百勝餐飲集團 (YUM) 2002 Q4 法說會逐字稿

My name is Kim, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Yum!

Brands 2002 fourth quarter earnings release conference call.

All lines have been placed on mute to prevent background noise noise.

After the speakers remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, please press star and the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

I will turn the call over to Mr. Tim Jerzyk, Vice President of Investor Relations.

Thanks, Kim.

Good morning everyone.

Thanks for joining us on our call.

Before we begin, I would like to go over a few necessities.

This call is being recorded and will be available for playback.

We are broadcasting the conference call via our website at www.yum.com.

Please be advised, if you ask a question, it will be included in both our live conference call and in any future use of the recording.

I would also like to advise that this conference call may include forward-looking statements that reflect management's expectations based on currently available data.

However, actual results are subject to future events and uncertainties.

This information in this conference call related to projections and/or other forward- forward-looking statements may be relied on subject to the Safe Harbor Statement, including our earnings release from last evening and may continue to be used while this call remains in the active portion of our company's website, which will be until approximately March 11, 2003.

On today's call, we have David Novak, Chairman and CEO.

Dave Deno our CFO, and David Fitzjohn, Leader of our International Development Team who will speak to you about international development, one of our key drivers.

Each will follow with remarks and we will then take your questions and now I'll turn it over to David Novak.

Thanks, Tim.

Good morning, everybody.

I'm sure you've seen the earnings release from last night and you saw we made our quarterly EPS commitment again, growing a modest 5% versus a year ago, as we overlap very strong results from 2001.

This growth continues to be driven by exceptional performance from our international and Taco Bell businesses.

Our international business accounts for more than half of our earnings growth, driven by strong top-line system sales growth of 7% in local currency terms and 9% in U.S. dollars for the fourth quarter.

We were also especially pleased Taco Bell overlapped plus 8% sales from a year ago with 3% same-store sales growth and finished the full year up 7%.

I'm sure you'll agree the best year in any business is when you can beat your financial plan and then set the table for future growth. 2002 was that kind of year for Yum!

Brands.

Our long-term commitment is to grow EPS at least 10%.

In 2002, we grew 19%. 14% prior to FASB reduction and goodwill amortization.

We also said 2002 would be a year of revenue growth and we delivered revenue growth of 12%, plus 6% on the base business.

In so doing, we achieved our 2% blended same-store sales target in U.S. company restaurants.

The U.S. system, including our franchise partners, did even better, up 4%.

Even more important, we set the table for the future as we continue to build the capability of our powerful international growth engine, successfully acquired and then successfully integrated Long John Silvers and A&W All-American food brands to enable broad scale execution of our multibranding strategy.

And we launched our customer mania operational program around the globe, improving key operational measures and setting the stage for a more trusted, [consistently] positive customer experience in our restaurants.

Given the results we've achieved and the progress that we've made made, we believe we can achieve at least 10% earnings growth in 2003 for years to come.

Here's what you can expect.

Our international growth will continue.

We will benefit from the 1,051 new stores we opened in 2002 and the strength we have in our key markets, in particular, China, Mexico and the United Kingdom.

In 2003, we will open at least 1,000 new stores internationally and grow international profits at a target 15% rate.

David Fitzjohn, our Chief Development Officer for International is on this call and will detail our strategy for continued profitable growth.

You will see that we are very disciplined in our capital investments and have a sound basis for our estimates.

Number two, we'll continue to ramp up multibranding to accelerate U.S. growth.

We will also begin testing multibranding in the international markets.

Over time, multibranding has a potential to transform our existing 26,000 single branch traditional restaurants world worldwide and unlock even more new unit growth.

Taking KFC and Taco Bell in the United States to Burger King level of unit distribution potentially adds more than 2,000 new units for each brand or about 5,000 new restaurants in total.

KFC, Taco Bell combination, KFC and A&W and Long John Silver combinations, Taco Bell Long John Silvers and A&W combinations, and A&W Long John Silvers combinations give us multibranding options to make it happen.

What's more, we're testing a multibranding combination for the Pizza Hut dine-in business with Pasta Bravo.

Early results are very

encouraging.

This year, we will add another 400 multibrand restaurants as we execute a strategy that we believe will transform the U.S.

QSR industry as we know it.

We believe that multibranding is

the biggest sales and profit driver in the category, since the advent of the drive-through window.

Consumers tell us that this is simply a great idea.

Number three, we will continue to steadily improve our operations, which we believe will improve our capability to drive consistent U.S. same-store sales growth of at least 2%, which we achieved in 2002.

The key to this is people, and we're especially proud our team member turnover is down 128%, well below the industry average.

This is a foundation we've never had before and we have that now going into this year.

As you may know, our [core] portfolio has averaged about 2% growth the past 15 years.

We're confident that with our portfolio of category-leading brands, the innovation that we have planned for this year, continued improvement in operations, combined with the expansion of multibranding, we can continue to perform at least at this historical same-store sales average.

Importantly, we have experienced 100% dedicated teams, focused on differentiating each of our brands in everything that we do, to make sure that we continue our operational progress and individual brand building.

Operationally, we will also continue to leverage our strong franchise relationships.

I'm pleased to say that our relationships with our franchise groups have never been better.

We're working hand-in-hand to grow their businesses and as a result, reap the rewards and benefits of a high-return business.

Based on the strength of our franchise system, Yum!'s U.S. system wide same-store sales growth was up 4% in 2002.

Our franchise fees now total $866m and will grow at 4-5% annually with virtually no capital investment on our part.

The key measure for Yum! in the United States is blended same- same-store sales.

This reflects our advantage in the fact that we own a portfolio of category-leading brands, diversified within the QSR industry.

In fact, if you look over the last 15 years, we have consistently delivered 2% same-store sales growth and we expect to continue to do that in the future.

With this portfolio, it allows us to hedge the inevitable ups and downs of each of the brands and combined with multibranding increases our capability to deliver at a 2% blended same-store sales growth in 2003 and out into the future years.

I'll answer any questions that you have on the individual brands in Q&A and Dave Deno will give you a snap shot of some of the activity we have for 2003.

International growth, multibranding and continuing improving operations in differentiating our category-leading brands.

These are the three building blocks that give us an unprecedented growth opportunity in our industry.

With that, let me turn it over to Dave Deno, our CFO, to take you through the details of the quarter and how we will deliver at least 10% earnings growth, strong cash flow, continued growth in franchise fees, and high returns for 2003.

Dave?

Thank you, David.

And good morning everybody.

Before I get into our results, I would just like to underscore what David said earlier.

At Yum!, we have three terrific growth drivers that differentiate us from the rest of the category.

First and foremost, international expansion.

As you know, our international division is our largest and fastest growing.

Second, our portfolio of category leading brands.

This combined with significant existing U.S. restaurant assets enables us to drive a solid multibranding expansion strategy.

And third, improving our operations at each of these brands in our portfolio through customer mania and operations improvement program.

With the execution of these strategies along with sound execution of our financial

strategy, we are confident in our ability to deliver at least 10% earnings growth during 2003 and in the future.

Now, turning to Q4 results.

First, let's take a look at the fourth quarter just briefly.

I'll give you my thoughts and let you review additional details of our fourth quarter performance in our earnings release from yesterday evening, if you have not already done so.

We were pleased with our latest quarterly results given two significant factors.

A very strong performance from last year to last.

If you recall, our operating earnings growth in Q4 last year was 33%.

And we did it in a tough U.S. operating environment.

Despite these factors through the power of our international business and U.S. portfolio brands, we were able to deliver another quarter of earnings growth.

The 5% growth in ongoing EPS was driven by very good performance in our international and Taco Bell businesses as well as a favor favorable tax rate and reduction in goodwill amortization expenses.

As I've noted in the past, our international business is our largest and fastest growing division generating nearly 40% of Yum! profits.

Taco Bell continues to consistently demonstrate top tier sales growth performance within the overall QSR category.

Most important to our shareholders, we finished the year at the high-end of the EPS range previously provided at 56 cents for the fourth quarter and $1.91 for the full year 2002.

I'd also like to point out that our initial guidance for 2002 was $1.77 to $1.82.

We never reduced our full-year EPS estimate during the year.

As the year progressed, we gradually raised our EPS guidance ending the year with growth essentially right on our annual earnings growth model, prior to any contingencies, with an additional boost from a [FASB] driven reduction in goodwill amortization expense.

We would love to repeat that 2003.

In summary, 2002 was a great year by any measure.

Revenue up 12%.

Ongoing operating earnings per share up 19%.

Our cash flow was very strong with the overall enterprise, total cash generation was $1.4 billion, enabling us to acquire Long John Silvers and A&W, buy back $228m of our own stock, make $70m of debt repayments and invest $773m of capital in our business for growth and ongoing maintenance of our core business.

We did this with an ROIC, or Return on Capital, of 18% again, a category leading number number.

That has helped our restaurant margins of 16%, our best ever.

Importantly, we'll continue to grow off this performance, as I'll discuss regarding our 2003 expectations.

At this point, I'll just ask our investors to review this performance very carefully.

One of the things we believe in strongly and is our biggest strength is the global portfolio of the businesses we have.

As CFO, it is clear to me every time I come to you in this setting to address our shareholders on the latest quarterly performance.

We have ebbs and flows as most businesses do, but what you saw in 2002 is the power of this great portfolio which gives us the ability to grow earnings consistently year after year.

As just a spin off, our operating EPS has more than doubled in our cash flow returns which have increased significantly.

We definitely have a track record in our financial measures and you can expect more of the same in 2003.

Now, some quick things in the fourth quarter.

International systems sales growth was 7% local currency terms, right in the range we provided to you.

The U.S. dollar growth rate in system sales was 9%, right in the range we provided of 8-10%.

Key markets were China, Mexico and the U.K, as well as solid

growth from the franchise partners.

Fourth quarter international operating profit was up 17% in U.S. dollar terms, better than our up 14% forecast.

Our U.S. blended same-store sales growth for company stores was down slightly, down 1%, versus our expectation of flat.

As we noted in yesterday's release, franchise performance was slightly positive.

U.S. ongoing operating profits was even with last year's Q4 as

expected.

We expected worldwide Yum! restaurant margins to increase slightly due to higher international margins, offsetting a decline in U.S. results.

Actual Yum! restaurant margins declined slightly by just 10 basis points.

This was due to higher labor costs, primarily.

Productivity performance remains strong and commodity costs came in as expected.

G&A and interest expense were essentially right on forecast.

The tax rate for ongoing operating earnings was 29%, which was slightly better than we thought.

All in all, the fourth quarter was pretty much what we expected with some upside in profit performance from the international business and a slightly better tax rate.

That wraps up 2002.

Before talking about the first quarter, let me remind everyone that starting with our 2003 results, we will no longer be reporting against ongoing operating EPS.

We laid this out in our December Investor meeting in New York.

We've essentially completed our re-franchising program begun in late 1997, and as such, things like re-franchising gains will be much less impactful to our results going forward.

We will track performance against reported EPS, of course, prior to any unusual items.

Our earnings targets on this basis are the same as we presented in New York.

Our full year reported EPS target before any unusuals is at least $2.00 a share, up at least 10% from a comparable basis in 2002, or $1.82.

Our first quarter target is at least 38 cents a share, spot on to what we said in New York.

Now, onto the first quarter.

Our first quarter will be even with last year prior to any unusuals, and last year, we had an unusual gain of 2 cents a share.

Let me remind you briefly in Q1 of last year, our U.S. same-store sales growth increased 5%, and our ongoing operating earnings increased 37%.

A very strong performance to consider as you review our expectations for Q1 of 2003.

We expect U.S. blended same- same-store sales growth to decline 2% versus prior expectations for flat results.

This will be offset by slightly better performance from our international business.

The full details of our Q1 expectations can be found in yesterday's release.

Now, let me briefly cover our view of how we currently expect the year to shake out.

Before I do that, I know you will recall that we build our business plans with 16% earnings EPS growth.

We commit to at least 10% earnings every year.

In other words, we carry a 6% contingency in our business model.

This contingency is designed to cover same-store sales in the U.S. that may be lower than expected and to cover against any unforeseen currency hazards.

Looking at the full-year 2003, nothing much has changed since our communication and presentation at our New York meeting in December.

Like we said, the beginning of the year will be a little bumpy in the U.S., particularly at Pizza Hut and KFC, along with a very strong [lap] versus Q1 for last year.

Having said that, our confidence in 2003 performance remains high.

We continue to focus on executing our strategies and believe that this will lead us to another year of profitable high-return growth.

Let me briefly recap our key drivers.

One, international expansion.

Two, our base business led by diversified QSR portfolio brands.

Three, multibrand expansion, and four, continued operations improvement in customer mania.

Let me take each one of those.

Number one, we expect our international business, our largest and fastest growing division, to have another very good year.

You should expect the following from international. 7% growth in systems sales on a local currency basis. 1,000 or more new, traditional restaurant openings or 5-6% net growth, and at least 15% growth in profits.

Our franchise growth partners will likely open about 65% of our new units in markets around the world.

On the company side, we will focus most of our capital for expansion in our four high-growth, high-investment markets, China, Mexico, Korea and the U.K.

These markets should deliver high levels of growth in system sales and units.

Our core markets of Australia, Canada and Japan will generate solid profit and cash flow performance as they have in the past and will continue to work on developing markets for growth 5 years from now, such as KFC Europe, India and Brazil, as well as testing multibranding in core markets.

We'll continue to focus on fewer company owned markets.

There will be some re-franchising activity in 2003 as previously communicated, such as the Pizza Hut Germany business.

Number two, looking at the U.S. brand portfolio for 2003, we expect to gain momentum as the year progresses.

Taco Bell is on path for a good year, relatively steady growth throughout the year.

They are working on getting better and better at what they successfully achieved over the last 18 months.

Taco Bell's performance continues to be among the best in the restaurant business.

They are positively lapping strong sales gains from a year ago. [inaudible] Their two-year sales growth trends are terrific.

Let me give you specifics behind Taco Bell.

Taco Bell's marketing spent just over $200m in 2003.

That's up about 3% from last year.

Their TV coverage is measured in TRPs is expected to grow about 5%.

Taco Bell will continue to focus on the brand positioning of a bold choice, utilizing the "think outside the bun" campaign.

Their actions will be centered around the customers needs of heavy users want a better Taco Bell, and lighter and last users want a more relevant Taco Bell.

Expect that Taco Bell will accomplish this through balanced calendar of price value, core product and products news.

Additionally, they'll be working on getting better and better at late-night sales and Hispanic communication.

Now let's look at KFC.

At KFC the laps are visible.

Q1 in 2002 was a very strong +5%.

The team is working very hard on differentiating the brand, building the product news pipeline enhancing relevancy and value and improving convenience for the customer with speed at drive-through.

You should expect to see a general progress beginning the second quarter and a good second half.

Once again, let me give you the specific.

KFC will have the brand power of roughly $200m in marketing spending for 2003.

This is up about 3% from 2002.

KFC will continue focus on the positioning of delicious, satisfying meals that are convenient and affordable, a step above ordering fast foods.

This will be accomplished through a continuation of their ad campaign focus on “there’s fast-food and then there's KFC.”

The KFC team will focus on the following.

Family style meals, i.e., the bucket.

Individual meals, on new plates.

Snackables for on the go, products comparable to what they've done in the past, popcorn, flavored wings, twisters and strips.

The team will target the breakdown of barriers to growth at which they see as one, better operations.

We want to focus on hot and fresh and fast.

Drive-through speed of service improvement will be a major focus, targeting a 30-second reduction.

We're going to use the successful Taco Bell program so that it has been implemented for a while.

Two, looking at everyday value.

A break from special occasions used to solve the daily dinner dilemma.

We're not going to do a $0.99 menu.

Testing will soon begin on various menu communication strategies.

This will differentiate our meal occasions on winning terms for the consumer and our economics.

We want sustained value, not a short-term hit.

Number three and finally, we are pursuing non-fried items for our menu which will provide meaningful variety.

More to come in 2003.

Additionally, in the details, they'll be working on getting better and better at late-night sales and combo trade-ups.

At Pizza Hut we have a new team in place.

Our expectations are for progress to show in the second half, especially in the area that will drive growth in that business.

Great operations, good pipeline of product news and most importantly, a well differentiated brand.

Here is what the new Pizza Hut team is working on.

Pizza Hut will have the brand power of about $300m in marketing spending for 2003, up about 4% from last year.

That's more than $100m above their nearest competitors spending level.

The teams working on an evolution of their current brand positioning and a new advertising campaign.

You'll hear more about that in the second half.

Pizza Hut will continue to focus on product news and innovation.

On the value front our goal is to raise the guest check and give the customer more for their money, than the bulk pizza occasion.

Just as importantly, you will see Pizza Hut very focused on improved operations execution.

This includes telephone access and better trade area delivery penetration.

In the details, Pizza Hut will be working on getting better at suggested selling on delivery, catering sales and trade area blocking and tackling.

Finally, in all of our businesses around the world, we have tasked our operators to build store-by-store plans to generate at least 2 percentage points same-store sales growth through operational improvements alone.

Aylwin Lewis is leading this effort.

All told, even though our blended U.S. same-store sales growth is slightly negative in Q1, we still expect to be up at least 2% in 2003.

Inherently, we think we have a U.S. business that we think can grow 2% each year and on average over 15 years, we have delivered.

Number three, multibrand expansion.

We reviewed at length in New New York our progress of multibranding which we expect to continue in 2003.

We'll add another 400 multibrand restaurants in the U.S. during 2003, setting the stage for higher levels of growth in 2004 and we'll begin testing multibranding stores overseas during 2003.

With successful the integration of Long John Silvers and A&W, along with our new build and conversion pipeline, we are confident in achieving our multibrand targets.

Number four, improved operations.

As David mentioned, the key to all of this is great operations.

And we will again focus on customer mania and operations initiatives.

Importantly, these have been fully resourced and funded for 2003.

Now, turning to our 2003 quarterly expectations, we provide our thoughts for Q1 of 2003.

At least 38 cents per share, even with last year's results prior to any unusual items.

Expect that the second quarter will be slightly better than Q1, with modest growth, in the second half to half equally balanced growth.

Finally, turning to cash flow.

Looking at cash flow we expect another strong year in 2003.

Cash flow from operations should be about a billion dollars.

One of the key strengths of this billion dollars of cash flow each year is as sourced significantly by franchise fees which is expected to be in excess of $900m prior to any taxes, and growing at 4% to 5% each year.

These fees do not require any capital investment on our part.

Adding in the positive cash flow benefit of re-franchising, booking capital changes and stock option proceeds, we will generate over $1.2b of cash this year.

That will more than fund $825m in CAPEX, generating total free cash flow of about $400m in 2003.

Looking ahead, and as we detailed for you in our New York meeting, we believe we have the balance sheet and cash flow to grow this business for many years to come.

To wrap it up, again, we expect another good year for Yum!

Brands.

We believe we will deliver at least 10% growth in EPS.

As you know from our earnings growth model, we're targeting to do even better than that.

Like last year, you can count on us doing our best to deliver our full targeted growth.

Back to you, David.

Okay, before I introduce David Fitzjohn to talk about international development, let me just say that our international business is now our largest and fastest growing division.

We have doubled our profits in our first five years as a public company.

We now have basically generated about $400m in profits outside of the United States.

We have the scale and operational capability to continue to grow.

What makes us unique is that when you look at the category, McDonald's earns $2b in profit outside of the United States.

We earned nearly $400m as I just said, and the next largest competitor is Burger King which earned roughly $50m.

Only McDonald's and Yum! have

significant international infrastructures and it will take years and millions of dollars of investment for competition to develop a significant international business.

As a result, we have very little competition and a tremendous runway to continue growing not one, but two brands, not to mention the opportunities multibranding may unleash in the future.

We will continue to focus on growing the right way with high returns and the right process and discipline that we've established during our first five years of operations.

Now, to give you further details on our capability to deliver 1,000 profitable new international restaurants each year, let me turn it over to David Fitzjohn, our International Chief Development Officer.

David has been in development in the restaurant retail business for over 20 years.

He came to us from Burger King back in 1997, when we were first spun off from PepsiCo and he's been a major driver in our successful international development efforts and has built a tremendous team.

David, take it away.

Thanks, good morning, everyone.

I want to focus on our ability to drive global expansion at 1,000 plus units per year for the foreseeable future, and deliver great returns to our shareholders.

Up spending in late 90s, opening about 600 restaurant a year, we've now been building new restaurants at a rate of 1,000 plus per year for the past three years.

With confidence, that pace of growth is sustainable for years to come.

While we see that level increasing gradually, we're not predicting any significant rapid increase, because to do so, would threaten our standards and our returns.

So why are we confident that we can continue for the foreseeable future?

Well, we think that there are five major reasons.

They are disciplined focused company development in core markets.

Second, our extensive franchise partner base.

Third, starting up in new markets.

Fourth, our access to the portfolio of brands.

And fifth, our lack of real competition.

First, then, since the spin-off in '97, we have narrowed the focus of our equity operation from 32 markets down to 14.

And of those, there are four core markets where we are investing heavily as a company because the returns are terrific.

China, Mexico, Korea and the U.K.

In each of these markets, we have invested substantially in the last few years, building quality standards of execution and the capability of our teams.

In China, we have what must be one of the largest real estate teams, not just in the restaurant industry, but in any industry.

And we're at the fore front of creating world class market practices and training.

Another unique advantage for us in China is that we have our own distribution system, which gives us coverage of every major province and thus, access to almost the entire $1.3b population.

That is totally unique.

As a result of these capabilities, we're currently opening more than 200 restaurants in China each year.

Further, we have similar deep advance capabilities that allow us to open over 100 units a year in the U.K. and we're approaching 100 units in Mexico.

Together with Korea, that means we can safely look to develop at least 500 company and franchise restaurants in these core markets.

That's a great start, where we conservatively estimate the current potential for our two main brands will allow us to grow at least these rates for years to come, without encountering the absorption problems that have plagued our competition.

In addition to these core company markets, we have powerful businesses in Australia and joint ventures in Japan and Canada, which, together with our franchise [ease] there are building 200 units per year.

While the rate of openings is important, the quality of the results of the product is even more so, and that is all about process and discipline.

The processes that we use are equally relevant in our mix and franchise markets but they are critical to our company returns.

Every market which spends capital is monitored with a globally consistent tracking system.

This assesses returns quarterly and then twice each year, we have an in-depth review of the program, ranging from market conditions as asset strategy right down to a site-by-site examination.

We thus have the ability to react to changes quickly, which is critical, given the development cycle that can mean decisions taken today can take several months to result in a change in direction.

If returns weaken, markets are put on notice.

If the issue continues for two quarters, then that probation can become jail, until we can be sure we've addressed the problem problem.

At the very least, markets suffering weakness can expect their allocations to be rationed.

A great example of this is what we've been going through with the Pizza Hut business in Thailand, where we have scaled back development based on this process.

I have a sign in my office.

All of our local teams worldwide know it and have heard the words on it many times.

It says "the most powerful word development is no."

That's not meant to sound negative, but the problem is development is inherently a positive action oriented activity, and deciding to do something which can risk returns and profit is all too easy.

Knowing when the facts tell us we should say no and then just moving on is a powerful weapon, and it requires deep, local knowledge of market dynamics.

Our focus has been on building local standards and capability first and only then allowing ourselves the luxury of thinking about the productivity, which adherence to those standards allows us [inaudible].

The second reason why we believe we can continue to open 1,000 plus units per year is our outstanding base of over 500 franchisees which operate in more than 90 countries.

They are responsible for the balance of our growth.

We do not invest in real estate operated by our franchisees as some franchisers try to.

Instead, we jealously guard our franchisees' capabilities to be completely self-sufficient in their needs to develop their market.

These franchisees are sophisticated businesses with scale and diversity.

Like Malaysia, for example, where our franchisee has both of our major brands, is a market leader in our industry, and regularly builds at a rate higher than the competition.

A great partner, who in addition this year purchased our Singapore business from us and is already improving its operations and restarting development.

Franchisees like KFC holdings in Malaysia are a key part of our focus on training and improving capability by ensuring that we expose all of our teams worldwide to best practices from elsewhere.

We spend more than 50% of our time in our central development team on this initiative.

As an example, we regularly teach week-long seminars in markets around world.

Most recently, for example, completing a new site evaluation course in Latin America where more than 60% of the 40 attendees were from our franchise partners.

So we learn and improve together.

Alongside our larger franchisees, there are many new partners in markets where our growth curve has just started.

A great example of this is India India, where after several years of cautious, slow growth, our core franchisees now cover the major cities and are doubling rates of expansion each year.

To complete the franchise picture, in order to ensure fresh entrance to build in yet new markets, we've recently established dedicated resources to recruit the very best new franchise talent in markets across Europe and in Latin America.

The third reason we believe we can sustain our rate of growth and continue to open at least 1,000 new units every year and hopefully more, is by target targeting key new markets.

As we discussed with you in the past, we're putting major focus on KFC in continental Europe and for the longer term, we're beginning to resource for development in KFC Brazil.

The fourth reason for our confidence is our portfolio of brands.

Our international growth is currently about 60% KFC and 40% Pizza Hut.

These two brands alone, especially when we add in the relatively untapped potential for Pizza Hut delivery, in both proven and new markets, they provide us with multiple options for growth in years to come.

But in addition, we have access to three more brands, Taco Bell, A&W and Long John Silvers.

They will find it a lot easier to grow internationally if they don't have to do so standalone.

And no one else has that advantage.

We have yet to do more than experiment with the U.S. multibranding program and so far only Canada, Puerto Rico and Australia have been involved.

This year, we will begin to test our new brands in Europe.

We need to learn how this works and then once again, we will move forward in a planned and quality way, but we are convinced going in that the future for multibranded outlets outside of the U.S. is just as bright because the obvious advantages here in the U.S. are just as relevant to our customers worldwide.

And finally, the fifth reason.

There really is only ourselves and McDonald's out there in the international markets of any size as David mentioned.

For new entrance to overcome our size advantage and compete adequately is almost impossible.

And for that, we have to thank PepsiCo, who developed international infrastructures which was a gift to us.

We used that capability as the strategic advantage underpinning our global growth.

So in summary, we are confident that our growth rate of 1,000 plus new restaurants per year can be sustained because of our focused disciplined equity investment in core markets, our outstanding and growing franchise base, the strategic investments we're making in new markets, the prospects we've access to our brand portfolio offers, and fact that our international infrastructure is unbeatable.

That rate of new restaurant openings will ensure that the international business can continue to grow profits at 15% plus per year and provide great returns to our shareholders.

Let me turn it back to David.

We're ready to take any questions that any of you may have.

Kim, we're ready.

At this time I would like to remind everyone, please press star and number 1 on the telephone keypad to ask your question.

Your first question comes from Coralie Witter with Goldman Sachs.

Hi, two questions, really.

The first one is on Pizza Hut.

You alluded briefly to an evolution of the current brand positioning.

I wanted to get a little more color there.

It seems to me that your Pizza Hut has struggled a little bit with how to position itself in the mind of consumers, sandwiched between Papa Johns, which gets credit for quality and Dominos, which gets credit for value and delivery in the minds of consumers.

Where do you see Pizza Hut's positioning to draw people back into that brand?

And then the second question is, at what point you would expect new unit growth in the U.S. to turn positive - so to have the openings greater than the closures?

Well, I'll take the second question.

On new unit growth, we expect this year, you'll see it in the second half for our net new unit openings, to start being positive, and then you'll see growth from there on out.

Let me make sure everybody knows that I think we do a very good job in our company being very aggressive and smart about our asset management and, closing restaurants that need to be closed and rebuilding and re relocating them.

Having said all of that, with out multibranding initiatives in the United States, I think you'll see new unit growth second half in the year and then from there, beyond.

On the positioning front, we have really been doing a lot of work on just our overall branding strategy, trying to drive more differentiation and take advantage of Pizza Hut's core branded equities.

We will launch a new advertising approach that brings positioning to life in the second quarter.

But basically, I don't want to give away exactly where we're headed for competitive reasons, but there is no brand that is more ubiquitous, more a part of America, and has a higher profile with the American consumer than Pizza Hut.

We have an incredible love, history, heritage.

We are a ubiquitous, pervasive brand that we want to capture that love and that -- what we do to bring families together around the United States and the world, with our positioning.

So we're going to continue to lead in innovation.

We're going to continue to lead in the value arena, in terms of offering quality at a very good price, and we're going to bring that forward to the customer in a way that takes advantage of our rich brand heritage and ties more directly into our family history and heritage.

So stay tuned on that.

We're very excited about that, and I think you'll see a much clearer more defined position in Pizza Hut in the second half of the year.

Next question, please, Kim?

Next question from Mitch Speiser with Lehman Brothers.

Thank you, good morning.

A couple of questions.

First, on the KFC, Taco Bell dual brands.

I believe you have about 650 in the U.S, which implies maybe about a quarter of the KFC system company is dual-branded.

And just with the comps, pretty negative at this point, I was wondering if you could comment on that piece of the equation?

Has that been running positive?

And then on the flip side, for the KFC stores, can you give us just KFC in particular, can you give us an update on the speed of service initiatives like the timers?

Are they in all company stores as of yet?

Have you seen improved speed of service?

And when do you think the franchise stores will start putting timers in?

Thanks.

I'll answer the second question first.

This is Dave.

On the KFC speed of service when they process of putting the time timers in along with the operations training programs and everything else.

We expect to have that done the first half of this year and we'll continue to show measured progress as the year goes along and speed of service both in the company restaurants and in our franchise restaurants.

KFC Taco Bell restaurants continue to outperform same-store sales growth versus our base KFC restaurants, which is one reason why we're so enthusiastic about our multibranding initiative.

So, the KFC Taco Bell restaurants, I don't know if they were specifically positive

in the fourth quarter, but they did outperform the KFC based restaurants as they have been for sometime.

And Mitch, keep in mind the 650, that's company and franchise.

We don't have the split available right now, but you have to assume it's approximately somewhere in the range of 50/50 company and franchise.

So that 650 does not all drive company comps.

Great, thanks.

Could you comment on the Pizza Hut system?

I believe there is about 700 or so dual-branded Pizza Hut stores.

You said that's not a focus going forward.

Are you going to pair those back or maintain the existing dual-branded pizza huts?

Yeah, they are primarily Taco Bell that has Pizza Hut express in them.

We'll continue to support and nurture those.

We don't expect to expand those much further.

We expect to look at multibrand combinations.

Thank you.

Thanks, Mitch.

Kim, next question, please.

Your next question comes from John Glass with CIBC World Markets.

Two questions, first I wanted to go back to your full-year 2% -- maintaining your 2% comp guidances.

Is there any way to assess the sensitivity of same-store sales for the blended number, given that your contingency, what's the minimum blended comp you would need to hit that $2 number?

And secondly, could you maybe talk about the comp trends in your core international markets?

Thanks.

Yeah, secondly, in our core international markets, our comp trends continue to be good throughout.

You can get that by looking at our total systems sales growth and looking at our 4-5% development and you can see we have positive same- same-store sales growth in our market.

It's been -- internationally, you've got the sweet spot of same-store sales growth and new unit development, which has been very, very good.

On the blended same-store sales growth, our contingency, we don't get quite that fine as far as what covers what.

We've got about 6% coverage in our earnings estimates.

We fully expect to gain 2% same-store sales growth for the year, and if you look at the timing of the quarterly laps, we we were up 5% in Q1 and the lap gets a little easier there on out.

But from a contingency standpoint, John, I hesitate to say what minimum numbers are.

I look at more the pool of dollars that we have set aside.

Thank you.

Thanks, John.

Kim, next question, please.

Your next question comes from Joe Buckley with Bear, Stearns.

I have a couple of questions as well.

First, very simply, I'm curious on the food cost outlook for chicken and cheese.

And a question on the international front.

I know that the U.K. market is one of the key growth markets.

Could you comment about how penetrated that market is?

What the relative maturity might be?

And then from an overall basis on the international -- opening 1,000 units a year, if you were to close no restaurants, you would have 8% growth, and I'm worried -- not worried, I'm interested to see if that 5-6% net growth number inches up over the next several years, even if the absolute number of openings stays about the same.

There's three questions.

I'll take the closure side and the food cost outlook side and then I'll turn it over to David Fitzjohn to talk about the U.K. business.

On the growth of in international restaurants net, I would say that we probably will have somewhere around 2% to 3% closures.

It's just part of this business to close and relocate and examine our asset base.

Having said that, those closures are typically replaced by much higher, much better, stronger restaurants.

So, I think hopefully that rate will inch up a bit, but at the same time, we're going to be active in it -- in managing our estate, and secondly, we're going to always replace those restaurants with higher quality restaurants.

And the food cost outlook, we see -- something – and something we've been mentioning for a while, we see our commodity costs to be still somewhat favorable.

The cheese costs look fine and the chicken costs outlook looks fine also.

On the commodity side, we're fine.

I'm grateful that my first question is about the UK, a market I know a little about.

We've done a lot of work in the U.K.

That's one of our core markets in understanding what each of our restaurant services in terms of trade area, and therefore extrapolating from successful restaurants how many similar trade areas there are left within the market.

Based on that detailed work, we're very confident that both of our systems can continue to grow at their current rate for more than the next 5 or 6 years.

And in that time, we anticipate that we will discover incremental trade area availability that will enable us to continue growing even further.

We're very comfortable with the current rate.

Thanks, Joe.

Next question, please, Kim.

Janice Meyer with Credit Suisse First Boston.

My question is for David first and I didn't hear your

whole presentation, but did you say that you’re going to test the new brands in Europe and if so, why not Asia, particularly Long Johns?

I was wondering what your outlook for Korea as a core company market would be over the next few years?

And then just on KFC, you've talked about non-fried.

You've done non-fried before and it seems like most research say people talk healthy but don't necessarily eat healthy, so I can understand it as a veto factor or a complement to the menu, but with all of the other things you're working on, why is non-fried important now?

And maybe you can tell us sort of what percent of sales non-fried has been for you in the past, and maybe where you expect it to be, how much of a contributor?

I'll take the Korea question first and then I'll ask -- turn it over to David on the other stuff.

We expect Korea to be a core market for us.

We do very, very well there.

We've got great operations.

We're rolling out pizza delivery and we'll continue to make that happen for us.

On multibranding, we are testing multibranding in Europe, in particular we're testing Long John Silvers in the U.K. where we think we have a lot of potential for there obvious reasons.

The other thing is, when we look at our continental Europe expansion, we're getting very good results in France, very good results in Holland.

We've been struggling in Germany, and we need to get, because of the social infrastructure costs, you've got to have a much higher volumes, and we think that the variety is going to be much needed in Germany to get the lines to where we can successfully open with high returns.

We're going to test KFC and A&W next year.

Plus, if you look at Germany, Germany is not a strong poultry country.

It's very much into beef, and so we think that we want to test the waters there.

We're just now -- we have a lot of run with our stand standalone brands internationally.

We're not on a full-court press to go after multibranding everywhere.

We're sort of picking and choosing where it makes some sense.

What we are doing is bringing people from international into the U.S. to see what we're doing doing, franchisees are getting excited about it and we'll be doing multibranding around the world in the next couple of years.

But short-term, we focus where we thought it made the most sense.

As Dave Fitzjohn said, we're doing multibranding quite successfully in Puerto Rico.

Already, we've had good results there.

We're doing it in Canada.

We're doing it in Australia.

Those are more mature markets, more like the U.S. where it makes a lot of sense, so that's where we think -- and we have great infrastructures already built in to where we can begin testing it.

So I think that's basically the approach that we're taking with multibranding outside of the United States.

I can tell you that the franchisees are extremely excited about it just as our franchisees are excited in the U.S.

About half of our multibranding units are franchised.

As you know, Janice, covering the industry, you don't get franchisees to take things unless the customer likes it and the economics are good.

So we're very excited about the future.

When you look at non-fried, and you look at the KFC opportunity, we really like the way our KFC is positioned for the future.

We think the fact that we offer complete meals is a real advantage.

It gives us a step up versus fast-food, and we think that bodes well with all of the trends that are out there and Cheryl and the team are focused on driving that more and more as we move ahead.

When you look at the menu and think about adding new products, the thing that we're really focused on is what we call meaningful variety.

The worst thing you can do in our business is add new products that don't give you incremental volume and only just increase the complexity of your operations without giving you the gain that you are really looking for.

When we look at non-fried, the customers tell us this is an area where we can provide meaningful variety.

We've done it in the past.

Every time we've done non-fried products in the past at KFC, we've had tremendous short-term success.

When we did tender roast, our mix got up in the 25% to 30% range.

We had over 20% sales growth.

The problem was is we did it in whole birds with a different operating format.

It didn't work for KFC and we weren't able to sustain it.

And so what we're really looking for is how do you get in the non-fried arena in a way that's very sustainable and can work within the operating format for KFC?

And we've got a couple of approaches that are different than what we've done in the past, that we think will provide meaningful variety, and I really don't want to go through those in detail right now, because we're going to be testing it.

But what we want is to bring forward a product line that makes the KFC menu even more contemporary, reinforces our complete meal notion, and provides meaningful incremental sales in an operating format that won't slow us down.

And that's what we're working on on, and we're confident that we're working on some things that can really make a difference, but we'll have to stay tuned and we'll report our results back to you.

Thank you.

Thanks, Janice.

Kim, can we have the next question, please?

Your next question comes from John Ivankoe with J.P.

Morgan.

Hi, thanks, my question was on international development.

I think you mentioned that you evaluate returns of international markets about quarterly.

Could you discuss the process that you've gone through to risk adjust those international returns?

I think that's where one of your competitors got in significant trouble.

That's a good yes question, John.

What we do is we look at macro economic risks and business risks associated with each of our countries and a hurdle rate or dollar invested in China or Mexico has a higher rate than it does in the U.S. or the U.K.

We'll go through country by country by country and lay out targeted hurdle rates each year and then David follows up on that in the process that he talked about about.

How much higher would Mexico and China on a hurdle rate basis --

I don't want to get into that kind of detail, I hope you don’t mind, but it is significantly higher.

Okay, thanks.

Let me just talk about the process.

Each quarter when we do this, every restaurant in every market that's been opened with our capital is assessed and ranked.

That continues for more than two years after each restaurant is opened.

So we have a [pool] of the last two years of restaurants that we’re considering, to make sure that we're holistic in our approach.

Thanks, John.

Kim, next question, please.

Your next question comes from Jeff Omohundro with Wachovia Securities.

Thanks.

My first question relates to KFC.

I think on the last call, you provided a little bit of color on the competitive environment.

I'm wondering if you can give us an update on that and if you've seen any changes in trends there there?

And then also, on the Pizza Hut Pasta Bravo, I wonder if you could relay to us what kind of feedback you're getting from franchisees who have made the trip up to Canonsburg to review the unit.

Regarding KFC, we haven't seen anything develop in the last few months that we haven't talked about in the past regard regarding competition.

As it relates to Pizza Hut Pasta Bravo, the franchisees that have been up there and I'd have to talk to Peter Hearl to get more on this, but my understanding is that they are very excited about it.

We have a number of franchisees who will be opening up Pasta Bravos this year.

They think we're on the right track here.

I don't know if you've had a chance to go visit the unit, but it is an absolute dramatic change.

I've been there.

I'm very excited about it.

It's doing everything that we had hoped it would do, and we think we're going have a viable option for Pizza Hut.

It's very early days, but, the customer response has been just what we thought it would be, and we will have to see how it's sustains, but we're very, very encourage by Pasta Bravo.

I really believe this can be a global idea.

Very good, thank you.

Thanks, Jeff.

Kim, next question, please.

Your next question comes from Peter Oakes with Merrill Lynch.

Good morning.

I wanted to go through the international growth.

Dave, I actually calculate that the total excluding licensees, the unit growth was up 8% year to year at the year end.

Does that number sound correct?

Yeah, on a license basis, and when we talk about our growth from an earnings growth model perspective, it's always traditional restaurants, because those are the more typical restaurants and they what would be more like the system average unit volumes unlike license locations.

Okay, so, do we think of these as what?

Kind of license locations that are non licensed from a lower average unit volume if we're trying to get a handle as to what the comparable unit growth is from the reported numbers?

Comparable unit growth, I would just use the -- if you look at the report and its schedule, just look at the traditional column and exclude license.

We're generally running between 5% and 6%.

That number was up 8% for year to and it was up 6% in '01, so I guess if I were to average it out, that would imply that unit growth for international is up about 7%, which actually mirrors what the system wide sales growth is.

That would suggest comps were about flat internationally.

So I didn't want to get in a debate what exactly are the international comps, but I was more curious on the margin front front, is the fact that in this case the fourth quarter, you're able to capture 150 basis points of company margin improvement, is that a mix shift because of countries of structural advantages you have underway in China?

Or is it -- because it wasn't just the food costs components.

Mix shift, food cost components, better productivity, good returns on our new restaurants, et cetera.

And so, that's what -- that's what we've been seeing in our margin performance in the international business.

So we're getting, Peter, better margin performance out of our new restaurants and our base business margins are improving all the time.

So even with somewhat of a comp slowdown, actually the --

I'd say, Peter, that our comp sales for the year certainly were positive, okay.

The markets were very strong, so I wouldn't say a comp slow down in any situation whatsoever.

What I'm trying to get a handle on is your ability to continue to generate the improving company margins internationally, even if the comps are under a little more pressure.

Obviously you proved that in the fourth quarter.

Yeah.

I'm trying to see if there was anything unique in fourth quarter that would cause us on the outside to look at the likelihood of continuity to be impacted.

I'm not hearing anything.

Keep in mind, Peter, that we did have -- as we filled out throughout the year, particularly coming into the year in 2002, we had the elimination of reduction in goodwill amortization expense.

We benefited margins in the U.S. and internationally, and international was about [60] basis points.

Did you have that.

That's a one-time change.

In addition beyond that, we talked about this earlier in the 2002.

There were some supply chain management initiatives that were fairly significant that benefited food costs.

And that's why you saw food costs on the international side was down.

That was primarily in our high growth markets.

One of the things, like in China, for example, we're increasing our level of sophistication and execution.

We put people on supply chain management.

Last year we had great savings in China.

We also have this process for margin improvement called [Pacesetter] that we rolled out around the world [inaudible] and it really lays out where the opportunities on a line-item by line-item basis are are.

If you talk to our franchisees, this helped them dramatically improve their margins and helped them develop more aggressively.

For example, I was in El Salvador a few months ago and Francisco Rivera thinks that's the best tool we've given him and it has helped him open more restaurants than he thought he could in that country.

Peter just in direction answer to your question, I think we'll target internationally 10 to 20 basis points in margin improvement this upcoming year.

Okay, good.

Thanks a lot.

Thank you.

Thanks, Peter.

Next question, please, Kim.

Your next question comes from Howard Penney with SunTrust.

Good morning, thanks very much.

I have three -- or two questions, actually.

In 2002 you spent a lot of time on acquisitions, joint ventures and what not.

Is 2003 shaping up to be a similar strategy or are you pretty much have a portfolio that you're going to grow with for the next couple of years?

And your line-item guidance appears to be conservative on a number of different areas except for the same-store sales and I only say that in light of, you hit your 2% guidance last year through Taco Bell, so essentially 28% of your business generated 100% of your comps and business, the competitive condition in business is a little soft today.

In reality your comparisons don't get easy until the fourth quarter.

Well, they get easier relative to the first quarter.

They really don’t get easy until the fourth quarter.

Can you just be a little bit more specific as to where the acceleration is going to come from in your comp store sales?

And then your last question is related to what Peter was talking about, given the growth in the international business and the importance in the international business, are you going to provide us comps by region for the international business or are you going to leave it as a fuzzy number?

Sure, I'll take the last two and turn it over to Dave for the other one on the acquisitions and joint ventures.

Comp sales, if you look at our last year, lapping last year, a +5 in Q1.

And then basically 2.5-3 in Quarters 2 and 3, and down in Q4, down 1.

KFC in particular, if you look at their figures, KFC in particular has a strong comp lap in Q1.

Taco Bell has been lapping very strong comp numbers throughout, and David mentioned that we -- that they are doing.

So we still feel good about the 2% same-store sales growth.

On the international comp sales by region, at this point, we don't have any plans to lay out comps by market or by region at this point.

We are always studying ways to make our financial information easier for our Investors, and we'll continue to think about that as the international business is changing in its character and growth as part of our company.

But at this point, we do not anticipate laying out by region or by country comp sale figures.

Dave, do you want to go back to to --

On the portfolio, we're very comfortable with the brands that we have and the partnerships that we have.

We're just in the execution mode and the next couple of years, and beyond.

We think we've got the arsenal we need to really deliver at least 10% operating EPS growth from here on out for a long time time.

So that's where we stand on the acquisition front.

And one addition, we will have minor re-franchising, as I mentioned, in some of our countries this year for international, but nothing really big on the acquisition front.

Yeah, Howard, one other thing to consider on the international side and what we've tried to emphasize is really, really important thing.

That's why we have David Fitzjohn here, is it’s a really important thing to drive our earnings growth is unit growth.

We do actively manage the

viability and the comp performance of our markets, particularly our key markets.

The key thing is to keep the health and vitality of that business but also growing units.

On the U.S. side you talked about the last -- they do get progressively easier, but the one thing you have to consider where we are today and we're not going to be in the business and you won't hear us give you weather reports.

You have to keep that in mind when you're looking at January and February performance, particularly against last year when you had really easy comparisons from the weather perspective.

It is impacting our business in January and February.

You can't necessarily project current trends and when we expect in the balance of the year where we are today.

Tim, you just broke one of our rules.

You’re not allowed to whine about the weather around here.

Thanks.

We have time for one more question.

Your final question comes from Larry Miller with Prudential.

I have two questions, really directed at KFC.

I was wondering how many stores have adopted the open-longer-hours at KFC?

And what kind of sales [lift] you might be seeing at those stores?

And when we can expect the initiative to be fully rolled out?

And lastly, what are you expecting a per share impact of franchising actions to date in 2003?

Yeah, as we've laid out in the prior discussions on -- we expect $50m, I think.

We expect basically to break even on re-franchising, plus 10 cents a share.

We'll just continue to do that.

One thing I want to mention to everybody, is that we do our impairment calculations on a store by store basis, we don't do market impairment or anything like that that.

We're very diligent in how we assess our stores and our closures and our impairment.

The open hours, longer hours, extension of hours for KFC will take into effect more in the second half of the year.

We have a couple of lead markets that are leading the way on that and we'll report back to you in more detail on where we're headed with that.

Thanks, Larry, Thanks.

That'll be the end of the call.

Thanks to everyone for attending and for all of your questions.

This concludes today's conference call.

You may now disconnect.