百勝餐飲集團 (YUM) 2007 Q4 法說會逐字稿

Good morning.

My name is Louann and I will condition where your conference operator for today.

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

Brands fourth-quarter earnings conference call.

(OPERATOR INSTRUCTIONS)

I will now turn the call over to Mr.

Tim Jerzyk.

Sir, you may begin your conference.

Thanks, Louann and good morning everyone and thank you for joining us on our call this morning.

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

We are broadcasting the conference call via our web site www.yum.com.

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

I would also like to advise that this conference call includes forward-looking statements that reflect management's expectations based on currently available data, however, actual results are subject to future events and uncertainties.

The information in this conference call related to projections, or other forward-looking statements may be relied on, subject to the Safe Harbor statement 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, www.yum.com.

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

Before I turn the call over to David I want to remind that you our first-quarter earnings release will be April 22, 2008, which is a Tuesday after the close.

And another reminder, a save the date reminder, Monday and Tuesday May 5 and 6 here in Louisville, we will host analysts and investors for a conference about all of our businesses.

It will be a comprehensive update, save the date.

We will look forward to you being here.

Now I would like to turn the call over to David Novak, our Chairman and CEO.

Thank you, Tim, and good morning, everybody.

With all the negative business headlines I have been reading lately, I can't tell you how happy I am to be in a position to share some really good news, which is that Yum!

Brands has continued to differentiate itself from other restaurant companies by delivering consistently strong results.

Led by the strength of our global portfolio category leading brands, we reported full-year EPS growth of 15% for 2007, up from our previous estimate of 13%,continuing to build on our track record of success.

This marks our 6th consecutive year of achieving double-digit EPS growth, meeting our shareholder commitment of at least 10%.

We also ended the year with significant core business momentum, while making good investments for the long term.

I am especially pleased with the outstanding positive momentum of our International and China business.

China delivered an exceptionally strong finish to the year with fourth-quarter operating profit up 44% on a reported basis, despite well publicized record high commodity inflation.

This is a phenomenal result, and speaks to the power of our superior brand positioning and execution in China.

Equally, our Yum!

Restaurants International business, or YRI, continues to impress achieving fourth-quarter systems sales growth of 9% on a constant currency basis.

A key driver of this performance was record level development of 852 new restaurants in 2007.

Which when combined with the opening of 506 new units in our China Division last year, makes us the number one retail developer outside the United States.

Our global powerhouse status not only explains our strong results in 2007, but positions us well to drive consistent growth going forward.

Importantly, while the U.S.

was weak, we are also confident momentum is building.

All of this is leading to even more good news, which is that we are revising our previous 2008 earnings-per-share guidance upward to $1.85, reaffirming our annual commitment to deliver EPS growth of at least 10%.

Now, 2008 will also be filled with major one-time benefits that are not included in our full-year guidance.

Rick will put the one-timers into perspective with his comments, but for those of you who can't wait, the $1.85 does not include an estimated $.06 of one timers, which take us to $1.91 of reported EPS.

We know the importance of consistency when it comes to investment performance.

So we have constructed our business model to deliver this level of consistency year after year.

We believe we can continue to build on our track record of success given the strength of our global brands and the breadth of our global presence.

And with our ability to use the significant operating tax we generate around the world to fund high-turn investments, we are even more confident in our ability to grow shareholder value.

As I talked about each of our businesses, I would like to do so in the context of our four key growth strategies.

Number one, build leading brands in China in every significant category.

Next, drive aggressive international expansion and build strong brands everywhere.

Third, dramatically improve U.S.

brand positions, consistency and returns.

And believe me, we are very convicted to do that.

And four, drive industry-leading, long-term, shareholder and franchisee value.

So, I will start with China where we are well on our way to building leading brands in every significant category.

2007 was an exceptionally good year for us in China, and we expect another outstanding year in this important growth market, driven by our continued rapid development of multiple brands in mainland China.

Currently we are in 450 cities in mainland China with KFC.

And we are in over 80 cities with Pizza Hut Casual Dining and expanding into several new cities with broader development of Pizza Hut Home Service.

Additionally, encouraged by the results of our East Dawning TV test last year, we are expanding this new concept further, going from 12 units today to more than 20 by the end of 2008, including restaurants in Beijing in time for the summer Olympics.

In terms of development in mainland China, our brands have an enormous first mover advantage, and we do not expect that picture to change for the foreseeable future.

Our huge lead is unlike anywhere else in the world, which is particularly important in a market of 1.3 billion people, expanding personal incomes and an economy growing in the low double digits.

A couple of interesting facts about this growth market.

First, recent government studies suggest that the middle class of mainland China now numbers over 250 million people, which is equivalent to what the entire U.S.

population was in 1990, at which point the U.S.

QSR category was already very well established.

Second, China's Ministry of Information Industry reported last week that at the end of December of 2007, there were 547 million cell phone subscribers in mainland China or roughly 40% of the population.

This speaks to how rapidly the Company is developing as Chinese consumers embrace new technology and new concepts.

These numbers are absolutely astounding and give us reason to believe that the demand for our brands will continue to grow at a significant pace.

For KFC, we expect again to add over 300 new restaurants in mainland China in 2008, which will continue to widen our lead over any competitor.

Today we have a lead of more than 1,000 units versus our nearest competitor, and we are out developing them by roughly three to one.

Our brand majors and returns remain very strong.

And we expect KFC to continue to strengthen its QSR leadership position in 2008, due to development of new proteins and new beverages and the expansion of our breakfast day part.

Our leadership position remains and continues to build for Pizza Hut Casual Dining.

Now with over 350 restaurants and growing rapidly, we are the undisputed leader in mainland China in this category.

We expect to open about 85 new Casual Dining Pizza Huts in 2008.

While at the same time expanding our tea time offering and innovating our menu with a range of new and exciting products.

Our Pizza Hut Home Service business continues to perform well.

So, we will further expand this concept to more cities to build to scale.

By year end, when expect to add 20 Pizza Hut Home Service units bringing our total to about 75.

Chinese consumers are embracing the convenience and value of home-delivered food, and we expect to ride this trend as it gains even more momentum.

You can see we remain very focused against our number one strategy of building leading brands in China in every significant category.

We have a huge strategic advantage with our stable and experienced management team in Shanghai, our established and state-of-the-art distribution system, our dedicated manufacturing capabilities and our large-scale development team.

All of which combined to produce results that are unmatched by anyone in mainland China, and this category is still on the ground floor.

As further evidence of our leadership position in this market, just last week, YUM!

China was voted by CCTV, China's leading media company, as one of the top ten best companies in China, and the only restaurant company to receive this unique distinction.

This only serves to strengthen our ability to attract and retain the very best talents and grow this very large business.

As I said before, we believe that with our China business, we are in the first inning of a nine inning game.

So we have a very long runway for growth in this very important market.

As a result, we continue to expect our China Division will be our lead growth business, delivering 20% growth in annual operating profit.

Now on to YRI, where you will see from our results that we are driving aggressive international expansion and building strong brands everywhere.

Our number two strategy.

As I noted earlier, YRI had another really good year in 2007 with reported operating profit growth of 18% driven by 15% growth in systems sales.

This is one of the best years YRI has ever had.

And after several consecutive years of significant growth, YRI is now one of the world's most profitable restaurant companies as a stand-alone entity, with operating profits of nearly $500 million.

And adding on 2007 on a strong note, YRI has entered 2008 with solid momentum.

The key driver underlying YRI's profit growth is that the worldwide development capability of our 700-plus franchisees, enabling us to be the leading player in QSR chicken with KFC and casual dining with Pizza Hut.

We opened a record 852 new restaurants last year, the 8th consecutive year we opened at least 700 new units, and a new record for YRI.

94% of these units were developed by our franchisees.

So, the returns in this business are without equal.

Importantly, we have plenty of room left to grow both KFC and Pizza Hut in the markets where we operate, as well markets we are only beginning to penetrate.

For example, we are accelerating our unit growth in India while continuing to develop it aggressively in Russia, the Middle East, southeast Asia, Africa and Latin America.

This really highlights the fact that our franchisees are realizing solid unit economics in their new restaurants, both KFC and Pizza Hut.

Additionally, our existing franchise business is very healthy in YRI, with 5% same-store sales growth in the fourth quarter.

This performance is especially remarkable given the pace of our new unit development, and like China speaks to our strong competitive positioning worldwide.

The key to this growth is that the YRI team has very effectively leveraged their global product development capability.

As great new ideas are generated in various markets around the world, they are quickly adapted in other markets.

Great examples of this best practice sharing includes boxed meals and the Wrapstar in KFC, and Cheesy Bites in Pizza Hut.

Just last week, Graham Allan and Mickey [Pant] our President and Chief Marketing Officer respectively of YRI, they took me through their initiatives to develop permanent sales layers and new concepts around the world.

From developing a new range of beverages in Australia, to testing a KFC breakfast offering in the UK and Singapore, to validating Taco Bell International Mexico.

The team has dedicated significant resources to building future growth platforms for already rapidly growing business, seating and shaping ideas that can be replicated around the world.

Finally YRI's new unit pipeline remains strong.

Aggressive development of our KFC and Pizza Hut brands will continue in many markets of the world.

And for the longer term, you should expect us to continue to build big businesses in India, Russia and continental Europe.

To summarize, we are very confident YRI will have another great year in 2008 with at least 5% growth in system sales on a local currency basis, and 10% operating profit.

Like we said in New York, we view YRI as a high-growth business having the greatest potential of our divisions given the size of the worldwide market that we have yet to penetrate.

So, stay tuned for more great news from YRI.

Clearly, our challenge in 2007 was our U.S.

business.

While fourth-quarter same-store sales increased by 1%, operating profit was down 1%.

In all candor, the best thing I can say about our weak U.S.

performance in 2007 is that it sets us up for growth in 2008.

And we can't wait to get into 2008.

I guess we are already in it, but we are glad we are here.

This is especially true when we consider that last year's results were primarily impacted by two isolated, and now distant incidents, that affected our largest and most profitable U.S.

brand Taco Bell.

Meanwhile, Pizza Hut made significant progress, and KFC basically stood still.

As I outlined earlier, our number three growth strategy is to improve U.S.

brand positions, consistency and returns.

And as I shared in New York, our disappointed U.S.

results in 2007 have strengthened our resolve to take the bold steps that are necessary to bring this growth strategy to life.

Learning from our experience of building a strong and growing business in China, and from studying the successes of our U.S.

competitors, we are now implementing five key strategic initiatives to turn around our U.S.

business.

Number one, providing more balanced menu options.

Number two, moving into multiple day parts.

Number three, offering multiple proteins and product layers, including aggressively pursuing beverages.

Number four, everyday value menus.

Number five, continuing contemporizing our assets.

These initiatives will take shape over the course of 2008 and begin to yield meaningful results in 2009.

With that said, given the weak results we will be lapping from 2007, coupled with the stronger marketing calendar, and better overall execution this year, we are confident that we can achieve 2% to 3% same-stores sales growth and 5% operating growth in our U.S.

businesses in 2008.

I'll now talk about each of our three key U.S.

brands.

As you know, Taco Bell is the second-most profitable QSR brand in the U.S., with a 70% share of the Mexican category.

And is perhaps the most charismatic QSR brand appealing to young Americans.

Our long-term goal is to make Taco Bell a true restaurant mega brand, leveraging our unique, Mexican-inspired positioning.

The good news is that we are building a strong momentum from 2007 to propel us on this journey.

Over the course of last year, we experienced a gradual improvement in Taco Bell sales and achieved same-store-sales growth of 2% in the fourth quarter, demonstrating that we are starting to turn the corner with this great brand.

We started 2008 promoting one of our customers' all-time favorite products Cheesy Gordita Crunch, underpinned by a secondary message promoting our $.99 Cheesy Bean and Rice Burrito, giving us a strong start to the year.

We followed this with yesterday's launch of Fiesta Platters, which was featured in Super Bowl's advertising over the weekend.

This new product is a complete real meal solution that packages together all the favorite dishes of a sit-down Mexican meal in a convenient and portable plate.

Great for lunch and dinner, all at a strong value price relative to comparable meals at sit-down restaurants.

As we are pairing this launch with a secondary message promoting our $.99 Gordita Supreme, we are offering value at the high-end versus casual dining at dinner, along with value at the low end versus fast food.

A powerful combination.

We consider our multi-layer marketing approach to be a breakthrough strategy for Taco Bell that will help drive much-improved performance in 2008.

And there is even more exciting product news on the horizon for Taco Bell as we introduce our new signature beverage line this summer,Frutista Freeze, and prepare for the launch of other breakthrough products later this year.

You will also see us build greater awareness of our great taste, less fat, Fresco line of products through a combination of print and online advertising.

In the spring, we plan to invigorate our already leading value positioning with a compelling Why Pay More Menu that builds on the success of our Think Outside the Bun advertising campaign.

Finally, we are also continuing to develop our breakfast offerings with the full intention of eventually entering and winning in the breakfast segment.

In fact our future backed vision for Taco Bell is ultimately 24-hour operations.

Obviously, we have got a long way to go and a lot of work to do to make this happen.

But I want you to know something -- We are striving to get it done and we are going to make it happen.

So, as you can see, we are regaining our edge at Taco Bell, and expect this brand to achieve very good results in 2008 as we build a platform to support even stronger growth ahead.

To update you on Pizza Hut, as I outlined in New York, we are on the verge of a major reinvention of the brand and delivery category as we drive the aggressive rollout of three new permanent sales layers of Pizza Hut -- pasta and WingStreet chicken and everyday pizza value alongside our category leading pizza innovation.

Just last month we introduced Pizza Mia, a value oriented product that we will promote year around, all day, everyday, currently priced at three for $15.

Initial sales of this product have been strong, supported by a compelling value message and heavier national television waves.

Which you will recall from our presentation in New York, includes an additional three quarters of a percentage point approved by our franchisees late last year because they are so bullish about our marketing plan.

And we will continue to be the pizza innovator.

As evidence of this, I encourage you to try our new Crunchy Cheesy Crust Pizza, which was launched just this month.

Even more exciting is the launch of Tuscany Pastas in April.

This represents a first for the quick-service restaurant business with home delivery of restaurant-quality great-tasting hot pastas all at a great value for families looking for an alternative, yet affordable, break from weekday kitchen duty.

Additionally, we are beginning to gain significant momentum with the rollout of WingStreet conversions.

We have reached an agreement with our franchisees to dramatically expand WingStreets into our existing Pizza Huts.

And by the end of 2009 we will be in position to advertise America's largest wing chain on National Television.

Given the competitiveness of the pizza category, I cannot provide specific information on the balance of the year marketing activities, but I can tell that you we are confident about our ability to grow our Pizza Hut brand in the U.S.

By developing layers of sales, not limited time only topping offerings offers,and in particular what we are doing to transform Pizza Hut into a home meal replacement business.

At KFC, results for 2007 fell short of expectations, and underscored the need for dramatic change.

As we talked about in New York, we are working with our franchisees with the goal of offering a new range of grilled and portable products, any way you want it, alongside our traditional delicious fried chicken.

In addition, we plan to give the business a more youthful and contemporary image, as we launch a new advertising campaign later this month.

We enter 2008 with our sauceless, yet spicy, hot wings product at an attractive price point of $2.99.

Capitalize on the end of the football season and providing a good start to the year.

This marketing window benefited not only from a strong product offer but from an improved advertisement as well.

Plus an incremental half-percentage point spread spent on National television as voted in by our franchisees last year.

Building on this momentum, we will introduce later this month a great-tasting value-priced toasted wrap.

And we will follow this up with the introduction of another grilled press portable product later in the year to solidify our position at lunch.

Looking longer term, we are excited about the launch of our non-fried chicken platform.

And we are making good progress with our franchise partners to prepare for the rollout in the first half of 2009.

This platform will form the centerpiece of our overall brand transformation in KFC, giving us the flexibility to sell a delicious range of products any way you want it.

Work is also continuing on a value oriented product, as well as a range of signature beverages to strengthen KFC as a destination brand.

Now on the development side in the U.S., we continue to expect new unit growth to ramp up at Taco Bell, achieving 2% net new unit growth in 2008.

Additionally, we expect our Taco Bell re-image activity to gain greater momentum as our franchisees have embraced a new step to bold initiative, that will accelerate the rollout our contemporary bold choice restaurant design, which has been very well received by our customers.

We're also making good progress with asset re-images at KFC and Pizza Hut.

On the KFC side, contractually mandated asset upgrades will be completed for virtually the entire system by the end of 2008.

And with Pizza Hut, our WingStreet conversion program which I mentioned earlier, will help drive asset improvements at our restaurants.

Lastly, we expect to continue to generate a lot of cash in the U.S.

this year.

And with continued re-franchise activity, our U.S.

EBITDA after capital expenditures should grow in 2008.

To summarize the U.S.

business, we expect to meet our full-year targets for growth in sales and operating profit, supported by bold new brand initiatives, as well as a relatively weak lap from 2007.

While the performance of our U.S.

business has been below expectations in the past, we have adopted breakthrough strategies to turn the business around with urgency.

I have seen the analyst reports that reflect a lot of skepticism about our ability to accomplish this transformation in the U.S., and I have sent them out to everybody in the U.S.

And I understand that many will not believe it until they see it.

With that said, I invite to you attend our Investor Conference in Louisville in May, where you see and hear and taste, tangible evidence of how we plan to leverage our U.S.

assets.

As I said in New York, our U.S.

business is an outstanding value investment with tremendous asset leverage, and we are committed to unlocking this value over the next two to three years.

And our U.S.

teams have a lot of pride, and there is a lot of pressure out there.

They are putting it on themselves.

And we want to deliver.

Our fourth and final growth strategy is to drive industry-leading long-term shareholder and franchisee value.

The good news is that we are already a leader in return on invested capital, not only among restaurant companies but among large Cap global retailers and consumer package good companies as well.

We are starting from a position of real strength.

The fact is that Yum!

Brands is an incredible cash machine.

With each of our divisions generating free cash flow.

Or effectively funding their own capital investments.

As if capital is deployed to high return opportunities.

For example, new restaurants in China where the cash payback is only two years, we expect our returns to remain strong.

These returns will further improve as we continue to re-franchise restaurants, which will increase our franchise fees, currently amounting to $1.3 billion with no capital investment, which makes those kind of returns unbeatable.

We are proud of the fact that we are one of the few companies that can make significant capital investments year after year, and make great investments in large-scale share buybacks and pay a meaningful dividend and grow EPS consistently in the double digits.

Our commitment is to continue this tradition of rewarding our shareholders with superior returns.

For more on our financial performance and outlook, I will now turn it over to Rick Carucci, our CFO.

Thank you, David.

Good morning, everyone.

In this section of our call, I am going to comment on four items.

2007's full-year results, 2007 fourth-quarter results, our U.S.

re-*franchising program, and 2008 guidance.

However before I do that, I would like to address some questions that surfaced yesterday, following yesterday's earnings release.

On the surface our fourth-quarter reported numbers understate the underlying strength of our business.

Although operating property increased only 1% and net income was essentially flat to prior year, our revenues increased 8%.

Furthermore, operating profit was reduced by unusually high G&A on the quarter, driven by incremental investments in growth projects, charges associated with certain restructurings, higher than expected compensation, partially offset by unexpected insurance recovery related income.

All of these items combined to reduce our year-over-year operating profit growth percentage by 8 points, reduce our net income growth percentage by 9 points.

Said differently, in the absence of these charges, both our operating profit and our net income would have grown 9%, which are numbers consistent with our strong track record of performance.

With that said, I would like to turn our focus to the four topics I outlined earlier.

Starting with our full-year results, I would like to highlight three foundations of Yum!'s financial story.

Our consistency of results, our global reach, and our strong cash generation.

First, for the sixth straight year, we met our commitment to deliver EPS growth of at least 10%, delivering 15% growth in 2007.

We take our commitments to shareholders very seriously and consistency of performance is a top priority.

Second, we continue to expand our business around the world opening a record 471 new units in mainland China and record 852 units in YRI.

This broad based unit expansion is central to our ability to meet our profit targets of at east 20% growth in China, and at least 10% growth for YRI.

We consider our global development engine to be a key competitive advantage.

Clearly, we are pleased with these development results in 2007, and our outlook for 2008 is also strong.

And third, we return a record $1.7 billion to our shareholders last year.

The share repurchases of $1.4 billion and dividends of almost $300 million.

Over the last two years, we repurchased nearly $2.5 billion of our stock at an average price of $29.31, which we believe has created significant value for our shareholders.

Over the next two years, we expect to repurchase about $4 billion of stock, further reducing our share count by approximately 20%.

With respect to our fourth-quarter results, I would like to briefly comment on our key businesses.

First, I am also very excited about our China performance, which is phenomenal by almost any measure.

Perhaps the most impressive result though is bottom-line growth of 44%, lapping 36% growth from the year before.

There are very few businesses anywhere that can drive same-store sales growth of 17%, while developing new units at record pace.

And there are probably fewer businesses that could absorb roughly 35% inflation in the cost of their number one commodity, in China's case, chicken, and yet experience less than a half point of margin dilution.

The fourth-quarter results again demonstrate how very special our China business is.

YRI delivered fourth-quarter results in line with expectations.

Importantly, this is another high-quality quarter, largely driven by systems sales growth of 9%.

[pre forex].

The system sales growth was underpinned by continued strong unit development, and 5% same-store sales growth.

Also as noted in our release, YRI's 11% growth in reported operating profit was achieved after accounting for incremental investments in KFC sales growth initiatives, higher incentive compensation, and selected market level organizational restructuring.

These items amounted to five points of profit growth.

Altogether, we were very pleased with YRI's fourth-quarter performance.

By the way, as David mentioned, YRI now generates nearly half a billion dollars of annual operating profits.

U.S.

results were below our expectations as David noted.

Fundamentally, fourth-quarter same-store sales growth of 1% was insufficient to offset rising commodity costs resulting in a 1% decline in U.S.

operating profit.

With that said, profits held up pretty well for the fourth quarter and full-year 2007 when you consider the weak sales at Taco Bell, our overall same-store sales softness, and higher-than-normal cost inflation.

This reflects our discipline cost management and as a result of much hard work by Yum!'s domestic teams throughout the year.

As David indicated, we anticipate better performance in the U.S.

for 2008 and remain confident in this outlook today.

On the nonoperating side, our tax rate was much better than we had expected in the fourth quarter, yielding a full year rate of 23.7%.

Higher foreign tax credits were the key driver to this upside to our forecast.

While we are happy with this result, as we have previously mentioned, we do expect our tax rate to trend upward over time.

For 2008, our tax rate is expected to be between 28% and 30%.

Before I transition to an update on re-franchising, I want to comment on one other aspect of our financial performance in 2007, capital spending.

In December, we indicated that our capital expenditures for 2007 would be approximately $700 million.

We actually spent close to the $740 million, but the good news is that the extra capital largely went toward higher return investments for new restaurants in China.

In December alone, we opened over 90 new units in China.

That is an amazing three new restaurants per day.

Now for a brief update on U.S.

re-franchising.

At the end of 2007, our U.S.

company ownership stood at 22% of the entire system.

As we announced in December, we intend to reduce this ownership to potentially reach below 10% by the end of 2010.

Due to a number factors including market conditions, it is extremely difficult to predict the exact timing of this re-franchising activity.

We remain confident we will achieve our U.S.

re-franchising goal over a three-year period and we will do it the right way for our brands, our operators, our franchisees and our customers.

Over the next three years, you should expect to see continued proceeds from re-franchising, positive benefits to U.S.

restaurant margin, operating margin and Yum!

ROIC, and less demand on capital expenditures from the U.S.

business.

In my update on 2008 guidance I will speak to the one-time earnings impact we will expect to see this year.

With 2007 in the books, let's quickly cover our 2008 outlook.

First of all, our growth model remains unchanged from what we presented in New York, which includes 20% operating profit growth from our China Division, 10% operating profit growth from YRI, and 5% operating growth from our U.S.

business.

This adds up to be between 9% to 10% growth in operating profit.

Combine this with a higher tax rate, higher interest expense, but expected share reductions, we are confident in our ability to deliver EPS growth of at least 10% in 2008, or $1.85 per share.

For 2008 earnings, there are two important twists that I want to point out.

First, as we discussed in New York, given the loss of roughly $30 million VAT benefit in Mexico this year, YRI's 10% earnings growth target will be more challenging to achieve than past years.

Fortunately, we expect foreign exchange upsides will continue to provide some measure of protection to YRI profits.

So, we remain confident that YRI will again achieve its 10% profit growth target.

Second, we will realize significant one-time net gains in 2008, which are very important to understand in order to properly evaluate the underlying performance of our business.

As outlined in our release, in quarter one alone, we will benefit from roughly $60 million of one-time net upsides.

Including a gain from the sale of our minority interest in KFC Japan, restructuring charges to drive stronger U.S.

brand growth, and expected re-franchising losses.

On a full-year basis, we expect a net positive impact from these quarter one items and future U.S.

re-franchising and brand investments.

We are currently estimating the full-year impact to be about $50 million in pre-tax profit, or about $.06 of full-year EPS.

This is not included in the $1.85 ongoing full-year EPS target I mentioned earlier.

Let me repeat that.

The estimated $50 million of one-time positive impact is not included in the $1.85 full-year EPS target.

Therefore, combining the baseline EPS of $1.85 with projected one-time benefits of $.06, you are currently guiding to full-year reported EPS of $1.91 for 2008.

We will update you on total and one-time EPS figures in future earnings releases.

But I want to stress to you the importance of understanding baseline EPS as we go forward.

Also, please understand that there could be considerable volatility during 2008 of these one-time benefits from our U.S.

re-franchising and brand transformation.

To wrap up, we expect another financial successful year for our share holders, generating consistent financial performance, impressive global growth, and strong cash flow.

Back to you, David.

Thank you very much, Rick.

And so I think you can all see 2007 was, in total, another strong year for Yum!

Brands.

We are truly in an unique position as a restaurant and retail company to be able to turn in such good results in a challenging environment.

With the buoyancy of China, and the stability of YRI's growing franchise fees, we are able to weather difficult storms.

We have done it in the past.

We can do it in the future.

The U.S.

is clearly our most competitive market, yet our core performances in 2007 is basically, we look at a mixed blessing as we get to overlap those results in 2008.

This, along with the significantly stronger stable sales building initiatives to drive growth across all the grounds, gives us confidence we will achieve our profit goals in the U.S.

With all that said, you can expect in 2008 that Yum!

Brands will once again differentiate itself as not your ordinary restaurant company.

So, with that we would like to open it up for questions.

And reported talking to you all.

Thanks for being on the call.

(Operator Instructions) The first question comes from the line of David Palmer with UBS.

Hi, guys.

Congratulations on another good year, especially from International.

Thanks, David.

I first wanted to ask a question about East Dawning.

I have a feeling you want to talk more about this in your Fall meeting out there, but I was wondering if you could give us a sneak peek.

You know can you give us any details on the returns on East Dawning?

How are the new East Dawnings comparing to maybe KFC's in terms of sales volume and margins, and that's versus the new KFC's, assuming there is lower volume, if maybe you can give us a rough sketch of how close it is.

And maybe some of the changes you have made that maybe making the return on investment more appealing for this concept.

Yeah, David.

It's Rick.

Let me talk first about the economics and then I will talk a little bit about the concept and David may want to add to that.

It is really too early for us to get into projected returns, et cetera.

We are still working on fine tuning the economic model.

From a sales perspective, the sales actually at peak periods of lunch and dinner are actually very comparable to KFC figures.

But we have been working on especially hard the last year is getting the sales up at the snack time period, later afternoon, later evening, dayparts.

And with the recent advertising we did, we actually did see a spike in sales there.

So we are very encouraged by the recent sales increase that we have got, which obviously bring us closer to the economics that we need.

In terms of changing the concept, we have changed the cooking platform over time.

When we first started it, it was heavily commissary.

Then our second version to increase the appeal to the customers, we went with almost exclusively in-store prepared.

And now this third version, we actually have a blend of both commissary and in-store prepared, so we think we are getting closer to getting the right cooking platform, which obviously will help the economics.

David, I don't know if there is something you would like to add?

I think the team is very confident.

We are very comfortable in making continual progress on this.

We see this as a big idea.

We are going and improving at the same time.

So we are moving from 12 restaurants to 20 restaurants, which I think is a good sign that we think we can ultimately get there.

And, you know, this is very consistent with our strategies to build leading brands in every significant category.

Obviously, Chinese food is the number one category in China, just like the Hamburger has been traditionally in the United States.

And we are embarking on really creating the first Chinese fast-food restaurant chain there.

So very excited about it.

The team is very targeted on what needs to be done, which is what Rick said is to expand the use of the facility more throughout the day with the snacking occasion.

If you go over there for the Olympics, you know we will have East Dawning in Beijing.

You can give it a try there.

But I think you will find that the food is excellent.

And what we are really bringing there with East Dawning is excellent food, affordable pricing, and facilities that are consistent with the KFC asset base, which is a major advantage in that category.

So, you know, it is early days.

Lots and lots of optimism.

We expect this to really pay off for us on the long-term basis.

Thanks.

Thanks, David.

Next question, please.

Your next question comes from the line of Jeffrey Bernstein with Lehman Brothers.

Great.

Thank you.

Actually a couple of questions further on China.

One kind of more specifically.

Restaurant margins were impressive seen a modest decline.

I think your guidance was for 200 basis points.

Looks like you have significant leverage on the food costs.

Just wondering if you could perhaps put out details for the outlook in the first half in terms of pressure on costs and second half, moderation, specifically related to, I guess, contracts with the commodities and perhaps pricing.

And then I had a follow-up on China.

Okay.

Regarding the commodities throughout the year, we just really know the first quarter costs will be a bit below what we had in the fourth quarter this year.

And we are in the process of finalizing negotiations for the quarter after that.

So, you know, we will have a better handle for it after we complete those negotiations.

We do expect since we had a large increase in the back half of the year, we obviously expect food inflation on the first half of the year, and negative inflation the second half of the year when we start lapping the very high chicken cost.

The pricing in that market, should that provide more of a margin lift in the back half then?

We haven't taken pricing yet in '08.

Again, as a reminder, we took modest price increase the beginning of '07.

And then we took a larger price increase in the middle of '07.

So, you know, we feel pretty good about our pricing.

Obviously we have to judge that in the context of what happens and what we think will happen regarding the chicken commodities in the back half of the year.

But we feel pretty good about it.

The other thing that the team has done a good job of, this is bit from a consumer standpoint, great, but also great from an economic standpoint, we were very successful with the fish introduction of products in the back half of 2007.

So we are actually running fish at a higher percentage of the menu than we thought at this point.

So, we are pleased with that, and that helps us a little bit on the cost side.

Okay.

Just one follow-up question, kind of more broader.

Obviously, you guys are very excited about China, and the results justify that.

Just wondering if there are potential inhibitors to faster growth.

I don't think it is capital.

Perhaps Human Resources or site selection, but obviously the results are tremendous and growing at the same time as delivering very strong comps.

I was wondering why we wouldn't see further acceleration on the unit growth.

I think in December we opened almost three a day.

So, you know, we are moving very aggressively in China.

I think the big thing we want to do in China, is we built a world-class business.

And we ensure that we have world-class operating teams, great sites, and, that's really what we are focused on, making sure that we do, so that over time the business is as great as it can be.

We never want to get ahead of our people capability.

We have tremendous people capability.

We never want to get ahead of our site selection.

We've got the largest retail development team in the world.

So we got all the resources to keep growing at the kind of pace that we are growing.

There is no need to grow any faster from our perspective.

We want to grow right.

And I think where the big development gains will come, will be through the expansion of Pizza Hut Home Service which is basically an embryonic concept at this stage, and with the development of East Dawning.

I think both of those concepts will give us some opportunity to have a step change in terms of our development, but, again, both of those concepts are in their embryonic stages.

We will keep growing at a steady pace.

I think the most exciting thing for me on China and what we are seeing, is driving so much of our growth, is that one little fact that I mentioned to you earlier that, the Chinese ministry reported, 540 million cell phone subscribers in China.

What we are seeing is say loft youthful kids now who can afford our food.

Not everybody can afford our food every day, okay.

But just think about if you have 550 million cell phone subscribers.

I bet you those people can afford us at least once a year.

That is only going to get better as we go forward.

So this is a very exciting time for us.

We have got a great business.

We want to protect it and grow it in an absolute high-quality fashion.

So that's our goal.

We have plenty of earning upside in our company or earnings capability to deliver at least 10% every year, and we are not going to try to be a hero one year.

We want to keep having lots and lots of good years.

And David covered these numbers Jeffrey in his speech but may be worth repeating in a competitive context.

KFC ended up adding net units above 300 for the year.

So our lead versus competition is really expanding and continuing to expand.

Amazing numbers.

Pizza Hut Casual Dining added almost 100 units off the base of 250 last year.

That is a staggering number.

That is 38% increase there.

And there is really nobody in Western Casual Dining.

And the emerging categories of Home Service and East Dawning, you know, we are making inroads.

So I feel good not just about the absolute numbers, but how it positions us from a competitive standpoint.

Thank you.

Thanks, Jeff.

Next question, please

Your next question comes from the line of Glen Petraglia with Citi Investment Research.

Thanks.

Good morning.

David, I was hoping you could comment on, specifically Taco Bell.

Back in, I think it was October, at the Taco Bell Investor Day in California some data was shared about consumer survey work and how consumers seemingly remember, or increasingly forgetting about issues of about a year ago.

I am curious to know if you feel that you are fully beyond that now or is that still impacting your business to a degree?

Well, I think that we definitely turned the corner.

We did have same-store sales growth last year off of very weak numbers in the fourth quarter.

We feel like we are off to a very good start this year.

And so, we are basically running the business today as if it is behind us.

And, you know, we anticipate a very good year at Taco Bell because, if for nothing else the fact that we are just overlapping a performance last year.

But beyond that, we are just very, very excited about the projects we have got in place.

We are building off what we think has to be one of the strongest advertising campaigns that positions us as a sandwich alternative with "Think Outside the Bun." We have a great line of product innovation.

We are going to begin building awareness of Fresco which is a great taste, no sacrifice line of products which we think will allow us to potentially really go after the people that want to add more balanced options in a much more aggressive way.

We have re-framed our value menu to really dramatize what makes it really special by going back and capturing some of our historical equities which you will see by midyear under the "Why Pay More?" We are launching a Fruitista Freeze line of beverages which was tested and proven enough to the point that the franchisees have made the equipment investment.

And we think that gives us the platform to go after the big booming category that Sonic is frankly dominated without a whole lot of competition, and that is our user base right there that we can we think tap into.

And we have got some very interesting ways to segment our business with different proteins.

And we're testing breakfast and looking at how to get after that.

And even with the line of the Fiesta Platters, a high-quality meal, a great value that I think is positioned well up against casual dining at times like this.

We are going up against the high end and the low end.

So we think we have a heck of a good plan for Taco Bell.

And, you know, the good news is the unfortunate incidents are very distant now and behind us.

There is a little bit of a hangover in some of the research.

But we expect that to go away in total through the balance of 2008.

So very optimistic about Taco Bell, and the team is very excited about what they've got going.

So I think you'll be pleased with the way we are taking the brand.

The other thing that is exciting about Taco Bell is we had net new unit development last year, in spite of all the problems that we had, and this year, it is going to be up plus 2.

So you have got a concept that is the second-most profitable restaurant brand in the United States.

It only has 5,000 restaurants, 5,000 traditional restaurants.

So, you know, we are not even close to cannibalizing ourselves and we have asset bases that we think we can do a lot.

And our -- our future back vision is to keep building the sales layers much like McDonald's has done, to get us to ultimately over the long term to 24 hours of operation.

And we can do that with the real distinct positioning.

Right now we have a 70% share of the Mexican quick service restaurant categories, right around in that range.

So, you know, we are very bullish on Taco Bell.

We are very glad that 2007 is behind us.

And we are very happy that we have got 2008 just staring us in the face.

And we want to put the numbers up on the board to get everybody feeling as great about Taco Bell as we are.

Thank you.

Thanks, Glen.

Next question please.

Your next question comes from the line of Jeff Omahundro with Wachovia.

Thanks, good morning.

Just another question on China.

Wondering if you could give us any update on any potential impact on traffic or commodity from the recent storms that have impacted much of the country.

Thanks.

Okay.

Well, first, I am pleased to report that neither rain nor sleet nor snow or dark of night can halt our China business.

But our team has worked very hard given the weather that has been there in China.

We have about 20 restaurant closures, temporarily, over the period of time.

Those are now minimized.

It is probably going to have about a one-point impact on the quarter on our same-store sales growth.

And the extra cost of getting the product to our locations is sort of negligible.

So that really won't impact us much.

But, again, I would like to emphasize the logistics team we have in China.

First of all, that gives us a competitive advantage as we said before.

We were able to work through a lot of these issues, especially in the northern part of the country.

And the logistics team, together with our supply chain, this really put out an all-out effort.

I was pleased we had the competitive advantage, but I was also very pleased and thank the effort of our China team to get us through this.

And we're glad that's largely behind us now that we are into the Chinese new year season that is a very high sales season for us.

Thanks.

Thanks, Jeff.

Next question please.

Your next question comes from the line of Howard Penny with SBR Capital Markets.

Thanks very much.

Unfortunately, easy comparisons don't necessarily, mean easy comparisons and maybe from your prepared remarks, can you pick one or two of the bold initiatives that are really going to transform the U.S.

business and make a difference in 2008?

Well, Howard, I just gave you about five, you know at Taco Bell.

I think when you look at Pizza Hut, I think when you are looking at Pizza Hut we are launching Tuscany Pastas which I think is the biggest news of all that we have at Pizza Hut this year.

In addition to the fact that we have got an all-day, every day, sales layer now with Pizza Mia which allows us to compete more effectively for the lower end of the category, the value seekers.

We also I think have a much more effective discounting strategy which will pay off in terms of profitability.

So those are the three big things at Pizza Hut.

And we continue to add WingStreets.

But we will be National advertiseing WingStreet by the end by 2009.

The other, when we look at KFC, I think KFC this year will be introducing a toasted line of grilled pressed products, which we think will be differentiated in the category.

But, we really see in terms of our longer term plan at KFC that 2009 will are our bigger, bolder initiative with the launch of, the planned launch of the grill products.

So, I feel we can have a solid year at KFC but I think the bigger initiative for KFC will be coming in 2009.

The other thing that we have at both KFC and Pizza Hut is that the franchisees have voted, for incremental national advertising.

So this allows us to really sell multiple layers of messages across the year.

For example, right now we are advertising Pizza Mia and our new crunchy pizza at Pizza Hut which, is a much more powerful punch than just launching Pizza Mia and forgetting about it.

We are able to continually advertise Pizza Mia as a value layer throughout the year.

Plus an innovation like the cheesy crunch, and plus introduce the pastas.

I think that is a big deal.

At KFC, you know, we're able to do toasted wrapped sandwiches, and do high end chicken on the bone to protect our chicken-on-the-bone-based business.

That gives us an opportunity to have a one, two punch as well.

So, hey, listen, do I wish we were overlapping a better year last year?

Absolutely.

In this kind of environment though, where everybody else seems like they have a lot more wind in their face, it is not bad to have a 2007 like we have to overlap.

Especially when you know you have got a lot better programs than we had the previous years.

So I'll take that.

And, you know, I am very convinced that we can deliver 2% to 3% same-store sales growth and 5% profit growth in 2008.

And you combine that with the power of China and the power of YRI, I think there are very few retailers, very few restaurant companies in the world that have the kind of play that we have this year as we go forward.

And more importantly, more importantly, to your point, is that we know this is all about the long term.

And when we look at our 35,000 restaurants around the world, we can have opportunities for huge leverage.

You know, that's why we are testing breakfast in Singapore.

That's why we are testing breakfast in the UK.

Those are lead markets for International.

That's why we have fish going in the CaribLA.

That's why we have beverages going in Australia.

That's why we have oven-roasted being test in Malaysia.

We have so many ways to leverage our existing assets.

Not only in the United States, all this stuff will work around the world, which is one of the reasons that China is doing so well.

They've got a tea time at Pizza Hut Casual Dining.

They have breakfast.

They've got beverages at KFC.

We are on a major strategy to get much more asset leverage, by being much more driven to bring relative sales layers to our business.

This is the same strategy that has worked for McDonald's.

It's the same strategy at work for us in China.

And we think that we will put wins on the board, slowly and surely.

But when you look at our business three years from now, you will look back and you will see a changed business.

Clearly, in the U.S.

where we are upgrading our assets, while we are doing all this stuff, and I also think you will see a changed business in International, because our assets will be better utilized as we go forward.

So we have a very good strategy for the long term.

And we are going to get after it.

So just we will just keep reporting our progress.

Thanks Howard.

Next question please.

Next question comes from the lane of Rachel Rothman with Merrill Lynch.

Hey, good morning, guys.

good morning.

Just to follow up on the re-franchising.

Can you talk -- it seems like the '07 target came in a little light of your initial guidance for, I believe, 600 units.

Looks like it came in at 3.

Can you talk about the dynamics in the re-franchising market, currently?

And whether or not you are seeing any pressures on the multiples or cash flow.

And why you have confidence in the $1.1 billion given the shortfalls in '06 and '07?

Thanks.

Thanks, Rachel.

First of all regarding our original plan, we were very happy with the progress in '06.

I will talk about '07 in a minute.

But going forward, as you look at 2008 and beyond, a couple of points.

First of all, the restaurants that were selling at this point are some of our better performing restaurants by brand.

So, we have restaurants that we think are going to be very desirable, to existing franchisees in particular.

But also as we go out we want to expand our franchisee base.

So we are selling relatively good restaurants.

Second reason is the size of the deals that we have come through are generally smaller type deals.

So the credit type crunch that's on bigger deals hasn't really yet hit that size market.

We have never done crazy deals on leveraging, et cetera.

So we always had common sense types of leverage.

In fact we require it.

We don't allow people to over leverage their business with franchising.

So, at this point, we are confident that the market conditions will allow us to do it.

Regarding '07, part of the reason we are selling fairly big block of stores in California.

We were hoping to get those done in '07.

We are confident those will get done in '08 and we will be back on track toward hitting our goal.

So like I said, I feel good about the progress that we are making, and I feel good about our prospects.

And we have given ourselves three years to do it, so, again, I am still very confident under current conditions we will be able to do that.

In terms of your G&A, I know you guys mentioned in the release something about maybe litigation costs.

Are there any one-time costs that made your G&A higher?

It was much higher than we would have thought.

Were there any one-time items we should be considering there?

There aren't any huge one-time items.

The biggest increase year-over-year was the higher incentive pay.

We do have a bunch of I would call smaller one-time items.

So, for example, we had consulting cost both tax and other areas.

We had the world food program, et cetera.

So we had a little, we had a higher-than normal closures probably pulled forward some that would normally occurred in '08.

So been more of a series of small items than one big item.

Okay.

Great, thank you very much.

Thanks, Rachel.

Next question please.

Your next question comes from the line of Steven Kron with Goldman Sachs.

Thanks, good morning.

Following up on Rachel's question on the G&A.

The Corporate G&A.

You mentioned strategic projects.

I know you discussed that in the past.

Can you be a little bit more specific on where the dollars were spent?

And also the guidance in December, the first-quarter of '08 is going to be a little less of this stuff.

So, did you pull some of that strategic spending forward?

Or is there just a change in the total dollars estimated going forward?

Well, as I said to answer to Rachel is we didn't have huge items, so not like we took some huge buckets of money.

Giving an example of something we are pushing as David talked about drinks.

We are trying to get more resources against getting drinks started.

We had more spending against drinks in the fourth quarter of '08 than we had, oh sorry, in the fourth quarter of '07, than we had before.

In terms of probably the one pull-forward where it is really more around closures.

We had a fair number of International closures that are a little higher than normal.

That will probably be the only impact that would impact Q1 of '08.

Okay.

And then the second question, I guess, Rick, just on the cash flow statement.

Obviously a lot of focus on free cash flow generation given the I guess what you guys have outlined as to cash return to shareholders over time and the evolution of the business model.

I just wlook on a year-over-year free cash grew $140 million to $150 million and I know a lot of give and takes within the operating cash flow line, but one thing just jumped out at me, the changes in accounts payable dealt on a year-over-year basis was $150 million favorable.

I am just wondering anything different from changes in payment terms or anything like that that we should just be aware of?

Steven, this is Tim.

No, not really, no changes in payment turns at all.

Accounts payable, depending on when our fiscal year closes or the quarter closes, the time of the month can vary quite a bit.

And that is just a factor of our retail business.

So, if the close happens to be in the middle of the month sometimes our utility bills which are pretty significant, if you add up all the Company stores we have, that can really drive the number in any given quarter, any fiscal year end because of the timing of when that cut off is.

It is not related to any payment terms at all.

I want to make sure because versus history it looks like a big jump.

Okay.

Fair enough.

Thank you very much.

Thanks, Steven.

Next question please.

Next question comes from the line of Virginia Chamblesss of J.P Morgan.

Hi, thanks.

Question on the planned $2 billion, or slightly more that $2 billion, of shareholder returns in 2008.

How much of that are you budgeting to be funded by incremental debt versus internally generated cash.

Thanks.

Yeah, thanks for the question.

This is Tim Jerzyk.

If you go back to our Q3 earnings release, we did say we anticipate repurchasing up to $4 billion of our company shares over a two-year period looking forward.

We did say we would be funded from company cash, and new debt.

We went to market and got $1.2 billion of cash from incremental debt in mid-October.

And we did expect that we would probably be doing more this year based on the leverage ratios that we committed too, with publicly and with the rating agencies.

So we are looking at possibly going back to the public debt markets again this year.

Probably later in the year.

We are going to try to be as flexible as we can, and fortunately, we did get a very, we renegotiated our credit facility also late last year, and that gives us tremendous amount of flexibility.

Very good interest costs with is LIBOR plus 27 basis points.

We are going to utilize that as much as we can during the year.

And acquire our stock back, which you can see we did a lot at the end of the year last year, and we will go to the market when we think it is right for us.

It has been very volatile and we will likely go back to the market, but at the same time, we are going to try to utilize our credit facility given the great interest costs.

Okay.

Thank you.

Thank you.

Next question please.

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

Thank you.

Couple of bookkeeping type questions, first.

First, on the YRI comments about the operating profit growth being negatively impacted by five points, and you mentioned spending initiatives and what not.

When does that fall, in the income statement?

Is that primarily G&A or is it spread throughout the income statement?

Primarily G&A and also in franchise and license expense.

Okay.

And then on the re-franchising, I realize your 2010 goals are the same.

At one point you thought you could get down to 17% company units by the end of '08.

Is that still an interim target, or is that slipping a bit?

Well mathematically, it ends up being pretty close, Joe.

We have sort of look at the below 10% as our new target, but we are around 22% today.

So if you straight line going from 22 to 10%, you get fairly close to that.

Okay.

And then just question on trends in two of your businesses.

First in the U.S.

a lot of talk of potential slowing in QSR and I realize you have these year-over-year comparisons that are going to match some of that, but kind of curious your read on the QSR business in the U.S.

You know what you are seeing and, you know, it seems like KFC slowed down a bit, at the end of the quarter.

I am curious what you are seeing so far in '08, if you will comment.

Conversely what drove China, so dramatically in the fourth quarter, and how sustainable do you think those very strong trends in China are?

Let me take the China question first and then I will let David talk about his view on the U.S.

You know China, you can never anticipate a quarter as strong as that one going forward.

I mean, as an example in the fourth quarter when we added, in December when we added 90 restaurants, our traffic growth was double digit.

Okay, and we told you we took some pricing increases during the course of the year.

So your not going to have months like that, always, but obviously a great month to build on to.

We are confident that China does have momentum, the economy there starts momentum.

We feel very bullish about China in '08.

Obviously we have a huge forex benefit as well in '08.

We feel very good about China in '08 but I can't promise quarters like this fourth quarter every time.

Anything that you guys did to stimulate the business in the fourth quarter?

I mentioned the fish program I thought was very successful.

So I think we did better than the industry, because of that program.

Obviously, it was a very strong business year in and year out.

So that was probably the one activity we did that maybe made it stronger than usual.

I think the other thing, Joe, is in China is when brands are really working on all cylinders and you've got your positioning and your advertising right and your operations are excellent, it is kind of hard to slow yourself down when an economy is growing and more and more people buying your food.

So, you know, I would not want to underestimate just the great job that China team is doing, marketing and operating their brand.

And on every measure we have seen, our brand tracker, tracking indicators are at all-time highs.

So, you know, that's a lot of power you got working for you.

And I think the asset leverage plays that we have made at both Pizza Hut and KFC are really paying off.

Everything from Pizza Hut, from having proprietary beverages, with the tea time and moving into the snacking occasion in the afternoon.

To KFC having, you know, proprietary desserts like the egg tarts to their Nine Lives Juice, to fish to pork.

This brand stretches into a whole lot of different categories, so every month, we got something new we are talking about to build on the base.

So that pipeline is full and robust.

And I think that's building fuel into the business.

I think in the U.S., you know, there is so many of you who follow our industry.

You are probably better than I am in terms of really trying to gauge where the economy is, the impact of what the real trends are.

I mean you are looking at every business out there, Joe, and probably not too many guys wetter at it than you.

I can only say in times like this, the biggest thing you have to be is you have to be good.

We have done a lot of studies.

We have looked at recessionary periods.

We have looked at consumer sentiment.

We looked at a lot of things, okay.

In every situation you would much rather operate obviously in a better environment, but what we have found, historically, are the brands that are positioned well, the brands that have the most news, the brands that have the best value proposition, they win, even in the toughest times.

And, I think that we are not, recession-proof.

But I do think that we have brands that can fair much better than other brands, and other categories at times like these.

And, you know, I had a level 12 meeting, that is our directors and above, meeting last week with our people and I talked about this, and I think the way we look at this is we have a real opportunity to distinguish ourselves as a company in a tough environment like this.

You know, by really delivering a strong U.S.

year and continuing to show the folio power of our business in terms of China and International.

After doing six straight years of 10% percent growth with lots of different challenges over the years, we ought to put another one up on the board.

And in particular, you know, we want to keep obviously our global strength and momentum going and get some momentum going in the U.S.

while we establish even stronger programs for the future.

So, we don't believe in weather reports.

We don't believe in economic reports.

We don't believe in any of that stuff in our company.

What we believe is our job is to win no matter what the environment is.

Thank you.

Thanks Joe.

Next question, please

Your next question comes from the line of Mitchell [Svisor] with Healthy Advisory Group.

Thanks very much, good morning.

Hey, Mitch.

Hey.

Couple of questions.

First on chicken costs.

Now that 2007 is over, can you give us a sense of what your U.S.

chicken costs were on a year-over-year basis.

Perhaps first half, second half.

And as you look out to '08, can you give us a sense of how much you are exposed to chicken cost.

I know you have some costs-plus arrangements, and maybe if you can address that.

But also the amount of requirements that are not contracted at all.

And then if I can just throw in a second separate question.

KFC, I guess it seems to have been weak in the fourth quarter and for '07.

And just wondering if KFC's average check is perhaps a bell weather for the consumer.

And if you can give us a sense if the average check was up or down in the fourth quarter at KFC.

Thanks.

Yeah, Mitch, this is Tim.

On the commodities, I think the one thing in looking back that we can tell you is that of the, I think it was of the $44 million in the U.S.

for last year, almost half of that was in the fourth quarter.

So a lot of it was Q4, and even looking forward, a fair amount of the inflation we expect for 2008 will happen in the first half in particularly Q1.

That gives you a little bit of the skewing.

In terms of chicken it was pretty much level throughout the year.

Because on chicken in the U.S., we are typically contracted.

There is some hedging that goes on based around the chicken-on-the-bone products, but most of the chicken products are contracted for the year, so that is the same case going forward.

When we talked about commodity inflation for '08, we said 5% to 6% inflation.

We feel pretty good about that.

We look back last year at the same time, we said 3 to 4 in the U.S., and came right in the middle of that range in actual terms.

Of the teams that we have focused on that do a pretty good darn job of looking at the market and what we have locked up in what we don't.

We end up coming up pretty close to those expectations.

Tim, just on that point.

The the cost plus arrangements that you have, is there exposure to cost plus?

I know you are contracted, but are there escalations in there?

No -- no.

The big exposure we have on, the exposure we have on cost plus is as our suppliers grow out the chickens, whatever they feed them, corn and soy meal that is charged to us at current market prices.

We hedge that through the forward commodity markets, on a rolling forward four-quarter basis.

So there is protection against that as well.

Okay.

Thanks.

And if you can talk about my second question about KFC average check.

KFC average check for the year?

For the fourth quarter and year.

That would be great.

It wasn't, we can hook up with you later in terms of more details, but I don't recall there being any significant movement in KFC check.

Okay.

Thank you.

Thanks, Mitch.

Next question please.

Your next question comes from the line of Jason West with Deutsche Bank.

Yeah, thanks a lot.

I was wondering just clarification on the guidance.

If that now excludes any re-franchising gains or losses for 2008.

I believe the original guidance had included about $20 to $50 million of gains in re-franchising activity.

The full-year guidance excludes the $20 to $50 million, it excludes the charges in the U.S.

business related to restructuring in any investments we make in the business and it excludes the Japan gain we expect in Q1 of $87 million.

Okay.

And you guys say the first quarter will see a $20 million loss in re-franchising.

And I was just wondering could you talk about what was that one transaction that drove that loss?

What was the make-up of that?

The way the accounting works is if you float a deal where there is an expected loss, you effectively recognize that loss when that deal is floated.

If you expect to gain it, you don't recognize that until the deal is closed.

So what has happened in the first quarter of '08, we have floated some expected loss deals, mostly Long John Silver related.

Okay.

Last thing on the VAT lap that you have in the Mexico business of $30 million.

Would that fall within the segment for YRI or will that fall within the consolidated tax rate?

That would fall within operating profit for YRI.

YRI reported numbers in 2008 unfortunately have the VAT included as a negative in their operating profits, but that one-time Japan gain sits outside of YRI.

And that's why we put that in the one-timers.

Thanks a lot, guys.

Thanks.

Next question please.

Your final question is a follow-up from David Palmer with UBS.

Hey, guys.

Two quick ones.

First, maybe Rick, outside the U.S., are you seeing any slowing in any markets anywhere in a way that feels macro?

And if so, where?

And maybe, Dave, your U.S.

chains, we have talked about this before, have a larger dinner business than perhaps the hamburger chains have as a percentage of your sales.

And I am wondering, do you view that as a particular challenge for Yum!, essentially making Yum!

more subject to discretionary spending pullbacks in your view, and perhaps having ramifications for how much volatility we could see in light of the macro concerns this year?

And perhaps how are you thinking about your 2008 marketing innovation.

Is that really targeted toward defending dinner?

I see it with Pizza Hut, but I am perhaps not seeing it so much with your other chains.

Thanks.

Let me take the first part, David.

Overall, our trends at YRI are very favorable.

So we feel good that we are entering 2008.

We entered 2008 with momentum.

We will have the typical YRI results.

Don't forget in 2007, it was very unusual.

We had very few countries with weak results.

Almost everybody was strong.

And we will probably have countries that are up and down, but I haven't seen anything across countries that look like a macro trend.

So, overall, we feel we are in good shape.

The one macro thing that we did talk about in December, and it is still there, is we do expect to see more global inflation than we normally do, but, again, remember, we are a franchise business and we are really not that susceptible to major bumps based on that.

Okay.

Thanks.

David, I think if you look at just the dinner skews at Pizza Hut and KFC, and just look at our portfolio in total, the value proposition that we absolutely feel the very best about going into this category is Taco Bell.

You know, because that's half of our profits, and, we are ranked number one on value.

And it is just in terms of amount of what you get for what you pay.

You know we have a tremendous core equity here.

I think we are most insulated on the value front today at Taco Bell.

Regarding dinner, it is a higher guest check.

But, what you do see that is going on in the category is tremendous tradedown in casual dining.

We are still very affordable at dinner versus the casual dining people.

But I think the real challenge for us is to bring more compelling news to compete more effectively in that segment.

And what we try to do on the value front for dinner at Pizza Hut is, you know, to shore that up by the launch of Pizza Mia, which is not an in and out product, but every day you can get three pizzas for $15 at Pizza Hut.

I think that gives us more strength in what we had to compete more effectively at dinner for that particular occasion.

While we innovate around new pizzas and bring pasta and chicken into the equation with WingStreet.

So, yeah, it is not quite the value proposition we have at Taco Bell, but we have done some things to shore it up.

I think our value perception at KFC is one of the biggest things we have to work on as we work toward the long-term transformation of that business.

We don't have an everyday value meal at the low end.

And I think that is not in our favor.

What we are doing this year is launching a line of oven-toasted products, with our grill press, that we think will make us much more competitive on the low end, and you will be seeing that.

But, the incremental advertising that the franchisees have approved have allowed us to do that and also reinforce our dinner occasion so we are hoping for a more effective one-two punch.

So in summary, in terms of how are we positioned from a value perspective, we think Taco Bell is an excellent shape.

We think Pizza Hut is in better shape than it has ever been.

KFC is a more difficult challenge, but it is taking some moves on the product news front that will hopefully mitigate some of the issues.

But I think the lower your entry price point is, like a Taco Bell, I think today's environment is better.

So I think anybody in dinner does have a little bit more of a challenge.

Thanks.

Thanks, David.

Do we have any more questions?

That's it.

No further questions at this time.

So let me just briefly wrap it up here.

You know I think as we look into 2008, you know, we think our global portfolio and the improvement that we expect to show in the U.S.

will give us another year of consistent EPS growth of at least 10%.

We will also see a lot of global growth this year.

We are going to be opening up 1500 new restaurants around the world.

And finally, each of our business will generate free cash flow, giving us the global capability to return over $2 billion to our shareholders through repurchases and dividends.

So thank you very much.

I appreciate you hearing our story, and we look forward to reporting our results throughout the year.

Thank you.

Thank you for participating in today's conference call.

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