Now some of you may want to ask today about our views around corporate restructuring related to our China Division, including a shareholder suggestion that was well publicized this quarter. We don’t plan to discuss that and distract from our second quarter results, but we want you to know this: the Yum! Board of Directors regularly review strategic options to optimizing long-term shareholder value, including those involving corporate structure. We routinely dialogue with shareholders, listen to their ideas and thoroughly evaluate those which may be in our shareholders’ best interests. In any event, our top priority is to get our China business back on track and we are making steady progress, as evidenced by our first and second quarter results. As we’ve discussed, we expect to have a strong second half of the year based on continued progress in China and fully expect Yum! to deliver at least 10% EPS growth in 2015.
Apparently, Morgan Stanley’s John Glass just wanted to make sure that the company really didn’t want to talk about the China spinoff:
John S. Glass
And Greg, if I could ask one more. Greg, you did open up that you talked about the possibility of this China spin notion. I know you don’t want it to be a distraction. Do you view that as a distraction, in and of itself, for the recovery of China so that you might want to wait till China recovers before entertaining that idea?
Greg Creed
No, I think as I said in my prepared remarks, we don’t want to talk about it. Obviously, we review our shareholder proposals, but I can assure you the China team is focused on one thing. Their #1 priority, my #1 priority, is getting China sales back into sort of stronger growth.
Nope, not interested. This piece notes that in order to hit the company’s aggressive EPS growth target, earnings would need to grow 30% in the second half of the year and that China’s profits would need to double. Quite impressive and testament to the opportunity overseas. The truth is that even those pushing for a spinoff should support a recovery of China’s operations and should agree that it is a good spot for managements’ focus given its size and importance to the company.
Finally, there had been other ideas about possible structural changes at the company, but those were shot down as well:
Jason West
I’m not sure how much you’re willing to talk about the other structural ideas, but the idea of recapitalizing the balance sheet has come up, particularly given the substantial franchise assets you guys have. And I’m just wondering if you could give your updated thoughts on that, particularly as you move toward sort of a 95% franchise mix outside of China. Does that start to change your thinking around the capital structure and then also looking at what’s happening across some of your franchise peers?
Patrick J. Grismer
Yes, Jason, this is Pat. No change to our policy, which is to optimize our capital structure based on what we believe is in the best interest of shareholders, which is to maintain that low investment-grade credit rating. And so our policy hasn’t changed and no specific guidance to what that capital structure might look like when we complete the 3-year refranchising program we announced in December.
Management’s focus appears to be on the right spot for now, but whether or not they can execute a recovery remains to be seen. Whether or not they are given the rope to succeed also remains to be seen. Regardless, the comments should put a damper on the spin enthusiasm for now which had seemed all but baked into the price. With activists such as Keith Meister and Dan Loeb holding sizable stakes in the company though, I wouldn’t be surprised if this situation heated up soon.
Disclosure: Author holds no position in any stock mentioned.