百勝餐飲集團 (YUM) 2005 Q4 法說會逐字稿

Good morning.

My name is Lee, and I will be your conference operator today.

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

Brands, Incorporated fourth-quarter 2005 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 session. [OPERATOR INSTRUCTIONS].

Thank you.

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

You may begin, sir.

Thanks, Lee.

And good morning, everyone.

Thanks for joining us on the call.

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

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

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

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

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

The information in this conference call related to projections or other forward-looking statements may be relied on subject to our Safe Harbor statement, which is 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 Web site, which will be until 5:00 p.m.

Eastern time, Friday, February 17, 2006.

On our call today, you will hear from David Novak, Chairman and CEO, and Rick Carucci, our CFO.

Following remarks from both we will take your questions.

Now I'll turn the call over to David Novak.

Thank you, Tim.

And good morning, everybody.

As you may have seen from our release last night we reported another year of double-digit EPS growth.

Up 13%, exceeding our commitment for at least 10% growth for the fourth year in a row.

There is no doubt our diversified global portfolio of leading brands is delivering a consistency level that shareholders desire.

That's why we're focused on building what we call the Yum!

Dynasty, becoming acknowledged as a team that wins again and again, which is why we're working to build consistency in all of our businesses around the world.

We know the best companies drive growth year after year, and we want to continue to do the same thing.

Going into 2006, we are very confident that we can again grow EPS by at least 10%.

In fact, I'm pleased to report that on the strength of our fourth-quarter results, we have already raised our forecasted EPS for 2006 to $2.79, which includes options expenses for growth of at least 10%.

For 2005 prior to option expense, worldwide operating profits was up 7%, and worldwide system sales grew by 7%.

Given all the challenges we had last year with the ingredient issue in mainland China, the consumer concerns about avian flu, Hurricane Katrina, and record gasoline prices, we were obviously pleased to be able to deliver 13% EPS growth behind the strength of our global business.

Still, we look back on 2005 and think what might have been.

You can see that only if China had stayed on its normal growth path, we were on our way to a fabulous year.

Having said that, stuff happens, every year.

And we still keep hitting the 13% growth level.

Looking ahead to 2006, we are confident that we will deliver at least 10% growth, and we are pleased to be off to a great start as you saw in the sales numbers for Period 1 last night.

Now, let's review our key highlights from 2005, our early 2006 performance, and what we see for the full year based on what we know today.

Let me briefly update you on our global expansion progress.

First, in our high-return China Division, we are aggressively expanding in the fast-food category with KFC and the casual-dining category with Pizza Hut new restaurants.

Year-over-year unit growth for 2005 was 19%.

In mainland China alone, our unit growth rate was 25%.

And we expect to open another 400 new units in 2006.

Second, in our high-return Yum!

Restaurants International Division, with over 11,000 restaurants, unit growth continues at a solid 4% rate, led primarily by our over 700 international franchise partners, and we are opening new KFC and Pizza Hut restaurants in over 50 countries.

In 2006, we expect to continue our track record of expansion and open 750 new restaurants.

Finally, our third key opportunity for growth, U.S. multibrand expansion, continues at a strong pace, up 17% year over year.

We just passed the 3,000 level in terms of number of U.S. multibrand restaurants at the end of the third quarter.

That translates to 17% of our restaurant - U.S. restaurant system.

We see further expansion of the multibrand concept across the U.S. with an expected 550 new additions in 2006.

As you can see, we're continuing to expand our global business on a number of fronts with our portfolio of leading brands.

We see plenty of room to continue this profitable expansion.

I'm also pleased to report our blended U.S. same-store-sales growth was plus 4% for last year lapping a solid 3% in 2004.

Importantly, despite the issues we had with our significant China business last year, our worldwide system same-store-sales grew by 2%.

Of course, I don't want to give you the impression most everything is just perfect in our global portfolio.

As always, we will talk about where we're working to get better performance.

But at the risk of being too competitive, I do want to point out a very good thing about our Company.

Having a global portfolio of brands, you don't have to be perfect everywhere to deliver solid consistent results.

Now, let me talk a little more detail about our global portfolio.

As we have said, our number-one key strategy is to build dominant restaurant brands in China.

So let's look at our China business first.

The January results show that we continue to make slow but sure improvements in sales trends since the ingredient issues we had in the second quarter of 2005.

Based on our research, KFC brand strength in China has returned to previous strong levels so we expect KFC sales will fully recover over time.

As you saw from the release last night, we're expecting solid double-digit growth in system sales for Q1, and that is lapping plus 26% growth a year ago.

We think that bodes well for the future.

There are still some concern about avian flu, but consumers seem to be getting more and more used to all the press and becoming less and less concerned about eating fully cooked chicken, which we are aggressively communicating is perfectly safe to eat.

We are continuing to move ahead in China with a business-as-usual posture.

As a result, you can count on KFC in mainland China to continue to build on its QSR leadership position.

If things change in our outlook, we will let you know.

We ended 2005 with 1,557 KFCs in mainland China, far exceeding any other similar business there.

We are clearly the dominant QSR brand in China.

Importantly, KFC in China continues to be a leader in innovation.

We are first to bring franchising to mainland China in 1992, first to open a drive-through restaurant in 2002, and we've been very proactive in bringing to our Chinese customers the types of foods that address their concerns for a balanced lifestyle.

Now that all the marketing effort to address the supplier issue is behind us, our marketing thrust in 2006 is to do what we do best, reemphasize the fun experience of eating our delicious chicken.

Our calendar has lots of product news, and we will continue to roll out breakfast, expand our unique line of desserts, which we intend to drive an additional sales layer.

Our Pizza Hut casual-dining business in mainland China had another exceptional year with 35% unit growth and positive same-store-sales growth.

Our Pizza Hut business in mainland China is even more entrenched as the number-one leader in the branded casual-dining category.

Branded competition, as a matter of fact, is virtually nonexistent and yet, we are now in over 50 cities.

Clearly, pizza - Pizza Hut is the dominant casual-dining brand.

Given that our China Division continues to generate the highest return on incremental capital, we are especially pleased that we set a new record with over 400 new-restaurant openings for 2005.

We expect a similar development level again in 2006.

There is no one else in China expanding at this level with the returns we are generating, and we continue to outpace McDonald's three to one in expansion.

Our leadership is unquestioned, and the gap is growing.

We are confident China will grow profits at least 20% this year because of our dramatic new-unit expansion in 2005 and because sales are recovering.

We are also expanding Pizza Hut At Home Service and East Dawning concepts, and we will update you on our expansion progress later in the year.

Again, our goal is to dominate in these two categories.

You can count on us to continue to aggressively execute our number-one strategy: to build a portfolio of dominant restaurant brands in China.

Our second key strategy is profitable international expansion outside of China with our YRI division.

So let's talk about Yum!

Restaurants International.

This business continues to generate healthy unit growth, earns high returns and gross profit even while we make substantial investments for the long term in some mega-market opportunities like India, Russia and continental Europe.

Our franchise-only business continues to perform extremely well.

Our franchisees led overall YRI performance for 2005, and as a result, YRI again met our long-term target growth rate of at least plus 5% growth for system sales.

Operating profit grew 14%, which was in the high end of our target range of plus 10 to 15%.

Our franchise-only business is an extremely high-return business representing nearly 40% of YRI's annual profit and is generating solid unit growth and same-store-sales growth.

From a shareholder perspective, you'd be pleased to know this growth is very geographically diverse.

We are operating KFC and Pizza Hut restaurants in about 100 countries.

Our Company equity market's performance, on the other hand, has been a bit uneven.

Our Mexico and Australia company markets are doing well; however, in the U.K. and South Korea, our businesses there have not executed as well as we would have liked.

We are aggressively working on the marking and operating opportunities and expect better results later in 2006.

As you may recall, Mexico was struggling prior to 2005.

We are now back on track, and we fully expect strong performance again in 2006.

Importantly, in terms of YRI new-restaurant development, we delivered the sixth straight year of over 700 new-restaurant openings with a record 780 in 2005.

Importantly, 93% of these openings were by our franchise and joint-venture partners.

Given the number of countries where we operate today, our infrastructure in place, over 700 franchise partners, and new mega markets to develop, our confidence is high that we can keep doing this for many years to come.

Now, let's talk about our U.S. portfolio, where we continue to be focused on steadily improving operations and expanding with multi-brand innovation.

Taco Bell in the United States continues to be one of the best and most consistent performers in QSR.

The brand is perfectly positioned in the QSR category with the ability to generate brand building ideas such as the successful Crunchwrap and the innovative Big Bell Value Menu.

And as you saw in last night's release, the Big Bell Value Menu delivered great performance yet again with plus 11% same-store-sales growth in Period 1, by innovation with a new and better Cheesy Bean & Rice Burrito.

The "Think Outside the Bun" advertising campaign continues to break through the clutter, and the Taco Bell team delivers impactful retail food news.

We remain confident in the prospects for Taco Bell to deliver at least plus 2 to 3% same-store-sales growth in 2006.

Our confidence is backed by a fully tested and locked-in calendar for all of 2006.

Taco Bell's growth in the last four years has made it our biggest business in terms of profit generation.

As we discussed in our recent December investor meeting, we're beginning to step up unit growth at Taco Bell as unit economics are outstanding for both Company and franchise partner development.

And we are going to make it happen with our exciting, newly designed Bold Choice restaurant design, along with KFC and Long John Silver's as multibranding partners.

Some of you could be skeptical about new-unit growth in the U.S., but remember Taco Bell only has 5,000 traditional restaurants compared to McDonald's with 14,000 in the U.S.

Now, let me review our KFC U.S. business.

We continue to be very pleased with the turnaround at our KFC business.

Now with 15 straight periods of same-store-sales growth, with the latest news released last night.

As you may have seen, KFC U.S. got off to a great start in 2006, with plus 8% same-store-sales growth.

The KFC team has done a great job of focusing on our core customer and building new sustainable sales layers.

You should expect to see us continue that approach in 2006.

Looking back at 2005, we focused on building sales layers in three areas: The individual eating occasion including lunch; the family alone meal replacement occasion at dinner; and distinctive and unique individual meal options for QSR users.

The Snacker chicken sandwich for $0.99 was launched last March and was a huge success.

It targeted the individual looking for a great value in a QSR meal.

We will continue to build on this KFC sub brand through 2006.

The KFC Variety Bucket was a hit with families looking for good value and variety in the dinnertime slot.

In Period 13, a build-your-own version was a success.

We will continue to leverage this KFC product, which provides a unique way for families to solve their home-meal-replacement needs.

Finally, KFC's Flavor Station, which we launched in the fall of 2005, continues to be a success.

It provides a distinctive and totally unique way for the QSR consumer to enjoy chicken.

Flavor Station was launched with three favorite sauces offered as a choice to sauce wings.

This past month, we just came back to Flavor Station, featuring Boneless Wings, a product that's relatively unique within the quick service restaurant category, only at Q - at KFC.

And you saw the results last night, plus 8% same-store-sales growth.

Again, as I said earlier, expect KFC to build further on these three key successes in 2006 with even more exciting news to build these new sales layers.

In addition, we expect to have one totally new product that we're all excited about and ready to launch later this year, that will create a new category for KFC.

The key is KFC's 2006 calendar is fully tested and ready to go.

We are currently in a local option window at KFC this period in our market testing for the first half of 2007.

For the year, we have 10 tests planned and ready to go targeted for the 2007 calendar.

Importantly, while we're making great progress at KFC U.S. with our product-pipeline development and marketing with very fundamentally sound consumer insights, we are also very focused on steadily improving our operations.

We are pleased to report that the KFC U.S. system just set a record high with their January CHAMPS score of just over 50% with perfect scores.

It's a great progress from the low 40s where we were at a year ago, but we still have a long way to go and are as focused as ever to run great restaurants at KFC, as well as around the world.

One final note on KFC U.S.

We have talked in the past about the requirement for the KFC U.S. system to upgrade all restaurants to current standard.

We are pleased to report that progress continues with about 60% of the system completed.

Over the next three years there will be a major upgrade to the restaurant base for KFC in the United States.

And all the work must be completed by the end of 2008.

The key overall take away is that we remain very confident that KFC U.S. will meet our target for at least 2 to 3% same-store-sales growth in 2006.

Now on to Pizza Hut U.S.

For the last year, Pizza Hut same-store sales were flat.

We expected a better fourth quarter but didn't quite get there.

We continue to see this as a short-term bump in the road.

We were up 5% in 2004 and flat last year.

We are confident the Pizza Hut team is executing a winning long-term strategy in a tough competitive category.

We still expect to win more than we lose in this category, and we expect to be positive in terms of same-store sales for 2006.

Frankly, we generated lots of news last year but did not win on value.

We believe we must win on both fronts to consistently drive same-store-sales growth, so improving our value offering will be our number-one focus while we continue to be the best pizza innovator.

Right now, we are doing what we do best - pizza innovation - by offering our new Cheesy Bites Pizza.

It's an innovative, fun, interactive pizza for the entire family.

We are optimistic about making progress at Pizza Hut in 2006.

On the value front, the team will be executing value ideas throughout the year, and given the competitive nature of the category, I won't go into the details.

What I can say is that we expect Pizza Hut to return to positive same-store-sales growth in 2006.

In the U.S., given the strength of our programs, we expect solid same-store-sales performance again in 2006 - at least plus 2 to 3% growth.

We also expect at least 5% growth in U.S. operating profit for the year.

Financially, we are very focused on continuing our track record of excellent financial management.

We are committed to invest new capital at the right returns.

As a result, we expect to maintain our industry-leading 18% ROIC.

We also continue to build a strong balance sheet, buy back stock with substantial amounts of cash, and pay a meaningful dividend.

Now, let me turn it to Rick Carucci, and he'll take you through more of the details of the quarter and the trends.

Rick?

Thank you, David.

And good morning, everyone.

I'm going to discuss three items - a review of the fourth quarter, a brief review of the important trends and how these trends impact our 2006 outlook, and an update of our cash-flow expectations and our plans for this cash flow.

Let me begin with the quarter-four review.

Prior to expensing stock options, we came in with EPS of $0.81 for the quarter or 11% growth.

Overall, we are particularly pleased to finish out this challenging year with 13% EPS growth.

We had some areas come in more favorable than we thought back in October, and of course, a number of items came in less favorably than we thought.

The good news is we netted out $0.03 better than we thought we would.

Now let's get into some of the details of our fourth quarter.

I will point out that these results exclude stock-option expensing.

First on the business side, our International Division had profit growth in local currency of about 11% before the benefit of the 53rd week.

Our franchise-only businesses continue to perform extremely well, with double-digit sales and profit growth.

This performance more than offset some uneven company market performance primarily in the U.K. business.

Overall, this division pretty much ended the year as expected.

Our China Division results were a major drag on the fourth quarter with weak sales due to avian flu concerns, and lingering consumer concerns related to the earlier supplier-ingredient issue.

As a result, operating profit was $12 million below last year, and well below our target level.

However, the good news is sales trends appear to have bottomed in the second half of November, and as a result, we had a better-than-expected December.

Fourth-quarter profits were a little better than we thought at our December investor meeting.

In the U.S., same-store-sales performance remains solid with 4% blended growth.

During the quarter, we absorbed about $4 million of one-time costs related to Hurricane Katrina.

Additionally, utility costs shot up and were about $3 million more than expected.

We expect this energy-cost trend to continue into Q1 of this year.

Overall, we were pleased with the improved U.S. profit performance during the quarter.

Before the benefit of an extra week in Q4, U.S. operating profit was up 5% before option expensing.

Importantly, U.S. restaurant margin improved by nearly 1 point versus last year prior to the 53rd-week benefit.

While we're happy with this improvement, we need to see this improvement continue during 2006.

We are very focused on this aspect of our business.

One other point I would like to make about U.S. performance, and this was noted in the release last night, as we refranchise the U.S. business to our target of 20%, this will negatively impact revenue growth.

These impacts are noted in the release, and we will continue to point them out during 2006.

The trade-off is lower revenue from the franchise royalty, versus 100% of sales at retail if it were a company unit.

Of course, there is normally no Yum! capital invested with a franchise restaurant.

Now just to recap the fourth quarter and address why we came in better than expected.

Our tax rate was lower than last year, better than we expected, and benefited this quarter's EPS by about $0.05 versus what we had previously expected.

China came in about $0.02 better than we thought based on a better December.

There were several unanticipated down sides which offset some of these upsides.

Let me briefly walk you through these.

Most of these were explained in last night's release as well.

The biggest cost increases were one-time corporate expenses.

First, we incurred $0.02 of additional expense for discontinued corporate software development projects.

We don't anticipate any additional material costs related to those projects.

Second, we incurred $0.02 of additional costs related to long-term employee-benefit liabilities.

This is driven by actuarial methods, and we made an adjustment for a lower discount rate to better reflect market rates and the low interest-rate environment.

That totaled $0.02.

Third, we made an adjustment to the gain of the Poland IPO recorded in Q2 based on all aspects of the deal being closed and audited.

This was an additional $0.015 of unexpected costs.

Overall, we thought it was a good fourth quarter with growth coming from YRI and U.S. business within our global portfolio.

China had a difficult fourth quarter due to sales performance below our target, but we experienced a slightly better-than-expected December performance.

It was good to end the year in China on an upside.

Moving now to 2006, you'll note in the release this morning that the new year got off to a really good start with solid Period 1 sales results for the U.S. portfolio of plus 5%.

We did have some benefit from great U.S. weather.

We are confident of reaching our plus 2 to 3% same-store-sales-growth target for the U.S. in 2006.

YRI also got off to a strong start with plus 7% growth in system sales in local currency.

We do expect that the U.K. will remain somewhat of a drag on YRI performance, particularly in the first half of the year.

However, our franchise-only markets remained very strong.

As a result, you should expect YRI performance for the first half of 2006 to look very similar to 2005's results.

Our China Division is certainly off to a good start.

Our sales are not being impacted by avian flu to the degree they were two months ago.

As David said, we'll continue to move ahead with a business-as-usual posture there.

When we first look at China performance in 2006, we should reflect on the sales and profit performance during 2005.

From a sales perspective, the China Division that had a great first quarter in 2005 with 26% systems growth.

Sales for the balance of the year were soft.

The weakest sales period were in the middle of the second quarter, due to our supplier-ingredient issue and the middle of the fourth quarter due to avian-flu concerns.

Our China Division profit results during 2005 generally mirrored the sales performance.

However, our profit performance was particularly below expectations in quarters two and four.

Q3 was bolstered by supplier recovery with $14 million benefiting in the third quarter of 2005, and [$]10 million in the fourth quarter.

Therefore, when we look at 2006, we expect the year-over-year profit growth to be particularly strong in Q2 and Q4.

We also anticipate a relatively week first quarter in China in 2006.

One trend that you should take note of is the higher energy costs we mentioned earlier.

That will impact Q1 cost U.S.

The impact is about $7 to $8 million of inflation versus last year or about 20% inflation on the line item represents about 3% of sales.

One last point.

We do expect about $0.01 of unfavorable foreign currency impact for YRI in Q1.

There will be a modest benefit offset in the China Division.

As always, you can track our progress during the fourth quarter.

We provide you with the International Division, China Division, and U.S. sales updates every four-week period.

Now, I'd like to briefly update you on our adoption of FAS 123, or employee stock-option expensing.

The impact is noted in yesterday's release.

We had previously noted that expensing our stock options would have an annual cost of $0.12 per share.

The actual results came in at $0.13, as the first quarter was a bit higher than expected.

We also anticipated $0.13 cost for full-year 2006.

Our release last night had all the details on quarterly splits, line of business impact, and the breakout between G&A and restaurant costs.

My last topic today is a brief review of our cash-flow generation.

We ended the year with a record of $1.2 billion in net cash provided by operating activities.

We invested $609 million in our business for capital spending for the year, and generated free cash flow of $629 million.

In addition, we generated $145 million from refranchising proceeds, $148 million in employee stock-option proceeds, and $81 million from sales of surplus property and equipment and other items.

When you add it all up, that's about $1 billion in available cash.

Consistent with our previously stated approach, we delivered most of that substantial cash back to the shareholders in the form of share buybacks - 21 million shares to be exact.

We think we got a very good value.

Our diluted share count decreased by 2% to 298 million shares for the full year and by 5% in Q4 to 292 million shares.

This is the lowest level since quarter four of 2000.

In addition, we now pay shareholders a meaningful quarterly dividend, which was recently increased by 15%.

For 2006 and 2007, we continue to expect a very similar picture with substantial levels of free cash flow.

In addition, our balance sheet continues to strengthen as our key financial ratios continue to improve.

Before I leave cash flow, I'd like to point out one key fact.

Each business - the U.S., YRI, and China - all fund their own growth and each division generates free cash flow.

I want to provide a brief update of our ROIC.

As David mentioned, from a return perspective, Yum! achieved another year of 18% ROIC.

This is especially encouraging since we're able to achieve this result while absorbing the options expenses previously discussed.

We have been able to achieve strong returns at Yum!, largely from discipline in two areas.

First, we continue to be disciplined in our ownership decision.

Over time, we have refranchised our smaller markets and our lower-return restaurants.

This has allowed us to concentrate our ownership efforts on markets where we achieved scale, strong returns, and higher growth.

We continued this trend during 2005 as we refranchised restaurants in the U.S., Pizza Hut Canada, Pizza Hut France, and Pizza Hut Australia.

All together, we've refranchised 524 restaurants globally during 2005.

Second, we maintained strong discipline in building our new units and spending every incremental dollar.

This discipline includes quarterly tracking of new-unit performance and in-depth capital reviews twice a year.

If return performance is strong, we continue to build and invest cash.

As an example, we have never capped China expansions as their actual expansion typically exceeds our original capital plan.

Similarly, we do not allow markets to spend their annual capital plan if the new-unit performance is below our expectations.

It is typical for us to reduce our capital spending either in a market or particular geography within a market or particular type of asset.

We will continue to main this discipline in ownership decision and new-unit capital going forward.

As an example, we plan to refranchise more than 450 U.S. restaurants during 2006 and about 170 YRI restaurants.

Finally, we always have the opportunity to acquire a brand if it fit our global portfolio.

However we have said any possible acquisition would need to fulfill three key requirements.

One, it must increase Yum!'s overall growth rate.

Two, it must leverage our international strength and capability.

And three, it must generate positive shareholder value with potential upside.

Clearly, we have seen more opportunity for high-return growth in our existing global portfolio and in the opportunity to buy our stock at a good price.

In wrapping up, we expect 2006 to be another successful financial year for our shareholders because we expect to deliver EPS of $2.79 or at least 10% growth versus last year.

This assumes the base of $2.54 for 2005, which is post-stock-options expense and includes a $0.01 special item credit.

Our sales overall in 2006 are off to a strong start.

We finished the year better in China than expected.

Given improving sales and our new-unit performance, we are optimistic that China will achieve its 20% growth target in 2006.

Overall, we expect 2006 to be Yum!'s fifth consecutive year of double-digit EPS growth and meeting our shareholder commitment of at least 10% EPS growth.

Back to you, David.

Rick, I think you summed it up very well.

Why don't we just go straight to the questions?

[OPERATOR INSTRUCTIONS].

Joe Buckley, Bear Stearns.

Thank you.

A couple of questions with respect to China.

Talk a little bit about the 12% systemwide-sales forecast for the first quarter.

Just put that in perspective for us, if you can, around the timing of the Chinese New Year and the comparisons from last year.

The timing of the Chinese New Year you asked, Joe?

Yes.

I mean, January obviously up a lot more than that.

Much tougher comparison coming in February.

And I guess - I guess maybe one way to slice it would be how did systemwide sales go as China - as January progressed?

Maybe was that number inflated by a - a big final week of January sales number?

The answer to that is no.

But Rick's going to answer the rest of the question.

Well, I - again, just to - for everyone's benefit, the reason it's hard to read China in just January results is that we have a difference in timing of the Chinese New Year between 2005 and 2006.

The Chinese New Year occurred in February of 2005, but it's occurring in January of 2006.

So we usually get a build up and then very strong sales during that period.

So in that sense, those sales did increase during the course of the month, but that was related to seasonality.

As we sort of said in the release, we'll have a much better handle on China sales once we look at the full quarter.

What does the 12% imply in terms of same-store sales for mainland China?

You can address that?

It's probably in the vicinity of down somewhere in the mid-single-digit range.

The 22% for January, Joe, was actually better than what would be implied by the calculation you normally would do.

It looks like there were a lot of units added near the end of the quarter, so the comp number for January was actually in the high-single-digit range.

Okay.

And then kind of a big picture question.

I know you're moving your business model a little bit more towards franchising.

Obviously, there's a lot of restructuring focus on the industry.

You've got businesses with disparate growth rates.

Any thoughts of taking your business model further in one direction or the other or trying to do something to isolate the growth potential in China?

Why don't I take that.

In terms of the refranchising in the U.S., we've been pretty consistent in trying to refranchise underperforming restaurants, for a period of time.

So we will continue to do that.

We do that in international as well.

In international markets, we also continue to divest of low-scale or low-returns markets.

So you can expect to see that.

In terms of any major restructuring, in China in particular, we don't expect any.

We are very happy with China and still a very high-growth, high-returning business, so we love that business, and we provide information on that as separate division, so investors can take a fair look at that.

But we have no plans for doing any significant restructuring.

Thank you.

One other point on that, just in terms of the big picture, one of the things that we've - we just sort of operated up against as a basic tenet of our Company from the minute we were spun off is that you would - is we call "earn the right to own."

We are not going to own anything unless we get a return that well exceeds our cost of capital.

We've been very disciplined on that.

That's why I think our ROIC is leading the industry.

And we look at every business, every year, and analyze its potential down the road.

And when we look at China, we're on the ground floor of an emerging category, and there's just no other place we'd rather be.

You look at Taco Bell, you're - you see a business where we have a 70% market share.

We're just beginning to grow new units now, and we're also really high on the opportunity for global expansion, given the fact the menu has been improved so significantly from a quality standpoint.

And then when you look at KFC and Pizza Hut, we have - we've refranchised more in those - those markets, because of the lower growth rate.

So I think we're extremely financially focused.

I think we have a good strategy.

And I think the last thing I'd say is we believe in our core business hugely, and that's where we want to spend our money, and that's where we think we can really grow our business.

Thank you.

Thanks, Joe.

Next question, please, Lee?

David Palmer, UBS.

Hi.

Thank you.

Could you perhaps delve a little bit into the U.K. and perhaps Korea?

Just describe for us what problem you see for your brands there?

Thank you.

Okay.

Okay, David.

In our South Korea business, we're in the midst right now of working to get stronger performance there.

I want to point out, in South Korea, it really has minimal impact on our overall growth rate, because the business is pretty small.

Having said that, we're working on just improving the overall value equation there and getting products that we think are more tailored for the Korean taste there.

So I think that's actually - even if we turn it around, it's sort of a small up side for us for the year.

The U.K. is a much bigger business for us, and it's a higher priority in terms of getting the business moving.

The one thing I'd point out on the U.K., last year was our first soft year that we've had in the U.K.

The last - the previous five years were extremely strong.

We think what happened that last year is that - it was primarily a case of self-inflicted wounds.

What we're doing right now is we're doing what we always do when our businesses get soft.

We're going back to the consumer, trying to figure out what the big consumer insight is that's going to turn the business around, and do better marketing, and steadily improve our operations.

I think in the U.K., we're doing that in a much more difficult retail environment right now.

But I think the teams are very focused on turning the business around, and we expect to see progress.

But I don't think we see an immediate turn-around in the U.K., but I think you'll see steady progress throughout the year.

Our basic belief is, is that our brands are extremely strong everywhere around the world.

When we go awry one way or the other, it's usually because we're not - we're not in tune with the consumer the way we need to be with our marketing and our value equations.

And what we're trying to do overall is institutionalize everywhere what we know really works, and for example, in April, we're going to have a global marketing summit.

April 25, we're bringing in all of our general manager, all of our CMOs, all of our food-innovation people, and we're going through the processes that we know if we consistently apply them and consistently execute them, we get great results.

And that's one thing about being a restaurant company, we can codify what works, leverage our scale.

We really are good at this when we execute well, and what we're trying to do now is just get everybody better at doing it on a consistent basis.

And when we do, our business is up.

And when we don't, our business is down.

Right now in the U.K. - I don't have any magic answer to give you right now other than the fact we haven't done a great job in marketing, and we can do a better job in operations, which is a continual challenge, I think, around the world, but we just haven't been in tune with the consumer like I think we should, and I guarantee you when we get it right, the brand's going to respond just like it does everywhere else, whether it's the United States, the Mid East or China.

You pick the place.

When we do our - when we get the consumer equation right, we turn the business around.

So this is a - I think a - what we think is a short-term hiccup,.We can certainly manage it within the year.

We're going to make steady progress, and just stay tuned.

I think you're just going to have to trust us on this one.

Rachael Rothman, Merrill Lynch.

Hey, guys.

If you could talk a little bit about China for the full year.

In light of the troubles that you guys encountered in 2005, I guess I would have expected to see a bigger lift going into 2006.

If you could comment on that, just for the full year?

And then, for your tax rate, I know you guys said it was $0.05 in the quarter versus what you had said in your third-quarter.press release.

Can you talk a little bit about what tax-rate guidance is embedded in your '06 EPS estimate?

And what changed between now and the third quarter?

Thanks.

Okay.

Let me talk first about China.

Then we'll move to the tax rate.

Again, China, a reminder, is lapping - first quarter, lapping very strong numbers that we had in the first quarter 2005.

So given the fact that we had softness from first, the supplier issue, and then from avian flu, we were expecting our sales to struggle in the year-over-year comparisons in the first quarter.

If you look at the balance of the year, from a sales basis, sales after Q4 were relatively weak throughout the year as I mentioned earlier.

So we do expect our year-over-year growth rate to strengthen as the year unfolds.

Regarding the tax rate, first of all, just very happy with the tax-team performance.

It was better than what we thought, but still the full-year number came in within our range.

Our full-year tax rate was 26.2%.

The quarter-four number was better than we thought, really because the full-year rate was better than we thought.

So the tax team has done a great job again in 2005 delivering fantastic results.

In 2006, our guidance remains the same, which is a 26 to 28% tax rate for the full year.

We don't have any input on quarterization at this point.

There's a lot of moving parts, but our full-year rate is 26 to 28.

I guess, one other point on China, is it's obvious, I think, from your question you think we might be being conservative.

I think last year, we built 400 restaurants.

We have that going into the year.

That helps drive the profits, obviously.

What we're committed to doing is driving at least 20% profit growth in China.

We're confident we can do it this year.

If we can beat it, we will.

But I think that 20% rate's something that we think can - we can drive profitable growth with, and we're confident that we can do it.

And then just quickly, have we seen the last of the Sudan 1 recoveries, or are you guys expecting another redemption or recovery in the first quarter?

Rick Carucci Could you repeat the question?

Sudan redemption.

That will be very minor, if any, in the first quarter.

Sorry.

In terms of financial recovery from the supplier, we're not expecting anything in 2006.

All right.

Perfect.

Thank you so much.

Thanks, Rachel.

Next question, please, Leigh?

Larry Miller, Prudential.

Hi, thanks.

First, if I could just - I have two questions.

But if I could just follow up on a previous question, in Period 1, YRI sales were up well over 2%, that's the first time I've seen it in several quarters, and I was just curious, was that the strength of the franchise-only business that you mentioned, or was there some turn potentially in the U.K.?

The number was actually 7% in local currency terms from YRI in P1, and as far as the trends, Larry, it was basically a continuation of what you saw in the fourth quarter and most of last year.

There really wasn't any change at all business to business.

Okay.

Thanks.

And then you talked about acquisitions, and you've been rumored to be either interested or a potential bidder in some of the recent brands like Dunkin' and Quizno's.

Can you just talk about, just generally speaking, how you view acquisitions, what holes you might have in the portfolio, and then the number of brands you guys think you can effectively operate in the U.S.?

I think that we're looking at - when we look at acquisition, the first thing I want to say is we like our core business.

We don't like our core business, we love our core business.

We have so much upside in terms of growing our brands globally, and we actually believe that we're going to be able to get growth in the U.S. Okay?

This year and beyond in terms of new units.

So we don't believe we have to acquire anything to continue to grow at least 10% in EPS growth.

So having said that, we look at everything all the time.

We're a big company.

We'd be - we wouldn't be doing our shareholders a very good service if we didn't look at options that were out there.

Anything that we would acquire, we'd want to improve our overall growth rate.

We'd want it to leverage our international capabilities, and we want it provide obvious shareholder value with significant upside going forward.

This is not an easy screen to pass these days.

I mean, there's just - there isn't a whole lot out there that we think has a lot more potential than our current business.

And frankly, people are paying extraordinary prices for things right now, and that's just kind of hard for us to rationalize.

So we're going to just stay close to the knitting.

Do what we do best, which is grow our business, and we'll keep looking at things as they come along.

We're going to be rumored to be in everything that in everybody's minds because we are obviously one of the few strategic buyers out there, and we're learning what we can, but the main thing I want to point out is we love our core business.

Do you think have you the capability to run several more brands?

I think we could run a lot more brands if we wanted to.

The real question is, is whether it is going to add a lot of value for our shareholders.

If we buy - any brand that we buy, we look at management capability.

We consider a lot of different things.

We want to be the leader in branded-restaurant choice.

And that includes multibranding great brands.

That's what we want to be the best in the world in.

Right now, we got the number-one leading brand in the world in the Mexican category with Taco Bell; 70 share.

Pizza Hut; number-one pizza brand;

KFC, number one in chicken within a 50% share of fried chicken.

We got the leader in fish.

And we got A&W, which gives us a hamburger entry.

So we're in the five major categories right now, and we don't have Taco Bell, Long John Silver or A&W at all seated on an international basis.

And - so we got - we have plenty of upside as we go forward, and our challenge is just to get the right resourcing up against the biggest ideas that we have, so we patient sequence properly so we can get great - continue to get excellent growth with great returns.

Okay.

Thanks.

Last question.

You talked about some communications that you were doing in China regarding the bird flu.

First of all, what are you guys doing?

And secondly, was that partly behind the reason that you saw less impact in terms of sales impact?

Well, I think that first of all, we've been communicating in our restaurants that fully cooked chicken is safe to eat.

It is not going to be an issue, as it relates to avian flu.

I think that when you have something that hangs around and lingers in the press for a long time, after a while, the consumer kind of gets tone deaf to it, okay?

You get back to normal, and I think that's what we're seeing right now.

Is that it is obvious a potential factor, but it's sort of business as usual.

Upward and onward, and people are getting back into their normal consumer habits.

We think that it's had a little bit of a lingering effect, but it's not something that we can point to, to a dramatic impact at this stage.

Thank you very much.

Thanks, Larry.

Next question, please, Leigh?

Jeffrey Bernstein, Lehman Brothers.

Thank you very much.

A question for David on the - the broad quick-service chicken category, I know you've seen some recent success at KFC.

You mentioned in the release what you think is a clear turnaround for the brand in '05.

I was wondering, first, if you think - I guess, if you attribute the recent strengthening in sales primarily to the new products you spoke about?

And I guess, importantly, do you think the brand can maintain these consistent results, or do you think you might be in for a little bit more near-term volatility?

It seems like it's ongoing and now new competitive pressures for a lot of the varied menu category, focusing on more chicken and less beef.

I was just wondering what your big-picture thoughts?

Thanks.

I think the chicken onslaught of competition has been around for quite a while now because the category - the chicken category is a dynamic category, and it's growing.

We are very confident about 2006 at KFC for one simple reason.

We tested everything.

We put it into our field-ready process.

We've done multiple test markets, and the products will be rolling this year, we are very confident that we're going to overlap last year, because we saw that kind of performance in test market.

The one thing I feel extremely good about with KFC is that brands need to find their sweet spot.

And what we're doing is we really found the sweet spot for KFC in a sense that we're proud as hell to sell fried food.

I mean - and leveraging purchase frequency up against our core use,r and you're going to see that with products like the Variety Bucket, the Snacker, the Flavor Station, all these are great-tasting, fried products, that are right in the mainstream of what we do.

And I think that we're very confident that we have a lot of news coming that will sustain the trend.

In February, for example, we're doing a local-market window where we'll be testing a number of different ideas for KFC.

We'll have 10 test markets this year for KFC.

Then hopefully that will feed into 2007.

It's the same marketing process that we used at Taco Bell, which has helped us drive consistent same-store sales.

And it's also the same process that I was making mention to early that we're going to be training all of our people on in April, because we know - we know what to do.

We just got to execute it consistently.

So I'm very, very confident that KFC - that the KFC team has its act together and we're going to be able to sustain this.

John Ivankoe, J.P. Morgan.

Great, hi, thanks.

Two questions.

Rick, the first one is for you.

Could you help us understand - this is as it relates to the YRI company-store margins, how much those margins were actually helped by refranchising, presumably in the fourth quarter and what the effect of refranchising will be in '06?

And if you could also quantify the incremental investment in some of the development markets as it affected margins in the fourth quarter and '06 as well?

And then I have a follow up.

John, just on the first piece, a couple of the details on the margin for YRI, there was actually - the Puerto Rico refranchising is still a negative impact on margins as we've explained.

If you go back to some of the earlier releases, I think maybe the first quarter.

How much was that just as a reminder in the quarter - fourth quarter?

It was less than a half a point.

It was like in the 0.3/0.4-of-a-point range, so that was a negative.

And then the rest of the refranchising that we mentioned going on last year at YRI was probably about the opposite impact, positively.

So net right from last year was probably no impact just because of the Puerto Rico refranchising in late 2004.

So it is therefore fair to assume Puerto Rico has now lapped, and the refranchising will actually be a benefit, then, in '06?

Yes, it should be.

Okay.

And what about the development markets, incremental, positive or negative?

Has it affected margins in the fourth quarter in '06?

Probably slightly negative, but the big problem we have in margin in 2005 for YRI was this performance of the U.K. and the Korea markets.

So that, by far, was bigger than any of the refranchising impact.

So to your point, while the slight benefit of refranchising in 2006, slight negative of developing markets in 2006, but our margins are going to be based on our performance over time in the U.K. and primarily the U.K. but our other company-owned markets.

It didn't look like there was anything particularly unusual in the sales side in the fourth quarter.

I mean, was it - was it all just - that was all comp driven relative to the previous quarters in the year?

The fourth-quarter performance.

Again, what's occurred in the second half of the year for YRI, and we expect to continue into the - at least the first quarter and up to the first half, is overall sales have been about - have been pretty good, but it's been weak company-owned markets and very strong franchise markets.

So the U.K. never really recovered from the bombings in the middle of the year and the retail environment there.

So that's sort of kept a lid on the sales within that market, and that impacts the margins.

So overall sales, again, as we've sort of said before, has been sort of uneven company performance and very strong franchise performance.

Okay.

And if I may, David Novak, a question for you as it relates to Pizza Hut.

I mean, it's clear that the U.S. businesses have understood what well-tested product development means, and how successful Taco Bell and now KFC has been in terms of achieving desired results in any given period.

Could you juxtapose that with Pizza Hut?

And secondly, give us confidence that the value strategy that you're enacting in 2006 will bring better results than the value product that you ran in the Period 1?

I think that if you look at Taco Bell and KFC last year, one thing that they both have when you look at our consumer ratings is we improved our value perceptions.

KFC through - primarily through the launch of the Snacker, the $4 meals, Variety Bucket; and Taco Bell through the launch of the Big Bell Value Menu.

I think when we can look at the difference with Pizza Hut, Pizza, Hut stood - spent too long on the product innovation side, without having the right arsenal on the value side.

Where as while Domino's was launching $5 pizzas and now their $7 Spectacular Sevens and there is lots of discounting, we were too focused on just single mindedly on the product innovation.

We're working at how do you improve your value equation and defend your economics in the category right now.

And that's always a balancing act.

We do not have a "Big Bell Value Menu" today.

We don't have "the Snacker" today at Pizza Hut.

We're working on getting that.

We are going to slug it out with all of our couponing and price promotions like we just recently did a Pizza Hut Pairs.

We think that that, the Pizza Hut Pairs, can be a consistent value layer to go along with our product innovation.

But I think, John, the proof's really going to be in the pudding in terms of how we put all this together, and I don't think there's anything I could say today that would make you confident other than the fact that when you start seeing it show up in our same-store sales, and that's what we're committed to doing.

Well, David, even in Period 1, I mean the negative four is kind of a bad number regardless of what the comparisons were.

I mean why the - I mean if we're just to look at that one period on a postmortem basis, why don't you think that resonated with the consumers al all?

What happened there is we had an advertising campaign, or execution that was very confusing.

That we didn't really articulate what the view - what the deal was.

While it was cute, and you had - but it's - we looked at it, we didn't communicate it as well as we could have.

And did that go through the testing process that you're currently using for the brand for other products?

I think it - processes are like a hammer.

A hammer works, right?

But if I use a hammer, it doesn't work very well sometimes, because I'm not a very good of a carpenter, okay?

You got to have - there's some human element that comes into every process, and we made - we had somebody using a hammer that did a pretty poor job with it the last time, okay?

And so there's no process that's going to execute anything.

It takes people to execute things.

When you have a big business around the world, sometimes you're going to miss, even if you know what's right, okay?

And we clearly can do better.

I can tell you that you the Pizza Hut team definitely feels the pressure, okay, to improve their execution.

But I'm very confident at the same time that we've got the team that can get that done.

John, one further point.

I do think that you're going to see more fluctuation in Pizza Hut than some of our other brands, one, because of the competitive factor, and secondly, you tend to buy one or two products at a time.

So you order a pizza for the evening.

When we do value, for example in Taco Bell or KFC, oftentimes people will have a separate occasion for that value or will add it on to a meal that they were purchasing, for example, the Snacker at $0.99.

We got some people who would come in as a special occasion for that, which is what we wanted, but we also got people who were buying a bucket of chicken, and then while they're driving home, eating a Snacker.

So I do think the other brands have a few more levers to play than Pizza Hut.

And the other thing, too, I would say is that we are [expletive] good at innovation.

And what we just launched here with this Cheesy Bites pizza, if you haven't tried it, you ought to try it.

It is an eye-popping pizza.

It's visually looks very unique and different.

And it's a great-tasting product.

So we're not all stupid all the time at Pizza Hut, okay?

But I - what you brought up about how we did value the last period, kind of sounds like me at one of our monthly calls.

So I think in retail, one of the things happened is you got to be right every day to win.

We're right more times than we're wrong, and we'll be right more times in the future than we're wrong.

Fair enough, thanks.

Good challenge, John.

We'll work on it.

Steven Kron, Goldman Sachs.

Great thanks.

Hi, guys.

I have two questions.

The first one's a follow-up.

David, you mentioned that your studies would suggest that the brand strength and the brand positioning of KFC in China is back to maybe pre-Sudan 1 levels, and that would kind of imply that the negative comps that you're seeing there is more a function of, perhaps, avian flu unless it's competitive environment or cannibalization.

But my question, and maybe you can address that, but my question is really, I think you talked about pulling back on your consumer communication.

I'm just wondering why educating them now is still not relevant?

And then I've got an additional question.

We're still - we still educate people in store about the safety of our product, and that's happening.

But last year with Sudan red, okay, for example, we had to go out on television, and we had safety assurance ads.

We literally went back and a lot of our ads said our products are safe to eat.

We focused on quality, it was more serious in tonality than what we would have liked to do in an ideal basis.

Now we're back into doing what we like to do.

Which is, we sell fun food that's delicious to eat, brings people together, happy times, good times, and that's really what we want to focus on.

Last year, we had to sort of batten down the hatches and make people feel - understand that we were committed to food safety, committed to them, and apologize, which is something you need to do in China.

We apologized for the error in our supply chain, and so we were kind of on the defensive, and now we're back on the offense.

And Steven, just to clarify, we haven't said we're back to the previous levels as Tim pointed out.

If you tried to sort through it, we think we're down in the single-digit same-store-sale level roughly in China right now.

But to David's point, at that level you could talk to the consumer about our news and our products, quality, et cetera.

When you're down in the 20% range, you have a different message.

So we like the arena we're playing in now, and that plays to our historical strength.

Okay.

The second question I had also in China is for you, Rick.

You reported restaurant margins in the fourth quarter of 13.9.

I guess the question is, is the margin - should we be looking at the margin decline coming solely from these negative comps, or are there other things on the cost side that may keep margins a little more at bay as we start to get sales recovery?

And maybe you could just talk a little bit about the margin build as we move through the year.

Well, the margin is primarily driven by the sales, and we saw that during the year.

The team actually did a great job, when sales did come back, of quickly getting the margin back.

When you look at the sales performance and the margin performance, it correlates almost exactly in China.

So we're very confident that our cost controls there are good, and that when the sales come back, the margins will come back.

Yes, and, Steven, in terms of the - some of the other components, you will see - we are still seeing labor inflation, and we expect that to continue, probably mid-single-digit range, but we're also continuing to work on getting product cost efficiencies that we definitely have plenty of room there.

So you'll see some - within the restaurant-cost level, you'll see some offsets, food costs likely coming down, and labor going up.

Okay.

Thanks.

Thanks, Steven.

Next question, please, Lee?

Peter Oakes, Piper Jaffray.

Hi, good morning.

Good morning.

Going back over to Pizza Hut just for a moment.

Is the comp there benefiting by approximately 1% still from WingStreet?

Yes, that would be the case.

Okay.

And is - now that WingStreet's getting the kind of critical mass that it is, is that prompting some reallocation of the marketing spend at Pizza Hut possibly contributing to that?

Yes.

WingStreet is still growing, and we expect to get a lot more traction actually in this year, as we get more franchisees to do it.

But we're not - the marketing for WingStreet is incremental and not out of the Pizza Hut budget.

Okay.

Okay.

That's helpful.

And actually, on multibranding as a whole, this quarter you didn't break out the composition.

Is that something you're going to go back to, breaking it out, so we can see that?

Or is just kind of new disclosure going forward?

It's available on the Web site.

There's a link at the end of the release, Peter, and just go to that link and click on it.

It'll - the same schedule will pop up that's on our Web site.

Fair enough.

Thanks a lot.

Thanks, Peter.

Next question, please, Lee?

David Palmer, UBS.

Hi.

Could you perhaps remind us if you anticipate reported gains or losses from refranchising, and obviously, this will happen both in the U.S. and international, not only in '06, but over the next few years?

And while you're at it, could you perhaps remind us if you had some guidance or give us some feel as to cash proceeds from refranchising, not just '06, but over the next few years?

Thanks very much.

I'll start, and I'll let Tim fill in.

For 2006, the refranchising, we said $0 to $15 million in terms of the P&L impact in '06.

We also said over a two-year period, about a flat impact from refranchising.

And refranchising proceeds, David, will be about in the same range that you saw for '05, in that 150-ish kind of range.

But it'll depend - the timing will definitely vary.

It's all dependent upon when we close these deals.

And we want to do it the right way so that when we turn these businesses over to our franchisees, they're locked and ready to go.

So we - it's very difficult to project the timing, but that's kind of what we expect on average over the next couple of years.

Okay.

Thank you.

Okay.

Well, let me wrap it up real quickly, and we'll sign off.

In summary, we had a good fourth quarter and we had another very good year last year: Up 13% in EPS.

As we look into 2006, the business is off to a good start.

China's getting better.

The U.K. is our biggest challenge with our Yum!

Restaurants International business.

Pizza Hut's our biggest challenge in the United States.

I can assure you we're all over both of those opportunities.

And when you add it all up, we're very confident that we continue to generate at least 10% EPS growth in 2005 with our portfolio.

And - 2006.

I'm sorry.

And we'll do better if we can.

All right.

Thank you very much.

And appreciate the call.

Ladies and gentlemen, this concludes today's Yum!

Brands Incorporated fourth-quarter 2005 earnings conference call.

You may all disconnect.