百勝餐飲集團 (YUM) 2008 Q4 法說會逐字稿

Good morning, my name is Christie and I will be your conference operator today.

At this time I would like to welcome everyone to 2008 fourth quarter 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 will now turn today's conference over to Mr.

Tim Jerzyk, Senior Vice President of Investor Relations and Treasurer.

Sir, you may begin your conference.

Thanks, Christie.

Good morning everyone, and thanks for joining us today on the call.

The call is being recorded.

It will be available for playback.

We are broadcasting the conference call via our website at www.yum.com.

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

I would 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.

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 the earnings release last night and may continue to be used while this call remains in the active portion of the company's website.

In addition, we would like you to please be aware that our next earnings date will be Wednesday, April 22 which would include first quarter earnings release.

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.

Thanks, Tim, and good morning, everyone.

I'm very pleased to report 14% EPS growth for the full year 2008 which once again exceeds our annual target of at least 10% growth and represents our seventh straight year of at least 13% growth.

Our China and YRI divisions, which now account for 60% of operating profit are a major factor in driving this consistency of performance.

2008 was no exception as we opened a record 1,495 new restaurants outside the United States.

Generated worldwide same store sales growth of 3% and worldwide operating profit growth of 8%.

Importantly, our return on invested capital improved by roughly one point to an all time high of 20%.

For the fourth quarter, our operating profit growth was an impressive 17% in an environment of declining economic trends, particularly in the United States.

We generated worldwide system sales growth of 6% excluding foreign currency translation with strong international new unit development and worldwide same store sales growth of 3%.

Looking at China, our business continued to perform well.

Unit development is on track with a strong 18% new unit growth in mainland China which surpassed the 3,000 unit mark while also achieving same store sales growth of 1%, resulting in division operating profit growth of 18%.

It is important to note in the fourth quarter, we were lapping extraordinary impressive year ago results including mainland China same store sales growth of 17% and division operating profit growth of 44%.

The best quarterly performance in the division's history, which makes China's fourth quarter performance even more impressive.

In December, apples-to-apples, we were down 1% same store sales growth on top of 23% versus year ago.

I don't know of one business that wouldn't be happy with that, especially given our rapid expansion.

Our China business remains the best restaurant opportunity in the world.

Next, our YRI business continues to produce strong results with the fourth quarter capping off a year with record new unit development of 924 units for the year and strong same store sales growth of 5% in the quarter, which was one point better than the third quarter resulting in 8% operating profit growth in local currency terms.

Finally, we were also pleased with our US business which generated same store sales growth of 2%, the sixth straight quarter of positive growth, improved margins of nearly 2 points and operating profit growth of 7% in the fourth quarter.

So 2008 clearly ended well.

Let me now give you my perspective on the overall business as we look forward to 2009.

First, let me point out that the fundamentals that have driven seven straight years of at least 13% EPS growth are still solidly in place for Yum!

brands.

We are on the ground floor of a huge long term growth opportunity in China, we have ever increasing growth opportunities in YRI and finally, our US business, an area of our company that has underperformed in the past, is set up for much improved performance in the future as we have made tremendous progress in building new incremental sales layers that better leverage our assets and have substantially reduced our US G&A costs by $60 million or an 11% reduction.

At the same time, we face the short term reality in the global economy that will make 2009 a very challenging year.

As we showed you in our New York investor update meeting in December, we are sharpening our value offerings and continuing expand our new incremental sales layers to succeed in this environment.

Now let me address three questions that we are hearing from our investors.

First, can our China business continue to grow at a strong rate if the economy continues to slowdown?

Now, there is no question the China economy has slowed down.

However, it is still the fastest growing major economy in the world.

Now while we are not economists, here are some key points worth mentioning.

The recent slowdown has been driven more by the decline in exports versus a change in consumer spending, which now makes up a larger component of China's GDP growth.

While there are a number of statistics and reports circulating, we watched retail sales that were still up 19% in December, down from plus 23% midyear.

And while some predict China retail sales will see low double digit growth by mid 2009, there is a huge stimulus package which has been already underway on infrastructure projects.

Like I said, we are not economists and we certainly recognize that the China economy is not booming as it once was, but solid growth continues and the slowdown may not be as severe as some reports predict.

In any scenario, our brands are well position to perform.

Looking at our overall business in China, our pricing has always been expensive when the average income for the total population is considered.

However, middle class, our typical consumer, continues to grow in size along with their incomes.

So our average guest check at KFC of around $4 and our average guest check at Pizza Hut of around $20 are more accessible to more consumers today than they were a year ago.

Still, we expect consumer sentiment to be down along with the GDP growth rate which is why we reduced our operating profit growth target from our ongoing 20% target in China to a range of 15% to 20%.

Remember, our development pace, currently an 18% growth rate, includes new units already in the ground and should generate approximately three-quarters of China's operating profit growth target for 2009.

The rest should come from more modest same store sales growth of around 5% and G&A leverage.

Longer term, we have significant competitive advantages which are very much to our benefit, and our China business still funds our high return new unit growth so we can keep the pedal to the metal to fulfill long term demand.

Let's not lose sight of this country's great potential with 1.3 billion people and a huge middle class population of roughly 300 million people today.

Bottom line, the macros of 6% GDP growth obviously aren't as good as double digit growth that we have seen in the past, but is still the fastest growing major economy in the world.

We think we can continue to build leading brands in every significant category.

In the end, we continue to believe our China business will have more units and generate more profits than our US business one day.

While the near term is more challenging, we sure are glad that we are in China with such a great team operating such great brands, and we expect that we will improve our competitive position and grow profits by 15% to 20% in 2009.

Next question.

Is the global economic slowdown going to impact YRI's growth?

Here again, YRI's results in the fourth quarter were strong including significant development of 404 new units in the quarter and same store growth of 5% which was one point better than the third quarter.

The good news is that they were unforecast as we start the year.

Remember, new unit development largely driven by our franchisees generates about half of YRI's operating growth target of 10%, and we have 924 new units of 2008 in the ground and 900 more planned for 2009.

The balance of YRI's operating profit growth should come from same store sales growth of 3% to 5% and leverage on our existing G&A structure.

As you would expect, like all business, there is some nervousness in our franchise community about the credit markets.

But we haven't seen noteworthy impact to our franchise new unit development plans today.

And just like China, our long term competitive advantage is huge given the fact that we only have one major competitor in many international markets and in this environment, there will be fewer and fewer companies attempting to become international.

So YRI has held up remarkably well in this challenging global economic environment.

We are confident we will be able to deliver our target of 10% profit growth in 2009 prior to significant headwinds from foreign currency translation that will be reflected in our reported results.

Now the last question.

Will the US continue to be a drag on Yum!

earnings?

Here's where we are more pleased than ever that we got ahead of the sales challenges almost everyone in our industry faces.

We took actions to reduce our G&A cost structure for the long-term and strategically we are sharpening our value positions and developing major new sales layers at each brand, which will drive long term asset utilization.

So there is no question we are focused on the right fundamentals that should drive profitability.

On the cost side, we have taken actions to reduce $60 million of G&A expenses or an 11% reduction which will alone drive 9 points of profit growth for the US business.

With respect to our brands, first Taco Bell is a Mexican inspired powerhouse brand that owns the value position in the QSR category and is positioned well to do well in this environment.

Remember, Taco Bell now represents 60% of the new United States' profits.

Our new sales layers with the why-pay-more value menu and Frutista Freeze continue to perform well and we have lots of news planned for the year.

We see our biggest challenge to be Pizza Hut and KFC, which are off to a slower start than we expected because these brands focus on the higher ticket dinner occasion which is under the most pressure due to customers doing more cooking at home.

The good news is that we haven't yet launched our big marketing guns and we don't expect one month of the year to predict our full year performance.

It is just too early to draw any conclusions.

For example, Pizza Hut just launched lasagna which tested well in this environment and has generated excellent consumer response.

Wing Street also continues to grow, ending the year with 2,063 units in the ground as we move towards the 3,000 unit level which allow for national advertising of Wing Street wings at Pizza Hut later this year.

We are more confident than ever that our quality pasta and award winning chicken wings will totally transform the Pizza Hut brand over time.

KFC clearly has the most ground to cover and our January sales were extremely poor.

However, we just went on air with our freshness campaign, highlighting our quality and featuring a $3 per person meal promotion.

The fresh message drove positive results in Australia and test markets here in the US.

Next week, we will be launching our first ever nationwide and nationally advertised value menu and in April, we will launch the successfully tested Kentucky Grilled Chicken.

As you know, KFC was our only underperforming business in 2008, and we have a lot of wood yet to chop.

But given all we have planned, we are confident our performance will start to steadily improve, beginning in the second quarter.

So bottom line, it's early.

And while our plans are definitely back end loaded, we expect our US business will achieve about 15% profit growth.

Finally, I would like to remind you that we have a remarkably strong free cash flow and a balance sheet which allows us to continue our dividend program and gives us the freedom from any dependence on the credit markets in 2009.

Let me wrap up by saying we continue to expect that the strength of our global portfolio will once again allow us to deliver at least 10% EPS growth in 2009, which will represent our eighth straight year of double digit growth.

Looking at the long term, I'm more optimistic than ever about our growth opportunities.

So now, let me turn it over to our Chief Financial Officer, Rick Carucci, to give you the financial update.

Thank you, David and good morning, everyone.

In this section of the call, I'm going to comment on three items.

Our 2008 full year results, our 2008 fourth quarter results and our outlook for 2009.

Starting with our full year results, I would like to highlight Yum!'s progress regarding three key drivers of shareholder value, same store sales growth, new unit growth and high return on invested capital.

First, worldwide same store sales growth of 3% in 2008 is the best full year results have sent off and marks the eighth straight year of worldwide same store sales growth.

Second, we continue to expand our business around the world, opening a record 1,495 new international restaurants.

This equates to opening more than four new restaurants per day outside the US, and exceeds the 2007 level by more than 125 new units.

And third, Yum!

improved its return on invested capital in 2008 to 20%, marking the fifth straight year Yum!

has increased its ROIC.

Yum!

continues to be an industry leader generating returns on invested capital.

We are very proud of our track record achieving global growth while also demonstrating financial discipline.

We believe that this combination allows Yum!

to consistently drive shareholder value for our investors.

Now let's move over to the fourth quarter results.

In the fourth quarter of 2008, the China division delivered system sales growth of 15% excluding foreign currency translation.

This growth was driven largely by mainland China net unit growth of 18% and mainland China same store sales growth of 1%.

Fourth quarter margins were down 1.5 points primarily due to continued high commodity inflation.

This resulted in fourth quarter operating profit growth of 8% prior to 4X translation.

When looking at China's division's fourth quarter results, it is important to take into account the truly exceptional results achieved in 2007.

As David just mentioned, we lapped the best quarter in the division's history.

In fact, during last year's call at this time, I commented upon how special those results were.

I mentioned that the mainland China same store sales growth of 17% in Q4 of 2007 was unexpected, especially in light of achieving net unit growth of 21%.

Given the strong results we were lapping in the second half of 2007, it makes sense to look at two year growth rates to gain a greater understanding of China trends.

When examining two year trends to the China division system sales growth, you'll find that fourth quarter growth was 49%, just three points below the first half strong results, an improvement of four points over the third quarter.

Yum!

Restaurants International posted solid results in the fourth quarter.

YRI generated strong top line performance with 5% same store sales growth and 5% net unit growth.

This generated system sales growth of 9% which is actually slightly above our full year growth profit -- sorry, full year growth rate.

Profits were up 8% on a constant currency basis.

Importantly, YRI's fourth quarter results are more impressive when you consider the loss of a value added tax exemption in our Mexico business.

Excluding the impact of VAT, YRI profits were up 16% on a constant currency basis.

It is important to note that YRI reported fourth quarter operating profit was negatively impacted by $13 million due to foreign currency translation or ten points of growth.

Our established presence in numerous growing markets, together with our franchise business model make YRI a crucial part of Yum!

's overall growth story, and we are pleased that this business maintained momentum in the fourth quarter.

For the fourth quarter, US systems same store sales growth of 2% was driven by strong performance of Taco Bell of plus 9% partially offset by Pizza Hut which was down 1% and KFC which was down 3%.

While commodity inflation remained relatively high at $32 million, cumulative pricing actions finally caught up to this inflation and facilitated fourth quarter restaurant margin improvement of almost 200 basis points.

Solid sales growth and improved restaurant margins led to profit growth of 7% for the quarter.

This is driven by strong profit results during the quarter at Taco Bell and Pizza Hut, capping strong overall results for these brands in 2008 as their sales growth initiatives gained traction with consumers.

On the financial side, Yum!

's fourth quarter results was significantly impacted by a higher effective tax rate and increased interest expense, partially offset by a reduction in average diluted shares outstanding.

These negative financial impacts were more than offset by a $33 million reduction in corporate and unallocated G&A expense excluding special items.

This reduction was due to the lapping of higher annual incentive compensation and strategic project timing in the fourth quarter of 2007 and accounted for 10 points of the 17% operating profit growth in the fourth quarter.

Now I would like to talk about 2009.

In the December investor meeting, we gave a pretty thorough review of our expectations for 2009.

Today I will provide some perspective on how our early results coincide with that outlook.

First, let me make a comment about the first quarter.

Let's remember that our plan for growth in 2009 was significantly back end loaded.

As mentioned in the release last night, the number of items that will impact our overall 2009 growth have a disproportionate impact on our first quarter results.

Please note one, the majority of full year commodity inflation is expected to occur in the first quarter.

Two, the financial benefits of the G&A restructuring announced in the fourth quarter will not be fully realized until the second quarter.

Three, KFC in the US does not expect significant improvement until the launch of Kentucky Grilled Chicken in the second quarter and four, China is lapping exceptionally strong performance in the first half of 2009.

We are still early in 2009, but please keep in mind that we have not changed our full year expectations for profit growth for our key segments or for Yum!

overall.

I will now discuss how sales are coinciding with our December expectations, and let's start with China.

Given the timing of the Chinese New Year and other factors, it's very difficult to get a read on China sales performance right now.

However, I would best categorize the actual sales since our December meeting as roughly in line to slightly below our expectations.

Our brands have distanced themselves from competition and are stronger than ever as we remain extremely confident of our China business model.

Our competitive position continues to improve.

KFC ended 2008 with about a 1,500 unit advantage versus our nearest competitor.

This lead was only about 225 units in 2002.

In addition, our new KFC stores throughout the country continue to perform well with cash margins of nearly 25% and projected internal rates of return of about 30%.

We view the current slowdown in the Chinese economy as only a short term issue.

We do not know exactly how the Chinese consumer will react in the next several months in the economic slowdown.

However, we are not changing our approach to new unit investment or other long term decisions.

With 3,000 restaurants today, Yum!

only has about two restaurants per million people in China versus 60 restaurants per million people in the US.

This continues to create a substantial opportunity.

We expect the Chinese middle class to continue to grow at a rapid rate as the economy continues to grow.

The World Bank forecasted the Chinese middle and upper classes will grow at about 9% annually through 2030 and reach 900 million people.

While this growth may get bumpy at times and may not remain as smooth as in the recent past, we are still in the early stages of penetrating this massive market of 1.3 billion people.

With our improving competitor position, great new unit returns and a rapidly growing middle class, we will continue to build units at a rapid pace in China.

Let's briefly turn to YRI.

As I mentioned earlier, sales continue to perform well in the fourth quarter of 2008.

These strong results were posted across a broad geographic range as shown in the new chart in the earnings release.

So far in fiscal 2009, we have seen sales broadly in line with both recent trends and our December expectation.

The biggest unknown for YRI in 2009 remains the impact of foreign exchange.

In December, we expected a negative $80 million impact on YRI's full year reported profits.

We currently expect about a $25 million negative impact in the first quarter.

Overall, we remain quite pleased with the competitive position and prospects of our YRI business.

For the US business in 2009, we previously communicated that we expected profit growth of 15%.

This is driven largely by G&A cost savings that will make up about 9 points of the growth.

David has already commented US sales started the year below our expectations, especially in the higher ticket dinner occasion.

In the US our current expectations versus December also include the following: lower than expected sales in the first quarter, a tougher overall environment for sales in 2009 and better commodity costs, especially in the second half of the year.

So how does this all add up?

When we met in December, we did provide most of the pieces that would impact our Q1 results.

This translated into a mid single digit decrease in quarter one 2009 year-over-year operating profit.

From where we sit today, there are probably more potential downsides and upsides to this Q1 operating profit scenario.

On a full year basis, we have not changed our outlook.

We expect to build our consistent track record in 2009 and achieve at least 10% EPS growth.

We have a strong balance sheet and substantial cash flow which helped provide tremendous stability.

We believe we have a business model that allows us to be a company that will deliver global growth in today's environment while also building for the future.

We look forward to generating substantial shareholder value by maintaining a passioned focus on generating same store sales growth, new unit development and industry leading ROIC.

Back to you, David.

Thank you very much, Rick.

I want to thank our team around the world for the results we generated in 2008.

We are really proud of the results, the fact we delivered 14% EPS growth.

We are even prouder of the fact that we've exceeded our 10% earnings per share target for the past seven years, one of the very few companies that have done that and finally, we expect to deliver at least 10% EPS growth in 2009.

We are proud of our track record and we intend on keeping it.

So, with that, what we'd like to do is take any questions that you have.

(Operator instructions).

Your first question from the line of David Palmer of UBS.

Thanks.

With regard to your outlook, Rick, you said that there were these pistons to your earnings where you had -- the consumer might be weak, but commodities may also be weak in that sort of an environment.

It seems like dairy has come off a good bit since the outlook.

But it also seems like for many, many companies, even in the consumer products world within food retailing that December and January for the consumer was a different thing than it was before .

That said, dairy has been much better than you would have thought as well, and I just -- maybe there is also something to the fact that chicken prices in China, for instance, might be coming off and inflation in general and that market may be better than it once was.

So could you perhaps kind of wrap that up?

Talk about those different levers and what degree does one offset the

Yes, first of all, regarding -- I'll try to do this a bit by division and then come back to the total, because you're going to see similarities.

If you see YRI, we've basically seen our sales hold up pretty much consistent with the levels we had before December and January.

So we've been encouraged by that.

We do expect some reduction in commodity costs in the second half of the year versus where we were before.

But yes, I think it's likely in most places around the world that there will be some correlation between sales and commodity growth.

If there's weaker demand, you expect there to be weaker demand for commodities and therefore, lower prices.

In China, we talked about what happened to the sales, David went through that in some depth.

Sales are hanging in versus what were expecting, maybe a little bit down depending on the week we're talking about.

Again, we expected commodity inflation to be higher in the first half of the year.

We see that still seeing the case.

In fact, we probably see the second half of the year looking better in China as well as where we were in December at the analysts meeting.

And then the US, same story.

We probably saw a little bigger decline in sales than we expected in the second half of January versus where we were at the December time frame, but we also are seeing commodity costs getting better, significantly better, I would say in the second half of the year is our guess at this time.

Obviously, very fluid.

It's very hard to predict in this environment.

But I do believe that if we get sales softness, we'll likely get commodity upside.

Okay.

Thank you very much.

Thanks, David.

Next question, please.

Your next question comes from the line of John Ivankoe with JP Morgan.

Great, hi, thanks.

A question on China and your infrastructure build in that country.

Obviously, the fourth quarter G&A was only up a couple of million dollars and in constant currency, if you assume that it affected G&A the same as it did your operating profit, it may have actually been down in the fourth quarter.

So is China in a position now where you can begin to leverage the last couple of years of infrastructure growth?

Or is the unit growth that you are still pursuing in the market dictate that your G&A still grows roughly as a percentage or slightly less than a percentage of sales?

Again, good question, John.

If you look at what's happened historically in China with G&A and revenue growth, they have been roughly traveling at the same rate if you go back over a five year period.

We sort of said about a year ago, six months ago, is we do believe we should start to get some leverage on the G&A line.

We still are going to be growing G&A in real terms in China, but it should be at a rate that's below our rate of revenue, and therefore, we do expect some leverage on the G&A line.

Not huge amounts, but should help our business model over the next several year period.

Okay.

If I may make a follow up question as well, one of your competitors talked about pulling back some of that.

I guess tier four, tier five or smaller tier markets in China based on the fact that returns aren't there today relative to what they may have been six months or 12 months ago.

Can you comment on kind of how important those markets are to you?

Whether you are seeing that similar kind of trend?

Whether you are changing your development in China to perhaps try to pursue some lower risk opportunities, especially in a slowing cycle?

Obviously, we spend a huge amount of time looking at our China business returns in both brands by all sizes of cities by all regions.

One of the things that's really great about our China business is our performances have really been outstanding on new unit development returns throughout the country.

Having said that, probably for us even better in the lower tier cities or at least as good.

So what we have seen is actually by now half of our units are in tier three to five cities -- tier three to tier six cities.

Those units continue to perform at a very strong rate for us.

We are not changing anything along those lines.

Overall, KFC projected IRR s continued to do great.

But just to give you an idea of how we do look at this in depth by brand.

What we have done is we have slowed down development of Pizza Hut Dine In in tier one cities where we have had a lot of expansion recently in that brand and we were seeing results that were good overall, but not as good as the rest of our portfolio.

So we have decided to slowdown in that area.

But that is just an example of how we look at stuff all the time, and we have had great results in these lower tier cities.

Great, thanks so much.

Thanks, John.

Next question please, Christie.

Your next question from the line of Jeff Omohundro of Wachovia.

Thanks, another question on China development.

Maybe you could talk a little bit about the new store opening performance over the last six months in terms of average sales.

And when looking at the full year profit growth of 15% to 20%, what kind of targets are you thinking about in terms of new store performance?

Thanks.

Again, we -- the China division, we opened up 500 units in 2008.

Our plans are for high growth again in 2009, again, across all tier cities.

The performance the last six months has continued to be strong.

That is one of the things we look at when look at the performance.

We assume a sales transfer -- some sales transfer will occur and despite that, we have great returns.

We often do want to cannibalize ourselves, so to speak, as we go into places we have a very high performing restaurant, we almost need to take some of the sales off and that's sort of built into our business plan as well.

As we open up new units on average, just for people who look at us, we start out at a rate that is lower than our total sales average, and that is because we do go into some smaller tier cities that have high returns but then grow quicker over time, is how we have seen those markets perform and then obviously, as we go into a developed city, you are sharing that volume over two units or three units versus what was one or two units before.

So you see some sales transfer there.

So far we have not seen anything unusual or different on actual sales transfer versus our projected sales transfer.

So again, all systems go on the new unit front.

So one of the things I'm very confident about in our model is we look at that all the time, we get great returns.

So we keep going as long as we keep getting great sites and great trade zones.

Thanks, Jeff.

Next question please, Christie.

Your next question comes from the line of Jeffrey Bernstein of Barclays Capital.

Great, thank you.

Two questions.

One specific to China.

I know you mentioned when you guys look at the numbers internally, it didn't appear to be a major deceleration toward the end of the quarter obviously highlighting, well, weekend shifts and then just two year averages and what not.

Is it possible you can give some color around what the monthly trend was this year and what the monthly trend was last year to just kind of get a handle around the degree of any slowdown in December and into January?

It just seems as if you are targeting profit growth of 15 to 20 which is below your long term target.

But yet in '08, which was presumably a stronger year, it looks like it was only 14% prior to foreign exchange.

I want to make sure in terms of the degree of conservatism there.

First of all in 2008, we had the 14% growth and operating profit.

The system sales growth in local currency was still 20%.

So our challenge in 2008 for my belief wasn't from a sales perspective, it was from a margin perspective.

We talked about that with the higher chicken commodity cost.

So when I look at 2007, 2008 all in, again, felt pretty good about the sales level growth, the unit development growth.

What we did experience as we said earlier is we did see a deceleration of sales really starting with the earthquake in about the middle of the year.

Since that time, you've got better weeks and months versus others.

But I would say it's been fairly consistent during that period of time.

So as we look into 2009, hard to predict.

As I mentioned, one, we don't share monthly, but secondly, it wouldn't help because you have Chinese New Year, you have a lot of stuff happening in January in China.

So I don't really predict -- it's hard to predict how the sales will develop month by month or even quarter to quarter given what's happening there.

But we do expect the commodity to get better.

We had $78 million of commodities in the full year of 2008.

We probably expect a similar type level in the first quarter and then after that, we expect it to get better.

So we actually expect to get commodity declines in the back half of the year.

Since the early December update, the sales in December and January were not overly -- the deceleration perhaps was not much of the surprise to you over the past two months.

It depended on the week.

It was in the range of bad on expectations to slightly below our expectations.

Put it another way.

I wasn't getting a lot of phone calls from China complaining about their sales.

Great.

And then just one question.

I know at your analyst day in early December you talked about cash and the effort to stockpile.

I know you historically kind of run $100 million to $200 million on the balance sheet at any point in time.

Can you talk about an update on your willingness for share repurchase or debt pay down perhaps by the end of the first half?

I think you had mentioned that was a possibility just with how quickly you guys do generate this cash, just wondering how you might spend it if things were to slow from a fundamental standpoint, whether you would use that earlier with share repurchase, for example.

As we said in December, our plans are for no share repurchases in the year.

In the first half, very unlikely we would do anything.

Then as we look at the back half of the year as we generate more cash, we will look at an option of paying down some possible share buy backs.

But in this environment, probably more focused on getting the balance sheet strong and getting our debt down.

Thanks.

Thanks, Jeff.

Next question, please, Christie.

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

Yes, thanks.

Had a couple of questions on the US side just on the margins in the quarter.

It looked like the food costs were only up about 20 basis points, even though the comps were up about 2%.

I know you had some more pricing in there, but the overall comp was still fairly soft.

And then just a leverage on the payroll side, it was almost 200 basis points of leverage there and just sort of wanted to get some clarification if that's something that could have a run rate or is this some sort of an unusual quarter?

Thanks.

Jason, this is Tim Jerzyk.

The biggest impact on those things that you mentioned, food costs up slightly and labor costs down is mostly from refranchising.

If you look at the mix of stores that we sold by brand, it was very much Pizza Hut and Long John Silver's driven for the year, and then particularly in the back half, more so Pizza Hut.

Because of the food cost and labor cost mix at Pizza Hut in particular versus the same numbers at Taco Bell and KFC, it is basically a portfolio mix.

You have got higher labor costs the Pizza Hut than existing brands Taco Bell and KFC.

So as you sell those stores, you are going to have that kind of an impact.

Okay.

Just easier question, how do you see restaurant margins performing over the course of '09 in the US.?

Obviously, it will depend some on the sales level, but we mentioned the commodity piece, it will also depend on how much that gets better in the second half of the year.

We are very focused on conversion this year.

We are putting a lot of emphasis on margins.

I expect us to do better on margins in '09 than '08.

But obviously, we have on to show you guys that quarter in and quarter out.

Okay thanks, guys.

Thanks Jason.

Next question please, Christie.

Your next question comes from the line of Larry Miller of RBC Capital Markets.

Hey, guys.

I think you alluded to this a little bit throughout the call, but I would love to get a little bit more color.

One of the things I think is great about the investment story Yum!, as year in, year out, you deliver that 10% earnings growth and this year, you are starting off a little slower than planned in Q1 you talked about a mid single digit decrease in profit in Q1 and that would imply that you need something like 13% or so profit growth throughout the year despite headwinds of foreign exchange in China slowing and the US compares relative to 2007 are a little bit harder.

So you're expressing a lot of comfort and I was just wondering of you could point out those couple things other than cost saving that you need to get done in 2009 that would give you that high level of comfort?

As we sort of mentioned, and I won't review them all again, I do want to highlight to everybody, we do have unusual things in Q1 that aren't going to continue throughout the year.

Those are combinations of both cost things on the commodities side and sales things like KFC in the US getting, we think, better and lapping very strong sales in China in the first half of the year.

So the reason we believe we can do better in the back half of the year is that we feel we will have an environment where commodities are not going up any more.

In fact, they could be going down, and we'll have another year of getting the sales layers in place, and we think we can make pretty good progress as we have that combination in place.

The other thing that we've spent a lot of time on has been the G&A.

As David mentioned, we did that work and we were working on that really through a good chunk of 2008 to get ready for 2009.

It was something strategically you want to do, but it also will help our financial picture.

So the G&A piece, we'll get some benefit to that in Q1, but that improvement will also get better throughout the year.

So I feel we have got our cost stuff managed well, and we believe as we get the easier overlaps in the back half of the year, we'll do better on the sales line.

If I could just ask a question about China.

Am I still on?

Yes.

It certainly held up pretty well given that comparison you had, that 22% a year ago.

Are you guys seeing any changes at all in the way the Chinese consumer is using the brand today?

You mentioned the high average check.

Is it a frequency decline, are you seeing some negative mix?

And then I don't know if you ever looked at it, but have you ever looked at what rate of Chinese GDP growth you all need in your business to get what you would call positive same store sales?

Let me add to the second part first.

As we look at the -- the correlation for us on unit, I just want to come back to, what we always look at in China is we look at, can we get in development?

Again let's not forget our story in China is a development story.

That is our biggest concern is, does the business still have those opportunities?

As we mentioned several times on the call, we feel very confident about that.

Trade zones continue to grow in China, new cities continue to grow in China, and I don't see that trend stopping.

So we feel very good about that piece of it.

Regarding the same store sales growth, as long as we stay, anything flattish is actually okay for us on the development side and from a business model side, we obviously prefer to have same store sales growth.

In terms of how people are accessing the brand, we have not seen any really big changes.

As the economy has gotten a little tighter, he one thing we've seen is maybe a little reduction on soft drink incidents.

Some people have come in and cut back on that purchase when they come into the stores.

Other than that, we haven't seen any significant changes.

I think the only point I would add to that is we look at the middle class, the growth of the middle class being key to our success.

In continuing today, the middle class, there is more people in the middle class today than there was a year ago, and the middle class has more income than they had a year ago.

Having said that, we do recognize, obviously, consumer sentiment is down.

The big thing we want to do is we know we've got an incredible long term proposition in China.

We continue to think that our China opportunity represents the best restaurant opportunity in the world bar none.

We don't even think there is a close second in terms of that.

So the thing we are focused on this year is the thing that we have been focused on the past.

Work in the fundamentals of building great brands.

What you are going to be seeing this year is you'll see continued progress with us expanding into new proteins, new day parts.

We have had successful shrimp and fish promotions.

We recently launched the Beef Wrap at KFC.

We now have KFC in breakfast in 90% of our restaurants and we think we have a significant opportunity to improve our breakfast business as we go forward.

I think our mix is only 5% to 6%.

We are going to try to take that in the 10% to 15% range like we have done in Singapore and other Asian markets.

We now have delivery in 23 cities.

KFC delivery, which is getting us into a higher guest check at KFC and the dinner business, we are going to be moving into 65 cities and KFC is the leading brand for young people and teens.

Which are -- now, even though the economy is tough, there is still more kids out there that have money than there was a year ago.

So these l factors that I think bode well for KFC.

When we look at Pizza Hut, it is the number one casual dining brand in China, and we have dramatically expanded our menu so that we offer much more than pizza.

We have a full line of appetizers, pasta, rice, we have tea time now with coffee and sweets, and we are giving the consumers more variety and we are really transforming our whole casual dining business to make it even more powerful as we go forward.

Then we continue to expand pizza at home service, and we are developing east dining, the Chinese fast food concept that we have talked about.

So this is a -- when I look back, I remember the Asian currency crisis in 1998, and people were going oh my God, can you open up more stores?

We just kept building these brands and we have had great unit economics.

Someone talked about unit economics in China.

Nobody has unit economics like we do in China, that is why we can go in tier four and tier five cities and other people can't.

That is why this year, we are stronger than we have ever been in competition.

Competition hasn't gotten closer to us, we have widened the gap.

So that is a tremendous strength as we go forward, and our goal next year is to have a wider gap.

I'm really pleased to hear people are having difficulties moving into tier four and tier five cities.

That is great news for us because we are not, and we are going to keep growing the business.

We have a lot of challenges this year, there's no doubt about it.

There's lots of challenges that we haven't had from an overall economic standpoint, but there is nothing like the power of great brands and the ability to leverage your assets by giving the consumers more.

That is what we are focused on all around the world.

Thank you very much.

Appreciate the color.

Okay.

Thanks, next question please, Christie.

Your next question comes from the line of Howard Penney of Research Edge.

Thanks very much.

One of the things that we are constantly reminded of following this industry is when a company accelerates the pace of development for an extended period of time, that things -- not all the stores that open are opening up at the right levels of returns.

In the past two years, your CapEx has grown by nearly 60%, and that's 30% faster than revenues.

I know years ago, McDonald's used to espouse the (inaudible) theorum which looked at the relative income and population levels in the US and compared that to other markets, and that didn't really work for them.

So my question is why, when you look at income levels and population in China or any country for that matter, penetration rates, how do we know that you are not growing too fast, one?

And two, is there a chance that this is sort of the peak in the growth rate, this 1,400, 1,500 unit level of the 900 million, or is that going to head higher as we end through the year?

Thanks.

Well, a few things.

Again, like you say Howard, you just can't look at the statistics of income, et cetera by itself.

But it is a good thing to have, and we have talked about that, how outside the US, we have under three restaurants per million people versus 60 restaurants per million people in the US.

Secondly, you look at your competitive position.

As David mentioned earlier, we generally have only a few competitors in our markets outside the US.

So you have that strength as well.

But one of the things we have spent a lot of time doing is we look at our performance in new units.

While we have increased over time, if you were to look at it by country, those increases have generally been gradual.

So we have not taken units from -- we didn't have units from 200 to 1,495.

We have done that over time and by building discipline.

If you look at our returns, obviously, we think we have been overall pretty good stewards of capital and to ensure that we can continue to get great returns.

So we take a lot of pride in that.

If you looked at our general managers around the world, asked any one of them how their new units are performing, they would know those answers at the top of the head and be able to talk about it in a fair amount of depth.

So we look at development as just a very important part of our strategy.

It's our day job, and we have a lot of process and discipline built around it.

Usually, when you run into problems is when you try to expand too early too quickly.

And if you start explaining your returns are down because of, you know that story, or you start reducing or relaxing your sight criteria, as we have gone through our past,, we have not relaxed our site criteria.

If anything, we have tightened them up.

You can never be perfect Howard, we have made mistakes as well on development over time.

I wouldn't say we are perfect, but I think we are pretty good at.

Regarding the first part on the increase we have had in capital, quite frankly, some of that was on existing units and just catching up to what we think we need to do to properly maintain those units.

You are going to see that in China, that number continuing to go up because obviously, this -- we have increased our new unit growth, and if you look at -- some of those units are now coming up for remodeling.

So in China you are going to see higher capital costs on both the new unit side as we hopefully can increase that number over time, but also as we take care of the units we have already built.

Howard, I'll tell you how you'll know when we have a problem.

We'll slowdown.

We are fixated on three things that drive shareholder value.

Same store value, new unit development and return on invested capital.

And since you are giving us a history lesson, if you go back and study history, what happened is people grew without any sense of what was going on with their returns.

That was a big problem, I think.

During that decade, a lot of companies did that, and people weren't fixated on return on investment capital.

Everybody started looking at how everybody was spending their money.

They weren't getting a whole lot of returns.

So that's not a problem that we have.

I want our investors to know we are not chasing any numbers.

We are not even chasing 10% EPS growth.

We think we can get 10% EPS growth, but if we thought it was going to be 8% we would tell you it's 8%.

We want to do what we say.

We are not chasing numbers.

I have always said we will never grow faster than our people capability.

The reason we are growing so fast in China is we had the best restaurant teams in the world.

We have almost two managers per store that are ready to be restaurant general managers so we can open up stores with great operations, and we can continue to get great returns.

The minute that we don't get great returns, we will turn the faucet off and we'll go back and figure out what we have to do to get great returns, and we'll tell you.

So I think that's -- the big thing that we have is we have discipline around us and we're not chasing numbers.

Because we know, to your point, that is how companies get in trouble.

Just as in example of what we mean by that discipline, when we have new unit capital budgets, those are not fixed budgets.

For example, we have never said China, sorry China, you have hit your new unit budget even though you are getting 30% returns, please stop.

Similarly, if we see problems either in a country or even in a section of a country as I mentioned earlier with Pizza Hut tier one cities, we reduce the capital and we shut it down so people don't get to spend their capital budget estimate at the beginning of the year, they have to earn it throughout the year and get the returns.

Thank you.

Thanks Howard.

Next question please, Christie.

Your next question comes from the line of Joe Buckley of Bank of America.

Thank you.

A couple of questions, again on China, just a couple of detail things.

Can you share that the December '07 monthly performance in China was very, very strong, I think 23% same store sales growth if I'm not mistaken, and I guess I'm curious.

Any reason why it spiked up at the end of '07?

I realize this is looking backwards quite a bit.

And then a couple other questions with China, just where you are in pricing year-over-year and how much visibility there is for food costs to actually come down in the back half of the year.

And then I have a couple on the US, but let me stop there for now.

Joe, on the question about the December comps, basically throughout the quarter, I think the third quarter '07 comps for China were plus 11.

We basically entered the quarter, which for China in fourth quarter September is the first month.

We basically entered at that kind of rate, and by the time we got to the end of the quarter, it was basically accelerating at like four points every month.

It was just what was going on and at the same time, like Rick said earlier, we pointed out last year our development was also getting stronger and stronger.

We ended the year well ahead of our beginning of the year expectations in terms of new unit development.

If terms of pricing, our current run rate right now, right in I believe in the 4%to 5% range.

Half of that rolls off in March and the other half comes off in August.

And the full year impact right now, we take no pricing, would be about two and a half.

Okay.

And then, question on the US, you indicated the dinner day part is soft and obviously, that is Pizza Hut and KFC.

Has Taco Bell slowed down as well, and if you can, would you share the brand performance for the fourth quarter?

The fourth quarter brand performance, I'm looking up the numbers.

I did have it in my speech.

It was plus 9 -- plus 8 for Taco Bell, minus 1 for Pizza Hut and minus 3 for KFC.

Okay.

And have you seen Taco Bell slow in the first part of '09 like the other two brands?

We don't expect it to be at that level.

It's not that far off of our expectations, but our expectations were not at that level.

Okay.

And then questions you started refranchising.

Does the KFC brand have to turn before you can accelerate the refranchising for KFC?

I know much of the '08 activity was Long John's and Pizza Hut.

Probably yes.

The short answer to that for a couple of reasons.

We'll be able to do some refranchising, but you have both -- people want to see confidence in the brand.

We're not trying to get the last dollar in refranchising, but we don't want to also sell at the bottom bottom of the market.

So we'll probably have slow going in KFC until the brand starts to get healthier.

Okay, just one more.

How does pricing look in the US year-over-year?

If you can give it by brand, that would be great, but even in the aggregate would be helpful.

We are not really planning on a lot of pricing in the US this year.

Obviously, it will depend in part on the -- what happens with commodities.

But if you look at it, I think we have got about a 1.0 to 2 point increase impact on pricing in 2009.

It depends on the brand.

So in Taco Bell, we have about a 3 point assumption on pricing, about 2 of that is carry over and about another point this year.

KFC about a 4 point and then no pricing assumed at Pizza Hut.

Joe, just to run through those brand numbers again, Taco Bell was plus 9, KFC was minus 3 and Pizza was minus 1.

That was for a fourth quarter system.

Thank you.

Thanks, Joe.

Next question please, Christie?

Your next question comes from the line of Keith Siegner at Credit Suisse.

Thanks.

One last question on China, particularly as it relates to margin.

You talked about Pizza Hut and some of the, maybe the disappointments in returns, especially in the tier one cities and how you have scaled back the growth plans for those cities as well.

With the cut back in the absolute growth, especially including the cut back in the tier one markets, if we think about the margins for that business with lower preopening, lower inefficiencies and just less openings in the tier one units, how should we think about the margin impact at Pizza Hut in China and maybe for the whole division as a result?

Just to keep in mind, these are not big factors for China division.

To put the numbers in perspective, we probably built about 30 Pizza dine in units in tier one/two tier cities in 2008.

We expect that number to be about 10 in 2009.

So it really is not going to have a material impact on overall China margins.

Okay, another question.

Cash flow for the fourth quarter and therefore for the full year came in below what I was looking for and I think what you were probably originally guiding to as well.

It looks like a large portion of that was massive reduction in accounts payable.

I'm just wondering if there was a reason or rationale behind this?

It looks like it declined more than I would have anticipated given the refranchising.

Is this something that maybe can turn in 2009?

Is it temporary?

How should we think about that?

If you are looking at versus end of year last year, which is the best way to do it, the biggest delta there is the Japan gain.

It is the way it was accounted for at the end of last year.

That by far was like $100 million dollars.

Of the accounts payable decline?

Yes.

It was in the (inaudible) current liabilities side, there was an impact of $100 million dollars.

$128 million.

Okay.

It was accounted for because of the fact if you go back, the transaction actually occurred after the year end for YRI, but before the Yum!

year end, so it was because of that lag for YRI accounting for 30 days, it had that balance sheet impact at year end.

But it's basically that and the fact that we did sell 700 stores last year and as you may recall, in our business, company stores, basically you do lose working capital when you sell stores.

Okay.

One last question just on KFC and the US.

I think you gave the number for Taco Bell earlier.

What's the percent of US profits generated by KFC at this time?

For KFC US as a percentage of the total?

I think you said it was 60% for Taco Bell.

It was at -- end of year was 8% for KFC US.

8% of US profits is KFC.

Correct.

Okay.

Thank you.

Thanks, Keith.

Next question please, Christie?

Your next question comes from the line of John Glass of Morgan Stanley.

Thanks, two questions.

First, if you could just go back on you are commentary about what has happened in the US in the last four weeks?

Has this been an abrupt slowdown or simply a continuation of maybe trends you saw in the fourth quarter?

And what is the likelihood that comps for the quarter end up being negative because of this slowdown?

I think, John, it is just very hard to predict in this environment exactly what's going to happen with sales.

So I do expect that sales, as we said before, to be a tough environment.

I expect sales to be down below what we were expecting in December.

But I really can't give you a great number with precision, and Q1 therefore, obviously is going to be softer than Q4.

Okay, fine.

There has been a lot of discussion about what's going on in China as it relates to the slowdown.

But what advantages does this slowdown give you in China?

For example, in the United States, rent relief has been a big topic among retailers.

There has been discussion of lower wage inflation.

Have you seen any of those things manifest themselves in China yet?

Does the dynamic even work the same way there to a greater or lesser extent?

Probably to a lesser extent, but it will be there.

For example, the government did a lot of things on benefits in '08.

They have already said they are not going to do anything new on that in '09.

Obviously, we are going to negotiate hard the way we always negotiate on real estate and we have a better opportunity to do that in this environment than we did, let's say, a year ago.

And I think as we pointed out, as you well know, we self fund all our growth, so capital is not an issue for us.

Thank you.

Thanks John.

Next question please, Christie.

Your next question comes from the line of Mitch Speiser of Buckingham Research.

Thanks very much, a few questions.

First on YRI, great performance in the fourth quarter.

Can you give us a sense of where you saw an uptick in comps at YRI from the third quarter?

The thing we feel good about is if you look at the two year growth in YRI, it's been about flat through the year, so we've had pretty consistent growth in YRI if you look at the numbers over the last three year period.

So there haven't been dramatic shifts between Q3 and Q4.

I think the growth difference was the point.

If you do look at the table that we gave in the earnings release, the thing that I felt really good about is just the breadth of the growth.

It is really every continent, across many countries.

So that's the thing that gives us a lot of confidence.

And the other thing is that we're making good progress for us in the high growth market, that has been our strategic initiative.

So we feel good about that and the fact that it is franchise driven growth.

94% of the new units being franchise deals, it really just speaks to the overall strength of the market and our system and our brand.

Got it.

And separately, there hasn't been too much commentary on Kentucky Grilled Chicken.

Can you give us a sense of how many stores it's in now?

Have the trends continued which seem to be very strong in test in '07, '08?

Can you give us a sense of did those trends continue in the back half of '08?

And how do you plan on marketing Kentucky Grilled Chicken?

Is it -- is there any particular focus to get people in the stores to try this type of product?

I'll talk about the trends and let David talk about the marketing.

Really no change in the trends from what we talked about before on grilled product.

It's been in tests for years, and it is not in more restaurants now because we are still putting the ovens in, so the test markets were San Diego, Indianapolis and Oklahoma City, the difference between those and the other markets really hasn't changed from what we've last reported.

So it's been a product that's been tested for a long period of tim, which is obviously why the system is going to go forward.

And on the positioning, I'll let you know David say a few words.

I think that we've got a big, bold approach to introducing this, and I would rather just say that until we announce it.

Because we are going to get a lot of value out of the announcement.

Great.

Thanks.

Thanks, Mitch.

Next question please, Christie.

Your next question comes from the line of Greg Badishkanian of Citi.

This is [Jeff Hans] actually speaking on behalf of Greg today.

Just a quick question on refranchising.

Quick update on what the pipeline looks for and then -- what the pipeline is looking like right now and then your comments about KFC.

Is your target of 500 units more back end loaded this year?

Not particularly.

The big thing on -- it's always hard to predict when deals will close.

We have a decent pipeline, credit is about the same as what we talked about, it is tight but available, but not as broadly available, clearly, as it was a year ago.

So I guess we don't have a lot of visibility into how it's going to really develop by quarter.

I think that the thing that I would add on this, and we have said this before is that we have never needed refranchising for anything in our company.

There's never been a timetable that we were wedded to do refranchising because it is something we need to do.

It's a strategic decision that we made that we feel very good about, and we are going to get there the right way.

Obviously, the world has changed dramatically since we talked about our refranchising strategy, so the timing will change and it will take longer, but the strategic intent remains.

Thanks.

And then just one more quick one on KFC US.

The rollout of the national value menu, I think you said next week is the launch.

How big of an impact do you expect that to be, particularly in relation to grilled chicken and your easy compares in terms of just driving your overall growth at KFC for 09?

I think the biggest gun that we have this year is grilled chicken.

That's how I would look at it.

I think we are being more competitive on the value front with the launch of this national menu.

But Subway has the $5 subs, McDonald's has the dollar menu, weekend Wendy's has Freakonomics.

Everybody's got value.

I think what we are doing is getting in the game maybe a little late, so I don't see this as a game changer for us, but I think it does make us more competitive.

Throughout the year, we are going to be attacking two major barriers.

The first is we need the opportunities to offer more than just fried chicken to broaden our menu offering, make it more appealing to more people and the second is value.

So we have got comprehensive programs including this value program to keep those two messages front and center throughout the year.

But the big gun that we see is Kentucky Grilled Chicken.

Thanks.

Next question please, Christie.

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

Hi.

Thanks guys, thanks for hanging on for additional questions here.

I have a few related to the US.

Can you guys drill down a little bit more specifically about the that dinner pressure that you are seeing?

Whether it is more traffic driven, or are you also seeing check management, I guess related to that and related to the Kentucky Grilled Chicken rollout.

Is it worrisome to be launching such a big campaign when the dinner business seemingly across brands and you are not the only ones talking about this, is under significant pressure?

Could that maybe stem enthusiasm for that product?

I think that there's no secret that the dinner occasion has been under the most pressure across the category for some time now.

So that is not really new news.

When we look at our portfolio, Taco Bell, which is the biggest chunk of the portfolio, 60% of profits, it's the best position clearly as we go into this year because of the Why Pay More menu and the fact it ranks number one in value in the entire category, so it's got the low end covering.

And as we look at Pizza Hut, Pizza Hut is also working very hard on the value front as well and has Pizza Mia.

But it is still a higher guest check occasion, and pizza is a dinner occasion and it is being impacted.

But the other thing that really drives our category, as you well know, is innovation.

Where we think we are getting significant innovation, and we think gives us a lot more strength in our competitors is in the pasta arena and we just launched our lasagna product which is getting very good consumer feedback and we are very hopeful that will be a sales driver for as well -- for us.

As we go into the second half of the year, we'll have nationally advertised Wing Street.

But having said that, clearly, pizza is not as big a lunch stack type occasion, it is more of a dinner occasion.

So we are going to have to innovate to drive sales in that arena and broaden our menu do drive sales in that arena and keep a strong value message out there.

Yesterday I had a call with the Pizza Hut team and they worked very hard on both the value and innovation front, and I think you'll see a steady stream of news on that as we go forward.

KFC, I think the first thing we have to do at KFC is really shore up our chicken on the bone business which is a dinner business, primarily.

We will be doing that with the launch of Kentucky Grilled Chicken, because it will give people the opportunity to mix and match their buckets and I think it really does broaden our appeal in an occasion that basically needs to be shored up, which is dinner.

We also have value at the low end, though now for the first time with our national value menu, which we think is going to give us more of a snacking, lunch type occasion.

So we are hopeful that in the combination of the Kentucky Grilled Chicken, which really is a big dinner innovation, which by the way will also be introduced with a good, low end offer which could drive occasions of both lunch and dinner, we think that major innovation, coupled with what we are doing on value will give us some business momentum as we move into the year.

Okay.

With that said, I guess Rick, maybe I could just ask you a numbers question related to the US business.

Clearly, as you guys laid out at your analysts day 15% profit growth, you guys are sticking with that today.

9% of that growth seemingly come from controllable costs which you have seemingly harvested or are pretty far along in getting it.

The other 6% was reliant on US core profit growth driven presumably by same store sales.

We started off the year a little bit softer and certainly one month does not a year make.

But can you share with us a little bit around the sensitivity of weaker same store sales?

How that might flow through the margins or operating profit line if you have those numbers?

And I guess in addition, are there other controllable factors?

Other controllable costs that you guys are looking at that if sales do come up short that you can offset?

I think if you look at our franchise business, the flow through is just related to sales, so whatever happens to sales pretty much happens to profits on the company side up or down, flow throughs probably in the 40% range.

If you -- I think the hard thing to make the prediction for this year is just -- that was one of the questions earlier, is just the relationship between sales and commodities.

I do expect there to be correlation there, so if the market -- if the environment's tougher on the sales side, I do expect this to do better on the commodity side.

So that's what makes it, I think, tough to call.

We are doing everything we can on the productivity and cost piece.

The biggest piece of that is the G&A, but we are looking at all the things that we at in these types of environments, and we are putting a lot of -- we are going to take care of the customer, but we are very focused on margin this year as well.

We don't have a lot more to say than what we have already said.

I'll leave it at that.

Thanks.

Thanks, Steven.

Next question please Christie.

Your next question comes from the line of Fitzhugh Taylor of Thomas Weisel partners.

Hey guys, thanks also for hanging on.

Just a quick question about margins briefly.

Last year you were talking about catching up in price at both the US and in China.

The US margins seemed to reflect a benefit of that while China, at least on the surface has not.

Is the biggest different there just the refranchising in the US or are there some other pieces that have prohibited some improvement in margins in China?

Well I think as Tim mentioned earlier, the refranchising has helped margins.

But we were able to catch up pricing with commodities, as I mentioned earlier.

So we feel good about that in the US and we expect that to sort of continue in 2009.

We expect that to be a positive where it's a negative through most of 2008 until the fourth quarter.

So that is sort of the US story.

On China, the real difference there was just the magnitude of the commodity cost increase.

Remember, we were in a period of China where even though there was some inflation in China, because KFC was growing and we were getting leverage purchasing, we actually had very little pricing for about a four year period.

So it's really it is only the last couple of years where we had started a price and then we had the huge increase in chicken costs.

I think it was just -- what really happened to us in China is the chicken costs were high and they have been sticky on the way down.

We actually do expect them to go down a little bit in the last part of the year, so that gets us you know pretty well caught up by then.

Thank you.

Thanks.

Christie, we have time for one more question.

Your final question comes from the line of Rob Wilson of Tiburon Research.

Yes, thanks for taking my call.

I'm looking at the dramatic improvement in profitability in the US division in Q4.

You had run nine straight quarters of restaurant margin decline and then all of a sudden it spiked dramatically higher in Q4.

You mentioned that this was related to refranchising.

If so, why would we not expect that to continue going forward?

Well, we will get some benefits from refranchising going forward.

We also, as we mentioned, did get the benefit of the pricing finally beating and overtaking the commodity cost increase.

So we -- our full year guidance was a 1 point increase in margins for 2009 versus 2008.

I guess I'm looking at Q4, and I'm just seeing this dramatic change versus previous history.

Why would Q4 have spiked so much higher, yet you are not really expecting that improvement to continue into 2009?

Well we are expecting improvement.

In terms of that level, it's probably most related to the timing of pricing versus commodity increases which probably work to our favor a little bit more in Q4 than they will on average throughout 2009.

But again, as we mentioned earlier, that could happen if commodities go in our direction.

Okay.

One last question.

You talk about restructure charges and US brand reinvestments as your special items.

What are these?

Well the restructuring charges were the severance costs.

The investments were really -- mostly the biggest piece of that will be the ovens, for KFC.

We also had investments in system -- investment for KFC to put systems into test markets for franchise test markets.

So those were the two investment parts there and then the severances, the other piece of restructuring.

Okay.

Well, thanks for taking my call.

Okay.

Sure.

Okay, well let me just briefly wrap up.

First of all, our China business is on track and we continue to expect solid growth, 15% to 20% 2009 which we adjusted from our long term target of 20% due to the short term economic issues we talked about.

Second, YRI continues to produce consistent results with the strength of its broad geography of over 110 countries and 700 franchisees, and has held up remarkably well during this challenging economic environment.

And third, our US business that has underperformed is better positioned than ever to grow about 15% in 2009.

Importantly, 9 points of this growth will come from G&A cost reductions we initiated last year.

Fourth, our company has remarkable financial strength from our global cash flows, strong balance sheet, and there is no need for new financing in 2009.

We are fully funded for our global growth as always.

With all these things in mind, we continue to expect that we will achieve our EPS growth target of at least 10% in 2009.

That's our story and we're sticking to it.

Talk to you guys later.

This concludes today's conference call.

You may now disconnect.