-over-yearexcludingforeigncurrencytranslationandspecialitems.
Second,aspreviouslyannounced,effectiveJanuaryofthisyeartheCompany'sIndiabusinessintegrateditsthreebrandsintoourglobalbranddivisions.Prior-yearfigureshavebeenrestatedintherelease.
Nowit'smypleasuretohandthecallovertoMr.GregCreed.
GregCreed (CEO):
Thankyou,Steve.Goodmorning,everyone.
I'mpleasedwe'reofftoastrongstartin2016,withbetterthanexpectedcoreoperatingprofitgrowthof21%inthefirstquarter.
Thisincludes42%growthinourChinabusiness,duetooutstandingChineseNewYearresultsatKFC,underscoringthepoweroftheKFCbrandinChinawhenwedeliverinsight-drivenmarketingthatresonateswithourcustomers.Companywide,allfourofourdivisionspostedpositivesame-storesalesandoperatingprofitgrowthinconstantcurrency.
Furthermore,weareontracktofinalizethespinoffofourChinabusinessbyyear-end,creatingtwopowerful,independent,focusedgrowthcompanies.
Asyousawinourrelease,we'reraisingfull-yearcoreoperatingprofitgrowthguidanceforYum!Brandsto12%from10%previously.Eventhoughitisstillearlyintheyear,weareconfidentabouttherevisedguidanceandwillupdateyouastheyearprogresses.
Today,I'llgiveyouanoverviewofeachofouroperatingdivisions,andthenDaveRussell,ourinterimCFO,willwalkyouthroughthefinancials.
Sofirst,China.FortheChinaDivision,same-storesalesgrew6%,ledby12%same-storesalesgrowthatKFC.OurKFCbusiness,asareminder,representsabout75%ofouroperatingprofitinChina.
WesawparticularsuccessatKFCduringtheChineseNewYearwithBucketMeals,whichwetailored
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
EventDescription:Q12016EarningsCallMarketCapasofEventDate:33.44BPriceasofEventDate:82.06
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acrossfourcustomergroupsrangingfromkidsbucketstolargergroupmeals.Asaresult,bucketsmixhadamuchhigherpercentagethannormally.Thisliftedaverageticketaswefocusedmoreongrouplocations;andwegainedevenmoreconsumerinsightsthisyear,whichwillhelpourbusinessbothgoingforwardaswellasnextNewYear.
PizzaHutCasualDining,whichrepresentsabout25%ofouroperatingprofitinChina,remainedchallenging.Systemsalesdeclined1%,andsame-storesalesdeclined12%inthequarter.
Atoughmacroenvironmentandcompetitivelandscapecontinuedtoweighonperformance.We'readdressingthiswithurgency,butrealizearecoverywilltaketime.
SowrappinguponChina,we'repleasedwithourfirstquarter'soveralloperatingprofitgrowth,whichcameinwellaheadofourexpectations.Thestrongmarginperformancereinforcesourconfidenceinthefutureearningspowerofthisbusiness.Whenwegeneratesalesgrowth,profitflow-throughisimpressive.
AsStevementioned,MickyPant,ourChinaDivisionCEO,isonthecalltodayandwillbehappytoassistinansweringquestionsyoumayhaveontheChinabusiness.
Now,turningtoourthreeglobalbranddivisions.InourKFCDivision,same-storesalesgrew1%inthefirstquarter,or5%onatwo-yearstack.Operatingprofitgrew7%inconstantcurrencywhenadjustingforincrementaladvertisingspendintheUS.
Thedivisionopened79newinternationalrestaurantsin32countries.77%oftheseunitswereopenedbyfranchisees,and71%ofournewinternationalopeningswereinemergingmarkets.I'mencouragedbyourabilitytogenerategrowthinbothemerginganddevelopedmarkets.
Systemsalesininternationaldevelopedmarketsgrew5%,andininternationalemergingmarketsgrew8%.IrecentlyvisitedwiththeteaminCanadaandwasthrilledtoseetheassetsbeingupgradedandthemarketingpositionedaroundAlwaysOriginal.With6%same-storesalesgrowthinthequarter,I'dsayit'sworking.
I'malsopleasedtoseesuccessinemergingmarkets,whichareakeycontributortoKFC'sgrowthstory.KFCisafranchise-led,emergingpowerhouse,andI'mconfidentthebrandisgettingevenstrongerandwillproducestronggrowththisyearandformanyyearstocome.
PizzaHutgrewsame-storesales3%inthequarterandwasledby5%same-storesalesgrowthintheUS,whichmakesupapproximately60%oftotalsales.Our$5Flavormenuhelpeddrivesystemtransactions,withCompanystoresleadingtheway,up8%inthequarter.
Ourdisciplinearoundmakingiteasiertogetabetterpizzaisholisticanddrivingtraffic.Wearefocusedontheentirecustomerexperiencefromordering,payment,anddeliverytrackingtoourassetsandmenu.AndIbelievethisquarter'sresultsarefurthertestamenttoourmaniacalemphasisonthiswayofthinking.
Weareontracktoreplaceover1,300USovensin2016.Forthosestoresreplacingolderovens,thisshouldresultinaverageenergysavingsof25%inongoingoperationalcostsandafastercooktime.
Fromamarketingcalendarperspective,wearefocusingonbalancingpremiumpriceinnovation,suchasStuffedGarlicKnotsPizza,toprotectandimproveunit-leveleconomicswithcompellingvalueofferingssuchasourongoing$6.99ANYpairsdeal.Allofthiswillenableustoprovideourcustomerswithabetterpizzaatgreatvalue.
OurinternationalbusinessatPizzaHutsawsystemssalesgrowthof3%inconstantcurrencyanda1%declineinsame-storesalesinthequarter.SaleswereespeciallystronginLatinAmericaandCanada,butoffsetbyweaknessesinKorea,Australia,andIndia.
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
EventDescription:Q12016EarningsCallMarketCapasofEventDate:33.44BPriceasofEventDate:82.06
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Wearecommittedtoofferingconsistent,everydayvaluetoourcustomersandwillleverageprovenvaluestrategiesacrossmarketswithsimilarcharacteristics.WehavehighexpectationsfortheinternationalPizzaHutbusiness.Overthelastfiveyears,wehaveopen1,200internationalrestaurants,andwewillcontinuetogrowthisbusinessovertime.
ThebottomlineisthatwehaveestablishedsolidmomentumwithourstrategyintheUS,especiallyaroundthe$5Flavormenu.Andaswerollthisoverallstrategyoutinternationallywehopetoachievesimilarsuccess.
NowturningtoTacoBell.Same-storesalesgrew1%,lagging6%growthayearago,andoperatingprofitgrew4%inthequarter.Restaurantsmarginswereanimpressive21%.
While1%same-storesalesgrowthisnotwhatwe'reusedtoseeingatTacoBell,thetimingofourkeylauncheshadanimpactonsame-storesalesgrowthforthequarter.TheQuesalupa,whichlaunchedinFebruary,mixedatalmost10%anddroveameaningfulliftintransactions.
Wealsolaunchedour$1breakfastmenuinMarch.The$1pricepointisconsistentwithTacoBell'sreputationasthevalueleaderinQSR.
TacoBell'snewbreakfast$1valuemenudifferentiatesitselffromthecompetitorsandputsitattheforefrontofvalueinagrowingdaypart.Wenowhave10$1itemsonthebreakfastmenuandareseeingbreakfastsalesholdat8%andtransactiongrowthaccelerating.
TheTacoBellteamisexhibitinggreatflexibilitytoreadandreacttothecompetitivevaluepressures,andadjustedtheir2016promotionalcalendaraccordinglytohighlightevenmorevalue.Insight-driveninnovation,cravablefood,andbreakthroughvalue--suchastheupcominglaunchesofthe$1BeefyCrunchBurritoandsteakvaluelaterthisyear--shouldboostsalesandfurtherthebrand'smomentum.
Sowe'reofftoagreatstartatYum!.Overthepastseveralquarterswe'vereallyhadthreebusinessesthatneededdramaticimprovement:KFCChina,PizzaHutChina,andPizzaHutUS.I'mpleasedthatwe'vebeenabletoturntwooutofthesethreebusinesses,asKFCChinaandPizzaHutUSareonmoresolidfooting.
Nowlet'sbeclear.We'renotoutofthewoodsonthesebusinesses,butwe'vemadealotofprogressandwe'llcontinuetofocusondeliveringbetterresults.
Asyou'veheardmesaybefore,thisisatransformationalyearforYum!aswefinalizethespinoffofourChinabusiness,creatingtwopowerful,independent,focusedgrowthcompanies.Ourbrandstrength,unwaveringfocusonthecustomer,andinnovativefoodofferingsdrivenbyconsumerinsightswillallowustogrowYum!intoanevenbetterglobalCompany.
ThisisanexcitingtimeandpivotaltimeforourCompany,andIlookforwardtowhatthefutureholds.AndwiththatI'llhandthecallovertoDave.
DaveRussell(InterimCFO):
Thanks,Greg,andgoodmorning,everyone.InmyremarkstodayI'llcoverthreeareas:ourfirst-quarterresults;ouroutlookfor2016;andanupdateonourplannedrecapitalizationandthespinoffofourChinabusiness.
AsGregmentioned,weareverypleasedwithourstrongfirst-quarterresults,wherecoreoperatingprofitincreased21%.EPSbeforespecialitemsgrew19%,includinga5-pointnegativeimpactfromforeigncurrency.
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
EventDescription:Q12016EarningsCallMarketCapasofEventDate:33.44BPriceasofEventDate:82.06
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TheseresultswereledbybetterthanexpectedsalesandrestaurantmarginsatKFCChina.EPSalsobenefitedfroma5%reductioninourdilutedsharecountcomparedtoourfirstquarterlastyear,duetooursignificantsharebuybacksoverthepast12months.
I'llnowtakeyouthroughourresultsbydivision,startingwithourChinabusiness.FortheChinaDivisionoverall,same-storesalesgrew6%inthequarter.
KFCgrewsame-storesales12%,whichwassequentiallybetterthanQ4andexceededourexpectations.AsuccessfulChineseNewYearpromotiondroveresults.AsGregsaid,theKFCbrandinChinaisreallypowerfulwhenyoudeliverinsight-drivenmarketingthatresonateswithourcustomers.
Same-storesalesatPizzaHutCasualDiningremainedsluggish,declining12%inthequarter.WeareworkingtostartturningthePizzaHutbusinessaroundinadifficultmacroandcompetitiveenvironment.
Restaurantmarginimproved3.5percentagepointsversustheprioryearto22.4%,helpedbysalesleverageatKFC,productivityinitiatives,andcommoditydeflation,morethanoffsettingsalesdeleverageatPizzaHut.
WhileourfirstquarterisaseasonallyhighsalesperiodfortheChinaDivision,restaurantmarginsofover22%giveustremendousconfidenceinthefutureearningspowerofthisbusiness.Whenwedeliversolidtop-linegrowth,theprofitsareimpressive.
OneothernoteonChina'sfirst-quarterresults.Wehadaleapyearbenefitthataddedanadditional$6millionofoperatingprofitinQ1toChina'sresults.However,wepulledsalesfromtheleapdayoutofoursame-storesalescalculation,sincetheextradayhadnoimpactonourreported6%same-storesalesgrowth.ThewayourreportingcalendarsworkhereatYum!,noneofourotherdivisionssawanyimpactfromleapyearinQ1.
NowmovingtoourglobalKFCDivision,whichposteditsninthconsecutivequarterofsame-storesalesandprofitgrowth.Emergingandinternationaldevelopedmarketseachgrewcomps1%.TheUSrecordeditsseventhconsecutivequarterofsame-storesalesgrowthdespiteoverlapping7%compsinthefirstquarteroflastyear.
Operatingmarginsimproved30basispointsinconstantcurrency,andcoreoperatingprofitgrew4%inthequarter.Adjustingfortheincrementaladvertisingexpenseassociatedwiththeaccelerationagreementwereachedwithourfranchiseesin2015,coreoperatingprofitgrew7%inthequarter.
Asareminder,theaccelerationagreementwithourUSfranchisees,whichwentintoeffectduringthesecondquarteroflastyear,callsforustoinvestincrementalmediaof$20millionin2016asopposedto$10millionlastyear.
OurglobalPizzaHutDivisiondelivered3%same-storesalesgrowthforthequarter,ledby5%same-storesalesgrowthinourUSbusiness.Same-storesalesgrowthandlowerG&Aexpensesdrovecoreoperatingprofitgrowthof9%.
Thisisthebestresultwe'veseenonPizzaHutUSinyears,andwebelieveourstrategyisworkingtodriveincrementaltransactions.IampleasedtoseemomentumbehindthebusinessandbelievewecantransferourUSlearningstobenefitthesystemglobally.
Digitalcontinuestogrowinimportancetooursales,comprising46%ofUSdeliveryandcarryoutsales,a3percentagepointincreaseversusayearago.OnSuperBowlSundayalonewetookover500,000digitalorders,representingabout50%ofsalesonwhatwasanall-timerecorddayforthebusiness.
Withdigitalorderscomehigherlevelsofloyaltyandhigheraveragespend,sowe'reinvestingasyou
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
EventDescription:Q12016EarningsCallMarketCapasofEventDate:33.44BPriceasofEventDate:82.06
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wouldexpect.Alongthoselines,wearemakingprogressinmigratingtoasinglepoint-of-salesystemintheUSbytheendof2017,whichwillallowustobemorenimbleaswerolloutdigitalinitiativesgoingforward.
Finally,TacoBellfacedincreasedvaluepressurefromtheburgerchainsinthefirstquarterandposted1%same-storesalesgrowth.Same-storesalesimprovedthroughoutthequarter,andweremainconfidentinachieving3%same-storesalesgrowthfortheyear,withastrongersecondhalfthanfirsthalf.
Despitethelowerthanexpectedfull-quartersales,operatingmarginimproved150basispointsto28%andoperatingprofitgrew4%.Restaurantmarginsalsoimproved150basispointsat21%,andweexpectfull-yearmarginstobegreaterthan20%thisyear,albeitslightlylowerthanlastyear.
Onthedevelopmentfront,weopened49newrestaurantsinthefirstquarter,with90%openedbyfranchiseesandlicensees.Ofournewopenings,sevenwereinternationalunits.WeexpecttoopenarecordnumberofTacoBellunitsinternationallyin2016aswecontinuetomakeprogressinbuildingouttheunit-leveleconomicsasweenterintonewcountries.
I'dnowliketoshifttoour2016outlook.Withourstrongfirst-quarterresultsandthechangeinChina'staxlaws,wherebyavalue-addedtaxorVATisreplacingthebusinesstax,weareraisingourfull-yearcoreoperatingprofitgrowthforecastto12%from10%forYum!.ForalittlebitofbackgroundontheVAT,Chinarecentlyannouncedfurtherreformtoitsretailtaxstructure,whichisintendedtobeaprogressiveandpositiveshifttomorecloselyalignwiththemoremodernservice-basedeconomy.
Underthisreform,a6%outputVATwouldreplacethe5%businesstaxcurrentlyappliedtocertainrestaurantsales.InputVATwouldbecreditabletotheaforementioned6%outputVAT.ThischangeiseffectiveMay1,2016;soitinnowayhadanyimpactonourfirst-quarterperformance.
WhileitisdifficulttoestimatetheimpactofthisVATreformpriortoitsactualimplementation,YUMChinacurrentlyexpectsapositivefinancialbenefit,furtherenablingcontinuedinvestmentinthebusinessandcreatingthousandsofadditionaljobsinChina.
WhileweareraisingourforecastforcoreoperatingprofitgrowthfromYum!from10%to12%,we'remaintainingourguidanceforChinasame-storesalesof2%to3%forthefullyear.Fromamodelingstandpoint,therearetwootherthingstobearinmindasyoubuildyourforecast.
First,thesecondquarterinChina,whichistypicallyourseasonallylowquarter,happenstobeourtoughesthurdleoftheyearonatwo-,three-,andfour-yearstackedsame-storesalesbasis.Second,wehaveanRGMconventioninthesecondquarterthatwedidnothavelastyearthatweexpecttocostaround$7million.Itisimportantforyoutonotethesefactorswerefullyfactoredintoourinitialguidance,andourfirst-halfandfull-yearperformanceisexpectedtoexceedourexpectationscomingintotheyear.
All-inforYum!,weoutperformedourexpectationsinfirstquarterandareraisingourfull-yearguidanceto12%coreoperatingprofitgrowth,includingthe53rdweek.ThistakesintoaccountthestrongfirstquarterproducedbyKFCChina,weaknessatPizzaHutCasualDining,andtheexpectedVATbenefitinChina,inadditiontoourbranddivisionscontinuingtoproduceresultsconsistentwithourinitial2016targets.
Itisearlyintheyeartoraiseguidance,butwefeelconfidentgivenwherethingsstand,andwe'llupdateyouastheyearprogresses.
NowI'dliketoquicklyupdateyouonourspinoffplans.Weremainontracktocompletethespinoffbyyear-end.
WeplanonfilingourinitialForm10byearlyMayandconductingcomprehensiveroadshowsaheadoftheseparation.Thisspinoffwillestablishtwouniqueinvestmentopportunitiesandcreateoneofthelargest
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
EventDescription:Q12016EarningsCallMarketCapasofEventDate:33.44BPriceasofEventDate:82.06
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US-listedChinaretailbusinesses.
AnotherkeyaspectofourstrategyistooptimizethecapitalstructureofYum!.Giventhesignificantimprovementwe'veseenrecentlyinthedebtmarkets,we'dliketoannounceanothermilestoneinourpreviouslycommunicatedplanoftargetingcompanywideleverageofapproximately5timesEBITDA.
InearlyMay,weplantoenterintoanewfinancingfacilityofatleast$2millionsecuritizingTacoBellUSroyalties.Asanextstepinourplan,subsidiariesthatoperateourKFC,PizzaHut,andTacoBellbusinesses,excludingtheTacoBellsubsidiariesincludedinthesecuritizationfinancing,areexpectedtoenterintoanewseniorsecuredcreditfacilityandissuenewhigh-yieldnotes.Moredetailswillbeforthcominginaseparatereleaselatertoday.
Inlinewithwhatwe'vepreviouslycommunicated,weplantocompleteourrightscapitalizationandhaveapproximately$9billionofdebtoutstandingbytheendofthesecondquarter.
Finally,sinceweannouncedinOctober2015ourintentiontoseparatetheChinabusiness,wehaveboughtback24.7millionsharesatanaveragepriceof$71,returningatotalof$1.8billiontoshareholders,excludingdividends.Aspreviouslyannounced,ourrecapwillenableustocompleteanadditional$4.4billionreturnofcapitaltoshareholders.
Soletmewrapthingsup.I'mpleasedwestarted2016offwithastrongquarter.We'reconfidentwe'lldeliver12%coreoperatingprofitgrowthforthefullyear,andwe'reproceedingasexpectedwiththeseparationofourChinabusinessintoanindependent,publiclytradedcompany.Weareworkingdiligentlytosetupbothcompaniesforfuturesuccessandlookforwardtoupdatingyouonanyprogressthroughouttheyear.
Withthat,I'llhandthecallbacktoGreg.
GregCreed (CEO):
Thankyou,Dave.
BeforewestartQ&A,IwanttoprovideabriefupdateonourplansfortheChinabusiness.Youmayhaveseenrecentnewsstoriesaboutasaleorapotentialstrategicinvestor.
IwanttoassureyouthatwearefullycommittedtomaximizingthevalueofourChinabusinessforthebenefitofourshareholders,andwewillcarefullyconsideralloptionstoachievethatgoal.
Asyouknow,weannouncedinOctoberthat,aftercarefulconsideration,webelievethatthebestwaytomaximizeshareholdervalueistospinoffourChinabusinessbytheendofthisyear,andwearemakinggreatprogresstowardsthespinoff.Wewon'thaveanyfurthercommentonthis.
AndwiththatIwillopenthecalluptoQ&A.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
DavidPalmer,RBCCapitalMarkets.
DavidPalmer (Analyst-RBC):
Thanks.FundamentalquestionaboutChinaforMicky,ifImay.RegardingPizzaHut,whathaveyoudonesofar,perhapseventhroughthesecondquartertodate,withregardtothemenuandthemarketing?I
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
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knowyouwantedtogetbacktothatfive-stardiningatthree-starprices.Haveyoudonestuffsofar?Howisthatworking?
AndhowhasyourthinkinggenerallyevolvedaboutthetimetableforaturnaroundforthePizzaHutbrand?Thanks.
MickyPant (CEOChinaDivision):
Thankyou,David.Ihopeyoucanhearme,becauseIhadabitoftrouble;I'llspeakslowly.FirstonPizzaHut,IjustwantedtosaytoallofyouthatitisanextremelystrongbrandinChina.Allourconsumermetrics,thebrandimagetrackingthatwedoregularly,showsthatbrandregard,valuescores,foodscoresareveryhighandthey'verecoveredfullyfromthecrisisthatwehadacoupleofyearsago.
Weopened280newPizzaHutslastyear,andnewunitreturnsareverygood.Overthelastfouryearswe'veopened1,000PizzaHutdine-inrestaurantsalone,andwedwarfthecompetition.Soitisaverystrongbrand.
Itistruethatsame-storesaleshavebeennegative.Butin2015,forexample,oursystemsaleswereup10points,andwedotrackthroughCRESTin22citiesandalsothroughpubliclyreportedcompaniesthatoperateincasualdiningheretheoverallcasualdiningperformance.Anditisourunderstandingthatwegainedmarketshare.
Partofthereasonthecasualdiningsectorhasbeenhithasbeenduetoadeclineinconsumerconfidence.AsweexplainedinDecemberlastyear,partofitwasonaccountofthefactthathomedeliverytoaggregatorsisgrowing.
Thislatterphenomenonhastaperedoffabitonaccountofburnouts,etc.,sowefullyexpectthatPizzaHutwillturnthecorner.Itisastrongbrand;themarginperformancehasbeengood.Oursaleswereminus1%systemsalesinthefirstquarter,butourgoalistogettosame-storesalespositive.
Icannotputadateonit,David,becausethemarketisvolatile.Butwe'redoinganumberofthings.
Firstisthatwehaveshiftedthefocusbacktothecoremenuwithalotofpizzaactivity.Sowewillhavemorepizzainnovationinthenextsixmonthsthanwe'vehadinalongtime,andthesehavetestedverywell.
Thesecond,Ibelieve,isourvaluescoresareactuallygood.YoucaneatlunchataPizzaHutatjustalittlemorethanataKFC,sothereisnoneedforanymargincompression.
Butwedoneedtocommunicatethatvaluebetter,whichwehavestarteddoing.We'veclarifiedthebrandpositionsignificantly,andwe'vehiredoneofthebestcelebritiesinChinatobringthatpointhome.
Andlastly,wecontinuetoemphasizecustomerservicethroughtheprogramsthatwepresentedinDecember.SowiththatIfeelmuchbetteraboutPizzaHutthanIdidafewmonthsago.Butofcourse,I'mdisappointedthatsame-storesalesarestillnegative.
Imightalsoremindyou,asyouknowverywell,thatPizzaHutisabout25%ofoursalesandourprofits.SoonewaytolookatitisthatthreeofthefourenginesthatdrivetheYUMChinabusinessareKFC;andwithKFCperformingwell,IthinkwehavetheabilitytosortPizzaHutincomingquarters.
Operator :
JohnGlass,MorganStanley.
JohnGlass (Analyst-MorganStanley):
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
EventDescription:Q12016EarningsCallMarketCapasofEventDate:33.44BPriceasofEventDate:82.06
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Thanksverymuch.Micky,I'llkeepyouontheline.OnKFC,youtalkedaboutBucketpromotionbeinganessentialdriver,sohowmuchofthesuccessinthefirstquarterwasrelatedjusttothat?
Iguessrelated,ifitwasvery--ifitwasasuccessfulpromotion,howmuchofthatsustainsgoingforward?Ifyoucantalkaboutsustainabilityofthosesales,maybesincewe'rewellintoAprilhere.
Canyoualsojust--commoditiesweresignificantlydeflationarythisquarter.Ithinktheyaresupposedtobeupthisyear.Soareyouchangingyourviewoncommodities,orwasthisjustthetimingofbettercommoditiesinthefirstquarterbutnotfortheyear?
GregCreed (CEO):
John,it'sGreg.Imightjust(multiplespeakers)Micky,Iwasjustgoingtojumpinfirstandthen,obviously,letyouprovidethedetail.Look,firstIwanttocommendMickyandtheentireChinateamforwhatIthinkisafantasticQ1.KFCChinadelivered12%same-storesalesgrowth;andasyoucanseefromthe42%growthinopprofit,theearningspowerofthebusinessisextraordinarywhensalesareworkinginourfavor.
We'reveryencouragedthatwe'venowhadthreeconsecutivequartersofsame-storesalesatKFCChina.Ithink,fortunately,wedidn'tassumeandwedon'tneedheroicnumberslikethistocontinuethroughouttheyeartoreachour2016guidanceof2%to3%same-storesalesgrowth.AndrecenthistoryshowsthatsalesinChinahavebeendifficultforustocall.
Regardingourexpectationscomingintotheyear,KFCsaleswereobviouslymuchbetterinQ1thanwecould'veimagined.InQ2,we'reclosertowherewethoughtwe'dbeforKFC,aswebelievethatoursuccessfulChineseNewYearmayhavepulledforwardsomeofourearlyQ2salesintoQ1.
Thatsaid,sixweeksintothequarter,KFCsalesareslightlypositive,andwe'reencouragedbywherethebusinessisgoing.Obviously,I'llletMickyspeaktothatinmoredetail.
Asweknowthatwe'vestillgotalotworktodoonPizzaHutinChina.Quarter-to-datesaleshaveremaineddouble-digitnegative.ButagainasDavementioned,ourQ2lapsatbothKFCandPizzaHut'smoredifficult,especiallywhenyoulookatthesemultiyearstacks.
Wefeelgreataboutthestarttotheyear.We'reconfidentlyraisingourguidance.WestillexpectChinafull-year--ChinaDivisionsame-storesalestobeinthe2%to3%range,whichisconsistentwithourexpectation.
Sowiththat,I'lljustletMickytakeover.IjustwantedtocomplimentMickyandtheteamforajobwelldone.
MickyPant (CEOChinaDivision):
Thankyou,Greg.Ithink,John,thereweresomefactorsthatwereuniquetoQ1,andthatistodowiththeChineseNewYear.ItwastheYearoftheMonkeyandwewerefortunatethatthe--actuallyitwasnotjustfortune,buttheteamofKFChasreallyhittheirstride.JoeyWatt,whoisaveryaccomplishedretailexecutive,hasnowreallyunderstoodtherhythmoftheKFCbusiness,andtheyputtogethera1,2,3puncharoundtheChineseNewYear,extendingitfromthetraditional10daystoaboutfourweeks,centeredaroundaverypowerfulBucketpromotion,butalsothanwithactivityafterwardsfeaturinga[greater]sandwich,whichwasgoodthinking,becauseafteraheavyChineseNewYearpeoplearelookingforahealthierfare.
SothataspectwasuniquetotheChineseNewYear,andIthinkitwasaspectacularlysuccessfulpromotion.Somebodyaskedmehowwe'lleverlapthatnextyear,andIthinktheonebitofgoodnews
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wehaveisnextyearisactuallytheYearoftheChicken.Sowestartedworkalreadyonthepromotionsthatwillberunning.
ButsomeofthefactorsthatworkedinQ1actuallygivemeencouragementforKFCoverall.Thefirstisthesuccessofsellingourcoreproducts:friedchicken,hotwings,frenchfries,eggdots,andallthefamiliarfavoritesinChina.WeareextendingthatprinciplebydoingmoreactivityaroundBucketsinthebackhalfoftheyearandalsointroducingBoxMeals,whichareaproveninternationalsuccess,whereyoucanbuyafairly,agood--it'saslightlylittlebitmoremoneybutsignificantlymoreproduct.
Asyoucanimagine,followingaverylargesuccessinJanuaryandFebruary,wehitalmostrecordvolumesintheamountofchickenthatwedidsell.Andalso,thatsalewasaccompaniedbycorrespondingtraffic.Theticketimpactonoursalesofplus12%inQ1wasabout3%.Soitwasn'tasthough--sorry,thepricingimpact.
Soitwasn'tasthoughwetookpricingtogetthere.Thepriceimpactwasonlyplus3%.
Therestofitwasonaccountofthefactthatpartysizesfortheselargebucketswereverylarge.Andalsotherewasasignificantincreaseinthenumberofitemsboughtperperson,becausethepromotionwasverywellrun.
InQ2we'reabouthalfwaythroughthequarter.ThepleasingthingisthatKFCispositive.ButasGregsaid,there'salotofvolatilityaroundit.
It'sadifficultquarterbecausewe'vegottoughlaps.We'vehadsomeexpenses.
OurgoalasateamhereistomakeQ2thisyearthefourthconsecutivequarterofpositiveKFCsame-storesales.ButIcannotsaythatthat'saguaranteeuntilwehavemorevisibility.
Butthefactthattheflow-throughwasverystronginprofitterms,thesimplificationofthemenuboards,whichwaswellconducted,thestrengthofthemarketingcalendarinthebackhalfgivesmeandtheteamalotmoreconfidencethatwehadsixmonthsago.
SteveSchmitt (InvestorRelations):
Thanks,Micky.
DaveRussell(InterimCFO):
First,tofurtherwhatMickysaidalittlebit,too--thetimingofChineseNewYear,withitbeingalittlebitearlierthisyear,didprovideaslightbenefittoQ1whichwillbealittlebit--hurtsQ2alittlebit.Sothatwasalittlebitonthesalesline.
Asfarasyourcommoditiesquestion,John,wesawa2%declineincommoditiesinChinaduringthefirstquarter.Andwearestillonourforecastforplus1%forthefullyear.
Operator :
JosephBuckley,BankofAmerica.
JosephBuckley(Analyst-BoAMerrillLynch):
Thankyou.Yougavealittlebitofthisinanswertothelastquestion,butcouldyoutalkabouttrafficversuspriceversusmixforbothKFCChinaandKFCPizzaHutduringthequarter?
SteveSchmitt (InvestorRelations):
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Joe,it'sSteve.Forthedivision,wehadabout--forthe6%compforthedivision,wehad9pointsofcheckgrowthanda3-pointdeclineintransactionsoverall.
JosephBuckley(Analyst-BoAMerrillLynch):
Okay.Presumably,though,positivetransactionsatKFC?
SteveSchmitt (InvestorRelations):
That'sthenumberforthedivision.
MickyPant (CEOChinaDivision):
Yes,wehadpositivetransactionsatKFC.AsIsaid,thetransactionnumberaswemeasureditisthenumberofticketswecutinthestore.But,asIexplained,thesizeoftheticketwasbiggeronaccountofshareablemeals,principallytheBucket.
Soweestimatethatthepriceimpactonoursaleswasabout3%,andtherestofitwasonaccountoftrafficplusalargercheckonaccountofmoreitemsbeingbought.Soitwasafairlyhealthygrowth.
JosephBuckley(Analyst-BoAMerrillLynch):
Thankyou.Thenjustswitchingtopicsforamoment,PizzaHutUSnumberslookprettygood.PizzaHutinternationalslightlynegative.
CanyoutalkalittlebitaboutPizzaHutinternational,andwhat'sgoingonthere,andwhatchangesyoucouldimplementthere?
GregCreed (CEO):
Yes,certainly,Joe.Ithinkthegoodnews,asyousaid,isPizzaHutUShadanexcellentquarter:same-storesalesup5%,Companytransactionswereup8%.Ithinkacombinationofthe$6.99pairsandthe$5Flavormenuhavecertainlyworked.
Obviouslywhatwe'redoingnowisintheprocessoftakingthatsuccessandallthetacticsthatareassociatedwiththatandexpandingthatrapidlyonaglobalbasis.Likeallthings,thisbusinessisverymuchdrivenbyourUSsuccess,andIthinkwhatwe'redoingnowisintheprocessofrollingoutthatUSsuccessandtakingitaroundonaglobalbasis.
IhappenedtobeinThailand,actuallyinJanuary,earlierintheyear,andyoucanseealreadythatthatteamwasstartingtotakethesuccessfultacticsthatwereworkingandstarttoseehowwecanimplementthoseinthatcountry.Andthat'shappeningaroundtheworld.
Operator :
JohnIvankoe,JPMorgan.
JohnIvankoe (Analyst-JPMorgan):
Thankyouverymuch.Twounrelatedquestions,ifImay.Firstoneforyou,Micky.
Foranumberofyearsnow,laborcosts,labordollarsperoperatingweekinChinahavebeenaprettymajorcontributortomargins.Asyoudoplantoregrowcustomertraffic,obviously,inthesegmentandwanttostaycompetitivewithwages,areweatthepointnowwherelaborstartstoinflecttheotherway,andaddingbackcostsintothesystemthathavebeentakenoutoverthelastseveralyears?
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MickyPant (CEOChinaDivision):
Well,it'struethatoverthelastfiveyearslaborhasinflatedinChinaonaccountofminimum-wageincreasesbythegovernment.Butwe'veseenamoderationofthat.Ithinktheauthoritiesrecognizethattheeconomyhastobesupported,soIthinkwe'reseeingamorereasonablepicturethere.
Whatwedidgetinthequarterparticularlywassomegoodproductivitygainsonaccountofusingmorepart-timeandstudentlabor,whichisaphenomenonthatdidnotexistinChinainthelongpast,andthatismakingadifference.Solookingforward,it'salwaysarisk;butIdon'tseelaborpriceinflationasbeingasignificantrisk.
Ithinkthekeyforusisgoingtobeproductinnovation,sensiblepricing,andgettrafficscoresback.SoIhopethathelps.
JohnIvankoe (Analyst-JPMorgan):
Okay,thankyou.Thensecondly,Ithoughtthecommentaryonthecapitalstructurewasinteresting,inthatpartofthenewcapitalstructureisgoingtobearoyaltysecuritizationonlytoTacoBell,whichIdon'tthinkyourpreviousdebtactuallyassigneditselftoindividualbrands.SoIjustwantedtounderstandthesymbolismbehindthedebtsecuritythat'sonlyrelatedtoTacoBell.
Couldpeople'simaginationstarttothinkthatTacoBelldoesn'tnecessarilyremainapartofYum!overthelongtermifanopportunityarises?
LarryGathof (Treasurer):
Hi,John;it'sLarryGathof.I'llanswerthedebtaspectofitanyways.Butwhatwe'redoingiswe'retryingtotakeadvantageofthedebtmarketsintotal.Sowe'relookingatdoingbothasecuritization,bankandbonddebt;sowe'reputtingdebtacrossallthedifferentavenuestoagaingetthebestpricingandoptimizeourbalancesheet.
TheTacoBellsecuritizationisonlygoingtobeontheUSTacoBellfranchiseandlicensefees.Soit'sjustthatpart.
TherestoftheTacoBellbusinesswillalsobepartoftheotherborrowings.Soagainthesecuritizationmarket,quitehonestly,isn'tdeepenoughtodoanyoneofourentirebusinesses;sowejustpeeledoffthepiecethatwethoughtwasmostappropriateforasecuritizationandareaccessingthatmarket.
Thenagain,we'llhavethebalanceoftheborrowingsacrossallthreebrandsafterthat'scompleted.
GregCreed (CEO):
John,toputitbluntly,Iwouldn'twantanyonetotakeawayanythinkingthatwe'regoingtobedoinganythingtoTacoBell,otherthanloveitasapartoftheportfolio,loveitsgrowth,loveitsprofitcontribution,andlovethatitisabrandthatwecantakeglobal.
JohnIvankoe (Analyst-JPMorgan):
Thankyou.
Operator :
KeithSiegner,UBS.
KeithSiegner (Analyst-UBS):
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Thanks.Greg.Justaquestionforyou,havingcomefromtheTacoBellbrandandhavingwatchedthatbrandbeoneoftheleadersintermsofoveralldigitalengagement,mobileordering,andmore.Wheredoyou--howdoyoufeelabouttherestoftheUSportfolioandpositioningnow?
Areyoumakingtheprogressyouwant?IsPizzaHutbecomingmoreofaleaderinitscategories?IsKFCalsocomingalong?
Andthenwhatabouttestsondeliveryforotherbrands?LikewholemealreplacementforKFCandevenforTacoBell.IstherestoftheUSportfoliocatchinguptoTacoBell?Wheredowestand?Thanks.
GregCreed (CEO):
Keith,goodquestion,andIwouldsay:Yes.IthinkthegreatthingiswecancodifywhatmakesTacoBellsuccessful;andobviouslytheothertwobrandscanobviouslytrackwithwhatthey'vedoneandobviouslyattempttoreplicateit,butintheirownbrandvoice.
SoI'mverypleasedwiththeprogressthatPizzaHut'smaking.Ithinkitspositioningaroundmakingiteasiertogetabetterpizza,Ithinknotonlythesalesgrowthbutthetransactiongrowththatwejustgot.Obviously,partofmakingiteasierwastogetourvaluebetteronPizzaHut,whichwe'vedone.
ButIthinkyou--aswealsosaidonthecall,weareinvestingintechnology.WedoneedtogetfromninePOSsystemsdowntoonePOSsystem.
Butaswealsosaid,46%ofourdeliverycarryoutsalesaredigital;andthat'sgrowing.SoIdothinkwe'remakinggoodprogressthere.
OntheKFCside,IthinktheAlwaysOriginalpositioning,themovebacktoFingerLickin'Good,thegreatthingaboutKFCintheUSisit'sthebrandthat'snowbeingtalkedabout.Ithinkforalongtimeitwasn'tonanyone'sradarscreen,soI'mverycomfortable.
IthinkthelaunchofNashvilleHothasreallyhelped.Obviouslythereisavaluegamebeingplayedbytheburgerboysbecauseofbeefpricing;butIthinkthereturnto$5boxeshasbeenagoodmovebytheKFCteam.
AndthenforTacoBell,yes,theanswerisIthinkwe'renowin500storesdoingdeliveryinacoupleofthekeycities--LosAngeles,SanFrancisco,Dallas;I'mnotquitesurewhereelse,but--sothat'sbeenexpanded.
Ithinkifyoujusttaketheoverallconceptofeasybeatsbetter,whichIknowthePizzaHutteamoriginated,butwhatitbasicallysaysis:Yes,we'vegottofindwaystomakeiteasierforourpeople,forcustomerstogettoourbrands.Wedothattwoways:webuildmoreunits,butwealsoobviouslywillstartlookingatdeliveryasawaytogetourfoodtocustomersintheirhome.
Soverygoodquestion.We'remakingprogress.Theotherbrands,Ithink,aremovingtowheretheTacoBellbrandstrengthis.
Alotofworktobedone,butIthinkwe'removingintherightdirection.I'mencouragedbythat.
Operator :
DavidTarantino,Baird.
DavidT arantino (Analyst-R.W.Baird):
Hi,goodmorning.Myquestionisontheguidancefortheyear.Iwaswonderingifyoucouldprovidesome
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additionaldetailorinsightonwhatyou'reassumingforChinaprofitgrowthfortheyearinthatguidance;andmaybealsothemarginthatyouexpecttodeliverinthatbusinessforthefullyear.
DaveRussell(InterimCFO):
Sure.ThefirstthingI'dsayisifyou'regoingtohaveagoodquarteratYum!youwantittobethefirstquarteroftheyear,whichiswhatwecertainlydidandhadablowoutquarterinChina.Whenwelookedatthatfirstquarter,aswellassomeoftheother--thetailwindswehaveinthebusinesswithregardstotheVATwetalkedaboutearlier--thoughit'sverydifficulttoquantifythebenefit;weknowthere'ssomethingthere--someofthecommoditydeflationthatwe'reseeing,wefeltveryconfidentthatevenwithsomeoftheotherheadwindswe'refacing,particularlyPizzaHutCasualDininginChina,ofgettingtoanumberthatwasup12%fortheyear.
Aswesaidwehavenotyet--wehavenotadjustedthesame-storesalesforecastforthebalanceoftheyearforChina.It'sjusttoodifficulttocallgivenwe'reonlythreeandahalfmonthsin.Butatthispointwefeelverycomfortablewiththe12%.
GregCreed (CEO):
Imean,thewayIlookatitistoraiseguidanceinthefirstquarterdemonstratesadegreeofconfidencewe'vegotintheyear.Aswesaid,therewillbesomeputsandcallsastheyearunfolds,nodoubt;butwefeltconfidentinraisingitfrom10%to12%.
DaveRussell(InterimCFO):
YouaskedspecificallyaboutthemarginsinChina.Giventheyaresodependentuponsales,we'restillthinkingsomewherealong--we'renotcomingoffourguidancefromthebeginningoftheyeararound16%atthispoint.
DavidT arantino (Analyst-R.W.Baird):
IfI'mstillon,Iguessifthemarginguidancestillisaround16%fortheyear,IguessI'malittleconfusedonthat,giventheoverperformanceinQ1.Wastheresomethingthatchangedabouttheoutlookforthelastthreequarters?Oristhissomelevelofconservatismthatyou'rebakinginorperhaps--?
DaveRussell(InterimCFO):
No,Idon'tthinkso.Idon'tthinkwe'rethinkingaboutitnecessarilyinthatlevelofdetail.Ithinkwe'resayingit'sjusttooearly.
We'reofftoagreatstart.WiththeQ1successthatwehadwefeelverygoodwiththe12%.ButIdon'tthinkyoushouldbereadingthatintothebalanceofyourforecast.
Operator :
JeffreyBernstein,Barclays.
Jef f reyBernstein (Analyst-BarclaysCapital):
Great;thankyouverymuch.Twothings.Justone,IwashopingtogetalittlebitmorecolorfromMickyontheChinaside.Obviously,withtheshort-termstrength,whichseemstobeattributedtotheNewYear'spromotion,justwonderinghowinyourmindyouperhapsseparatethatfromthelonger-termrecoveryefforts?
Justitseemslikeyou'reconfidentthatthebrandIthinkyousaidhasreallyturned.Butthenitseemslike
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maybeinMarchandinAprilthingshavereallyeased.SoI'mjustwonderinghowyouthinkaboutthebusinessoverthenext12monthsintermsofjustshort-termspikesbecauseofpromotionversusthelong-termtrajectoryimproving.AndthenIhadonefollow-uponTacoBellUS.
MickyPant (CEOChinaDivision):
Yes,well,thanks,Jeffrey.LikeIsaid,Ithinktheteamandmyselfarefeelingverymuchmoreconfident.Wejustthisweekhadallofourstoremanagers--wehadastadiuminthecityofDalianwith8,000people,talkingaboutthethemeforthefuture,whichisFromStrengthtoStrength.Inparticular,whentheKFCsectionwasdiscussedandweputoutplansfortherestoftheyearandthepositioningandtheproposedmarketing,therewasjustanunboundedconfidence.
SoIfeelthat--Ireallyfeelthebrandismakingalotofprogress.Itismuchstronger.Ithinkthepositioningisveryclear.Thecalendarsarestrong.
Wearedoingsensitivethingsaroundthecoreofthebrand.We'vealreadycleanedupthemenuboards;wewilldothatevenmore.We'reintroducingproveninternationalwinners.
IthinkyoualwayshavetobecautiouswhenyoucometoChina,becausethereiseconomicvolatility,andthereisalsounexpectedtwistsandturns.
Sothereisnothinghidden;itisnotasthoughweareworriedaboutsomespecificeventorthereissomethinghappeningthatcausesustoworry.Butyoujustwanttobecautious.We'vehadtwoorthreeyearsofalotofvolatility.
Sothewaywearelookingatitrightnowisit'sashowme,don'ttellmesortofstory.We'rehopingquarterafterquartertoimproveandstrengthenthebusiness.
Ithinkit'sbeenmentionedanumberoftimesQ2isgoingtobeadifferentdifficultquarteronaccountofavarietyoffactors.Butweareveryfocusedonseeingwhetherwecandeliverpositivesame-storesalesandtakeitfromthere.
SoonKFCIfeelconfident.Ifeelthatthebrandismakingalotofprogress.
Theotherthingwedidn'ttalkabouttodayisthatwe'vespentalotofenergyandaregoingtobetakingverygoodcareofstorerefurbishment.Wehavegooddesigns,we'vegotgoodplansforaggressiverefurbsofsomeofourolderstores.Weareopeningasymbolicallyimportant5,000thstoreinShanghai,whichis,Ithink,maybethebestKFCintheworld.It'sastate-of-the-artgreenstorewhichwillopennextweek.SoIthinkthebrandismakingprogressoneveryfront.
OnPizzaHut,likeIsaidbefore,Iamverydisappointedatnegativesame-storesales.Idon'tseeanyreasonwhywecannotturnitaround.Thereisnointrinsicreason.
Allourscoresaregood;ourcompetitivepositionisfantastic.Therereallyisnointernationalcompetitorwiththename.Andinadditiontothe1,500dine-instoreswe'vegotabout300deliveryunitswhichdwarfthecompetition.
SoIfeelthebrandsaretechnologygenuinelymakingprogress.It'sjustthatit'sbeentwomonths--thefirstquarterwastwomonths.Andtomakeacallontherestoftheyearknowingwhatwe'veseenoverthelastthreeyearsseemstobeoutoftheboundsofwhatweshouldbedoing.Sothathopefullygivesyousomecontextonthewaywe'relookingatit.
Jef f reyBernstein (Analyst-BarclaysCapital):
Forsure.ThenGreg,Ijustwantedtofollowup.YoumadeacommentabouttheTacoBellUS.Itseemslike
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maybeitwasalittlelightofyourinternalexpectation,whichIthinkyouattributedtomaybesomeoftheQSRburgercompetitorstakingadvantageoffavorablebeef.
SoI'mjustwondering,justtogetabetterunderstandingofyourresponse,doesitseemlikegettingmoreaggressivepresumablyonvalue?Iknowyou'veobviouslybeenwiththebrandforalongtimeandgonethroughthesephasesbefore.Butjusttheideathatyou'dprogressivelypursuethediscountingversusstayingthecoursewithyourinitialplan,justtryingtogetyourthoughts.
GregCreed (CEO):
Sure,Jeffrey.IthinkthefirstthingIwanttodoisjustcorrectit.ApparentlyinmypreparedremarksIthinkIsaidthebreakfastmixwas8%;it'sactually6%.The8%isactuallythetransactiongrowththatwegotinbreakfastinQ1,soIjustwanttoclarifythat.
Bytheway,I'mveryhappywith8%transactiongrowthinbreakfast,withoneofourcompetitorsdoingAllDayBreakfast.Soletmejustsaythat.
Toansweryourquestion,yes,wehadtiedthelaunchoftheQuesalupatotheSuperBowl.ItriedtogettheSuperBowlbroughtforwardacoupleofweeksbecausethatwouldhavereallyhelpedus,butunfortunatelytheNFLwasn'tgoingtoplayalong.
Soweweresotieduptothelaunchwiththateventthattherewasacoupleofweekswherewewerealittlenaked,Iwouldsay.Soobviouslysalesandtransactionsuptothereweresoft.Thegoodnewsisthatafterthatevent,theQuesalupahasmixedatover10%andhasdonewellforus.
ButIthinkevenmoreimportantlyBrian,whoisdoingagreatjobleadingthebrand,heandtheteamhavealreadychangedthecalendar.Infacttoday,wewilllaunchsomenew$1itemsintothemarketplace.Therehavebeenanumberofrevisionstothecalendar.
SoIthinkwecanstillbeanincrediblyinnovativebrand,asociallyconsciousbrand,ledbydigital.Butwecanalsojustgetourvaluesoit'smorethancompetitiveinthemarketplace.
IthinktalkingtoBriantheotherday,heandIstillhavealotofconfidencewe'lldelivertheatleast3%same-storesalesgrowthfortheyearatTacoBell.
Operator :
HowardPenney,HedgeyeRiskManagement.
HowardPenney(Analyst-HedgeyeRiskManagement):
Hi;thanksverymuch.IwaswonderingifyoucouldhelpmewithChinesecultureandwhatthezodiaccalendarandchickenmeansnextyear,intermsofwhatthatassetpotentiallycoulddoforbusiness.Thanks.
MickyPant (CEOChinaDivision):
Yes,Idon'tthinkitisaveryseriousfactor,frankly.TheYearoftheDragonandtheMonkeyareparticularsignificance.Everyyearisimportant.
OneinterestingfeaturethatJoeyandtheteamputtogetherwastheyactuallyintroducedaChristmasBucketin2015Decemberwhichwasreasonablysuccessful,sotheyaredialingthatup.IthinkthepointreallyisthatifyoudoagoodBucket-orientedcalendarinDecemberforChristmasandthenChineseNewYearnextyear,wecanlooktoagoodperformance.
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ThesuccessoftheMonkey,theYearoftheMonkeypromotionhasshowntoustheimportanceofchoosingthecharacterwell--thetoysthatgowithit,thekidsmealsthataccompanyit--whichwillallhelpustobuildforthefuture.
Ithinktheyearofthechickendoeshelp.ThereisnobetterauthorityonchickenthanKFC.ButIdon'tthinkit'sgoingtobeculturallythatsignificantthatpeoplehavetoeatchickenintheYearoftheChickenorsomethinglikethat.
Soit'sahelp.AllIwassayingwasthattolapthisverysuccessfulYearoftheMonkeypromotion,that'sonelittlegiftonourside.
HowardPenney(Analyst-HedgeyeRiskManagement):
IfIcouldask--
SteveSchmitt (InvestorRelations):
Goforit.
HowardPenney(Analyst-HedgeyeRiskManagement):
Sorry;thankyou.Greg,ninemonthsagoobviouslythequarterwasn'tasstrongasyouwouldhavehoped.ThenwegothroughtheprocessofyouspinningouttheChinabusinessandtalkingaboutthechangeofthestructureoftheCompany;andnowninemonthsforwardthingslookalotbetter.
Iwaswonderingifyoucouldmaybeputtangibleevidencearoundanintangiblequestion.AndthatiswhatthechangesinternallytotheemployeesofYum!andYUMChinahavedonetohelpturnthebusinessaround.Idon'tknowifI'maskingthatcorrectly,butIthinkpartofthereasonfordoingthisspinwasmaybetofocusonthedifferentassets.
Thisobviouslywasafantasticquarterandforallthosereasons--maybesomeofthosereasons--I'mstrugglingtoaskthequestionproperly.Butjustwonderingifsomeofthe--thankyou.Sorry.Goahead.
GregCreed (CEO):
Howard,I'llhaveago.IthinkIcouldn'tbehappiertohaveMickyleadingtheteam.Mickyhasanenormousamountofjustexperience,hastheconfidenceofallofus,anddidanamazingjobrunningourinternationalbusinessforsuchalongperiodoftimeonallthreebrands.SoI'vegotaleaderintherewhoIhavetheutmostconfidenceinandwhohasralliedtheteaminChina.
We'vegotgreatpeopleleadingthebrands,JoeyandPeter.Theyarejust--they'rereally--IwasthereinMarchlookingattheplans,lookingatwhatthey'velearnedfromthelessons.OurcultureisaliveandwellinChina.SothewholerecognitioncultureandourbeliefthatculturefuelsresultsIthinkwasabsolutelyevident.
Ithinkatthesametime,what'salsohappeninginthewholebusinessisthatwe'regettingmuchbetteratbrandbuildingandstrengtheningourbrandpositioning.SoIthinkChina--Iwouldsaythewordsaren'texactlyalwaysoriginal;Ithinksit's:beyourtrueself.Buttheyprettymuchresonate.
We'venowgotthisbrandonaglobalpositioningsowecanleveragethings.Mickyhasreachedoutandtakenthingslikethe$5boxesthathavebeenincrediblysuccessfulinanumberofmarkets;ashesaid,theywillgointothemarketsooninChina.
ThePizzaHutteamislookingatanewpositioningforPizzaHut.And,asMickysaid,Ithinkfocusingonthepizzaandlessonthemoreandgettingbacktothecorewillhelpthatbrandaswell.
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SoIwouldsumitupasanewleader,greatleader,freshperspective,greatteam,moreglobalalignment,andarealfocusonbrandbuilding,allunderpinnedbyourfundamentalbeliefthatweleverageculturetofuelresults.
HowardPenney(Analyst-HedgeyeRiskManagement):
Thanks.
Operator :
BrianBittner,Oppenheimer&Company.
BrianBittner (Analyst-Oppenheimer):
Thankyou;thanksalot.IjustwanttoaskaquestiononTacoBell.YoudidrolloutyourprettyaggressivedollarbreakfastmenuinMarchyousaid;soitdidn'treallyimpactthefullfirstquarter.Canyoujusttalkabouthowthisisimpactingtheoverallbusiness?
Isitaccretivetoyoursalestrends?Isitdoingwhatyouexpectedittodo?Andexternally,uslookingatthemargin,howshouldwethinkabouthowthisimpactsthefoodmargingoingforwardortheCOGSmargin?
GregCreed (CEO):
Well,Ithinkthegoodnews,asIsaid,wehad8%transactiongrowthinthatbreakfastdaypartinthefirstquarterbeforewereallygotafullimpactofthedollarmenu.SoIthinkwefeelreallygoodthatthat'sgoingtocontinuetohaveanimpactonourbreakfastbusiness.
Ourfoodandpapercostsforbreakfastareinlineforthebalanceofthebusiness.Sowhetheritgrowsorgrowsfasterorslowerdoesn'treallyimpacttheoverallfoodandpapercosts.
Thegoodnewsis,obviously,TacoBellisbenefitingfromthepriceofbeefrightnow,andthat'sobviouslywhyyou'reseeinginthemarketplacealotofvaluebyboththeburgerchainsandwhyTacoBellcanplayanaggressiveplayinbeefaswell.
DaveRussell(InterimCFO):
Iwouldjustadd,Brian,thatat6%mix,thebreakfastdoesn'tchangetheoverallTacoBellstorymuch.
GregCreed (CEO):
Yes.Ithinkthegoodnewsisit'sgrowing.It'sgrowinginthefaceofusbeingfocused.We'redoingtherightthing,whichwehavegotinnovativeproducts,we'vegotvaluenowinthatcategory,inthatdaypart.AndIfeelreallygood.
IwasoutinrestaurantsintheUSjustrecently.VisitedTacoBellsforbreakfast,gotgreatfood,andhadagreatexperience.Ithinkthegeneralfeelingisthatthisissomethingwe'regoingtoinvestinforthelongterm.
Operator :
AndyBarish,Jefferies.
AndyBarish (Analyst-Jefferies):
Thanks.Yes,justaquickfollow-uponthatandthenoneotherquickone.OntheTacoBellmargin
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maintenanceintermsofyourguidancefortheyear,evenwithamoresharpenedvaluefocus,islowercommoditycostreallytheprimaryreasonyoufeelconfidentinthatstill?
GregCreed (CEO):
Well,Ithinktwothings.Idobelievewe'lldeliveratleast3%same-storesalesgrowthforthefullyear.Obviouslywegotofftoaslowerthanexpectedstart;butaswesaidwearerollingoutthebignumbers,plus6%.
ButinthediscussionsI'vehadwithBrianhestillfeelsveryconfident.SoIthinkwe'reconfidentwewilldeliverthesame-storesalesgrowth.We're[winning]intheUSandobviouslycommoditiesarefavorable,andIthinkallsignsarethatcertainlybeefwillstayfavorableprobablythroughthebalanceof2016.
AndyBarish (Analyst-Jefferies):
ThenjustquicklyonemergingmarketsatKFC,IknowyoucalledoutacoupleofPizzaHutmarkets.Thatnumberwasonlyup1%.Isthereanyspecificcountryorareathatwasalittlesofterthisquarter?
GregCreed (CEO):
Look,Ithinkthatwhenyou'rein120--130countries,Ialways--I'mneversurequitesurehowmanycountrieswe'reinonanyoneday--Ithinkthegoodnewsiswehad--in130countriesyou'regoingtohavesomeupmarketsandsomedowns.Indiawasminus1%butRussiawasplus27%insystemsalesforKFC.
Wealsohadstrongdevelopedmarkets.Australiadeliveredanotherreallygoodquarter.Theywereplus5%,which--ifyouthinkaboutwhatthey'vebeenrollingover.
Soweweresoftinanumberofplaces,butthereisalsorealsignsofrealstrengthbothinemerginganddeveloped.IthinkthatRogerEatonandtheteambelievethattheyalsocanobviouslygetsalesupintoatleastthe3%same-storesalesgrowthnumberfortheyear.
Operator :
KarenHolthouse,GoldmanSachs.
KarenHolthouse (Analyst-GoldmanSachs):
Hi;thankyoufortakingthequestion.AquestiononChinathat'sactuallynotoncompsalesbutonnewstoreproductivity.Itlookslikethereisstillagrowinggapbetweencompgrowthandaverageweeklysalesgrowth.Justcuriousifyoucouldcommentonthat.
Isitbeingdrivenbyoneofthetwobrands,unitsinoneareaoranother?Andanysortofupdateonhowtobethinkingaboutuniteconomicsperyear?BecauseIthinkthelastdisclosureswehavereallyonlygothroughlike2014.Thanks.
MickyPant (CEOChinaDivision):
Okay.Karen,whatwereyouquotingasthereasonwhyyouhadthatfeeling?
KarenHolthouse (Analyst-GoldmanSachs):
Thatifyoulookatoverallstoreproductivitygrowth--sojustsalesperunitversuscompgrowth--itlookslikethegapbetweenthosetwonumbersisstillgettingwider.
MickyPant (CEOChinaDivision):
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
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Isee.Well,whenwelookatourperformancebypeersit'sprettyconsistent;soIdon'tthinkthere'saparticularfactorthere.Ireallycan'tatthemomentthinkofaparticularreason.Thatcertainlyhasnotstruckme,thatthenewunitsthatwearebuildingareinanyway--haveinferioreconomicsoranysuch.
It'snotasthoughwe'rebuildingnecessarilysmallerunits.Itistruethatwebuiltmorestoresinsmallercities;butourcompsalesgrowthacrosspeershasbeenfairlyconsistent.
WeareexperimentingwithmultiplestoreformatstotakeintoaccountthefactthatthereisstillaveryrapidbuildoutininfrastructureinChina.Sowe'reexpecting--verylargenumberofmallsarealreadyunderconstruction;thehigh-speedrailnetworkisbeingexpanded.AndtheninChina,unliketheUS,thereisnotthephenomenonatthemomentofhighwayswithdrive-throughsorthereststops,andallthosearebeingdeveloped.
Idon'treallyseethecharacterofourproductivityperunitchangingintheyearstocome.Ithinkworldwidethereisatrendtowhatwecallsmallbox,whichisbecausein-linesarebecomingmorepopularinmallstores,etc.Sotheremaybeinthelongertermaslightlysmallerformatunit.
ButChinaisnotthatimpacted,becausewehardlyhaveanydrive-throughshere.Youhardlyhaveanydrive-throughsatall,somostofthemarein-linesanyway.
Maybeweneedtothinkaboutthisquestionalittlemore.Butwedon'tintrinsicallyseeanyreasonwhythesortofgrowthwe'veenjoyedshouldnotbeprojectedlong-termintothefuture.
KarenHolthouse (Analyst-GoldmanSachs):
Allright.Thankyou.
Operator :
JasonWest,CreditSuisse.
JasonWest (Analyst-CreditSuisse):
Yes,thanks,guys;twoquestions.One,ifMicky--I'dlovetohaveyourthoughts,nowthatyou'vebeenoverinChinaforawhile,ontheideaoffranchisingcertainbrandsormarketsorstoresinChina.Justyouroutlookandthoughtsthere.
Thensecondly,Dave,couldyouwalkthroughagainthemathorthereasoningbehindtheVATchange,andhowthatimpactsthebusiness,andwhyyouthinkitwouldbepositive?Itwouldbehelpfuljusttounderstandthatalittlebitbetter.Thanks.
MickyPant (CEOChinaDivision):
Okay.TheVATquestionIwillleavetoDave.Idon'tknow,Dave,whetheryouwanttotakethatfirstor--?
DaveRussell(InterimCFO):
No,goahead,Micky.I'llgosecond.
MickyPant (CEOChinaDivision):
Okay.Justremindme;sorry,yourfirstquestionwas?
JasonWest (Analyst-CreditSuisse):
JustyouroutlookforfranchisinginChina.WouldyouliketoconvertmoreCompanystorestofranchise?
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
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MickyPant (CEOChinaDivision):
Right.Well,atthemomentasyouknowwehavestayedataboutjustover7,000stores.About10%arefranchisedand90%areequity.
Ithinkatthemomentaslongaswehave--andthewayweneverchaseanumberofstoresthatwehavetobuild.Butwhenwegetnewtradezonesopeningandopportunitiesthatmakecommercialsense,andthere'saverydisciplinedprocessforcapitalallocationandmeasuringnew-unitreturns,wehavealotofsurpluscapital,asyouknow,inChina.AllthestoresherehavebeenbuiltwithChinese-generatedcapital.Thereisnointrinsicreasonwhywewouldwanttogivethatuptofranchisees.
Thetworeasonswhywedoexpect,however,franchisingtoupmarginallyis,firstly,thereareregionsofthecountrywhereitmakessenseforfranchiseestooperate.WerecentlyopenedintheautonomousregionofTibetourfirststoreinLhasa,Tibet.Andforavarietyofreasons,includingdifficultoperatingconditionsandlocalmarketknowledge,thatwasgiventoafranchisee.That'sbeensuccessfulandIthinkthatwillgrow.
Sotherearepartsofthecountrywherewewilldoitforreasonsthatitmakessensetodoitthatway.Andtheotheristhattherewillbeopportunitiestodofranchising,forexample,withgasstationchains,etc.Forthosetechnicalreasonsthepercentageoffranchisingmightgoupfrom10%tomaybe15%orsomethingintheforeseeablefuture,butwedon'texpectasignificantchangethere.
Ofcourse,ifwedonotfindtheabilitytoinvestourcapitalinproductiveequityinvestment,surewe'lllookatfranchisingmoreactively.Wearenot--atthemomentweareagnostictowhetherit'sfranchisingorequity,frankly.
Bothhaveadvantages.Franchiseescan--obviouslythey'recapitallight,andalsothey'reveryinnovative.
Butatthemoment,withthecapitalthatwehave,especiallyaswebecomeindependent,Ithinkitwillbeagooduseofthecapitaltocontinuetoinvest.Chinaisagrowthmarketthewayweseeit,andwestillhavethevisionofdoublingortreblingourstorebase.
Sothat'sthewaywe'relookingatit.SoIwouldsaythefranchisingpercentagewilledgeup,butitwillnotbeagamechangerinourbusiness.
DaveRussell(InterimCFO):
Okay.OntheVAT,currentlyChinaispaying5%ofalltheirsalesintheformofabusinesstaxtothegovernment.What'shappeningnowisChinaismovingtoamoretraditionalVATregime,whichissimilartotheregimeinmanyotherpartsoftheworld,wherewewillpay6%ofthosetop-linesalestothegovernment;butwe'llgetacreditforsomeoftheinputsthatwehaveintoourP&Lcommodities,utilities,rent,againstthat6%credit.
What'sdifficultforustosayrightnowisexactlyhowthosecreditsaregoingtoaccumulateandwhatexactlyisgoingtobecreditable.Weareworkingthroughthat.Asyoucanimagine,with6,000storesthisisgoingtobeamonumentaleffort.
Thereisalsosomelackofclarityaroundtherulesatthispoint,still.Sowe'regoingtohavealotmoreforyouinJuly.We'llhaveonemonthworthofthisinourQ2results,thebenefitinourQ2results,andwe'llbeabletoquantifyitinmuchmoredetailatthatpointintime.
Operator :
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
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AndrewCharles,CowenandCompany.
AndrewCharles (Analyst-Cowen):
Great;thankyou.Micky,asyousawsuccesswithanoperationallysimplepromotionatKFCinthefirstquarter,IrealizePizzaHutisnotastime-sensitiveofanoccasion,butthereareopportunitiestoimplementbetteroperationalpracticesofthatbrandparticularlyaroundthebreadthofthemenu?
MickyPant (CEOChinaDivision):
Yes,absolutely,Andrew.Thereare.
Ithinkthemenuiscomplicated.IthinkImentionedthisinDecemberaswell.
It'satabbedmenu.Youactuallyhave--it'saverylargenumberofpages.It'sabook.
It'salittledifficulttonavigate,sosimplifyingthatisapriority.
PizzaHutiscelebratedandknownforthevarietyofmenuhere,sowedonotwanttolosethat.ButatthesametimeIthinkwecanmakeitfarmorecontrolled.
Italsospeedsupservice.AndtableturnsareanissueatPizzaHutatpeaktimes.Soforthosereasonswe'rerationalizingthemenu.
Wearealso,likeIsaidearlier,pointingoutthegreatvaluethatwehavethroughlunchcombosandotheroffers.Soweareredesigningthatpartofthemenuaswell.
Andlastly,I'mconstantlyamazedathowadvancedChinaisdigitally.It'sgottwicethenumberofcellphones,smartphones,astheUSpopulation.Eveninourofficespeoplegoupanddowntheelevatortogotolunch,they'relookingupwheretheoffersareavailableandwheretheycanbookatable,etc.
Sotheactionisshiftingveryrapidlytomobiledevices,andboththemenuaswellasdigitalmarketingisbecomingverysignificant.Sowe'reworkingonthat.
Thegoodnewsisthatforbothourbrandsweareinaleadershippositionwhenitcomestothatwholedigitalinterface,cashlesspayment,etc.Buttoyourquestion,yes,IthinktheoperationalsimplicityatKFC,makingiteasierforconsumerstochooseourbest-sellingproducts,andthegeneralphilosophythatthemenushouldnotbea--itshouldbeusedmoreasguidingcustomerstoourbest-sellingproductsthantogiveopenchoices,whichtheygetconfusedabout,issomethingthatisapplicableatPizzaHutaswell.
AndrewCharles (Analyst-Cowen):
Thanks.
SteveSchmitt (InvestorRelations):
Amy,wehavetimeforonemorequestion,please.
Operator :
BrettLevy,DeutscheBank.
Brett Levy(Analyst-DeutscheBank):
Goodmorningandthankyou.Canyouguysprovideuswithalittlebitofanupdateonhowyou're
CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A
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thinkingaboutthere-franchisingeffortsintermsofcadenceacrossthedivisions?Howweshouldbethinkingaboutitoverthenextsixmonthstothreeyearsout.Thankyou.
DaveRussell(InterimCFO):
Sure.Theplanisstilltobe96%franchisedbytheendof2017,whichthatwillincludetheChinaunits,post-spin.Thisyear,moreofwhat'sgoingtogetdonearetheUSre-franchising,whichisgoingtobeKFCsand--I'msorry,TacoBellsandtoalesserdegreePizzaHut.Wewouldexpectsignificantgainsinthoseregards.
Quitefrankly,sellingsomeoftheinternationalmarketsisalittlebitmoredifficult,sothatwilltakealittlebitmoretime.Weexpectthattobemore2017loaded.
GregCreed (CEO):
Okay.Ijustwanttothankeveryoneforbeingonthecall.Obviouslywe'repleasedwe'reofftoastrongstartin2016,thatwe'veraisedfull-yearcoreoperatingprofitguidanceto12%from10%.IalsowanttothankMicky,Larry,andDaveforjoiningSteveandIonthecalltoday.
Sothankyouall,andlookforwardtocatchingupwithyouinthenearfuture.Thankyou.
Operator :
Thisconcludestoday'sconferencecall.
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