百勝餐飲集團 (YUM) 2004 Q3 法說會逐字稿

Good morning.

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

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

Brands Inc. third-quarter 2004 earnings conference call.

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

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Tim Jerzyk, Vice President Investor Relations.

Mr. Jerzyk, you may begin your conference.

Thank you, Matthew, and good morning, everyone, and thanks for joining us on the call.

Before we begin, I would like to go through a few necessary things.

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

We are broadcasting the conference call via our Website, www.yum.com.

Please be advised that if you do 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 the conference call related to projections, other forward-looking statements may be relied on subject to the Safe Harbor statement included in our earnings release from last night, and may continue to be used while this call remains in the active portion of the Company's Website, which will be until midnight October 25, 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 it over to David Novak.

Thank you, Tim, and good morning, everybody.

For those of you who have been following our Company, you know one of the things that we are most proud of is the high-performance culture we have built, which is based on the belief in people and recognizing the achievements of our best performers.

On Thursday, we are having our annual Founders' Day to celebrate our anniversary of becoming a public company and have declared October 7 Customer Appreciation Day around the world.

This is our seventh year, and we have a lot to celebrate.

We are having a very good year and are even more excited about the years ahead because we continue to believe and demonstrate we are not your ordinary restaurant company, given our extraordinary international business, the ever-growing strength of our U.S.-based brands and operating turnaround, and the opportunity we have to lead the way in offering consumers branded choice by offering two great brands in one restaurant with multibranding.

We are also now armed with an investment-grade balance sheet, which sets us up to continue to invest in our growth drivers, pay a meaningful quarterly dividend, buy back shares, and pay down debt.

As you probably saw from our release last night, we had another good quarter - 61 cents per share and 12 percent growth.

This was led by continued strong performance from our international business as well as very good results from Pizza Hut and Taco Bell in the United States.

The solid operating performance of our global portfolio was able to more than offset unusually high U.S. commodity inflation, which significantly affected our U.S. margin.

Based on the solid year-to-date results and the momentum in our key businesses, we are again raising our commitment for 2004.

We are increasing our earnings per share forecast to $2.35 or 14 percent growth.

We are confident of our new full-year forecast because we have solid plans in place for the fourth quarter.

Dave Deno, our CFO, will provide further detail on the numbers for the quarter and full-year forecast coming up shortly.

But before I turn it over to Dave, let me provide some insights on our current trends and, importantly, some perspective on 2005 since we are in the midst of our annual operating plan review process.

Based on our plans and programs that we have in place, we are confident we will be able to deliver on another year of at least 10 percent earnings per share growth in 2005.

Here's why.

First, the continued growth of China and expansion and dominance of our brands there.

Second, international growth outside of China is also strong, and we have good momentum in most of our businesses.

Unlike the United States, our only major competitor is McDonald's outside the United States, and there are very few chains to compete with.

Third, excellent business plans at both Taco Bell and Pizza Hut, with proven programs already tested and ready to go for 2005.

Fourth, we believe we have leveled off at KFC U.S. and have some profit upside as we continue to develop the programs to drive a sustained turnaround.

Fifth, we are overlapping unprecedented commodity inflation, which should moderate.

And finally, we have an ever-strengthening balance sheet and terrific cash flow with the opportunity to further reduce interest expense.

Net-net, we are confident we can achieve at least 1,000 new international restaurant openings, grow same-store sales plus 1 to 2 percent in the United States, and further expand multibranding.

We are confident about signing up for at least 10 percent earnings per share growth in 2005.

Now let's talk about our current business trends.

First, let me talk about our largest division, our high-growth, high-return international business.

We fully expect to open at least 1,000 new international restaurants again for the fourth straight year, with about 70 percent of those restaurants being opened up by our franchisees.

Importantly, we expect to open about 750 new international restaurants excluding China, which shows the depth of our international business.

In fact, we have opened new KFCs and Pizza Huts in 50 countries around world so far this year.

Our three biggest profit-contributing international business segments are all doing well - China, the United Kingdom, and our extensive franchise business units around the world.

Dave Deno and I just returned from Shanghai this week and continue to be impressed with the growing capacity of our China division team and the results that we are generating.

China is our number-one market for new company restaurant development worldwide.

We expect to open at least 300 new company and joint-venture restaurants in China this year, and grow same-store sales for both the KFC and Pizza Hut brands.

Our strategy is to dominate every significant food-service category in China.

Unit growth is running above 25 percent for all of China, and comps are solidly positive year to date.

We currently have over 1,100 KFCs and nearly 150 Pizza Huts in China.

Both brands are clear leaders in their respective categories - KFC in mainstream fast food and Pizza Hut in casual dining.

And we are in the early stages of development of Pizza Hut home service, a completely separate concept from the casual-dining business.

China is a significant Yum! business that has very strong strategic capability on the forefront of the biggest and fastest-growing economy outside of the United States.

Our most profitable international business after China is the United Kingdom, where we have over 600 each of KFCs and Pizza Huts, with room to double the business in this important market.

In the United Kingdom, we continue to open new company, franchise, and joint-venture units at a healthy pace - plus 7 percent - and grow same-store sales for both the Pizza Hut and KFC brands.

Our very significant franchise-only business units in Asia, Middle East, Latin America, and South Africa continue to produce solid results.

You can see from last night's earnings release that system sales growth in local currency terms for this franchise business segment is up 13 percent driven by both new-unit expansion and same-store-sales growth.

Yum Restaurants International outside of China is a powerful business and together with China gives us a one-two punch no one in our category can match for future growth.

In the United States, we have excellent momentum in our two largest businesses and new programs backing us up as we continue to make progress improving our core operating capability to run great restaurants.

First, some perspective on Taco Bell, our largest U.S. profit contributor.

The mission at Taco Bell is to provide the fast food consumer with near-quick-casual quality with all the functionality of quick-service restaurants.

Taco Bell continues to lead the way for the United States business and the category.

It is clearly performing in the top tier of all restaurant companies.

You can see from last night's release the solid performance carried into Period 10, the first period of Q4, with growth of 4 percent in same-store sales despite terrible weather and business interruptions in Southeast US.

2004 will be Taco Bell's third straight year of solid same-store-sales growth, and Taco Bell system average unit volumes are now approaching $1.1 million.

Importantly, Taco Bell's operations performance continues to steadily improve, with a focus on people development and exceptional execution of the basics.

Stability of restaurant teams continues to improve.

Team-member turnover is now running below 100 percent from 138 percent just two years ago, and drive-through speed of service is now top tier.

Taco Bell has also been raising quality through improved chicken, higher-priced new products like quesadillas, Border Bowls, and Grilled Stuft Burritos, as well as through quality upgrades of tried and true core menu items like the Fiesta Taco Salad and the Ranchero Chicken Soft Taco introduced earlier this year.

One of Taco Bell's obvious key consumer strengths is our strong value image.

Recently, you may have seen the launch of the Big Bell Value Menu.

This is a line of nine products with everyday value of 99 cents to $1.29 positioned to be the first value menu with big, filling products and new taste excitement.

The Big Bell Value Menu is performing well, driving transactions, and meeting our expectations, and we have it going into next year.

We are on a study, consistent growth path at Taco Bell, have a beat-year-ago marketing calendar for the balance of 2004, and are targeting to stay on track for same-store-sales growth in 2005.

On to Pizza Hut.

Q3 was another very good quarter at Pizza Hut, with 5 percent same-store-sales growth and 5 percent growth year to date.

Our Pizza Hut franchisees are experiencing even higher growth, about 1 point better.

We are steadily improving the consistency of our same-store-sales performance.

Pizza Hut has now shown positive same-store-sales growth in 17 of the last 18 periods.

As you saw in last night's release, for Period 10, we had 6 percent growth in same-store sales.

This is a great start to the quarter for Pizza Hut, which we expect will be our best performer in the United States this quarter.

The brand is being successfully positioned to target the heart of the pizza category, the family, and the primary decision maker, Mom.

As you may remember, in 2003, the new product pipeline was rebuilt with a record number of products and concept tests.

You have seen the results of these efforts this year with our best same-store-sales growth since 1988 and 1999.

Importantly, our pipeline is full for 2005.

We have been in the labs, and the products are delicious and more news is coming.

This year, we kicked off the year, if you'll recall, with the new 4forALL Pizza, which gives the family four pizza choices in one size.

We advertised the 4forALL Pizza again in the last part of Period 10, and you can see the results, another very good period.

Pizza Hut is steadily improving its operations, as team member turnover remains below 100 percent.

We are also improving on every facet associated with customer access to our nationwide service delivery.

At Pizza Hut, we are also continuing to expand the testing of multibranding with a new concept we created called WingStreet to go in our Pizza Hut delivery locations.

WingStreet offers a line of tasty bone-in and boneless flavored chicken wings.

Initial results are promising enough to expand testing to additional markets.

Pizza Hut is also in the early stage of developing an enhanced dining concept for our red-roof restaurants.

First, we continue to test Pasta Bravo as a full-scale multibranding option.

We have also developed a lower-cost option called Pizza Hut Italian Bistro that the franchisees are very excited about.

As you know, our franchisees have the bulk of our dine-in restaurants.

We have 38 restaurants in test, of which 36 are franchise locations.

It is targeted to provide relevant, casual-dining style service, products, and atmosphere for mainstream America.

We have used many of the products and much of the learning that we had gained from Pasta Bravo the past two years and put it into Italian Bistro, and the menu includes specialty pizzas, pastas, sandwiches, and appetizers.

It's early days on this, but we are very encouraged by the results.

KFC in the United States is our biggest challenge.

While same-store sales were down 1 percent in Period 10, we continue to expect same-store sales to be up 1 to 2 percent for the quarter.

As I have said before, we are in the very early stages of getting this business back on track, and I am very confident our management team is taking the right actions to turn the business.

Just like Taco Bell and Pizza Hut, we are focusing, first and foremost, on operational improvement.

We have implemented Taco Bell's drive-through program as a best practice and have reorganized our operations to work more closely with our franchisees to drive a unified, trusted customer experience.

We are seeing early signs of progress in 100 percent CHAMPS scores and speed of service as a result.

And this progress should build over time.

The new "Chicken Capital USA" ad campaign has produced excellent consumer awareness for us, and the KFC system is pleased with the new menu boards in place.

A number of products are in constant development and market test.

We are starting to build a more robust pipeline, and you will likely begin to see some news from KFC in the first half of 2005.

We expect consistent same-store-sales growth at KFC in 2005.

Overall, when you look at our entire U.S. portfolio, led by the strength of Taco Bell and Pizza Hut, we expect fourth quarter blended same-store sales to be up 3 to 4 percent.

Importantly, our overall global portfolio of business continues to drive shareholder value.

Our Company continues to demonstrate a growth track record.

We increased EPS 19 percent in 2002, 13 percent in 2003, and now we are targeting to achieve 14 percent in 2004.

Going forward, we expect to continue to meet our annual commitment to shareholders for at least 10 percent growth in EPS year in and year out.

This requires that we continue our track record of opening at least 1,000 new restaurants outside the U.S., growing same-store sales 1 to 2 percent a year in the United States, and continuing to add at least 500 multibrand locations in the U.S.

We are very confident of our ability to deliver in each area.

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

Dave's very excited about Minnesota beating the Yankees last night.

I am not very happy about that, but he is.

Well, thank you, David.

And hopefully, it won't be a repeat of the past where Minnesota beat the Yankees early and then lost out, but we will see.

Good morning, everybody.

As we stated in the earnings release yesterday, we continue to feel very good about our business outlook and trends in 2004 relative to the commitment we have made to our shareholders.

I am pleased to report that our new earnings-per-share forecast prior to special-item gains for 2004 is $2.35 or 14 percent growth.

This is 12 cents ahead of our original commitment to shareholders last December.

As you know, our stated goal is to grow EPS at least 10 percent every year, and we are once again exceeding that target.

The financial strength of our company is better than ever.

We continue to expect about $1.2 billion in net cash provided by operating activities.

We will hit or exceed our substantial cash flow commitments for the year, and we have made significant progress to date in returning cash to shareholders with share buybacks.

We have invested 294 million in share buybacks year-to-date, which is more than we have ever invested previously in an entire fiscal year, and we still have the fourth quarter to go.

And during Q3, we made our first-ever quarterly dividend payment to shareholders.

Our target payout ratio is in the range of 15 to 20 percent of our annual net income, and we plan to review our dividend every year in the second quarter.

Now, let's look at Q3 in some detail.

During the quarter, we were able to achieve 61 cents a share in earnings per share, with growth of 12 percent prior to special items versus a year ago.

Overall, we were especially pleased with third-quarter results considering substantially higher commodity costs in the United States.

This once again demonstrates the power of our global business portfolio.

The hurricanes did negatively impact parts of the Southeastern United States business on a short-term basis.

But on the flip side, we also lapped the Northeast U.S. power shortage from last year and the last of the SARS impact in Asia.

Our international business had a great quarter.

System sales were up 16 percent, profits up 25 percent, and restaurant margin was up 1.1 percentage points.

In addition, we opened up another 216 new restaurants - another terrific quarter.

And just as a reminder, our international business is now expected to be 40 percent of Yum!'s profits this year.

Typically, the international business generates over 60 percent of our year-over-year earnings growth.

In the United States, our blended U.S. same-store-sales growth was plus 4 percent, which is better than our plus 1 to plus 2 percent ongoing target but was in line with what we told you on our last call.

Our two biggest businesses, Taco Bell and Pizza Hut, had strong quarters with same-store-sales growth of 5 percent each.

David has already taken you through the impressive plans these businesses have in place to keep the momentum going.

Taco Bell and Pizza Hut are expected to generate over 75 percent of Yum!'s U.S. profit this year.

Overall, restaurant margin in the U.S. was down 0.7 percentage points.

While we are never happy to see declining margins, this performance was quite good considering we experienced 2.0 percentage point negative impact from higher commodity costs.

Cheese and chicken was by far the largest component of this increase, but we also saw increases in beef and pork costs.

We were able to overcome a substantial portion of the commodity cost margin impact because of very good sales growth and excellent cost controls.

Worldwide general and administrative expenses increased 38 million or 18 percent in the third quarter.

The year-over-year comparison was impacted by the Company operating restaurants in Canada that were previously owned by our Canada joint venture.

This was approximately $3 million.

Factors contributing to the increase include costs associated with strategic initiatives and enabling future growth.

This includes G&A investments in China, other international growth markets, and the implementation of a new ERP system, both in our financial area and in human resources.

Additional costs also are from higher compensation-related expense, such as pension, and from higher surplus facility costs.

Now, turning to the fourth quarter.

For the fourth quarter, we are comfortable with the consensus estimate of 72 cents a share, or 12 percent growth prior to special items.

We expect our three big businesses - international, Taco Bell, and Pizza Hut - will lead the way with solid profit growth.

Our international business is lapping a very strong Q4 last year with terrific results, including the roll out of a roasted-chicken platform in China.

We expect international will lap last year's 28 percent profit increase with more growth in Q4.

And as mentioned earlier, we expect another solid quarter in the U.S. blended same-store-sales growth in the plus-3 to plus-4 range.

International system sales growth for the quarter is expected to be up 7 to 9 percent prior to foreign currency conversion.

You'll note from the release yesterday, the quarter got off to a very good start with solid Period 10 sales results from both international and the U.S. as right on target for the quarter.

For the fourth quarter, simply put, our global portfolio of businesses is expected to again deliver double-digit EPS growth despite higher U.S. commodity costs and other challenges.

We do expect above-average commodity costs to again impact fourth-quarter U.S. restaurant margin but at a slightly lesser rate than the third quarter.

The inflation in Q4 will be in meat and cheese.

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.

Importantly, if our earnings expectations change, you will hear from us in these updates.

Otherwise, you should expect we are on our EPS targets.

Stepping back, when you look at our company, you can see we have a strong ability to handle short-term challenges such as SARS, commodity spikes and Avian flu.

I hope you have the sense that management is very responsive and biased to take action.

We are a large, diversified global restaurant company with plenty of opportunities and are definitely not your ordinary restaurant company.

Let me briefly review our ever-strengthening balance sheet and what you would expect regarding our strong cash flow.

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

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

As you can expect from us, we will generate an additional 100 million plus from refranchising, at least $130 million in employee stock-option proceeds, and $50 million from the sale of the surplus property and equipment.

That is nearly $300 million of additional cash that will be generated in 2004 for a total of $700 million.

Now some good news on the refranchising front.

Our refranchising cash proceeds number looks very solid.

We just completed a large international transaction, refranchising the Puerto Rico market this week.

We will continue to see U.S. refranchise businesses that do not earn the right to own and remain on the balance sheet.

Having said that, we will also continue to significantly invest behind our key international markets, which are our major growth drivers overseas.

Additionally, we made a 50 million, or $35 million after-tax, voluntary pension-plan contribution, which will show up in our Q4 cash flow.

We expect to end 2004 with a stronger balance sheet and better financial ratios than 2003.

For 2004 and 2005, we'll use our cash available to continue to buy back our stock, pay our shareholders a nice quarterly dividend, and look for additional opportunities to reduce debt.

Before I wrap up, I have one reminder for investors to consider for 2005.

As noted previously, we will separate our China business as a reporting segment.

As you will see in our earnings releases now, there is an international segment and a U.S. segment.

For 2005, there will be three divisions - U.S., China, and international, which of course would be the same business today excluding China.

The China division will include two other smaller businesses currently managed by a general manager there, Thailand and KFC Taiwan.

Our annual target profit growth rates for these three business segments are for the U.S., up 5 to 7 percent; for the China division, up at least 20 percent; and for our international division, excluding China, up 10 to 15 percent.

To wrap up, we beat our earnings expectations for Q1 with 19 percent growth, delivered 16 percent growth in Q2, with strong business performances more than offsetting short-term cost surges, and now in Q3 delivered 12 percent growth despite a headwinding from U.S. commodities.

We are committed to 14 percent growth before special items for the full year, well ahead of our plus-10-percent target, and as David explained earlier, believe we have plans in place for our key businesses to have a terrific year again in 2005.

We will provide more details on 2005 with our Period 12 sales release on December 2, 2004, later this year, and at our annual Investors Conference in New York on December 7.

We remain very focused on achieving at least 10 percent growth in EPS each year going forward, and we work very hard to exceed that.

Back to you, David.

Thanks, Dave.

Let me just summarize the three key messages.

First, our third quarter was obviously a very good quarter for us.

Next, 2004 will be a very good year - should be up 14 percent EPS versus our 10-percent commitment that we made going into the year.

And finally 2005, as we look forward, we expect it to be another year of consistent, at least 10 percent EPS growth.

Now we will be happy to take any questions that you have.

(OPERATOR INSTRUCTIONS) Joe Buckley from Bear Stearns.

Thank you.

I have two questions.

First on China and then on the G&A line.

First with China, you mentioned 300 openings this year.

It looks like you'll need a very active fourth quarter to get there.

How confident are you in that number?

Also in China, if you would share with us what growth you have seen in operating profits year to date for the first three quarters?

Sure, Joe, it's Dave.

A couple things.

One, typically we do a lot of openings in the fourth quarter.

It's four periods; we feel very good about their opening plan.

David and I were just in Shanghai last week, and we went through the development plans and feel very good, Joe, about achieving that.

And at this point, we do not break out our China business separately.

We will be doing that next year, but I can tell you they are clearly on track going forward, and we will provide more perspective, Joe, at the New York meeting coming up on that.

Just on the G&A line, obviously up a lot the last couple of quarters.

And I think we went back to your beginning-of-the-year expectations, up an awful lot.

And I know a lot of that can flow or not flow depending on what kind of year you are having, but would you review some of the major elements?

You mentioned ERP programs for both financial and HR areas.

Could you elaborate a little bit on what those are?

Sure.

Joe, we really have four or five things that are impacting quarter to quarter.

First of all, earlier this year we made a decision, a management team decision, to upspend in some of our key international businesses, for instance China and the UK.

That was a decision we made a few months ago, and that is really helping us get growth and setting us up for success for the longer term.

That is the first thing.

The second thing is we did have some higher people costs this year.

We did have some additional pension costs, and we do have some of our companies doing quite well this year, as you know, and so our bonus plans are tied to performance, so we have had to uptick a bit in some of our bonus costs.

Thirdly, Joe, we did have some what we call excess facilities that we decided to write down this quarter, and we have addressed that this particular quarter.

And finally, last year, Canada was a joint venture, and the G&A did not show up on our P&L statement.

This year it does.

So there is a reason for the increase there.

I can assure you, Joe, looking at quarters 2 and quarters 3, those will be the high watermarks in a year-on-year increase in overhead.

We are very prudent in overhead, and I think the increase that you have seen this year is specifically behind our growth drivers to move the business forward.

What implications do the increases this year have for '05?

I think we're in pretty good shape, Joe, because if you look at a lot of stuff that we've made investments in - for instance, some of our special investments behind our China and U.K. business, and also if you look at some of the actions we had to take against some of our facilities.

And finally, Joe, one thing I did not mention was our new financial system and our new human-resources system.

Those are projects that are done this year; for the most part, they are done this year.

We have some spending in our human resources systems next year.

Those are to take currently very good systems and make them great, and I think we are going to have world-class systems that will help us with our productivity going forward.

So those are projects that were spent this year, Joe.

Very good, thank you.

John Glass with CIBC World Markets.

Good morning.

At KFC, in the first two quarters of the year, your check was flat and your traffic was down.

Now you are seeing some stabilization of those comps.

Can you discuss how much of a role ticket's play in that, particularly as you emphasize the buckets and then maybe underlying traffic trends.

And if the ticket is the driver, how comfortable do you feel that is being sustainable given the state of the consumer?

We have seen some firming up of our traffic, but we have also seen some check.

I think we are always on top of how the consumer feels about value.

We have tried not to - we're very prudent on our check moves.

And we think, as David mentioned, I think we're leveling out at KFC as we move forward.

So we do have some check growth.

We have seen some firming up of our traffic, but it is early days, yet and we are watching the value equation very carefully at KFC.

Would the check be more than half of the comp increase for the quarter?

I don't have that number right in front of me.

We will have that in the Q coming out.

Okay.

And then Dave, you cited a couple times the impact that the commodities markets are having on your U.S. margin in the third and the fourth quarter.

Can you maybe look out two more quarters?

What do you see for your individual commodities, and what kind of relief do you expect over the next couple of quarters?

Well, the cheese market is very difficult to predict.

Some are saying that cheese will be down somewhere between 10 and 20 percent next year.

I don't know.

It is a volatile market.

We will see.

Chicken, we expect to continue to be pretty robust in its pricing, and we're taking a look at that now as we speak as to what we see some of the factors being on chicken.

But we do expect cheese to be a little bit lighter next year, although it's a very volatile market.

Okay.

And then just a technical point.

I think next year you actually have an extra week, so presuming you talk about 10 percent growth, maybe that is not factoring that in and how much would an extra week add to earnings?

We're looking at that right now, and we will give you a feel for that, exactly how much that extra week is worth at the December conference.

We're going through our business plans right now.

I think the big thing that we are committed to when we look at over the long term is at least 10 percent every year.

If we do at least 10 percent every year, which we think we're fully capable of doing, we think that's going to put us in the echelon of companies that - and we do that consistently - we think we'll get reward in the marketplace.

So that's what we want to do.

Just get to that 10 percent at least every year.

Thank you.

Janice Meyer with Credit Suisse First Boston.

Thanks.

Hi. 'Sorry to ask some more China questions, but McDonald's has begun to see some global opportunities to launch products.

Is there any chance some of the KFC China successes are transferable to the U.S.?

And just back on the GA, could you detail a bit more what the spending in China is for, and whether - I think Joe sort of asked this - whether this is ongoing spending, or are you spending in advance of something?

I will take the second question first.

What it is is when you are expanding at the rate we are expanding, and you are looking at the capability that we need to grow this business, it is all about getting our people capability right and investing behind key areas like development, resource and R&D capabilities, and also marketing.

So there is a component there of staying with the earnings growth in China.

So that one we will continue to spend up against.

Some of the other stuff I talked about on Joe's question, I think I laid out what some of the one timers were.

But in China, we're spending up against it, because we want to grow that business.

Janice, in terms of transferable earnings from China, I think one of the things that I am most pleased with in terms of our Company is just the sharing of best practices and transferring of the things that really do work.

One of the things that we really can learn from China in the United States, not only in KFC, but at Taco Bell and Pizza Hut as well, is just their operational excellence.

And last month, Aylwin Lewis took the Chief Operating Officers from the U.S. over to China and went through their operational processes in detail.

And the things that they are doing to take the things that we have put in place - CHAMPS, Customer Mania, RGM is Number One, a lot of these things - China has taken this to a higher level.

For example, one of the things that we are adopting in U.S. restaurants is a program that was developed in China to really recognize team members for Customer Mania behavior.

That program will be launched as we go into 2005.

So we are learning already, I think, from the operations capability over there, which is best in class.

When you look at the products, we have a lot of innovation going on in China.

Some of it is relevant; some of it not so relevant.

There is a sandwich over there that is very popular called the Zinger, which is a very spicy product that is really outstanding that I think has application.

They've also had experience with oven-roasted wings that has been very, very positive.

The good news is that we have our R&D departments working together and this knowledge is being transferred.

I think we have a much stronger back-of-house capability right now in China than we actually do in the U.S.

The kitchens are bigger.

We have more equipment that allows us to do more variety, and I think that is a big advantage that we can't immediately adopt in the U.S. given our current asset base and system the way it's formulated.

David Palmer with UBS.

That was a great quarter.

Congratulations.

Two longer-term oriented questions on the cost side of your business.

First, could you educate us about your supply-chain initiatives in Asia?

I get a sense from your food costs that you are getting some ongoing benefits there, and maybe you can give a sense of the sustainability or the incrementality of the benefits going forward.

Second, could you talk about the supply-chain cost savings you have generated in the U.S. in recent years?

Particularly after the Yorkshire acquisition, how sustainable are those savings?

Maybe you can give us some specifics there.

This is Dave Deno.

First in Asia, what we benefited from - we have talked about this a little bit on previous calls - is the World Trade Organization has opened up both markets over in Asia.

And it enables more competition, more choices, and as a result, because we are so big over there and such a big customer, we are able to really leverage that.

We have done a great job the last couple of years ringing costs out of our supply chain in Asia.

Can we continue to do that?

We certainly hope so.

Will we be able to do that at the same rate that we have done the last couple of years?

I think that is probably a little premature to say that.

We certainly hope to do that, but we've gotten a lot of benefit over the last couple years just on opening up the supply chain.

Secondly, regarding our cost savings with the Yorkshire acquisition on various commodities.

The Yorkshire group got a tremendous benefit by joining our cooperative, which is the world's largest cooperative in purchasing.

They got the benefit on those purchase opportunities, and they saw it in all areas, be it potatoes, soda, seafood, etc., to bring our scale and our capability to Long John's was quite a good benefit.

It is also an organization that worked hard to bring us benefit across the board in all of our businesses here in the United States.

So we do have the benefit of a very large purchasing organization.

Thank you.

John Ivankoe with JP Morgan.

Hi, thanks.

My question also is on China.

It's been a great comp story in 2004, so I'm going to ask maybe a few questions in relation to that.

First, do you expect that to continue, and do you expect to see the menu board continue to expand at KFC in China going forward, and is pricing an opportunity?

Secondly, relating to costs, and I guess following up on David's question to an extent, could you discuss the cost dynamics in the market in China with regards to labor, food, and occupancy, and what kind of comps that you feel that you may need to sustain store-level margins?

And maybe if we can talk about other initiatives that you may have in addition to the supply chain to make each individual store more profitable if comps do slow down.

Thanks.

I'll take the second half of that question first, at that is on the cost pressures in China, we do have labor costs increasing, much like you have in other countries.

You have food costs that you have to manage.

Again, because of our place in the marketplace on the food-cost side, in particular, I think we're in a very good position to manage those costs.

On labor, what we need is - we hope to achieve each year in China is positive same-store-sales growth.

We do have a very favorable labor situation there.

We do manage the costs very tightly.

And we do manage every restaurant much like we manage every restaurant here in the United States for profitability.

So we have a very, very professional, hard-charging management team on the cost side of the business.

We enjoy purchasing leverage on food, and we watch the costs extremely carefully, be it energy, be it labor, be it whatever, to enjoy the margins that we do.

Is there any change on occupancy in the market that we should be sensitive to?

Occupancy has been pretty good, John.

China is the meeting of terrific sales, good margins, and lower-than-expected occupancy costs, which generate terrific returns and great economics, and we see that continuing into the future.

John, in terms of same-store sales in China, I think first of all, obviously when you're adding over 300 restaurants a year, the real key measure that we look at is system-sales growth.

Now this year has been a year of harmonic convergence because we have had very strong system-sales growth that has been driven by the new-unit expansion, plus same-store-sales growth.

Our goal as we go into next year is to continue to make that happen.

In the fourth quarter, it may be difficult for us to get that same-store-sales growth, because we have a very tough lap this quarter in China.

We were up double digits because last year we launched the roasted-chicken line of products, and so we had double-digit comps in Q4 of last year.

Having said that, we are optimistic about same-store sales next year because we are doing a couple of things.

Number one, we continue to expand breakfast.

We continue to have good experience with our roasted products.

And also, one of the things that we are doing in China that we are very excited about is much like McDonald's has been successful by being able to broaden its image and take it into different food categories, we have been successful selling pork and fish-type products and broadened our menu variety in China, which we think gives us even more potential down the road.

But I think China just does an outstanding job of having innovation and has a very full pipeline.

I know that team spends a day in the lab on each one of our brands, testing and trying new foods.

We're able to do operations testing and expand very quickly in China when we have a good idea because we basically have 100 percent control of our system.

So I think our speed to market in China is better than anywhere else in the world.

So a lot of good things are in place for us to continue to, number one, drive our system-sales growth, and we're really going to continue to focus on trying to get the one-two punch of new units and same-store-sales growth as we go into 2005.

Do you feel that you have the opportunity to price if you ever need it?

I think one of the great things that we do have in China is we have a very strong competitive position, very highly differentiated, the number-one brand in China, number-one consumer brand in China.

When you have that kind of high-market-share commanding presence, it gives you the opportunity to price.

But I have to tell you, we look at that very carefully, because we are really trying to make our products very affordable to the Chinese customer, and I think that it is an opportunity we have that we use reluctantly.

But there is no doubt in my mind that we could take pricing if we wanted to.

That is great.

Thanks.

Larry Miller with Prudential.

Sorry to harp on the G&A question.

I just want to make sure that - I think your guidance on the long-term basis was for half the rate of sales growth.

Are you still comfortable with that?

And can you also talk about the U.K.?

You did elaborate on the G&A spend in China.

If there anything different going on in the U.K.?

It's a more mature market than China.

And I just had one other question.

We are very comfortable with half the growth rate in G&A.

As you delineated - I'd don't mind the questions in overhead at all.

That's great.

As we have tried to delineate a little bit, we did have some things happen this quarter that were one time in nature and also some project-related expenses that drove our numbers up.

But we are very comfortable with the half of revenue growth assumption.

In the U.K., we did have some one-time things - and in Europe too - some one-time things from an organization standpoint that set us up for future growth that we decided to do this year.

So just getting our organization right and making that happen did happen in Europe this quarter.

I think just to give you my perspective on the G&A, number one, this has been a very good year, so it has allowed us to make some investments that we really, really needed to make.

Number two, the financial systems and HR systems that we put in place are primarily one-time costs that should make us more efficient as we go down the road.

Number three, we're not going to have these G&A costs be out of control.

That is not in our culture.

It is not something that we are going to tolerate.

Okay?

But we do believe in strategic investment, and that is what we are making this year, and we're going to be focused on productivity as we go forward.

That is great.

You also mentioned briefly you're expanding the tests with Pizza Hut and WingStreet.

Can you give us any color on how those comps are going or what the check average might be relative to a Pizza Hut Delco?

They are meeting our - we don't like to get in a lot of detail here because of the competitive nature of things - but we are meeting our targets as far as what sales growth needs to be.

We are meeting our investment targets.

We are meeting our flow-through targets.

It is still in test, but everything that we have seen coming together looks good, and we are rolling out to more markets.

But the sales, earnings, and investment targets are all where they need to be.

One way to think about this is that this is not our first effort into the chicken business at Pizza Hut.

We have been selling chicken for a long time at Pizza Hut.

We have wings that we are currently selling at Pizza Hut.

What we're trying to do is look for a way to sell our chicken products in a more distinguished and higher-quality fashion than our competition.

And WingStreet is a way to do that in a more compelling, more direct way to customers, to say that we have that additional variety there - we deliver.

So we have been in the chicken business for a long time at Pizza Hut.

We're looking at the WingStreet as a way to really evolve and improve our entry into that segment and clearly differentiate us from competition.

As you know, Papa John's sells chicken.

Domino's sells chicken.

So it's just part of the category.

We are just trying to distinguish ourselves, and we are very encouraged by the testing that we are doing.

It gives us a better customer proposition to compete more effectively with the Papa John's and the Domino's of the world.

Would it be fair to say, then, that it is having a nonmaterial impact on the Pizza Hut comp overall?

Yes, the Pizza Hut Comp for the most part is pizza.

I wouldn't put too much up against that, because it is still in relatively few markets, and it is just a test right now.

That's great, thank you very much.

Jeff Omohundro with Wachovia Securities.

Thanks.

I just have two.

First, I want to focus a bit on KFC U.S.A. and your efforts to drive frequency of the core customer.

Maybe you can talk a bit about that and perhaps a bit about your relative performance of the 10-piece Dale Earnhardt bucket versus your Game-Day bucket in the early days on that.

And then the second question relates to your Pizza Hut home service initiative that you mentioned.

Maybe you can give us a little more color on that and where you see that going.

Thanks.

On the Game-Day bucket, Jeff, it's too early to comment because it is in the period.

And so, as you know, we were quite happy with the Dale Earnhardt promotion, and we have been quite happy with our efforts up against the high end.

Can I just ask one clarifying question to your question?

When you talk about the home-service initiatives, are you talking about international business or the U.S. business?

I'm sorry.

I meant Pizza Hut in China.

We are just beginning our home-service efforts in China.

We have a very good home-service business in Korea, in Mexico, and the U.K. that's getting some scale, and we believe that the customer will eventually come to that type of service.

And we are working that carefully but taking a close look to see the success, and we're pleased with how it's going so far.

It is small, but it is an opportunity, we think, for the long term to have a good delivery business outside the U.S.

And on KFC?

On the frequency?

I think that we are focused on driving frequency of our core customer that happens to enjoy fried foods.

We're doing that on the high end with the bucket promotions that you referenced.

We're trying to bring occasion-based news and the bucket.

You'll see more and more news around chicken on the bone that is bucket driven.

We think that the bucket is a terrific equity that we have that we haven't leveraged as much as we can.

For example, you will see what we think should be a very good promotion in December around the bucket that I really can't go into detail on.

But we think the high end, we need to bring news to chicken on the bone, and the best way to do that is in packaging forms.

The other thing we are doing is that we're really working hard to bring the "Chicken Capital USA" theme to life.

We know we have recognition for being the number-one chicken brand.

We stand for chicken.

What we need to do is bring more fried news to the party to really make KFC a more dynamic chicken place, in the sense of really offering more and more offerings and more and more news.

So our R&D department is at hard work, and we're testing product ideas that we can leverage our existing fryers to really bring forward a lot of news, which we think will drive frequency of our heavy user.

It is interesting, for example, what happens with product news.

A lot of times you think you're bringing in your lighter user, but it's really the heavy user that you increase the frequency on.

We have seen that at Taco Bell for example.

Even with the quesadillas and Border Bowls, which were geared to go after the lighter user.

It has really increased frequency of the heavy user, which is the real name of the game here.

So I think you'll see more news at Pizza Hut as we go forward.

Our pipeline - excuse me, at KFC - our pipeline at KFC is not as robust and is not as well established as it is at both Pizza Hut and Taco Bell, but we are making progress and you'll begin to see some news next year.

Thanks.

Mark Wiltamuth with Morgan Stanley.

You started to hit on my question there at the end on just how broad that new pipeline opportunity is there on the KFC products.

And also, I'm curious why we have not seen any of the new products here towards the end of '04.

It sounds like there may have been a little bit of a delay.

I think what we have been doing, frankly, is trying to hunker down and get really back to the basics.

And we've been very much focus on building our operating capability so that we can ready the system for more products.

And we have been working hard to catch up on getting more products in the pipeline.

The franchisees are working very closely with this and encouraging us to develop more new products, and I think that that is something that we will be doing more and more testing on next year.

We have a couple of things that you'll see that give us news as we go into the next year.

It sounds like the salads, you are waiting for spring to arrive before you (multiple speakers).

We're rolling out salads in places like the Southwest and West already.

Most of the system will have a salad next year.

We're not sure that that is a big advertisable idea for us.

We think that is more, at this stage, based on testing, is more of a defensive play for us in terms of our menu versus a big-traffic driver.

But we will have salads.

We will have the roasted platform.

And we will offer salads with both fried chicken on it and roasted chicken, certainly in all of our company stores as we go forward.

And we're building a nice little layer of sales where we have done that.

It is just going to be more of a longer-term way to benefit the concept than a big sales driver like McDonald's saw, clearly, when they launched salads.

Okay, thank you.

Andy Barish with Banc of America.

Just one more on KFC.

Can you give us an update on the menu-board rollout there versus the beginning-of-the-year expectations, when roasted was in the plans and the greens section and all that - what we would see more broadly?

Was that held up?

Does it change next year again when you start rolling some new products?

I think the menu board is out.

It's being very well-received by the entire system.

One of the things we like about this is it's a modular menu board that we are able to add products on and make changes on the menu board relatively easy.

And I think you'll see it evolve as we go forward.

But we like the way the menu board is set up.

It is set up to have the everyday value section with our $4 meals, good value combinations.

The green layer, which will include the salads and the oven-roasted-type products.

Snackables, which will include things like Popcorn Chicken on a permanent basis, plus other products that we are working on to develop that will give us more of a - go after the snacking occasion.

And then our high-end chicken on the bone and sides.

So those are basically the four major sections that we have on the menu that we want to bring news around.

We really believe that this category is a retail-driven category, and the consumer gets excited about news.

I think that that is the biggest challenge we have right now, is working together with our franchisees, who understand the need for it, to really develop a pipeline of products and give us news day in and day out, so that is something exciting happen that makes "Chicken Capital USA" come to life.

One thing we really do feel very good about is that we think we have positioned KFC properly with this notion of "Chicken Capital USA" and really trying to contemporarize the brand.

We're seeing excellent consumer awareness, excellent feedback in terms of we are on the right track there.

Our big challenge is that you put more substance behind "Chicken Capital USA," it is one thing to say it; it is another to demonstrate it.

So, yes, we are known as "" primarily because of our chicken on the bone business and the heritage that we have.

But what we have to do now is really make our other products come to life and make that campaign work through a demonstration of what we are bringing to the marketplace.

And that is the big challenge that we have.

When you look at Taco Bell, when we're "thinking outside the bun," you're seeing news every month, things that are coming.

When you look at Pizza Hut today, when we say "gather around the good stuff," we got lots of good stuff coming every month.

At KFC, we don't have that.

We're not bringing "Chicken Capital USA" to life the way we need to, and I know the team is very focused on it.

We are very, very focused on that, and that is where we are really playing catch up.

And I think as we go into next year, one of the benefits that we do have is a real soft overlap, and as I said, I think we have leveled off.

But when I look at the business, I think in 2005 we will have same-store-sales growth, but I think in 2006, you'll see real, real productive efforts from our pipeline.

Thanks.

Joe Buckley with Bear Stearns.

I had a follow-up question.

I wanted to go back to the chicken-cost question.

And Dave, it sounded like chicken costs may stay high over the next couple of quarters.

There's been a little bit of give in that market lately, so I guess I'm curious why you would not enjoy some lower chicken costs sooner.

We hope to, Joe.

It is early.

We are going through our discussions with our suppliers and things.

But one thing I don't want to do is overcommit on the commodity side, because it has been an interesting year from that perspective, but hopefully we will see some progress in that area.

Okay.

Are you contractually covered on chicken?

Is that part of the issue?

We have contracts for chicken, and as we talk to our suppliers and things, we need to negotiate that through.

But we do have some contracts on our chicken, and they have rolling expirations.

Okay.

Do they tend to be based on feed-grain prices, or are they kind of fixed prices?

They vary depending on the marketplace, but chicken on the bone tends to be more based on feed-grain prices, and then you have the demand for the white breast-meat chicken, which you have to factor in also.

Okay, thank you.

Peter Oakes with Piper Jaffray.

Actually, I have a couple on China, if I may.

First, I was hoping you could remind us how the model works as far as real estate.

What role does purchasing land and buildings play as opposed to rental properties and has that shown any shift of late?

Obviously, where I'm trying to go with that question is the opportunity to leverage the comps here depending on the real estate model.

And then secondly, David, you updated us that breakfast continues to be a day-part opportunity and you have been working on that here for a couple of quarters.

What role did breakfast play as far as the comp contribution in the third quarter?

On the real estate, Peter, we tend to lease.

It is not a marketplace that leads itself to lots of purchasing.

We do try to negotiate fixed-rate leases with relatively modest increases in inflation so we can get some flowthrough on that.

But it is pretty much a leased environment.

So that is how the real-estate situation is there.

Just want to remind everybody that the real-estate situation in China, relative to some of our other markets here in the U.S. or overseas, is quite good.

Breakfast right now is playing a relatively modest part in the same-store-sales growth in China.

It is more of a future growth driver.

We hope to have it in the system by the end of 2005.

But what David talked about earlier, what we are excited about is expanding the menu and getting credibility across lines of business other than just chicken, be it breakfast, be it pork, be it shrimp or whatever.

So in this particular quarter, Peter, it was relatively modest.

You'll see more of it going forward and rolled off completely in 2005.

Actually, just back on the real-estate side, when you say it is predominantly leases, is that a fixed percent or generally a fixed dollar or RMD, just so you can give us a sense as to sensitivity to the comp there?

It is all in local currency, and where we can, we try and get fixed rents just like we would here in the U.S. or any other country.

It varies lease by lease, but our goal obviously is to lock in the lease costs for a fairly long period of time.

Okay, thank you.

Richard Friary with Delphi Management.

Can you tell us the extent to which energy or electricity costs have had an impact in your operating expenses?

We have had a pretty -- touch wood - we've had a pretty good year in energy in our operating expenses.

It has not been that bad, so (multiple speakers).

Well, when you say it hasn't been that bad, what kind of an increase does that imply?

Our natural gas cost increases have been modest.

I can't tell you on this call exactly how much of an increase has been in other energy components.

But when I look at the P&L on utility costs and things like that, it's in relatively good shape.

All right.

And are you contracting any of that, hedging it going forward?

Do you do anything like that?

No, we are not that sophisticated.

So it is on the spot?

We just buy and plan as we can.

All right.

And can you say what portion of G&A or operating expenses energy is?

Very little.

I don't have off the top of my head.

It is less than 5 percent.

Very good, thank you.

David Palmer with UBS.

Two Pizza Hut related questions.

First, WingStreet multibrands now represent, at least by my math, 16 percent of your company-owned Pizza Hut restaurants, which is up from about 4 percent earlier in the year.

And with that 12-point increase, it begs the question how much should WingStreet additions add to your company-owned Pizza Hut same-store sales in 2005.

And I have a follow up then to that.

David, we are in the process of sorting that out with our Pizza Hut team.

That all depends on how fast we decide to go.

We're having those discussions as we speak, and we will lay out for you in New York the components of the comp and what we expect from an investment standpoint at Pizza Hut.

Okay.

And second, perhaps you can give a state of the union on the Pizza Hut category.

Not that long ago, you were pointing to poor consumer confidence as a big drag on the category.

Consumer confidence turned this year.

And arguably, we're running into tougher comparisons on consumer confidence in early '05.

Domino's seems to be getting a little more innovation focused.

Just your thoughts about Pizza Hut and the category for '05.

Well, I have said this even when the category was sluggish, the biggest thing that we can do is to run our business well and make the category exciting.

And I think that is that thing I am most excited about, is that we have a lot of really good news at Pizza Hut, and we're making our family positioning come to life and giving people lots of reasons why they should "gather 'round the good stuff."

I think the consumer confidence is up, but I also believe that you got, based on all the research that we see, is that the consumer is still anxious.

Nobody is running around going "yippee" these days, I think.

So it is a tentative mood to the upside.

I don't think that is the big driver of what is going on in the category.

I think what is really needed in the category is news and excitement that really brings the customer to it.

I think Domino's is a very good competitor, and I think they are focused on innovation, and it remains to be seen if their system can really deliver on that.

But we never discount any competitor, and they definitely have some smart people in that business going after it every day.

So we will see what happens, but we definitely think that we are the innovation leaders, and we will continue to do that.

And I think what we will see is more me-too products from our competitors as we go forward.

Thanks.

There are no further questions.

You may now proceed with your presentation or any closing remarks.

Let me wrap this up and then I'll turn it over to Tim for a couple comments about our New York meeting.

But, first of all, thanks for being on the call. 2004 has been a very good year for Yum!

Brands.

Our forecast for the full year is $2.35.

That is up 14 percent.

That is already 4 points ahead of what we signed up for at the beginning of the year.

So I want to emphasize this very, very much.

Don't get ahead of yourselves.

We have many opportunities to invest in our business for the long term, and I assure you that we will do it.

In 2005, as we go into 2005, I want you to expect another year of at least 10 percent earnings-per-share growth at Yum!

We really believe in this notion that we've got to run our business for the long term to get 10 percent year in and year out and year in and year out, and that is what we're building this company on, and that is what we define as dynasty-like performance - at least 10 percent earnings per share growth.

We are very confident, for all the reasons that I mentioned earlier, that we can do at least 10 percent next year, and if we can beat it, we will.

But what we are going to give you is at least 10 percent.

Matthew, before we close, just a couple of important reminders.

Our next scheduled communication is our Period 11 sales, which will be released Thursday, November 4, prior to the market's opening.

In addition, our 2004 Annual Conference for Investors and Analysts will take place Tuesday, December 7, from approximately 8:00 AM to 1:00 PM Eastern Standard Time at The St. Regis Hotel in New York.

Online registration is required before 5:00 PM Eastern Standard Time Friday, December 3.

To register, just go to our Website at www.yum.com, click on "register to attend" under "upcoming events."

If you have any questions at all, please call us at Yum!

Brands Investor Relations, 888-298-6986.

We look forward to seeing you there.

Thanks.

Ladies and gentlemen, that concludes the Yum!

Brands Incorporated third-quarter 2004 earnings conference call.

We thank you for your participation.

You may now disconnect.