百勝餐飲集團 (YUM) 2003 Q4 法說會逐字稿

Good morning, my name is Bridget, and I will be your conference facilitator today.

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

Brands 2003 fourth quarter earnings conference call.

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

After the speaker‘s remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star and then the number one on your telephone key pad.

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

Thank you.

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

Sir, you may begin your teleconference.

Thanks, Bridget, and good morning everyone.

Thanks for joining us on the call this morning.

Before we begin, I’d like to go through just a few things.

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

We are broadcasting the conference call via our Web site www.Yum.com.

Please be advised that if you ask a question, it will be included in both our live conference 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.

The information in this conference call related to projections or other forward-looking statements may be relied on subject to the Safe Harbor Statement including in the earnings release last night and may continue to be used while this call remains in the active portion of the company‘s Web site which will be until midnight February 27, 2004.

On our call today, we have David Novak, Chairman and CEO; and Dave Deno, our CFO.

Both will follow with remarks, and we will then take your questions.

Now I will turn the call over to David Novak.

Okay, Tim.

Thank you very much and good morning, everybody.

As you probably saw from our release, we had an even stronger than expected fourth quarter, 65 cents per share and 16% growth.

As a result, we ended the full year with 13% EPS growth.

Now, based on this momentum, we have already raised our commitment for 2004 4 cents, to at least $2.27.

Even more importantly, we are confident we have solid plans in place for all of our business, including KFC in the United States, which we expect to show positive results in the second half.

Our ongoing goal is to increase EPS at least 10% each year, and you can expect at least 10% earnings per share growth in 2004.

Before Dave Deno, our CFO, takes you through the details of our results and expectations, let me step back a moment and provide some highlights of last year and some perspective on the year ahead.

First, let me talk about our exciting international business, which is now our largest division.

In 2003, Yum!

Restaurants International achieved records for revenues of $2.7 billion.

Profits of $441 million.

And a return on invested capital of 20%.

Despite SARS, China‘s profits were up over 40%.

Profits in China are now over $150 million, and we just celebrated our 1,000th KFC opening.

KFC is the leading restaurant brand in China, and we are widening the gap versus our nearest competitor every day.

Pizza Hut also now has 120 stores and is the casual-dining leader.

We successfully opened our first Taco Bell, and we have every intention to stay the China leader in every significant food-service category.

We were also pleased to see our Middle East franchise business bounce back remarkably well after the Iraq war.

Same-store sales were up double digits the second half of 2003, and we opened over 50 restaurants in the MidEast showing the power of great U.S. brands even in the most volatile situation.

In fact, our international franchisees opened up over 70% of the new restaurants for the system, displaying solid confidence in the continued expansion of our KFC and Pizza Hut brands around the world.

For the third straight year, we opened over 1,000 restaurants outside the United States.

And in 2003, we set a record, opening 1,108 new units.

The revenues from these new units, combined with the generally strong performance we are seeing around the world, along with the improving global economy, gives us confidence we will grow our international profits at least 15% this year, and open up at least another 1,000 new units.

This includes any foreseeable impact of the avian flu in Asia.

Our team is SARS-battle tested, and on top of the situation.

Chicken supply is fine.

In the United States, we also have momentum and new programs backing us up.

First, some perspective and outlook for Taco Bell.

In 2003, Taco Bell led the way.

Taco Bell is now the second most profitable quick-service restaurant brand in the United States, and just celebrated hitting the $1 million mark for average system-unit volumes.

Franchise profitability and optimism is outstanding.

We are especially pleased Taco Bell grew its 2003 systemwide same-store-sales growth 4%.

Company same-store sales were up 2%, on top of 7% growth the previous year.

This result is coming from steadily improving our operations and excellent marketing.

Taco Bell is now ranked Number 2 in QSR Magazine‘s annual study for overall customer effectiveness and drive-through service.

Taco Bell‘s “Think Outside the Bun” advertising campaign and strong product pipeline also continued to help drive consistent same-store-sales growth.

For instance, right now we were driving the business with Club Chalupas, and the new Fiesta Taco Salad is on deck.

We were off to a solid start this year, have a strong beat-year-ago marketing calendar, and expect to stay on track at Taco Bell.

Now on to Pizza Hut. 2003 was a year of steady progress at Pizza Hut.

In fact, Pizza Hut showed positive same-store-sales growth seven of the last eight periods in 2003.

Most importantly, the Pizza Hut team laid a strong growth foundation for this year and beyond.

The brand was repositioned to target the heart of the pizza category.

Targeting the family and the primary decision maker, mom.

A new advertising campaign, “Gather ’Round the Good Stuff” was launched, and it’s gaining traction with customers.

The new product pipeline has been rebuilt with a record number of products and concept tests.

We just kicked off the year with one of those products.

The new 4forAl, which gives the family four pizza choices in one size.

Everyone in the family gets to pick the topping for their very own pizza.

Initial consumer acceptance has been very positive, and we believe this product is the most significant pizza-category innovation since we launched Stuffed Crust Pizza.

I encourage you to give it a try.

You’ll see exactly what I’m talking about.

Pizza Hut is also steadily improving its operations and is the first one of our brands to achieve team-member turnover of less than 100% for the full year, 99.6% to be exact.

Low team-member turn over is an operational fundamental that is critical to achieving consistent same-store-sales results, and we have made significant progress across Yum! on this dimension, with Pizza Hut leading our portfolio.

All in all, we expect a much improved year for Pizza Hut because of the heavy lifting we have done this past year and the news that we have coming.

KFC is clearly our biggest challenge going into this year, but we are confident our new management team is taking the right actions to turn this brand around.

We are repositioning our fried chicken as “Kitchen Fresh Chicken,” emphasizing the fact that our chicken is brought to our restaurants fresh — not frozen — every day.

We plan a major relaunch of our brand in the second half, featuring a new KFC menu board that we have mandated to our franchisees based on over a year of successful testing.

We will also be offering a roasted line of new products, and everyday value meals.

Our new advertising agency is working on an exciting new campaign to relaunch the KFC brand by communicating the changes we are making.

Just as importantly for KFC, we are making steady progress in speed of service as we roll out the same program that worked so effectively for Taco Bell.

One big competitive advantage that we have is the ability to implement our best practices from our global brands.

So Taco Bell speed system is something that we are rolling out and expanding around the world.

The first half of this year will be tough for KFC, particularly in the second quarter when we overlap boneless wings.

But we expect to see same-store sales turn positive the second half of the year.

I am confident we are working on the right things at KFC, and it will pay off.

In total, when you look at our entire U.S. portfolio, we expect blended same-store sales to be up at least 1 to 2% this year, given the improvement we are making in operations and what we believe are better positioned brands with significantly stronger marketing programs.

We also continue to make progress pursuing what we think is a breakthrough strategy in our industry, multibranding our great brands.

In 2003, we passed the 2,000 mark in number of U.S. multibranding units, and profits and fees are almost $200 million.

This year we expect to add at least 500 multibrand units.

As you recall, we acquired A&W All-American Foods and Long John Silver’s in 2002 to give us more multibranding opportunities by providing fish and burger variety to Taco Bell and KFC.

This acquisition has been an undeniable success.

Long John Silver’s is exceeding expectations and is our best multi-branding partner brand.

We are focused on executing a “fish-first” expansion strategy to make Long John Silver a national brand.

There is very little fish competition, which is resulting in high demand based on the sales results we are generating with our Long John Silver/Taco Bell, Long John Silver/KFC, and Long John Silver/A&W combinations.

We are transforming Long John Silver into a fish and shrimp seafood restaurant and improving the product quality.

In fact, we are launching a delicious giant shrimp that is almost 6 inches long during Lent.

We are also successfully expanding our A&W business.

At Pizza Hut, we are continuing to test Pasta Bravo with our franchisees as a way to remodel and revitalize our dine-in business.

And in 2003, we created a new concept called WingStreet that we are testing as a partner brand with Pizza Hut delivery.

This is a line of tasty bone-in and boneless flavored chicken wings.

Initial results are promising.

We have a full-time dedicated operations multibranding team working on the systems that will help us expand our multibranding business even more successfully in the future.

Significant progress is being made at improving service systems, investment costs, and margins.

We are as bullish as ever on the prospects of multibranding openings, and really driving new unit growth in the United States.

Our customers clearly love multibranding, and our franchisees are opening up half of our multibranding units, which is indicative of the power of the unit economics of a well-run store.

Last but not least, the Yum! balance sheet is now in outstanding shape.

We have essentially eliminated all of our bank debt and paid off $2.6 billion of debt of the $4.7 billion we inherited as a public company six years ago.

In 2003, our net cash flow from operating activities was over $1 billion, and we generated nearly $1.4 billion of cash available prior to capital spending.

As a result, we reduced debt by over $300 million and bought back a record $278 million of our own shares.

In 2004, we will once again generate well over $1 billion in cash, and the possibility of a dividend is now under consideration.

In closing, we expect this year to be another very good year for Yum!

We’ll achieve at least 10% EPS growth before any special items, generate outstanding cash flow, and our balance sheet will get stronger and stronger and stronger.

We are focused on executing our three key strategies.

International is doing very well.

We are making steady progress operating our great brands, and multibranding is continuing to expand with exciting new options.

What you can’t see in the numbers is that our — that worldwide we are continuing to build a people-first, “Customer Mania” culture that is centered on recognizing the execution that drives performance.

We believe that our culture is the secret weapon that is helping us build a truly great company.

With that as a preamble, let me turn it over to Dave Deno to take you through the details of the numbers.

Thank you, David.

And good morning, everybody.

This morning I’m going to cover the following items.

First of all important trends in our business, a brief fourth-quarter review, the outlook for the first quarter, the full year and what you should expect, a review of current trends in each of our businesses, and what’s ahead in terms of news and innovation.

I’m also going to update you on our Asia business, given the avian flu situation, and of course, I’ll review cash flow and the ever-strengthening balance sheet at Yum!.

As we stated in the earnings release from last night, we feel very good about fourth-quarter results and trends coming into 2004.

Our biggest business is international and Taco Bell ended the year with their very best scores of 2003, in terms of sales growth; and our next biggest business, Pizza Hut, ended the year with positive same-store-sales growth in seven of its last eight periods.

This enabled us to exceed what we had expected to deliver for the fourth quarter EPS, and raise our expectations for 2004.

We are pleased to complete 2003 on a strong note with an EPS of 13% for the year.

That’s ahead of the earnings-growth target we laid out in December of 2002.

Given the challenges of 2003 such as SARS, Iraq, and a weak U.S. economy in the first half, we are very pleased with 13% EPS growth.

Before we review our fourth-quarter results, let me briefly review some key trends in our business, which we think are important for future performance.

First, the international business, our largest and fastest growing division, is as strong as ever.

Let’s look at 2003 performance when this business was challenged by the Iraq war, a bout with anti-American sentiment, an outbreak of SARS in several Asia markets, including China, our biggest Asia market.

For 2003, systems sales growth of 7% in local currency met the low end of our ongoing target range, and profit excluding the benefit of foreign currency increased 15%, right on target.

And after you convert those profits to U.S. dollars, our profits were up 22%.

And during all that, our assets only increased by 9%.

Remember, the most important profit driver for our international business growth is profitable new-restaurant expansion.

After opening up over 1,000 new international restaurants in 2001 and 2002, we ended 2003 with a record level of new-restaurant openings of over 1,100 restaurants, and our new unit pipeline remains robust.

This should give you a clear sense we were profitably growing this big business.

This includes making the right G&A investments to support our growth.

International G&A increased 8% for 2003, excluding impact of For/ex.

And, as you saw in the earnings release last night, our base international business ended the year with its best performance of the year.

We had same-store-sales growth in many markets, and international’s fourth-quarter restaurant margin of 15.9% was the best we’ve ever done in the fourth quarter.

As I said earlier, profit excluding the benefit of for ex was up 15%, while assets grew by only 9%, demonstrating the high returns of this business.

Not only is the base business performing well, there’s plenty of room in markets around the world to continue to profitably grow this business.

Second important point.

Our largest U.S. businesses, Taco Bell and Pizza Hut, have solid sales momentum.

Taco Bell is into its third consecutive year same-store-sales growth since their turnaround began in the fourth quarter 2001.

Importantly, their growth continues to be balanced coming from both traffic growth and guest-check increases.

Taco Bell ended 2003 with its best quarterly growth for the year, and will continue in the first period of this year with results ahead of its own expectations.

Importantly, Taco Bell had terrific plans for 2004.

Pizza Hut has now hit positive same-store-sales growth in eight of its last nine periods, including the first period of 2004.

Pizza Hut has good momentum, very good plans for 2004, and as you can see, product news and innovation early in the year with 4forAll, and there’s more to come.

An added benefit is that the pizza category began to show some improvement the back half of last year.

The third important trend is our strong cash-flow performance and continued strengthening of our balance sheet.

We have virtually no debt that comes due in 2004.

The earliest traunch of our bond debt comes due in May of 2005, and it’s only $350 million.

In 2003, our balance sheet got even stronger, and we made a pension payment of $130 million in the fourth quarter.

The payment was more than double than what was required.

In addition, we reduced our debt by over $300 million, and bought back $278 million of our stock.

We expect these strong cash-flow trends and strengthening of our balance sheet to continue.

As we laid out to you this past December in New York, we expect an ever-increasing flow of cash available to shareholders for the next several years.

To sum it up, we have confidence in our three largest businesses in terms of momentum and the quality of the plans they have to execute, and YUM’s overall financial strength is as good as ever.

Now, let’s talk about the fourth quarter.

We came in at 65 cents for the quarter, 3 cents better than we expected back in October.

This is prior to the special-item gain of 5 cents.

International sales growth and restaurant margin were clearly better than we expected, as was U.S. restaurant margins.

These are the main factors as too why we beat our Q4 expectations.

Traditionally, foreign exchange was slightly favorable, and our tax rate was also slightly better than the range we expected for Q4.

Partially offsetting this upside, was higher G&A spending and facility-actions expense.

All in all, prior to a special items gain, EPS was up 16%.

G&A spending was more than expected primarily within our own international businesses.

Overall, management incentives were higher as this year’s results exceeded our prior forecast.

We spent additional dollars against some of our key additional strategies, and foreign currencies were stronger than expected, which added G&A dollars.

The tax rate was slightly below our expected range for the quarter.

The full-year rate was right on forecast we provided to you in December.

Our tax strategies will occasionally have upside that flow through a particular quarter.

As I mentioned on last quarter’s call, we experienced the benefit of favorable tax upside and an international business in Q3, and expected more in Q4.

The upsides were just a little bit better than we expected.

The one headwind we faced in fourth quarter was higher cost for cheese and beef.

This was nearly — had a 1-point negative impact to U.S. restaurant margins in the quarter.

We still expect some unfavorable commodity impact in 2004 that will lessen as the year progresses, but we have factored this into our forecast.

In Q4, despite this headwind from commodities and higher than expected G&A expenses and higher facilities-action expenses, we were still able to exceed our expectation for the quarter and drive 16% growth in EPS.

This should give you a sense of the earnings power of this company and its diversified portfolio of businesses.

For the full-year 2003, we were pleased with 13% growth in EPS prior to special items.

There were a number of challenges to our worldwide businesses throughout the year.

However, with the power of our diversified global restaurant business, we were able to exceed our commitment of at least 10% growth.

Our profitable international expansion clearly led the way, and Taco Bell continued its growth in 2003 with record average sales per restaurant and strong profits.

Turning now to cash flow.

You can see from last night’s earnings release, we continues to generate substantial cash. $1.1 billion of net cash from operating activities. $110 million in employee-stock-option proceeds, $92 million from refranchising, and another $80 million from various sources, such as miscellaneous sales of property.

All in, that’s $1.335 billion of cash available.

We invested $704 million in capital spending and acquisitions of franchise restaurants.

That left us with $631 million, which we used to reduce our debt by over $300 million, and buy back nearly $300 million of our own stock.

I will also point out that the net cash from operating activities included the large pension contribution of $130 million.

This included an extra $75 million beyond what was required.

Overall, this was a terrific year for cash flow, returning a record amount to our shareholders and stock buy back, and essentially eliminating all debt except our long-term bonds.

As a result, our balance sheets is as strong as ever.

While we’re talking about our balance sheet, let me remind you, we have a process in place we call Earn the Right to Own for our company operations.

Every year all of our restaurants must earn their right to stay on the balance sheet.

If not, they will be sold and converted to franchise restaurants.

We are ever vigilant regarding our return on invested capital and tend to keep our position as the highest-return company in QSRs.

In 2003, we spent a bit less in capital than the prior year, $704 million,, including acquisitions of franchise restaurants, versus $773 last year.

We have equally rigorous standards on the Cap Ex side, and as we have said in the past, we will slow or stop capital spending in a market or business if a performance dictates this.

Finally during 2003, we were able to make solid progress in reducing our share count, on a diluted basis, to just under 306 million shares, which is a net 1% reduction versus 2002.

We have a clear sense that we have a capability to deliver on our ongoing commitment of at least 10% annual growth in EPS, maintaining our high return on invested capital, and generating substantial amounts of free cash flow.

Now, let’s look at 2004.

As always, our internal plan calls for EPS growth of 15 to 16%.

If everything goes well in our diversified portfolio businesses, you should expect us to exceed our commitment of at least 10% growth in EPS.

For the first quarter, we are comfortable with the consensus estimate of 43 cents per share, prior to special items, or growth of at least 10% versus last year.

We expect our international business will continue on trend and lead the way in profit growth driven by new-restaurant expansion with the added benefit of several million dollars from foreign currency conversion.

Additionally, the timing of Chinese New Year adds some benefits to Q1.

In the U.S. we expect a solid quarter from both Taco Bell and Pizza Hut, as well as continued expansion of multibranding.

As always you can track our progress during the quarter as we provide you with both international and U.S. sales updates every four weeks.

Now let’s look at each of our businesses.

First let’s look at international and some of our key markets.

In China, we had a very strong fourth quarter and these trends continued into 2004.

The team there launched a new roasted-chicken platform, which has performed well.

Any time you can drive nearly 30% growth in units, and very solid same-store-sales growth, it has a powerful impact on profit growth.

Most importantly in China, we expect to open at least 300 new system restaurants this year, most of which will be KFCs, and we will also be continuing our Pizza Hut casual-dining expansion.

In the U.K., another large international business, both Pizza Hut and KFC continue to show positive same-store-sales growth.

In addition, the market in total is currently generating 8% new-restaurant growth.

Strong profitable expansion continues in this large market.

Generally, our important markets have shown a continuation of positive-growth trends from last year’s Q4.

China, the U.K., Pizza Hut Korea, and KFC Australia.

Mexico and Japan remain the markets that are providing us some challenges.

As we noted in earnings release last night, recently various Asian KFC markets have begun to be impacted by the avian flu.

This is negatively impacted KFC sales trends, particularly in Thailand a small primarily company-owned market.

KFC’s sales have recovered quickly in Thailand, and are currently running about 5 to 10 points below trend.

As for KFC franchise markets such as Japan, Malaysia, Singapore, Korea and Indonesia, sales have been running anywhere from modestly off trend to 20 points below trend.

In China this past week, KFC sales are running about 20 points below recent strong trends.

As I said earlier, the KFC business in China ended 2003 on a very positive note, and this performance carried on into 2004.

As you have seen in the earnings release, we laid out a hypothetical example regarding sales and profits in China and resulting impact on Yum!.

If KFC China sales remain down 20% versus trend for one to two months, which we do not expect, YUM’s EPS could be negatively impacted by 1 or 2 cents for the year.

Based on trends in the Yum! —- total Yum! portfolio, we believe we can easily offset this hypothetical shortfall and maintain the current EPS estimates for 2004 of at least $2.27, prior to special items.

On the supply side, virtually all of our chicken supplies have not, and I repeat, have not had the flock impacted by the avian flu.

As a matter of course, we have made minor adjustments to some markets, and have ensured contingency options wherever needed.

You should be confident our supply situation is fine.

On the cost side, we should have short-term pressures in a few small markets, but nothing we can’t handle.

Our large scale helps us and gives us an advantage in this situation.

Once again, regarding the avian flu situation, based on what we know today, we expect the situation to be short term in nature.

The effects, we believe, are included in our Q1 and full-year forecast.

Finally, and obviously, our Pizza Hut business in Asia is doing just fine.

I will remind you of some recent history in our Asian business.

Both KFC and Pizza Hut survived the SARS outbreak quite well last year, after a short-term period of sales decline.

For example, even with SARS, China’s profits in 2003 increased 40%.

If we proved one thing last year, we are blessed with a large, growing, and diversified restaurant business, which has the earnings power to cover short-term unforeseen items.

Wrapping up international, in 2004, it is very important for our international business to continue to profitably expand with new KFC and Pizza Hut restaurants.

I would reiterate we expect again to open more than 1,000 new international restaurants, as well as benefit from the first full year of operations from last year’s record openings.

This is the most significant driver of YUM’s annual EPS growth.

Now let’s talk some about our U.S. business.

In the U.S., we expect Pizza Hut to lead the way in sales performance for Q1.

In fact, we expect Taco Bell and Pizza Hut to have very good sales growth in the first quarter.

KFC will likely be slightly negative.

Overall, the U.S. should meet our 2004 target of at least 1 to 2% same-store-sales growth.

Our largest business, Taco Bell, continues on path for another very good year with steady same-store-sales growth of at least 2%.

We are in our third year of growth post the turnaround, which began in Q4 in 2001.

As you saw in the first period, we were up 3%, and we expect these trends to continue.

As David said earlier, we have a strong pipeline of new for 2004.

Taco Bell’s new and improved Fiesta Taco Salad will be out in three weeks.

The focus on lower-priced, unique value items, mixed with higher-priced items, like the Fiesta Taco Salad, will continue throughout the year.

On to Pizza Hut, which has now delivered same positive same store sales growth in eight of the last nine periods.

As you are all aware, Pizza Hut has just launched the 4forAll pizza, which is its first innovation of the year, and is performing well.

It’s great to have Pizza Hut, our second largest business, matching the kind of sales growth we have become accustomed to at Taco Bell.

At KFC, the message I want to emphasize is first half, second half.

First half will have challenges, including some tough laps, and the second half will be much improved.

As we said in the past, we do not expect material changes to their same-store-sales trends until summer when we expect they’ll begin to steadily improve.

Additionally, KFC has some tougher laps beginning in Period t3hree through Period 5.

Last year, KFC was plus 6 in Period 4 same-store sales, with a limited time offer of boneless wings.

So you should expect to see some negative numbers from KFC during those three periods: Periods 3, 4 and 5.

And the second half should begin to show steady progress.

Our Long John Silver’s and A&W brands continue to perform well.

As David is performing better than expected.

The role of these two brands is clearly to be our primary multibrand enablers in the United States.

Before I wrap up, let me briefly review our ever-improving balance sheet and continued strong cash flow.

We spent a lot of time in our strong cash flows in the December New York meeting for investors.

Let’s recap our overall expectations.

In 2004, we expect about $1.2 billion in net cash provided by operating activities, with about $770 million in capital spending.

So free cash flow will be substantial again this year, over $400 million.

In addition, as you can expect from us, we’ll generate an additional $100 million from refranchising, at least $130 million in employee-stock-option proceeds, and about $50 million from sales of surplus property and equipment.

That’s roughly another $280 million from cash we will have available.

We expect 2004 will be another — we will expect in 2004 will be another year the Yum! balance sheet continues to strengthen, and the financial ratios will continue to move in a favorable fashion.

So in wrapping up for 2004, you should expect to see us make solid progress with our share-repurchase authorization, consider a dividend, and get ready for additional debt reductions in 2005.

We beat our earnings commitment for 2003 with 13% growth in a tough operating year.

We’re committed to at least 10% again this year, and we believe we have the plans in place in all of our businesses to have a terrific year.

Back to you, David.

Okay.

Thank you, Dave.

Before we take questions, let me quickly summarize.

We expect this year to be another very good year for YUM.

We’ll achieve at least 10% EPS growth before any special items and generate well over $1 billion in cash.

Our balance sheet will get stronger and stronger, and the possibility of a dividend is now under consideration.

We’re focused on executing our three key strategies: international is doing very well.

We’re making steady progress operating our Great Brands, and multibranding is continuing to expand with exciting new options.

So, with that, I’ll turn it over to you and be happy to take any questions that you may have.

Okay, Bridget.

Let’s do questions and answers.

At this time, I would like to remind everyone in order to ask a question, please press star and then the Number 1 on your telephone key pad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from Coralie Witter of Goldman Sachs.

Good morning.

I had a question on margins and the outlook.

The margins in the fourth quarter were quite a bit better than I had expected, and you had stated in your press release, on the international side anyways, part of it was due to supply-chain initiatives.

And so the question is, how much more upside can we potentially get in ’04, and in what areas that would potentially get you closer to your internal targets versus your guidance?

Sure.

A couple things, Coralie.

First of all, we are holding to our guidance to 30 basis points improvement in margins.

We are always gonna be pursuing upsides in that direction.

As markets overseas, as the borders open up and there’s more and more free trade, especially in China, it just helps our competitive margin situation, because the supply chain is more robust.

So, that’s the first place there are opportunities.

In the U.S.

I did mention in my remarks that if we had a little bit of a headwind on commodities, and beef and cheese.

We’ve got to deal with that in the first part of the year.

We are trying to address that as best we can, but obviously our guidance remains 30 basis points improvement in margin, but we’re ever vigilant on margins in trying to improve them, both internationally and in the U.S.

Okay.

Thanks, Coralie.

Next question please.

Your next question comes from Janice Meyer.

Thanks.

My question is on Pizza Hut.

It’s nice that the 4forAll sounds like it’s doing well, and your pipeline is filled.

But when you were in New York and Peter was presenting, I thought the issue at Pizza Hut was actually more of a value issue that you had gone after the variety customer.

You had a good string of new products, but it seemed like the issue was that you had neglected the value customer in favor of the variety customer.

So, can you talk more about what you’re doing on the value fronts this year.

Well, I think that’s a challenge that you always have in the pizza category.

You have the value game that you have to fight day in and day out, and we’re doing that.

We are slugging it out with value.

We spend a significant amount of marketing dollars with our print couponing as we go forward.

We bring forward continuous value messages throughout the period.

As we introduced the 4forAll, for example, Janice, we have a $19.99 Family Meal Deal.

Basically, which we offer up a 4forAll pizza, a large one-topping pizza, bread sticks and a two liter for $19.99.

That’s a lot of food and a lot of value.

But what we’re really excited about is having a one-two punch.

You’ve got to compete on the value, but we would like to win on innovation.

And innovation breaks through the commoditazation, or potential commoditazation, of this category; and it’s not easy for our competition to duplicate the 4forAll because of the dough system that we have.

The other thing is that this product is very well received by the customer.

We’ve launched this product with lower complaints than any new product that we’ve ever launched.

In fact, we are getting less — and this is at Pizza Hut in total, we’re getting 1 complaint out of 1,000 complaints on the 4forAll.

Of the 1,000 complaints we get, only 1of them is on the 4forAll.

And the value is perceived to be very good.

In fact, there is only — of the 1 — only .25% of our complaints are on the value side of the equation with the 4forAll.

So this is a great proposition, but I think you are making a very good point.

At Pizza Hut we have to win on two fronts: value and innovation, and we’re doing that, and we feel very confident that we are bringing forward a great proposition.

The other thing is is don’t get ahead of us on Pizza Hut.

Bottom line is, competition doesn’t stand still.

I mean, there is rampant discounting out there, there’s lots of value offers, as you well know, and we don’t know about the full year, but we are very optimistic about the year.

We think we can clearly deliver what we said, but don’t go crazy just because we’ve got this great launch happening right now.

Thanks.

Thanks, Janice.

Next question, please.

Your next question comes from Joe Buckley.

Thank you.

We have two questions and two different topics.

Would you talk about what you’re doing in some of the Asian markets to educate the consumer that eating KFC chicken is perfectly safe?

Okay, Joe.

First of all, I just want to emphasize that we have strict quality controls across our entire supply chain to ensure that our food is indeed safe.

World Health Organization is doing a good job for us and has said that the flu is not transmitted humans to humans.

It can go from infected chickens to humans.

And that our cooking, our chicken when —- cooked chicken is absolutely perfectly safe.

So the government is reassuring the consumers about the quality of chicken, and the fact that cooked chicken is safe in every market.

There is lots of noise on this issue, and frankly we don’t — we don’t know what we do know.

What we do know is that in the early markets like Thailand, sales are already starting to come back, and the government is basically all over it in every one of these countries.

The governments where there have been issues in Asia, they are SARS tested just like we are.

They have gone through this before.

And we’re confident, based on what we know, that we can cover any of the downsides.

And remember as David was saying, in 2003, we had SARS, the Iraq war, anti-American sentiment, soft economy the first half of the year, and our diversified portfolio still delivered.

We think there is a lot of noise out there.

There’s a lot of confusion.

The dust will settle, and we feel good about it, that we’ll be able to manage this issue, and Pizza Hut, obviously, is fine in all of our Asian countries.

Second question on capital spending, it did look like your full-year numbers for ’03 came in below what you were originally thinking and maybe even thinking into the fourth quarter.

I was wondering if you’d comment on that.

And secondly, kind of in conjunction with that, it seems like the multibranding has definitely shifted to more of a new-build or scrape-an- rebuild approach, which, in theory, I think should be more capital intensive, yet you’re posting these somewhat lower than expected Cap Ex numbers.

Wondering if you could talk about it broadly in that contact.

Sure, Joe.

First of all, it’s two separate questions.

Most of the capital that we ended up not spending was primarily in our international markets.

And there is no cut back or pull back at all there.

It’s just the momentum continues into 2004.

We just opened up 1,100 some-odd restaurants along with our franchisees, and we did a great job there.

And the capital that we did not spend in Q4 is being spent in Q1 basically.

So, it was just a matter of timing.

Yet, we were still able to open all those number of restaurants.

On the multibrand piece, we still remain doing new units and conversions, Joe.

We are doing some more new builds, especially with Long John Silver and A&W.

What we are finding is that the new Long John Silver/A&W restaurant combination is quite attractive, and with — given that we only have 1,000 of them on the ground so far, there are a lot of trade areas that we can go into.

So, that’s the emphasis there, is on the new build with our Long John Silver and A&W restaurants.

We still are doing conversions.

Don’t get me wrong.

But new builds are returning higher numbers for us, and we’re doing conversions basically to fill in markets to get scale in various markets.

And it’s just the new builds?

Is something else in the capital budget kind of sliding back so the overall numbers are staying —

No, interesting again.

It was international.

It was not in the U.S.

It was all timing.

We expected this much amount of capital to be built, we expected this many new-unit openings, and our franchisees opened up even more.

That’s why we had a new–unit- opening record, and the capital that was not spent in Q4 is being spent in Q1.

Okay, thank you.

Yup.

Thanks, Joe.

Bridget, next question.

Your next question comes from John Ivankoe.

Yes, hi.

Thanks.

I want to ask a few questions about the avian flu, if I may.

Is there anything different in the different markets that are affected in terms of benchmarks that we should look for in terms of affecting consumption?

Is it actually finding the birds in the market?

Is it humans that are getting sick.

What kind of parallels can we draw between in Thailand and Vietnam where it was fairly severe and all these other markets, and I’ll have a couple of follow-ups on those as well.

Sure.

Based on what we know, John, we don’t find really a parallel situation.

My understanding is that some people lost their lives in Vietnam and Thailand, and that has not yet happened in China.

That’s the only thing I can draw from — I don’t know, David.

Do you have any other comments on this?

And, of course, John, just to remind everybody what David said is that, none of our suppliers had this situation.

Right.

Your press release, you say that certain sections of China have been affected, and I think you made comments in your prepared remarks, which I may have just slightly missed.

What exactly does that mean to sales in China, and what are those certain sections that you were referring to?

There are 13 provinces out of 31, or something like that, where the flu has appeared.

And what I mentioned in my remarks is that sales were 20 points off of the trend.

Okay.

And then obviously, it affected the major markets like Shanghai and Beijing?

Excuse me?

And that has affected the major markets like Shanghai and Beijing?

We are talking about all of China.

I want to make one correction.

Somebody pointed out to me in the room.

It’s six provinces in Asia for sure.

We think there could be other provinces but six for sure, not 13.

You missed that on your geography lesson.

Yeah, I missed that.

Only 13 provinces.

What about in terms of in-store operations.

Has there been any reluctance in people to go to the store and work.

Has there been any kind of issue with staffing or through put that is of note at the store, in terms of handling that raw chicken?

None whatsoever.

Okay.

All right.

Thanks.

Your next question comes from Peter Oakes.

First on the international side, it looks like for fourth quarter, the comps were in the 4 to 5% range.

Is that reasonable?

And besides China, which I think you describe in your narrative, any other markets that were a material contributor to that improvement?

Yes, Peter, we don’t disclose comps by market.

I did highlight in my comments about KFC Australia, the U.K., and China and Pizza Hut Korea having very good quarters, and Mexico and Japan being our challenges.

Okay, so we should take those three you previously mentioned — all were meaningful contributors to that improvement in the aggregate comp, correct?

They were — improvement in revenue, yes came out of those markets.

As you recall, Peter, we get about five to six points of growth in our system sales from new units, and so it looked like we were three to four points up in comps.

Okay.

And obviously that’s an improvement in comp from where you were in the third quarter, which kind of transcends into the margin performance.

And I guess trying to understand the behavior of the international margin; obviously it’s a lot of markets coming together.

But is the preponderance of that improvement, versus what we saw in the third quarter, year over year, is that comp driven, or is a big slug of it structural, as you were suggesting on the sourcing success?

It’s the magic of the and, Peter, it’s both.

It’s the -— base-business growth in comps, and then it’s the structural improvement we’re getting in our supply chain situation.

Okay.

And just one last one.

On the $130 million pension contribution, how much did that actually impact the P&L, and what was that year over year?

It was just a little bit, Peter.

It wasn’t — it didn’t have a big impact year on year.

I don’t have that number exactly in front of me.

It was not material.

Okay, thank you.

Next question, please.

Your next question comes from Mark Kalinowski.

I wanted to ask about.

First, just looking at the possible dividend, I realize you’re early on in the process, but just wondering if you think this will be in theory more like a meaningful dividend, or more like a token dividend, and just any preliminary thoughts on when such an announcement might be forthcoming.

Second question —

Can we answer that one first, Mark, and then come back to you?

Basically the pacing and sequencing we are trying to do on that is we are working with our friends in the rating agency.

We’d very much like to become investment-grade company.

We’ve got a share buyback authorization that we’re working on, and then hopefully this year we will be able to look at a dividend.

At this point, we don’t have approval from our board, so for me to speculate or for anybody to speculate token, meaningful whatever that means, we can’t really get into that, and obviously we will update our shareholders from time to time.

But obviously, we would like to accomplish all three to get to investment grade, continue to buyback our shares in a meaningful way and initiate a dividend.

Fair enough.

Second question’s on the Taco Bell/Long John Silver’s multibranded units.

I believe in your release that roughly 50 of them were opened in 2003.

Nation’s Restaurant News suggests that you’re planning 270 of them to be rolled out in 2004.

Maybe you can give us a little bit more detail to help us get the confidence that the Long John Silver’s multibranded units are going to work, because it’s obviously becoming a more important part of the growth story here.

First of all, I did not see the Nation’s Restaurant News article, but the 270 being referenced have got to include Long John Silver’s and A&W, and Taco Bell/Long John Silver.

We monitor our capital in returns religiously.

We track performance weekly on base units and new openings.

And believe me, we will only continue to open those restaurants up if they earn the right to be opened, and they’re going to — we hope to continue to do that because the return so far and the performance is quite good.

So we feel quite good like — we feel quite good about that.

We also think, Mark, that we’ve had good success with our KFC/Taco Bell combination over the years, and we think Taco Bell/Long John Silver will also be a good combination, much like the KFC/Taco Bell combination.

But the number you quoted, I believe, includes Long John Silver/A&W combination.

Just on Long John Silver’s, it seems to me the reputation of the brand is that it does better in lower-income communities.

Have you tried opening multibranded restaurants in kind of upper–middle-class areas, and if so how have they generally done.

We are opening them up in all different kinds of trade areas.

We have a lot of opportunities to open these restaurants up, because we only have 1,000 today, and wherever we open them up they are doing well.

Thank you.

In fact, when we did the acquisition, that was one of the things we did, partnering with at the time it was Yorkshire, we went into different trade areas to see the impact.

One of the things we found was very strong acceptance in every trade area and also in other parts of the country.

The other thing to remember on the — on the Long John Silver combinations, our franchisees have really been leading the way on the testing and the pursuit of this concept.

Franchisees typically, they are entrepreneurs.

They are very conscious of their returns, and they’re very enthusiastic about the Long John Silver combinations.

Thanks.

Thanks, Mark.

Bridget, next question, please.

Your next question comes from David Palmer.

Hey, guys, great quarter.

Thanks, David.

The — you mentioned that sales were off 20% from trend rates in China.

Can you maybe refresh us, maybe give us your best estimate as to what sales were off last year in China as a result of SARS?

And didn’t that start around April?

Would you maybe give us the dimensions there.

Yes.

They were in May and June and they were off 20 to 30% for a couple or three weeks.

And, yes, you are right, within the last week or so in China they were off 20% versus trend.

And is your thought from the numbers you mentioned with 40% profit out of China, and that representing 30 plus percent of your business, and then 15% profit-growth internationally, it sounds like you’re in the low single-digit profit growth for other international for ’03 going — and you mentioned some of those other factors.

Is that — are those other two thirds of international, are you expecting robust growth there?

We were expecting greater profit growth in that, out of our remaining international businesses, and we didn’t plan China at 40% profit growth.

That’s with a phenomenal year.

So just to mention, there are other markets in international even though we’re quite proud of our China business, but we’ve got the monster markets internationally.

Australia business and U.K. business, et cetera.

And we’ve given you all the details on our Web site and at the New York meeting.

And there’s nothing weird as far as the leverage on profitability that you had last year that you wouldn’t have this year, is there?

No, it was good old-fashioned same-store-sales growth and unit growth.

Thank you.

Bridget, next question please?

Your next question comes from Mitch Speiser.

Thanks, good morning.

First question’s on KFC, then I have a question on China.

First on KFC, can you give us a sense of how the roasted product test is going?

It seems like a big part of the second-half story.

And also on KFC, the permanent rollout of popcorn chicken and the wings product, kind of why it wasn’t been permanent in the past, why you think you can make it permanent and consistent going forward and then a follow-up related to China.

I will take the first half, and then we’ll talk about the popcorn and wings.

The roasted product continues to test very well.

It’s been in the marketplace for a while, so we’re getting a good read on it.

The menu board is testing well.

And I think we‘ve got the discipline in place to roll it out properly, hopefully, this year.

So we continue to do well with those product lines.

I think the real focus we have at KFC is relevance and reliability.

On the relevance side, we really believe that we need the everyday value that will be coming with the value meals that will be on this menu board, and we also believe that we need to have better-for-you type products like the tender-roast business.

The reliability, the reliability issue at KFC is that we had some home-run products that people love.

Popcorn chicken and barbecue, the wings, are home-run products.

People love these products, and we think we lost more business by not making them available on a consistent basis.

And that’s why we’re really saying, “Hey, look.” We are putting them on in the company stores and hopefully our franchisees will come along with us, and we going to have those products available day in and day out, and we think it will ultimately make more money because of it.

One of the reasons why we take it off in the past is because of just product waste, and we are dealing with that now.

We’ve got it built into our food costs; it’s built into our plan for KFC for the year, and we think that we’re going to make customers happier by having those in day in and day out, so that they don’t have the disappointment of driving up through the drive through or coming into the restaurant, and bringing their kids in and saying I want popcorn chicken, and we say, “OK, we don’t have it this time.”

You make a customer unhappy once, and it’s harder to get them back in.

We think this will build reliability and pay off for us over the long term.

Will the new menu board be systemwide?

Yes.

We mandated this — systemwide.

By the end of June.

We mandated it, and we were able to mandate it to our franchisees, A, because we tested it for over a year.

And B, it’s no undue financial hardship.

It’s just a contractual capability that we have.

The investment isn’t an undue financial hardship, and we know we’re making the customer happier, and we’re going to have a real focus throughout the system to make this work.

We also are working very hard, as I mentioned earlier, to make sure that we announce the changes in a very powerful way that energizes the brand and gets the system excited about the new direction we are taking it at KFC.

Great.

Just on China, just want to get the numbers straight.

Six of the 13 provinces are experiencing a 20-percentage-point relative decline in sales.

So that’s not a complete China -— all of China is not down 20%.

Just six of the 13?

First of all, I failed geography.

It’s 13 provinces.

Six of the provinces have confirmed cases.

Mitch, in our aggregate China market our trend is 20 points down versus what it was in total for China.

And you are still confident in your international systemwide-sales target in the first quarter given this recent trend?

Yes.

And this trend, though, continues to deteriorate, or has it stabilized?

Stabilize and we had it for all the week.

Thank you.

And just to remind everybody, just remind everybody, that Thailand started off weak and has come back now to down 5 to 10 points.

I think just to put a little more color on this because there are so many questions.

In terms of what we are doing.

In some markets we are actually going on air with TV ads reassuring our customers that our food is perfectly safe and high quality.

The government in every market is educating consumers each day.

And we have not had any issues with any of our suppliers.

And we’re working with our suppliers to ensure that we continue to have safe foods.

We’re on top of this issue.

I think the biggest thing we’re weathering right now is the noise that’s out there.

And the concern that is out there.

The anxiety that’s out there.

And we have factored that into our projections, and we try to be very up front in terms of assessing what the impact could be in our release based on what we know, and we’ll see what happens.

So I think that’s the best way to put this all into perspective.

Thanks, Mitch.

Next question, please, Bridget.

Your next question comes from Andrew Barish.

Hi, guys.

Kind of big-picture margin question and then maybe on KFC in the U.S.

Your guidance is flattish margins in ’04 versus ’03, it sounds like —

Hopefully 30 basis points, Andy.

I’m sorry?

Flat 30-basis-points improvement.

Okay.

It sounds like a lot of pieces are falling in place on the positive side.

Are commodities kind of your concern as you mentioned up front, and then maybe drill down to that as it applies to the KFC business and sort of the chicken outlook for the U.S. or maybe just the pressures of doing all this new stuff in the U.S. and introducing some higher-cost items full time like wings and popcorn.

Do you see some short-term margin pressure continuing KFC.

First, we see first-half margin pressure because of some commodities, beef and cheese.

We don’t anticipate any unusual margin pressures at KFC.

And I think the main thing, Andy, it’s what February 12th and I think to get out ahead of ourselves in margin guidance at this point would not be productive.

We certainly want to have a great year in margins.

We are holding to our forecast.

The only headwind we know of right now that we can see is some unfavorabilities in cheese and beef.

Okay.

Thanks, Andy.

Next question, please, Bridget.

Your next question comes from Larry Miller.

Hi, guys.

I apologize if you already answered this, because I did get cut off.

But on the G&A, it was up a little more than I thought.

You said you were investing in some of the business internationally and a few other things.

Was that more opportunistic, and we shouldn’t expect that to continue?

It was opportunistic up against our business strategies in Q4 as we were having a fantastic quarter internationally.

I understand.

That’s it, thank you.

Yup.

Thanks, Larry.

Next question please.

Your next question comes from Alan Kim.

Good morning.

I got a couple of unrelated questions.

How much of the other income expense is foreign exchange gains and losses?

The number doesn’t — I can’t recall the exact number, but it was a relatively small number for income and expense and the rest of it’s in some joint-venture pickups.

Most of it is joint venture.

Joint venture income.

Looks like you closed a lot more restaurants in 2003.

Can you give us a little detail on if there is a concentration anywhere or the reasons why.

Sure.

There is no concentration anywhere.

What we are trying to do is execute our strategies.

We’re continuing to address low-volume Pizza Hut dine-in restaurants that we own, and we are addressing our Long John Silvers and A&W restaurants.

We had some low-volume A&W mall locations that we’ve been addressing, and as part of our strategy we’re closing and rebuilding and relocating Long John Silver’s restaurants, and you will continue to see that from us.

OK.

And one last thing.

You talked about the KFC domestically, that you’re going to be repositioning the fried chicken.

Can you talk a little bit about changes in the menu other than what you talked about a couple questions ago with the roasted products and all that?

Well, I think that basically we’ve got our menu set up in three panels.

One is value meals where we will try to have almost in every market in the country for — at least $4 everyday value meals, complete meals.

And some markets we will have three and four dollar complete value, complete meal values, which includes sides.

One of the big advantages that KFC has is the whole notion of complete meals with sides like mash potatoes and coleslaw.

Then we will have a new green part of the menu, which will be our roasted section, which we will have roasted strips, roasted twister, and we will — we’re testing salads at this point, but we don’t necessarily perceive them on the menu at mid year.

And then we have our core fried-chicken products that we feature in a family-meal basis, and then the snackables, which is like the popcorn chicken and the honey-barbecue wings.

We have a number of initiatives in the test that I really don’t want to talk about at this point in time.

But the menu that I just talked about is what you’ll see at mid year, and we’ll hopefully enhance that as the year goes along with more and more exciting news over the next two or three years.

We are making the — the one exciting thing about chicken is there is lots of different ways you can create lots of news.

And this business — one of the reasons that we lost some of our luster is that we haven’t been as aggressive with the pipeline and bringing forward new products.

The new management team is all over this.

Our franchisees are all over this.

There is a real sense of urgency to make our product line more relevant and more exciting, and we’re committed to making that happen, and we have the franchisees that are totally aligned on that part of the equation.

Thank you.

Thanks, Alan.

We have time for one more question, please, Bridget.

Your final question comes from John Glass.

Thank you.

On the KFC and the new menu, can you maybe talk about at the unit level how that impacts the franchisees profitability?

These are richer margin products.

We feel good about the profitability.

We don’t see them richer or more expensive.

We think that the sales requirements needed for the products are reasonable.

And we think that given the tests that we have done for extensive period of time, we have very rich data as to the sales gains and the profit improvements and those kind of things.

We have it pretty well modeled out.

Okay.

And then on the U.S. margins, I understand you talked about the food cost pressures, but I was under the assumption that worldwide margins were going to be down more in the fourth quarter, which meant that U.S. margins would be down.

Where have you seen better-than-expected results in the U.S. profitability?

Are you getting better labor leverage, for example?

Taco Bell sales were better than expected.

International sales were better than expected.

We got some supply-chain benefits in certain markets that we talked about.

And last year, as you recall, on maybe, I think it was the first- or second-quarter call, we did some pretty dumb discounting last year at KFC and Pizza Hut.

And we are not doing that this year, and we get the benefit of lapping that.

And then versus your third-quarter expectations it seemed like there was an improvement in the U.S. specifically.

It was the things I talked about.

It was the volume at Taco Bell.

And then the other things internationally.

Thank you.

Okay.

Let me wrap this up.

Obviously we are very, very bullish on our business.

We had a great performance in the fourth quarter.

We’re excited about 2004.

I would urge you not to get ahead of yourself.

This is a very challenging business.

A great business.

A challenging business.

What we’re committed to doing is growing our operating — our earnings per share at least 10% a year every year.

And that’s what we are building this company on.

We’re very confident that we can do that this year.

We’re also very early into the year, and when you look at the year in balance, we are very confident we can get that at least 10%.

If we can beat it, we will, and let’s just — we’ll keep reporting how we’re doing every month as we always do, and we’ll keep you totally advised on everything that is relevant to our earnings power, and you can count on that.

That’s very important for us to have our credibility with you, and we’ll keep you in touch with all the issues as they arise.

So just think of our business of at least 10% earnings-per-share growth this year.

Thank you very much and appreciate the call.

Thank you for participating in today’s conference call.

You may now disconnect.