百勝餐飲集團 (YUM) 2004 Q4 法說會逐字稿

Good afternoon, 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 fourth-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.

If you would like to ask a question during this time, simply press star, then the Number 1 on your telephone key pad.

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

Thank you.

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

Please go ahead, sir.

Thanks, David.

Good afternoon, everyone and welcome back to our call.

Before we do begin I would like to go through the few necessities as we did this morning.

This call is being recorded and will be available for play back.

We’re broadcasting, the call via our Web site at Yum.com Please be advised that if you ask a question, it will be included in both our live conference and any future use of the recording.

I would also like to advise that this 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 call related to projections or other forward-looking statements may be relied on subject to our Safe Harbor statement, which is included in our earnings release last night and may continue to be used while this call remains in the active portion of the company’s Web site, at WWW.yum.com, which will be at least until midnight February 18, 2005.

On our call today, you will hear from David Novak, our Chairman and CEO, Dave Deno our Chief Operating Officer and Chief Financial Officer and Rick Carucci our CFO designate.

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

I will turn the call over to David Novak.

Thank you, Tim.

I want you to know that we are definitely into execution at Yum!.

That’s why we abandoned ship when the fire alarm went off this morning.

As you can see from our Period 1 sales and 2004 performance, things are smoking here at Yum! and we didn’t know what kind of fire we had on our hands.

Seriously, it was a false alarm that resulted from a small leak in the sprinkler system in the basement.

Everything is fine here in Louisville, and we’re ready to go, but we do apologize for the inconvenience, and I’m very happy to say that there is no alarm whatsoever in our outlook that I’m going to share with you today.

So let’s try it again one more time, and we will start from the top.

And sorry to repeat this for some of you who heard this earlier.

As you probably saw from our release last night, we had another good quarter: $0.73 per share and 13 percent growth, despite a continuing challenged U.S. commodity-cost environment.

This was led by continued strong performance from our international business as well as excellent same-store-sales growth for both Taco Bell and Pizza Hut.

As a result, we ended the full year with 15 percent EPS growth and EPS of $2.36.

Based on our continued solid momentum, we have already raised our commitment for 2005 by $0.01 to at least $2.60.

Even more importantly, we are confident we have solid plans in place for all our businesses.

Our ongoing goal is to increase EPS at least 10 percent each year, and you can expect at least 10 percent earnings-per-share growth in 2005.

This would be the fourth consecutive year of solid double-digit EPS growth.

Before Dave Deno, our CFO, and Rick Carucci, our CFO designate, take 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 high-growth, high-return international business.

Our largest and fastest growing division, and one of the key factors that makes us unique in the restaurant industry.

In 2004, Yum!

Restaurants International achieved records for revenues of $3.2 billion, operating profits of 542 million, and a continued high level of return on invested capital.

Unlike the U.S., our only major competitor from a chain QSR perspective is McDonald’s.

There are very few other chains.

Also, in family and casual dining, Pizza Hut has very little competition.

In our most profitable market, China’s profits were up over 20 percent.

Profits are almost $200 million, and we have over 1,200 KFC units.

The key factor is the continued very strong growth of China expansion and dominance of our brands.

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 171 stores, and is clearly the casual dining leader.

We opened our first Chinese fast-food restaurant called East Dawning, and we’ve continue testing our Taco Bell casual-dining concept.

We are not sitting on our success with KFC and Pizza Hut.

We are very focused on building dominant restaurant brands in every significant restaurant category in China.

We’re also pleased to see our strong performances across our international businesses.

We achieved 15-percent growth in franchise fees, and positive same-store-sales growth in most of our major markets.

In fact, during 2004, our international franchisees opened over 70 percent 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 fourth straight year, we opened over 1,000 system restaurants outside the U.S.

To be exact, we opened 1,077 new units.

The incremental revenues from these new restaurants combined with the generally strong base business performance we are seeing around the world, gives us confidence we will continue to grow our international profits once again in 2005.

As our international business continues to gain scale and importance to our overall Yum! growth, we are splitting this business into a China Division and International Division.

Specifically, for 2005, in our rapid-growth China Division, we expect to open at least 375 new units and generate at least 20 percent profit growth.

For the high-return International Division, we expect to add at least 725 new units and generate at least 10-percent profit growth.

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

First, some perspective and outlook for Taco Bell.

In 2004, Taco Bell delivered outstanding results once again.

Taco Bell, the second most profitable QSR brand in the U.S., now has system average unit volumes approaching $1.1 million.

Importantly, franchise profitability and optimism is outstanding.

We are especially pleased with Taco Bell’s same-store-sales growth of 5 percent on top of 2 percent growth in 2003 and 7 percent the previous year.

These results come from steadily improving operations and excellent marketing.

Taco Bell’s CHAMPS measures all showed solid improvement in 2004, and the theme for their system continues to be exceptional execution of the basics.

Taco Bell’s “Think Outside the Bun” advertising campaign, strong product pipeline, and the new Big Bell Value Menu continues to help drive consistent same-store-sales growth.

We are now well into our fourth consecutive year of same-store-sales growth.

For 2005, we are off to a solid start and expect to stay on track at Taco Bell.

We have a strong beat-year-ago marketing calendar and will continue our focus on driving excellent customer experience, especially speed of service in our drive through.

Right now, in Period 2, we are driving the business with a new chicken enchilada grilled stuffed burrito, a limited-time-only line extension of our very successful Grilled Stuffed Burrito product.

This is an excellent premium price product.

As a reminder Taco Bell’s mission is to provide the fast-food consumer with near, quick-casual quality with all the functionality of a quick-service restaurant.

Certainly, we expect another year of same-store-sales growth for Taco Bell of at least 1 to 2 percent.

Now, on to Pizza Hut. 2004 was a great year at Pizza Hut.

In fact, Pizza Hut grew its 2004 same-store sales 5 percent.

Pizza Hut did this by staying one step ahead of our competition with the innovative 4forAll®, the Full House XL Pizza™, which is a great value, and several limited-time-only offers like the Buffalo Chicken Pizza.

Rest assured, we’re not resting on these successes.

The Pizza Hut team has done a fantastic job repositioning the brand to target the heart of the pizza category targeting the family and the primary decision maker, Mom.

The advertising campaign, “Gather ’Round the Good Stuff” is getting better and better, and you can continue to see it in our results.

Pizza Hut’s new-product pipeline could be the best that we’ve ever seen, with 2005 looking to be an exciting one for pizza lovers in the United States.

We just kicked off the year with one of those products, the new Dippin’ Strips Pizza, which gives our customers the ability to dip their pizza into strips in three different sauces.

Initial consumer acceptance has been positive, and we believe this product is the most significant pizza-category innovation since we launched 4forAll™ last year.

I encourage you all to give it a try, and you will 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 100 percent or lower team-member turnover two years in a row.

Low team-member turnover 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 the way.

Pizza Hut is also making good progress with leveraging and upgrading their restaurant assets.

We created a new brand for multibrand development to help us differentiate our delivery business.

For our very substantial delivery business, we’ve created WingStreet to deliver a tasty line of sauced wings and boneless wings for our customers.

We also created another concept for our dine-in business called Pizza Hut Italian Bistro with a line of pastas, salads, and sandwiches, and an upgraded decor and service package.

You will likely see another 3 to 400 Pizza Hut WingStreet combinations added in 2005 as well as possibly 100 additional Pizza Hut Italian Bistros.

For 2005, we fully expect to see a continuation of positive results at Pizza Hut because of the significant work that we have done across all aspects of the business.

The news that we have in the hopper and our maniacal focus on operational improvement particularly in the area of customer access for delivery.

KFC still remains our biggest challenge going into this year.

But we have every confidence in our management team and the fact that they are taking the right actions to turn the brand around.

The brand was repositioned as Chicken Capital USA to re-establish KFC’s leadership position.

During 2004, we instituted a same-product pipeline and marketing processes that Taco Bell and Pizza Hut are using, and which have been critical to their success and the development of their full pipeline of news.

One big competitive advantage we have is that ability to implement best practices from our global brands, and that’s exactly what we’re doing at KFC.

We are making steady progress in speed of service as we rolled out the same program that worked so effectively for Taco Bell.

In fact, our internal CHAMPS speed of service scores for 2004 showed steady improvement, but we know that we have much more work to do.

As with Taco Bell and Pizza Hut, improving restaurant operations is very important for KFC.

In 2005, we will be driving for consistency in great customer experience, especially in the areas of speed of service and improved hospitality.

At this point, we are pleased KFC ended the year with positive same-store sales in Period 13, and as you saw in the release, we started out with a plus 1 percent in Period 1 of 2005.

Again, more work needs to be done this year, and the team is working very hard to improve all aspects of the KFC brand in the United States.

When you look at our entire U.S. portfolio, we expect blended same-store sales to be up at least 1 to 2 percent this year given the continued improvements 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 great brands in the U.S.

In 2004, we passed the 2600 mark in number of U.S. multibrand units and added 547 multibrand locations during the year, the most the system has ever opened in one year.

For 2005 we expect to add another 550 multibrand units.

As you can see, we already have a sizable multibranding business.

We intend on maximizing every multibranding combination, where the customer says yes and returns are excellent.

We are very optimistic with the multibranding of Taco Bell and Long John Silver, and we are still testing the Long John Silver and A&W combination.

We currently have 327 WingStreet units and are looking to add another 300 to 400 to Pizza Hut’s delivery business this year.

We are also discovering the power of signage and concept layers with our newly created Italian Bistro concept, and our Pizza Hut franchisees are very excited about this.

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

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

We are as bullish as ever on the prospects for multibranding and its ability to improve average unit volumes and profits.

Customers clearly love multibranding, and our franchisees are opening up well over half of our multibranding units excluding our company-only WingStreet, which is indicative of the power of the unit economics of a well-run store.

We have made a lot of progress, and we are extremely excited about the potential of multibranding to really upgrade and enhance our U.S. restaurants.

Last but not least, the power of our global portfolio of leading restaurant brands makes us not your ordinary restaurant company and a cash-generating machine.

In fact, we generated net cash flow from operating activities of over $1.1 billion and nearly $1.5 billion counting all cash available prior to capital spending in 2004.

The increasing cash flow allowed us to pay off nearly $3 billion of debt over the last 7 years, increase our payout to shareholders by initiating the first quarterly dividend in our history, in May 2004, and buying back a record number of our own shares in 2004, spending $569 million.

The combination of our consistently strong performance and increasing cash flow has made our balance sheet fortress-like and allowed us to achieve our goal of investment-grade ratings from each major rating agency.

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

We will achieve at least 10 percent EPS growth before any special items, and our balance sheet will get stronger and stronger.

We will continue to build value by executing the unique growth opportunities that differentiate us from the competition and make us not your ordinary restaurant company.

Specifically, we will focus on four key strategies: building dominant restaurant brands in China, driving profitable international expansion, improving restaurant operations, and multibranding our category-leading brands.

What you can’t see in the numbers is 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 the culture we are building is a secret weapon that is helping us build a great company.

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

Dave?

Yes.

Thank you, David.

And good afternoon, everybody.

As we stated in the earnings release yesterday, we continue to feel very good about our business trends, the 2005 outlook, and our ability to generate at least 10 percent growth in earnings per share once again.

This will be our fourth consecutive year of double-digit growth.

I would expect that one year from now, shareholders will again be pleased with the increased value in this business, another great year of strong cash flow and substantial free cash flow directed to shareholders in the form of share buybacks and a meaningful quarterly dividend.

We will review the dividend rates in the second quarter this year and each succeeding year.

Additionally we expect to make progress in 2005, once again in building an even stronger balance sheet.

As David said, our four key strategies are building dominant restaurant brands in China, driving profitable international expansion, improving restaurant operations in multibranding category-leading brands.

When I took the CFO position over five years ago coming from our international business, it was apparent that our international growth opportunities were second to none in our industry.

We have executed against these opportunities and are positioned even stronger for continued growth in the years ahead.

Importantly, our pipeline to generate over 1,000 new-restaurant openings outside the U.S. looks very good.

Rick Carucci will be talking about this in a minute.

As we have continually said, this is our single most important factor in driving at least 10 percent earnings per share growth for Yum!.

As you can tell, we are optimistic as ever about our prospects.

Now let me take a look back at 2004 and recap our fourth-quarter results.

Then I will get into the details of our 2005 outlook.

For 2004, we are pleased to report earnings per share of $2.36 a share prior to special item gains, representing growth at 15 percent.

This was $0.09 ahead of our original commitment to shareholders in 2004.

Importantly, cash flow from operating activities was a record $1.1 billion and has grown at a compound annual growth rate of 15 percent the last five years.

We’re pleased as well that we were able to further reduce debt ahead of schedule, strengthen our balance sheet, and provide record levels of cash to shareholders in the form of a new quarterly dividend and 569 million in share buybacks.

Now let’s take a quick look at fourth quarter.

For Q4, we finished at $0.73 a share or 13 percent growth in earnings per share prior to special items.

As we reported to everyone in our New York meeting on December 7, the quarter proved to be challenging.

International results were slightly better than expected, which helped to offset U.S. performance, which was somewhat less than expected due to slightly lower same-store sales and higher-than-expected U.S. commodity costs, primarily cheese and tomatoes.

For our most important international growth market, China Q4 same-store-sales growth was flat to KFC and up 3 for Pizza Hut.

KFC was lapping double digit same-store-sales growth the year before from a tremendous response to their roasted-chicken platform.

For the full year 2004, KFC China was up 7 percent and Pizza Hut China was up 6 percent in same-store sales.

We expect another great year from China.

Now, moving on in the quarter, facility actions expense and interest expense were slightly better than expected.

This helped to offset $11.5 million of expense we did not anticipate from the cumulative effects of our recent change in interpretation related to the accounting for leases and leasehold improvements.

At this point, we were at $0.72 per share with a tax rate we had forecasted in the December.

As you know, our international business has grown to be a substantial part of our company, and I have mentioned in the past we had significant and continue to have significant tax-planning opportunities for our international business.

We were able to capture additional opportunities in Q4 resulting in an extra penny of earnings per share or $0.73 in total, 13 percent growth prior to special items.

Going forward we will continue to pursue tax-planning opportunities, particularly those related to our international business.

We would just like to remind everybody once again, though, that these opportunities can come in big lumps and affect a particular quarterly rate.

Overall, we were especially pleased with fourth-quarter results considering substantially higher U.S. commodity costs, another quarter of nearly 2 full percentage points of negative impact on U.S. restaurant margin.

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

Importantly, our biggest businesses continue to perform well, and we opened another 496 new international restaurants during the quarter, including 152 restaurants in the China market.

Now let’s take a brief look at our cash flow for 2004 and our ever-strengthening balance sheet.

As I mentioned earlier, we generated 1.1 billion in cash flow from operating activities in 2004.

Importantly, with all this cash, our first priority is to grow the value of our company and invest in the many growth opportunities we have to expand internationally or enhance our U.S. restaurants through multibrand innovation.

As stewards of this capital, our first priority is to ensure we don’t let our cash investment get ahead of our people capability.

Let me assure you we are expanding at the fastest appropriate rates in our key international markets, China and the U.K., as well as our early stage markets like France and India.

In the U.S., we are continuing to expand multibrand innovation with 547 additions in 2004, the most the system has ever done in one year.

We spent $683 million in capital for 2004 to drive these results.

Looking out over the next few years, we expect to average between $750 and $800 million in capital each year.

Overall, we ended 2004 with a stronger balance sheet than 2003, a trend that has continued for many years.

We were happy to receive the recognition of our progress by Standard and Poor’s who you may have seen upgraded us to “positive watch” last week.

Now, let’s spend a minute or two on 2005.

As noted yesterday in our release, we already have raised our earnings per share guidance for 2005 by $0.01 to $2.60 or 10 percent growth.

Importantly, it is still very early in the year.

Please do not get ahead of us.

As always, we will update you each quarter as we go through the year.

In the release, we also provided you with our best thoughts on growth by quarter for 2005.

This is based on using a tax rate which is flat across the year, equal to our full-year guidance of 28 to 30 percent.

We do expect there will be some lumpiness to the quarterly tax rate and will provide updates as appropriate.

Our quarterly split is our current best thinking based on the facts today.

Certainly, the chorus can change as we move through the year.

As always we will update you on each quarter-end release if necessary.

As I have said in the past, our commitment to our shareholders is to grow at least 10 percent in annual EPS.

We work very hard to meet and beat these figures, as we have the last few years.

For interim periods and quarters we will do what is right long term for our businesses including the proper pacing and sequencing of transactions, events and initiatives such as refranchisings and restaurant closures.

Now let’s turn to the first quarter.

For the first quarter, we’ll continue to be adversely impacted by U.S. commodity costs primarily meats and cheese, to the tune of about 2 full percentage points in restaurant margin.

As for same-store sales, we expect the recent trends to continue with our target of at least 1 to 2 percent for blended U.S. same-store-sales growth.

Please be mindful of the tougher laps ahead.

I will particularly refer to you that — refer you to when Pizza Hut lapped the extremely successful launch of 4forAll® Pizza last year in Periods 2 and 3, and in Period 3 Taco Bell will be lapping a very strong performance from the launch of their Fiesta Taco Salad.

Now to wrap up, we are confident we are on the path to continue our growth record given our unique opportunities and the strength we have in the company to execute against these opportunities.

Shareholders can continue to be confident that we will be excellent stewards of our capital and deliver a high level of return on invested capital, particularly in relation to our competitors.

We remain as focused as ever on achieving at least 10 percent growth in earnings per share each year going forward, and we work very hard to exceed that target.

Back to you, David.

Okay.

Thank you very much, Dave.

Now I would like to turn it over to Rick Carucci who is previously was our Chief Development Officer for international, and he is going to take you through our development plans international and Rick will be assuming the CFO position here at Yum! as Dave moves into the Chief Operating Officer role as we’ve talked about previously.

Rick?

Thank you, David.

And good afternoon, everyone.

Today I am going to talk about our broad-based development capability outside the U.S.

I will discuss information on some key company markets as well as our extensive franchise base.

As David mentioned, we have now opened more than 1,000 new restaurants outside the U.S. each of the last four years.

We are also well positioned to achieve growth with about 1,100 new units in 2005.

This activity has made international development the most significant driver of our year-over-year growth in EPS, and we expect this to continue in the future.

Given its importance to Yum! we thought it would be useful to you if we take a few minutes and provide some details.

First, some information on China and the China Division.

China had a phenomenal development year.

The China team set another development record adding over 330 restaurants.

This means that Yum! ended the year with about 1400 units in mainland China.

We had only 450 units in 2000.

That means that the mainland China unit count has more than tripled over the last four years.

We are off to a strong start in China in 2005, and we expect to add well over 300 restaurants again this year.

For the China Division, which includes Thailand and KFC Taiwan, we added over 350 units in 2004, and we expect to open at least 375 new restaurants in this division for 2005.

Let’s turn our attention to Yum!

Restaurants International, which we also refer to as YRI.

The new YRI division added over 700 units in 2004, and this resulted in about 325 net new units.

In 2005, we expect to add about 725 new units.

I will now focus on two important parts of the international business.

The United Kingdom and the franchise business unit.

For context, please note that the U.K. represents about 30 percent of International Division profits.

We built about 90 units in the U.K. in 2004; we have averaged approximately 100 units per year for the last three years.

We plan to add over 100 units in the United Kingdom for 2005, with the Pizza Hut brand reaching 50 units for the third straight year.

Over the last few years, over 80 percent of the new builds in the U.K. have translated into net new builds.

Therefore, for 2005, we plan to add over 80 net builds in the U.K.

Now to discuss our franchise-only business units.

As a group, these franchise-only business units make up close to 40 percent of International Division profits.

For 2004, our international franchise-only markets added over 400 new units and over 200 net new units.

This represents 5 percent net unit growth.

The development was very broad based with new development taking place in over 55 countries.

That’s right. 55 countries.

Asia is the largest franchise-only business unit.

The four largest contributors to the Asia franchise business-unit development are India, Indonesia, Malaysia, and the Philippines.

Together these four countries alone built over 150 new units in 2004.

The countries in Asia are generally made up of large franchisees who cover the complete market for that brand.

For example, in the Philippines, we have one franchisee for KFC and one franchisee for Pizza Hut.

We also had some strong performance outside of Asia.

For example, our franchise business unit that covers the Middle East and northern Africa had a record year in development.

This included new builds in 12 different countries with Saudi Arabia being the largest developing country in the region in 2004.

For 2005, we expect similar development output from the overall group of franchise-only markets.

We again expect a net unit increase of about 5 percent.

Before I wrap up, let me talk a little bit more about India, one of our key early-stage growth markets.

In India, we expect to add over 30 Pizza Hut restaurants on a base of about 100 franchise units at the end of 2004.

We are also adding some new KFC company-owned restaurants with the ultimate goal of having two high-growth brands in this very large and developing country.

In summary, in 2005 there will again be very broad-based development growth in our International Division.

There will be company development in a few markets, but it will be again largely driven by KFC and Pizza Hut franchisee development.

Overall, we are confident of surpassing 1,000 units for the fifth straight year in 2005 as we expect to build around 1100 new restaurants outside the U.S.

Back to you, David.

Okay.

Thanks, Rick.

I appreciate it.

We had a — in summary, we had a very good year in ’04, and we expect a repeat performance in 2005.

We’re off to a good start and expect to grow at least 10 percent in earnings per share growth, but don’t get ahead of us.

It’s early, and much needs to be done.

And we’re determined to do it.

And at this point in time, I will turn it over to you, and we will answer any questions that you may have.

If you would like to ask a question at this time, simply press star then the Number 1 on your telephone key pad.

Again, that is star then the Number 1 if you have a question.

And we will pause for just a moment to compile our Q&A roster.

Our first question comes from Mr. David Palmer with UBS.

Hey, guys.

Congratulations, Dave Deno —

Thanks, I appreciate it.

Five great years there.

I guess I would focus on the pizza category.

I think it was a couple years ago, we were talking about a swooning consumer confidence being an issue for the category, and last year it seemed like low carb added to the category woes.

Consumer confidence has been up a little bit lately, and we’re cycling the low-carb mania last year.

It seems like we’re seeing a little bit better pizza category growth against easier comparisons in early ’05.

Perhaps you can give a sense of how you see the category playing out as the year goes and then, you know, maybe giving some feel for how, you know, maybe the marketing and how you’re going to be focusing on perhaps gaining share within that category.

Thanks.

Well, last year we actually gained share in the pizza category.

We had an excellent year.

I think when you look at the macro trends, there are a couple of things that are actually in our favor.

As we’ve said before, we’ve been guided by — or been impacted more by consumer confidence.

We see that improving at least slightly at this stage.

The other thing is, is the trend towards carbs, you know, is at least seems to be waning at this stage.

When you look at what is going on in the grocery industry and other categories.

You know, we really think that our strategy is the right one for the pizza category, and a lot of what happens in the pizza category hinges on what we do because we are the leader.

And our strategy is basically two-fold: One is we want to lead in pizza innovation.

I mean we know that the heavy user loves pizza excitement.

You know, so we have a, you know, tremendous product-development process that we have in place that’s in full gear, and so we — you will see this year continued product innovation at Pizza Hut.

And I think a good testament to that right now is the Dippin’ Strips Pizza that we just launched, which is off to a very good start.

But it is a pizza which basically gives you bread sticks and a pizza form, new packaging innovation, and three dips of your choice.

And so that’s just one example of how we’re driving the pizza innovation.

Second thing is, is that, you know, we know value is very important.

And we come — we really believe in offering everyday value.

We do that through our couponing processes that we put together, and we’ve also done that by introducing a Full House XL Pizza™, which we introduced in the fourth quarter, which also continues to do well.

So we’ve got a pizza that is designed to give you everyday value, and we also have continuous discounting or coupon offering and a loyalty program up against our heavy users.

And then finally, you know, we continue to go up against the operational challenges at Pizza Hut.

And we’re getting better and better at providing better phone access for our customers.

We’ve remapped our trade areas to provide better coverage of households.

And, you know, we expect that to help drive some growth for us as we go forward.

So I think the category dynamics, in summary, are better than they were last year, and I think that our strategy of pizza innovation, everyday value, and operational improvement with the focus on access and delivery is really — puts us in good stead as we go forward.

Okay.

Thank you.

Thanks, David.

Next question, please, Matthew?

Our next question comes from Jeff Omohundro with Wachovia Securities.

Thanks.

My question addresses KFC U.S.

I wonder if you could maybe give us a little bit more color on that, the efforts you’ve been pursuing to target the core user at KFC surrounding the Chicken Capital USA strategy.

Thanks.

Okay.

All right.

Well, last year, we decided to go back to the real equity of our leadership and try to re-establish our leadership position going up against the heavy user, and we did that with Chicken Capital USA.

We basically are trying to improve our product pipeline in terms of offering products that appeal to our heavy user and also to our medium user.

In the area of our heavy user, we are focused very much on flavor.

You will see a lot of flavored new products this year and different forms.

So one of the things we think we can bring to the category that’s very unique and our heavy user enjoys is flavor.

So you will see a lot of things — a lot of products that emphasize the flavor, the fact that you just can’t get too much flavor, and we’ve got great flavor profiles that we will be advertising this year.

Second thing that we know our heavy user is looking for is value.

So we’re coming at value on two fronts.

One, that we have value in terms of complete meals where we can — the individual can get $4 complete meals at KFC.

And also the high end, we are offering up good value on high-end chicken on the bone, complete meal packages, as well.

So that’s currently, we’re doing that with the promotion we have in our local window right now, which is called stand up for — “Bring Back Dinner” where we’re really focused on our complete meal opportunity that we have.

The other thing that we’re doing on a value standpoint is, you know, we’ve never had anything really at the low end.

So you will be seeing in March a product that is a high-quality product that will get us down and at a very good price, that we’re excited about, that’s been tested.

I can’t really give you the details right now, because it’s competitive in nature, but we feel like we have something that gives us a very appealing offer at the low end of the pricing scale that works within our margin structure.

So it is not something that is going to really hurt our margins.

So we’re — we’re excited about that.

Now, the other thing that the heavy user wants is just basically a better KFC.

That means better speed of service, better hospitality.

So we’re really focused on that from an operating standpoint.

We feel that KFC is doing all the right things.

You know, we’ve really gone back, and we’ve stolen the best practices from the other brands, from both the marketing process standpoint, with our product pipeline development process, beat-year-ago calendar process, and also from an operations standpoint where we’ve taken the Taco Bell speed-of-service program and put it into Taco Bell.

So we think we — into KFC, I’m sorry.

So we think we — we think KFC is turning the corner.

We’re not ready to, you know, take any victory laps at this point in time.

But we think we, you know, we can at least get 1 to 2 percent same-store-sales growth out of KFC.

I would like to add, too, this is Dave Deno, coming in as the Chief Operating Officer, a lot of attention and focus will be on KFC operations, because we think it lags the other two brands in its measures, and David talked about speed of service and hospitality, and that will be a major focus of ours during the year.

And will these flavor initiatives be seen in the first half or the second half?

First and second half.

Combination.

Okay?

You will see value, flavor, high end.

One other product that we developed — the first initiative that we really put through the pipeline process and testing process for KFC was the variety bucket.

That’s what we had in Period 13 of last year where you basically — we combined, you know, gives the customer a choice of picking three items or having three items.

That variety bucket was very successful, and that’s also a promotional opportunity that we have this year that we plan on coming back to.

Thank you.

You bet.

Thanks, Jeff.

Matthew next question, please.

Our next question comes from Peter Oakes with Piper Jaffray.

Hi, gentlemen.

Taco Bell, David, as you mentioned up front has AUVs that are approaching a million one.

It is the second most profitable QSR brand in the country, and that would imply that unit economics are going the right direction.

Yet if we look at Taco Bell on a stand-alone basis and forget about the licensees, the unit count has been stagnant at best, if we kind of look back over the last five, six years and knowing that the priority is multibranding, are you leaving a little something on the table as far as unit-growth opportunities for the Taco Bell brand?

Well, first of all, thank you for the paid advertisement.

You know, I think that, you know, we clearly have a brand that’s getting broader and broader shoulders in terms of its stand-alone unit economics.

Our franchisees and us will be opening up stand-alone units, but we’ve also had very good success with Taco Bell and Long John Silver’s, where we — and in places like the Northeast where we know we need to have, you know, significantly higher volumes to make the economics work.

Where the real estate costs are higher, you know, we’re very bullish about Taco Bell, Long John Silver’s, which we’ll be expanding this year.

So we really think that this will be a year where we’re going to set the stage to ramp up more U.S. development.

You know, as Taco Bell continues to grow, we see more franchise development at Taco Bell in both the stand-alone and the multibranding format, and it will be a combination as we go forward.

You know, we see no reason in the world why Taco Bell, given its strength and its differentiation in the category, can’t have at least as many restaurants as Wendy’s does, and you know, and grow at the same rate as Wendy’s and Tim, I forget exactly what — they’re doing 250 to 350 a year.

So, you know, we — we’re very bullish on Taco Bell.

Taco Bell is in a whole different land that we haven’t been in before.

And you know, one of the big initiatives we have is to really get U.S. development going, and we want to do that with stand alone and multibranding combinations going forward.

Okay.

David, what kind of timetable are you thinking about ramping up some unit development here?

Because as I mentioned, you know, you go back — actually, I’m looking back the last six years here, you actually have less units today than you did six years ago so is this something kind of 3 to 5 years out or something you will be torquing up a little bit sooner?

I think this year is more of a ground foundation-building year, getting stronger and stronger as we go forward.

You will see more next year but I think it is more in the 3- to 5-year camp than something that you could look at short term.

We’re really not in the business of chasing numbers and trying to accelerate anything faster than needs to be accelerated.

We’re in this business over the long term.

We want to grow the right way.

And the great thing about our business is that we can — we can deliver our at-least 10 percent earnings per share growth without really ramping up that U.S. development.

That’s what I’ve always said is the lucky strike extra for our company.

That’s why we’ve been working on multibranding and trying to get our unit economics healthier because we think if we can, you know, keep growing our same-store sales and then bring in that new-unit development, that’s going to be the next opportunity for us, along with our international opportunity.

Okay.

I will get back in the queue.

Thanks.

Thanks, Peter.

Matthew, next question, please?

Your next question comes from Howard Penney with Friedman, Billings, Ramsey.

In the detailed financials that you provided on the China business, there was the last three years, there was a huge step down in food costs.

Yes.

Like 500 basis points.

What led — what is the driving force behind that decline?

Yes, sure, it is Dave, Howard.

How are you doing?

Two things, really.

One, we got better and better and better and better at our food destruction, which is — and purchasing which is a core strategy of ours now.

And two, with the World Trade Organization in China joining and borders opening up and everything else, there is a lot to choose from and that drives down costs, and we’ve gotten that benefit.

So two things there, is our own capability, and also the growing favorability of the economic environment in that part of the world.

We actually built a supply-chain-management function in China, okay?

With the target of really dramatically reducing our food costs, and they hit every objective we established.

And our distribution capability, too.

It has been fantastic.

We’ve had very little, if any, pricing in China over the last few years.

And the opportunity going forward, is there more?

Yes, I think there is.

I think that we can continue to see that as we get better at it and also as borders continue to get more and more free.

I think some of the low-hanging fruit is gone, candidly, but we anticipate additional opportunity.

Thanks very much.

Thank you.

Thanks, Howard.

Matthew, next question, please?

Our next question comes from John Glass with CIBC.

Thanks.

Could you explain maybe the nature of the facilities actions you’re expecting for KFC?

Why are they limited to a couple of quarters, and then also what’s the larger context?

Are you trying to drive down your corporate ownership significantly in ’05?

Maybe what the goal is?

Yes, sure, John.

First of all, we talked about in New York, we have a very robust process to identify opportunities on our asset ownership.

We talked about addressing some things at KFC.

We own slightly more than 20 percent of the restaurants today.

Probably end up somewhere between 15 and 20 percent.

And we do that in all of our brands as we go forward.

KFC happens to be the one that we’re spending the most amount of time on right now.

The quarterly split is our best estimate of addressing some of those issues.

And it is also, we’ll probably do some things in some of our international markets, some of our more emerging markets that we’ve been trying to make some progress.

So that’s the best estimate of our split right now.

If it changes, we will certainly update you.

But we wanted to continue to move ahead in this initiative and not try to manage a certain growth rate by quarter.

But give people the opportunity in advance of what we were thinking and what we’re — actions we’re going to be taking.

Okay.

And on the U.S. margin, could you comment if there are other factors that contributed to the food cost increase?

For example, is the value menu at Taco Bell increasing food costs?

Or perhaps is multibranding have some systemic influence on food costs just besides the commodities?

No, it has been primarily commodities, John.

And it’s been cheese and chicken.

And I think everybody pretty much knows where the cheese market is today, and we’ve been dealing with that along with our competitors so far this year.

Our multibranding margins continue to improve.

We’ve talked about that.

And the Taco Bell Value Menu has actually been quite a big success.

Okay.

Thank you.

Thank you, John.

Matthew next question, please?

Our next question comes from Mark Wiltamuth with Morgan Stanley.

Hi.

Just to follow-up a little more on the food costs, could you quantify just how much the food costs overruns were versus your internal goals for 2004?

And then which parts of the food costs do you think could swing in 2005?

Obviously, some of those contracts are booked, and I’m curious which ones have flexibility for movement.

The food costs year on year was $70 million higher than we expected.

And so — what we think about in our company from time to time is gosh, what would have happened in 2004 had we not had that, but we had it, so we just got to deal with it and move on.

The chicken contracts do roll over from time to time.

We do not anticipate, Mark, a big movement in that this year.

We may see some improvement as the year goes along.

The biggest wild card candidly is cheese.

It’s a $1.70, whatever it is $1.65 right now as we speak.

I’ve been involved with the Pizza Hut cheese — in the cheese market, working with Pizza Hut for 15 years.

That is exceptionally hard to predict.

We think that it will be tough here at the beginning, and as the year moves along it will moderate some, and that’s how we expect the year to go for cheese.

Chicken, we think that we’re fine in the second half.

We hope we should be down flat to down just a little bit, and beef we should see just a modest increase.

Bust just to remind everybody, chicken and cheese are our two largest commodity items.

Okay.

And I just wanted to follow up a little bit more on your quarterly splits.

Is there anything we should be thinking about on that 20 percent growth in the third quarter?

Was there anything in the year-ago period or anything that is going to happen in the upcoming third quarter that would cause that?

No it is just — it’s an absence of negatives for the most part, Mark.

I mean we now are in the lap of the commodities.

We don’t have any — any anticipated large transactions happening next quarter.

The tax rate wasn’t abnormally low.

So if you just basically take those assumptions, and apply that to this year, you would have seen a 20 percent course.

So that’s basically what’s going on.

Okay.

Thank you.

Thanks, Mark.

Matthew, next question, please?

Our next question comes from Joe Buckley with Bear Stearns.

Thank you.

David, a question on multibranding.

You’ve repeated your commitment to the program.

If you look at the ‘05 plans, most of the multibrands you’re planning to do are the Pizza Hut WingStreet, and then an additional 100 I guess are the Pizza Hut Italian Bistro.

Are you stepping back from the more traditional multibrands in some way?

Hi, Joe, it is Dave Deno.

In the — first of all in the Italian Bistro, we don’t count that as a multibrand per se.

But you’re right, we do — we are opening up a lot of Pizza Hut WingStreets.

If you think back to New York, Joe, we talked about Taco Bell, Long John Silver’s and we talked about Long John Silver’s and A&W and we talked about taking what we’ve got with KFC and A&W and making sure that that’s fixed as we go forward.

So we have, from a company standpoint, we have stopped and taken a look at where we stand on multibranding for KFC/A&W.

Some of our franchisees are moving forward with that business, and they are actually doing quite well.

When you look at Taco Bell, Long John Silver’s, Joe, Long John Silver’s, A&W and Pizza Hut WingStreet, we’re moving ahead as anticipated.

Dave, one more on capital spending.

I think for the full year, you came in well below what you were originally projecting and how you took a couple of years in a row.

Talk about what causes that?

Are there certain projects that just flip from year to year, or do you find more efficient ways to do things?

I think, Joe, when we look at it this particular time, it was spread across the board, so it was within all three of our brands and also in the U.S.

I think when it comes down to it, candidly, we have not always executed our appetite so some of this slips into the first quarter of the year.

As CFO I can tell you it’s something that is — we’ve got to get better at in forecasting that.

I guess it’s good to finish less than we thought, but I don’t think it’s acceptable to continue to finish less than you think.

And so in this particular year, Joe, it was across each of our brands.

There wasn’t one particular outlier or project, and much of that slipped into Q1.

Okay.

Thank you.

Thanks, Joe.

Matthew next question, please?

Our next question comes from John Beasley about Monarch Research.

Hi, good afternoon, most of my questions were answered, thank you.

Thanks, John.

Matthew, next question.

We have a follow-up question from David Palmer with UBS.

Hey, guys.

I’m just kind of curious, with regard to the facilitates actions, and today we see some refranchising of the KFC brand.

How might we think about how that would play out in terms of your P&L thereafter?

Clearly, you would have — you would be refranchising units that may not have the margins of your overall business, and perhaps could that — could that be a lift to your company restaurant margins in the U.S. for the second half of the year for instance?

And then would that also mean that you would perhaps, you know, downsize the amount of overhead allocated to that business, and perhaps see a little bit of a shrinkage in the G&A line as a consequence as well.

On the overhead side, we tend to find things to be a step function, so we have to move things quite a bit to make a cut — a cut in overhead of any significance.

On the other side of things, David, depending on when these things actually happen, there could be a slight pickup to this year, and these actually — I want to make sure, I mean these — these restaurants, they’re good cash-flow restaurants.

They’re — they add profits to the company but not to the level that we would expect.

So as we go ahead and refranchise the business, that’s a good business, what happens is we will get the cash from the refranchising.

Our returns will improve.

We will collect the royalty without a capital investment, and our margins absent everything else should improve.

And that’s basically what we’re looking at, but overall these are reasonable businesses.

Okay.

Thanks.

Thanks, David.

Matthew, next question?

Okay.

Our next question comes from Peter Oakes with Piper Jaffray.

Hi, QSR as a whole is experiencing a lot more success with price mix entering into the equation and helping provide some comp.

Can you give us a sense or perspective, what role that played for the three brands in ’04?

Yes, Peter.

In our brands, we had transaction growth.

Pizza Hut and Taco Bell, we had transaction growth and some price.

We are exceptionally, underline exceptionally, careful about pricing.

It is not something that we use to drive our comps.

We really want the transaction counts and guest-check count going forward.

Now we do take some price year to year to offset some cost increases but in those two U.S. brands we sell — the magic of the and, the price — the menu-check change and also transaction.

There is another way of course to get check, Peter, and that’s mix, and I think Taco Bell has employed that pretty successfully over the last few years in migrating towards higher volume and higher value, higher-cost products.

Now at Pizza Hut — or excuse me, at KFC we did see a drop off in transactions year to year in our negative same-store-sales growth.

Obviously our goal is to fix that, and David has outlined that approach prior.

Okay.

And Dave, while we have you, now that you’re wearing your COO hat, can you share with us what kind of operations learnings that you’ve picked up over the last couple of months relative to what you thought it would be just a few months ago?

Sure.

One, we got fantastic operating platform.

Aylwin Lewis built a tremendous platform.

Two, it is our job to simplify that a bit and focus on a few key measures, and which for us is improvement in our CHAMPS scores, improvement in same-store-sales growth in every restaurant and tracking how many of our restaurants have same-store-sales growth and improving in our profitability the percent of restaurants that are meeting our internal flow-through targets.

And the other thing we are trying to do, and David talked about this, is drive customer mania into all of our restaurants.

We think we’ve got — it has done pretty well with our senior leadership teams and some of our operating organizations out there, but we’ve got to drive it into our restaurants, and we do that two ways: one, through making sure the basics are there 100 percent CHAMPS all the time, and the second one is providing an emotional element to our service, which would include things like hospitality and things like that.

So we are working very hard to make sure the customer-mania feeling comes into our restaurants, taking our existing gray operating platform and simplifying some of our measures and processes.

All right.

Thanks.

Okay.

Thanks, Peter.

Matthew, do you have any more questions?

At this time there are no further questions.

Okay.

Well thank you all for calling in again today.

We appreciate that very much.

You know, we expect to have another good year at Yum!, grow at least 10 percent in operating earnings per share growth.

You know, looking, stepping back looking at our business, I’m very pleased with the performance that we have in the company around the process and disciplines that I think really matter in our business.

They’re being executed, and I continue to think that we’re building our people capability and a combination of that, those two elements will, I think — bodes well for us as we go into the future.

So thank you very much for the — calling in again.

And we look forward to talking to you next quarter.

Thanks, Matthew.

Thank you.

And that concludes your Yum! brands fourth-quarter 2004 earnings conference call.

We thank you for your participation.

You may now disconnect.