百勝餐飲集團 (YUM) 2012 Q3 法說會逐字稿

Good morning.

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

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

Brands third-quarter 2012 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.

Mr. Tim Jerzyk, Senior Vice President of Investor Relations, you may begin your conference.

Thank you, Ashley.

Good morning, everyone, and thanks for joining us today.

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

We are broadcasting the conference call via our website, www.Yum.com.

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

I would also like to remind you that this conference call includes forward-looking statements.

Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements.

All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release last night and the risk factors included in our filings with the SEC.

In addition, please refer to the investors section of the Yum!

Brands website to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call.

Also, we would like you to please be aware of a couple of Yum!

investor events.

Thursday, December 6, we will host our annual investor update meeting in New York City and then Monday, February 4, 2013, our fourth-quarter earnings will be released.

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

Following remarks from each we will take your questions.

Now I will turn the call over to David Novak.

Thank you very much, Tim, and good morning, everyone.

Before I talk about our third-quarter performance I think it is important to note this past Sunday, October 7, marked our 15th anniversary as a company.

From the very beginning our formula for success has been people capability first, satisfied customers and profitability followed.

I am proud of the How We Win Together ownership culture we have developed and pleased with the strong returns we have generated for our shareholders.

As we look back over the past 15 years we take satisfaction by what we have been able to accomplish, but as you will hear more about today, we are even more excited about the unfinished business that lies ahead.

When we started our company we benchmarked high performing companies and all were known for their consistent double-digit annual EPS growth.

As a result, we built our company around the objective of delivering dynasty-like performance of at least 10% annual EPS growth.

We just raised our guide and we expect that 2012 will mark the 11th consecutive year we deliver at least 13% EPS growth before special items.

As you know, there are three keys to driving shareholder value in retail -- new unit development, same-store sales growth, and high returns.

Our new unit opportunity in China is the best in retail and our opportunity to expand is now bigger than ever throughout the emerging markets.

As I said before, Yum!

Brands is about China and so much more.

As evidence, about 60% of our profit is generated in emerging markets, which is where the real economic growth in the world is occurring today.

This growth, combined with the fact that we have powerful global brands and only two restaurants per million people in the emerging markets compared with 58 restaurants per million people in the US, gives us tremendous confidence in our ability to continue our aggressive expansion.

Further, I would not trade our opportunity to grow same-store sales with anyone.

We have 38,000 restaurants with underutilized assets.

We are laying the foundation for more substantial same-store sales growth by developing breakfast, beverages, and broader menu variety that will leverage our existing restaurants and improve asset utilization over time.

Meanwhile, our returns continue to be among the best in the restaurant industry with return on invested capital over 22%.

These facts give us confidence that our business model delivers strong results in even the most challenging economic times.

Unlike most companies, we don't have to look for growth.

It is staring us right in the face every day.

We expect this opportunity will allow us to build on our track record of at least 10% earnings per share growth in 2013 and well into the future.

Now on to our results.

I'm pleased to report each of our divisions produced strong sales and profit results, driving 19% EPS growth prior to special items.

Given the strength of our year-to-date results, as I just mentioned, we are raising our full-year EPS growth forecast to at least 13% excluding special items.

We expect to open a record 1,750-plus new international units this year, including over 750 new units in China.

That is two new restaurants per day in China and nearly five new restaurants per day around the world.

Equally important, we have same-store sales growth across our divisions.

This combination of record new unit development and strong same-store sales growth has delivered high-quality earnings this year and gives us even more confidence in delivering a strong 2013 as well.

Now let me take you through our key strategies in China and India and then Rick will take you through our strategies at Yum!

Restaurants International and the United States.

Pat Grismer will then review our financial progress.

I am obviously very proud of our China team's continued strong performance.

For the third quarter operating profit grew 22% prior to foreign currency translations, units expanded 18%, and system sales grew 22%.

Importantly, and as we predicted, restaurant-level margins improved dramatically compared to our second quarter.

Same-store sales grew at a healthy rate of 6% with transactions down 1%.

Keep in mind this is overlapping 19% same-store sales growth with transaction growth of 27% during the third quarter of last year.

When you do the math, our two-year same-store sales growth is an impressive 26% with two-year same-store transaction growth of 26% as well.

What makes this even more impressive is that we are driving record new unit development at the same time.

We are excited that the China team is going to open over 750 new restaurants this year.

Our new unit returns in China remain the best in our business.

We know we are building shareholder value with cash paybacks less than three years.

However, you should know that my number one challenge to the team is to never build faster than our people capability.

Fortunately, as our scale grows in China our people capability continues to get even stronger.

We hired 10,000 new management trainees over the past year through our Whampoa Academy and currently have 2,000 assistant managers in our system today who are ready to become restaurant general managers and continue to build on our reputation for operational excellence.

Our focus on people capability first is alive and well in China.

Now let me share with you a few highlights from each of our leading brands in China.

Let's start with KFC, the largest Western QSR concept in China.

Our first KFC restaurant opened in China in 1987, so we have been in China for 25 years now.

I'm proud to say that we recently opened our 4,000th KFC restaurant.

It took 17 years to open our first 1,000 restaurants, but only two years to open our most recent 1,000.

We continue to expand our unit advantage over our nearest competitor and we are growing in both large and smaller cities throughout the country.

We are acquiring the premier sites in the most vibrant trade zones and we are using our assets throughout the day with breakfast, delivery, and 24-hour operations.

Our new fast food business model balances great tasting food with high quality service and speed.

We offer a balanced menu across multiple proteins and dayparts and promote healthy lifestyles, as well as focus on being rooted in China with continuous innovation.

We constantly monitor key consumer metrics and continue to win with Chinese consumers.

Now all of this success is underpinned by world-class operations and outstanding people capability.

Having said this, the most exciting new news in the past couple of years has been the tremendous growth and vibrancy of the Pizza Hut brand.

Pizza Hut casual dining goes beyond pizza and continues to unquestionably be the leading Western casual dining concept in China with over 700 units in 120 cities.

The Pizza Hut menu is revamped twice a year and continues to offer a broad variety of entrees including beef, chicken, and rice dishes along with appetizers, beverages, and desserts.

We are having tremendous success building a true Western casual dining concept with everyday affordable values.

In fact, our new unit returns are at least equal to the fantastic returns for KFC, and we expect to open over 150 Pizza Hut casual dining restaurants this year.

We are especially pleased to be opening Pizza Huts not only in the larger cities but in Tier 3, 4, and 5 cities as well where there is nearly 1 billion people.

We also continued to invest behind the development of our emerging brands.

Pizza Hut Home Service in the home delivery category now has 140 units in 14 cities.

East Dawning, our Chinese fast food brand, now has 28 restaurants.

We continue to make progress as we drive for scalable economics with both of these concepts.

As you know, we acquired a Little Sheep, China's leading hot pot concept, in February of this year.

We acquired Little Sheep to strengthen its operating model and increase its market leadership position.

We know this is a powerful brand and we have the expertise to make it even stronger.

We have completed management integration into Yum's China team and have new initiatives moving through the pipeline.

We didn't buy this business for its 400-plus units.

We bought this brand for its potential for thousands of restaurants.

Let me assure you our long-term belief in this brand continues to be very high.

In summary, our China business is having another strong year, but as I said before, China is going to have its inevitable ups and downs, and like I said last quarter, we now face a slowing economy.

But that doesn't change our long-term outlook in China one iota.

Our annual performance has been pretty consistent and I expect this to continue.

The progress we are making in executing our China strategy to build leading brands in every significant restaurant category is exceptional and we are confident in our ability to deliver strong growth in 2013 and beyond.

Now let's talk about our India division where our brands are all about the youth and providing an aspirational experience.

We have 495 restaurants in our India division and expect to open 100 new restaurants this year.

Our KFC business model is getting stronger, working in both large and smaller cities.

The team has gone to school on what makes KFC so successful in China and we are applying these strategies to India.

Based on the unit economics we are seeing, we believe there is a compelling reason to put even more capital to work at KFC in China -- in India, excuse me.

We are laying the foundation for this business to have leading brands in every significant category in India, including KFC, Pizza Hut casual dining, Pizza Hut Home Service, and Taco Bell.

We expect this business to have a substantial impact on Yum's profit growth in the future.

Now let me hand it over to Rick, who is going to give you an update on Yum!

Restaurants International and our US business.

Thank you, David.

Let me start this morning with Yum!

Restaurants International, which is perhaps the most underappreciated piece of Yum!.

YRI has a great business portfolio.

There are tremendous development opportunities in emerging and underdeveloped markets and over 85% of YRI's 14,000 restaurants are franchised.

This combination creates a steady stream of franchise royalties and strong growth.

For the quarter, YRI delivered systems sales growth of 4% and operating profit growth of 14% prior to foreign currency translations.

Same-store sales increased 2%, led by a 5% increase in emerging markets.

These YRI same-store sales were negatively impacted by about 1 point due to the calendar shift of Ramadan into the third-quarter of 2012.

With the results we have seen so far this year we are well on our way to build 900 new units in 2012.

While Yum!

Restaurants International has tremendous growth opportunities in many parts of the world, I'm going to spend some time today talking about the roles of four markets -- France, Germany, and Russia, as well as the African continent.

First, let me put France, Germany, and Russia into perspective.

In these three countries combined McDonald's has about 2,900 units and makes well over $1 billion in profits.

Last year in these countries YRI had 383 restaurants and made less than $30 million in profits, so we know we have a tremendous runway for growth.

In France we have 143 restaurants, we are on the air with national television advertising, and we have the highest KFC average unit volumes in the world.

We are using a business rental program which we patterned after the successful model used in France by McDonald's.

This approach, combined with the strong KFC consumer proposition, is driving disciplined unit growth.

We are making significant progress building a profitable business in France and we are using a similar approach in Germany.

I recently visited Germany where we now have 81 KFCs.

I saw that KFC is leveraging its freshly prepared chicken to differentiate itself on food quality.

The German team and franchisees are really excited because we have the scale necessary now to begin national advertising in 2013.

David, Pat, and I were also able to see our Russia business in person in August.

We all came away amazed at the breakthrough progress Oleg Pisklov and his team are making.

Two years ago our restaurants in Russia were all franchised, they were only sub-branded as KFCs, and they have average unit volumes of about $1.2 million.

Well, in the past two years Russia has had the highest KFC same-store sales growth in the world, so as we sit here today we now have 180 KFCs averaging $1.8 million.

The team has improved operations and brand marketing and has converted almost 100% of this system to stand-alone KFCs.

We attended a restaurant general manager conference in Moscow where we met many talented and committed RGMs.

McDonald's has a tremendous business in Russia so we know we have a long way to go.

However, after seeing how our KFC brand is evolving and the quality of our team, we left with even more confidence about our growth prospects in Russia and our ability to build a very strong business there.

The last YRI market I would like to highlight is Africa and you think about Africa in several pieces.

We have a very robust business in South Africa with 660 KFCs where we are clearly the market leader.

We have also been expecting to be in 17 African countries outside of South Africa by the end of 2012, including Nigeria, Kenya, and Ghana.

Our primary objective is to build people capability, infrastructure, and scale in these countries.

We do not expect them to add significantly to our profit results in the next several years; however, we are very pleased that we have started the journey in this part of Africa.

With over 1 billion people, Africa can be a very significant business for Yum!

and we are proud to be the restaurant leader on this continent.

We generated about $60 million of profit from South Africa last year, so if you include France, Germany, and Russia, and South Africa we made less than $100 million in these markets combined.

However, these four markets have impressive short-term and long-term growth potential.

Together they have the ability to generate up to half of YRI's 10% targeted profit growth over the next four years.

Overall, the Yum!

Restaurants International business is on track.

We are having a strong year in 2012 and we believe we are well positioned for future success.

Our strategy remains to drive aggressive expansion and build strong brands everywhere.

Now on to our US business, where our ongoing goal has been to improve our brand positions, consistency, and returns.

Same-store sales were up 6% in the third quarter and year-to-date.

In the third quarter operating profits grew 13% and is up 22% year-to-date.

We have structured the US business for more consistent returns and are putting the building blocks in place to build more powerful brands and to sustain our performance going forward.

Back in 2008 we began reducing our company ownership levels in the US.

By the end of this year we will have taken our company-owned restaurants from 3,900 to less than 1,700, therefore cutting our equity units by more than half.

We have put our restaurants in the hands of capable franchisees while improving our return of capital in the US business by about 4 points.

We have essentially completed our KFC and Pizza Hut re-franchising.

We began a more modest re-franchising of Taco Bell restaurants last year, although our US ownership will remain skewed towards Taco Bell.

We expect to reach our target ownership levels by the end of 2013.

At that time our US company mix will be about 10% compared to the 22% mix we had at the beginning of 2008.

As the largest US brand, Taco Bell has been the catalyst of our 2012 US performance.

The brand has made great strides with key product introductions of Doritos Locos Tacos and Cantina Bell.

The good news is that these initiatives not only delivered strong sales this year, but should drive sales in 2013 with new flavor varieties and line extensions to complement our current menu.

Our biggest global initiative is driving world-class operations and I am pleased that Taco Bell continues to make progress in this arena year after year.

Taco Bell was just recognized for being in the top two in both drive-through speed and accuracy by QSR magazine, a goal that they have been aspiring to achieve for several years.

Pizza Hut and KFC have also contributed significantly to our US performance this year.

Pizza Hut has been able to stay relevant to consumers by combining strong value with its $10 any pizza and solid innovation.

The system has also successfully reversed its trend of declining units by introducing a smaller, less expensive deliberate concept we call (inaudible).

After 10 years of unit decline Pizza Hut added 53 net units in 2011 and expects to add over 130 net new units this year.

Our franchisees are very excited about this initiative and the returns that they are generating.

At KFC we know we had some heavy sledding ahead of us, but we are stabilizing the business and working better with our franchisees.

Our number one focus is to improve our operations.

The system is making investments in technology and equipment that will provide a more consistent customer experience.

With the successful introduction of bites and a larger advertising presence, it is good to see improvement in 2012 in same-store sales and brand profitability.

We have initiated supply chain initiatives across our US brands.

Thanks to partnering with our purchasing co-op and our franchisees commodity costs in the US this year are essentially flat, which we believe is below the industry rate of inflation.

So when we look across our US business we are proud of what we are accomplishing this year, and we also believe that we are improving our business model.

We are building a foundation to deliver growth in 2013 and more consistent results going forward.

Now let me hand it over to Pat Grismer, our CFO.

Thank you, Rick.

To start, I would like to thank our operating divisions for their outstanding third-quarter performance as 19% EPS growth, excluding special items, was led by an impressive 18% growth in operating profit prior to foreign currency translation.

It is great to see each of our businesses deliver such strong results, reflecting the resilience of our global brands and business models in uncertain times.

As David and Rick have already summarized third-quarter results for each of our divisions, I will limit my Q3 remarks to three key items of interest -- China restaurant margin, China new unit development, and Yum shareholder cash payouts.

I will then lay out our expectations for the fourth quarter and share some initial thoughts on 2013.

First, China restaurant margin.

You will recall that China margin was down 4 percentage points in the second quarter compared to prior year.

As we expected, this trend reversed in the third quarter with margin improving modestly over prior year due to phased pricing actions and lower inflation.

For the third consecutive quarter inflation rates fell for both labor and commodities in Q3 coming in at 8% and 2%, respectively.

This result reinforces our belief that China can sustain a restaurant margin of 20% over the long run.

Second, China new unit development.

As David mentioned, our China division now expects to open over 750 new units this year.

To put this into perspective, I would like to point out that a couple of years ago in 2010 China's new unit growth rate was 13%.

This year it is 18% on a much larger store base.

This is a clear breakthrough in development and performance and a testament to the size and scale of our China development team.

Of course, in light of these development results we are sometimes asked whether we are growing too fast in China.

The simple answer is that we approach China development with extreme rigor, taking care not to let our cash get out in front of our people capability.

This development discipline has four key pillars.

Number one, we allocate significant resources to China development with a world-class team that is 1,000 team members strong on the ground; finding, evaluating, and securing sites.

Capability that is unmatched in China today.

Number two, we select sites based on an intimate understanding of retail development in China, fully informed by our experience with nearly 5,000 restaurants to date, a proprietary database that grows in size and sophistication with each passing year.

Number three, we evolve our new store portfolio to optimize our returns.

For example, shifting development from Tier 1 cities where store margins are under some pressure to lower tier cities where returns are higher.

And number four, as David mentioned, we build a large pipeline of fully qualified restaurant general managers to ensure we open new stores with excellence, delivering on our brand promise.

This is why we are comfortable with our rate of expansion in China and confident in our ability to sustain high returns and generate significant operating cash from this business.

Which brings me to my third Q3 topic -- Yum!

shareholder cash payouts.

We recently increased our dividend by 18%, marking our eight consecutive annual double-digit percentage increase, one of only 12 companies in the S&P 500 to do so.

With this rate of growth we have doubled our dividend in less than five years while also returning significant cash through share repurchases.

This year through Q3 we repurchased shares totaling just over $700 million and we continue to expect at least $800 million in repurchases for the full year.

Adding it up, we will return over $1.3 billion to shareholders in the form of dividends and share repurchase this year, all while continuing to invest behind new store development and other growth engines.

Now I'm going to talk about our expectations for the fourth quarter.

In China we anticipate modest year-over-year margin improvement in Q4 similar to what we saw in the third quarter.

This margin improvement and continued strength in new unit development should deliver solid double-digit profit growth for China in the fourth quarter.

I am sure many of you are interested to know how same-store sales are currently trending in China.

Remember, our overlap is two points higher as we move into the fourth quarter with same-store sales growth of 21% last year, so we do expect comps to moderate further.

Additionally, Q4 is our longest fiscal quarter and with three months remaining in a volatile and slowing economy sales are tough to predict.

At this point our best estimate is that China same-store sales will be low single digits to flat in Q4.

Now before I talk about YRI in the US, I would first like to remind everyone that we have an overlap headwind due to an additional week in our 2011 fiscal year.

This additional week produced a $26 million operating profit benefit to YRI in the US combined or over 4 percentage points of EPS growth.

This will obviously have a negative impact on this year's fourth-quarter growth.

At YRI we expect fourth-quarter same-store sales growth to benefit from the timing of Ramadan, reversing the impact seen in Q3.

This will contribute to solid profit growth for YRI in Q4, which will be partially offset by the 53rd week overlap that provided an $8 million benefit to operating profit last year.

In the United States, we will see substantially weaker performance in the fourth quarter than we have seen so far this year.

There are three key reasons why.

First, we will have a headwind of $18 million as we overlap last year's 53rd week benefit.

This alone equates to 10 points of profit growth on the quarter.

Second, we expect more moderate same-store sales growth than we have seen so far this year, in part because we will be lapping our toughest comps from last year.

And, finally, our year-to-date re-franchising of 340 US restaurants will be profit dilutive in the fourth quarter, albeit shareholder value positive in the long run.

In summary, for the full year we are expecting significant profit growth from each of our divisions led by strong sales performance across our entire business.

Therefore, we are raising our full-year EPS growth forecast to at least 13%, excluding special items, marking the 11th consecutive year we are expecting to deliver at least 13% EPS growth.

Considering the challenging global economy, I am very pleased with our performance and the overall quality of our earnings growth in 2012.

I am also confident that our work this year is setting us up nicely for a solid 2013.

We are still in the process of developing detailed plans for our businesses next year and, as usual, we will provide additional perspective at our December meeting in New York.

However, I do want to share some initial thoughts for 2013.

First, we are fortunate that our new unit development provides us with a head start on building next year's profit plan.

This year's record level pace of 1,750 new units outside the US provides us with the best development driven tailwind we have ever had.

In China specifically our current development rate is 18%, which is well above the low double-digit percentage unit increase our ongoing growth model requires.

As system sales growth is driven by both new unit development and same-store sales growth, this year's accelerated pace of development reduces our dependence on same-store sales growth in 2013 to achieve China's targeted profit growth of 15%.

Nevertheless, we do expect same-store sales growth in China next year with our new product pipeline as strong as ever and about 4 points of pricing as we enter the year.

At Yum!

Restaurants International our ongoing growth model calls for net unit growth of 3% to 4%.

This year we will build 900 new units, driving net unit growth of 4%.

When you consider that India is no longer contributing to YRI's new units, this effectively amounts to an increase in YRI's development pace.

Our growth model calls for same-store sales growth of at least 2% to 3% at YRI and we look to be on track to deliver this.

Additionally, over 45% of YRI's units are in emerging markets where economic growth is higher than the rest of the world, further bolstering YRI's same-store sales growth expectations for 2013.

In the US, our ongoing growth model calls for same-store sales growth of 2% to 3%.

As you know, the US had an outstanding year this year and Taco Bell is now building off two great new platforms, Doritos Locos Tacos and Cantina Bell.

These platforms will be the catalyst for innovation in 2013, driving same-store sales to expected levels.

In 2012 we also had net unit growth at both Taco Bell and Pizza Hut and expect this to continue next year as well.

And, finally, we will continue to benefit from our restaurant productivity initiatives which have delivered significant benefit to our US businesses this year.

In conclusion, we have a lot of confidence in our business model and the consistency that Yum!

provides through the power of our global portfolio.

At the end of 2012 this portfolio will have delivered annual double-digit EPS growth over the past 11 years, even in challenging macroeconomic circumstances.

And our global brand portfolio has never been stronger as our teams continue to grow and invest in emerging markets and manage costs efficiently.

For these reasons, I strongly believe that 2013 will be another year where Yum will deliver double-digit EPS growth for our shareholders.

And with that we are happy to take questions , Ashley.

(Operator Instructions) David Palmer, UBS.

Good morning.

Congrats on the quarter and also thanks for the details on this call.

You mentioned that the China economy is slowing and the fourth-quarter same-store sales will have less pricing and that leads you to the low single digit to flat guidance there.

Is there anything beyond -- in the details of your business, in the trends that you are seeing that gives you visibility in terms of where things may bottom in terms of same-store sales?

And I mention that -- just naturally investors are going to be off-balance until they figure out where the bottom in your at least the same-store sales are going to be.

Is there any sense of that for you in your China business?

Thanks.

David, I don't know how to really answer that.

First of all, we are not economists so we are not really seeing or reading any news or have any really news that you really don't have or you can't read about already.

What we do see is clearly there is an economic slowdown in China, which, again, is not any news and we talked about this the last time.

I think the biggest thing that I would want to just point is we have been able to deliver consistent results and we have been able to do that year after year.

And I think it is because our business model is really strong.

Obviously China, even with its challenges, is still growing at a reasonable pace.

It is up -- GDP was up 7% in the second quarter.

It is expected to be up 8% in 2013 according to the Financial Times and retail growth is supposed to be double the GDP.

I think for us the biggest tailwind we have is just the consuming class continues to grow, expected to double in the next 10 years.

You guys read the same stuff we read and the same facts are reported.

Personal incomes, middle-class incomes, are rising, which is also a big plus.

As you saw, our infrastructure -- the infrastructure growth is really continuing to grow at a high rate.

So we have got all these new cities and clusters and trade zones coming into play that we are able to now penetrate.

And so I think the big news for us is old news, frankly; is that we are really in position to capitalize on what is going on in China, which is still the fastest growing economy, more than any other retailer in the world.

We have got leading brands, a business model with three-year cash-on-cash returns.

Competitive brand positions that are better than they have ever been.

We have got unmatched development capability.

You have seen our management team in action.

They have been together for a long time; getting better and better.

A lot of young talent coming in.

We own our own supply chain and we are just attracting top talent.

I mean the fact -- I pointed out in my remarks, we have 10,000 management trainees this year and 2,000 ready-to-go assistant managers.

So I think -- I look at this business long term.

I say we are going to have our ups and downs.

Right now we kind of facing a slower economy, but I'm always going to be glad I wake up every day and know that we have the position that we have in China.

I think, as we look to the long term, we are very confident in what we have ahead of us.

David, what I would add to that is that we have clearly acknowledged that same-store sales have slowed down, in part because we are lapping extraordinary performance from last year, but also because the economy is slowing.

But I also pointed out that given the accelerated pace of new unit development this year tracking at 18%, as we enter next year we are going to be less reliant on same-store sales growth to achieve our 15% profit growth for the China division.

So when you add it all up, when you consider the pace of development, when you consider the pricing that we have rolling into next year and the ongoing strength of our new product pipeline, not to mention the strong people capability, as David mentioned, we continue to be very optimistic that we will achieve that 15% profit growth for China next year.

Thanks.

Michael Kelter, Goldman Sachs.

Hi, guys.

I have, I guess, two questions.

The first one is how can we be confident in positive China same-store sales growth in 2013, as per your guidance, when traffic is running negative right now, the economy is still decelerating, and you will have less pricing rolling through the P&L next year?

So, essentially, what I am asking is what are you seeing that makes positive your base case?

And then, secondly, the accelerated new unit development in China.

You talked about why you are comfortable with the pace of openings in the prepared remarks and it all makes total sense.

But I just wanted to ask if you were in fact growing too fast and maybe making some mistakes that were being obscured by the near-term growth that it provides, how would you know it before it was too late?

What are you looking at?

I'm happy to respond to that, Michael, and I will start with the second piece on development.

As I mentioned, we have extraordinary development capability in China.

We review with the performance of our new units routinely, paying attention to every possible operating metric you can imagine.

And there is extreme diligence around how we manage our new restaurant portfolio, including shifting, as I mentioned, development from the Tier 1 cities where returns have softened into the lower tier cities where we have higher margins and our returns are outstanding.

So we do capitalize on what we learned from recent new store openings to inform how we manage our pipeline going forward, so there is extreme diligence and rigor around that entire process.

Regular review by again a team that is very, very experienced and unmatched in capability in China.

As to the second question on positive same-store sales for next year, we do have 4 points of pricing as we enter next year.

And depending on how we construct our plan for next year, we may find opportunity to take additional pricing.

But at the same time, we are confident in our track record of new product innovation and how we have been able to grow our business over time.

We have added sales layers to our business.

We are not fully penetrated in all of those sales layers.

So as we move those to 100% penetration and we continue to introduce new product innovation we are confident that we will be able to generate eventually the same-store transaction growth along with the check growth that comes from pricing to achieve the same-store sales growth on the year.

Now, as we have said before, there can be volatility from quarter to quarter, so I am talking about a full-year basis when I say that we are optimistic that we will deliver the same-store sales growth in 2013.

I think one other really good example on just how we approach development, a couple of years ago Pizza Hut casual dining, our unit economics slowed down and so we did not expand further.

We didn't move into the Tier 3, 4, 5 cities at all.

What we did is we went back and the team revamped our business so that we added much more menu variety.

We also took our value equation where we went with the Eat Like a Rich Man, Eat Like a Poor Man approach where we had great everyday value entry pricing, half price menu, entrees on a daily basis.

And the transactions and profits just went through the roof.

Then we started expanding into 3, 4, and 5 cities.

So I think that is a great example where we really follow our mantra, which is don't get your cash out in front of your people capability and/or your business model.

We constantly are tracking our performance quarterly with what we call our new unit tracking system, as Pat talked about, but that is a great example of how we look at things.

I tell the guys all the, and I have said this before, we have got great diamonds, great brands.

Keep polishing; don't grow any faster than we can grow.

What is happening though is that we are able to grow fast because the opportunities are out there and increasing, and we are able to do it with great returns for our shareholders.

So we are confident that we are growing the business the right way, and I can assure you that the team has been told and from day one we have never been chasing a number.

The number just keeps getting bigger and bigger than what any of us ever expected.

We went into this year with projection of 600.

This was after we did 650 last year.

Why was it 600?

Don't grow faster than what we need to.

We don't give -- we are not trying to be heroes, we're trying to build a heroic business.

Jonathan Komp, Robert W. Baird.

Thanks for taking my question.

Pat, just a follow-up question on the restaurant margin outlook for China for Q4.

I am wondering specifically what your current expectation is in terms of commodity and wage rate inflation.

Absolutely.

As I mentioned in my prepared remarks, we are expecting modest year-over-year improvement in China margins in the fourth quarter, comparable to what we saw in the third quarter.

But how we will get there will be a bit different.

We are expecting, for example, a positive impact from inflation because we expect there will be, in fact, deflation on our commodities in China in the second quarter -- or excuse me, in the four quarter.

And we are expecting a lower benefit from pricing as we roll over some pricing actions we took last year.

We are expecting the impact from new store development to be about the same.

So when you add all of those factors together, we are looking at about 1 point of improvement on margins year over year excluding the impact of Little Sheep.

Okay.

And then I guess one more clarification question, just on the expectation for slower China comps in Q4.

You mentioned that you are cycling pricing; I think you already cycled some again in November.

So I just want to ask -- I'm wondering specifically on the traffic component for China how much slowing you expect for that factor in Q4 and then whether or not you have actually seen that materialize yet quarter to date.

Just to recap a little bit.

In Q3 what we had was 6% same-store sales growth.

We had about a 7% pricing advantage, so as David mentioned, transactions were down about 1 point.

What we are expecting for Q4 is same-store sales growth of low single digits to flat, and we will have about 5 points of pricing benefit.

So that would give you low single-digit same-store transaction decline in the fourth quarter.

Okay, got it.

And we should read the pricing as a proxy for overall check growth?

Yes.

Yes.

Okay, got it.

Thank you.

Jason West, Deutsche Bank.

Thanks, guys.

Just one thing on the modeling or I guess two things.

On the China revenue side that did come in a little bit below our total revenue for that segment even though the comps were better than we had expected.

So it looked like the new store productivity had slipped a little bit.

I don't know if you could talk about that, kind of what may be the drivers of that.

Then just secondly, should we be modeling unit growth in China next year similar to what you are doing this year, because I think historically once you step it up you have kept it at the higher rate?

Thanks.

John, this is Tim Jerzyk.

Sorry, Jason.

On the quarter, it is hard for us to understand exactly what you were expecting.

We kind of gave you our best thoughts on that even on the last call.

I am not sure what you were expecting for Little Sheep.

I know there were some discussions that we have had with other analysts about the expectations for royalties from Little Sheep and there was -- it was shorter than what people expected.

So that might be where you -- where we were below what you expected.

Our new store productivity has consistently been very much stable over the last five years, six years.

It is about 30% less than our average unit volumes of our business, and that is holding steady for both Pizza Hut and KFC.

Okay.

Then on the development side?

In terms of development outlook for next year?

Right.

Should we be modeling similar unit openings in China for next year that you did this year?

Jason, we will be providing that guidance at our December analyst conference as we have in years past.

Okay, thanks.

Brian Bittner, Oppenheimer.

Thanks a lot.

Two questions on the US business.

Number one, as this big jolt from the Doritos Locos Tacos somewhat fades a bit at Taco Bell when can we expect you to come out with some more SKUs to sustain the momentum, particularly the Cool Ranch, which is something I am just really excited for and waiting for.

Then also, just the very strong comps at Pizza Hut; if you could just talk about that.

Do you think this is a result of a strong category in the quarter or is there something different you were doing in 3Q to take some significant market share?

Brian, on the first piece they are not going to give out the exact date, but we expect to have extensions of Doritos Locos Tacos next year.

And part of the reason we pushed that into 2013 was because the product was so successful it basically used all of our available supply of taco shells.

But I will maybe send you a coupon right before the products come out this year since you are a big fan of the product.

I am as well.

Regarding Pizza Hut, we have had pretty good success through the course of the last year on the boxes.

So our box promotions have been very successful.

We used those heavily in Q3 and we will probably continue to go on those going forward.

But do you think that the category was strong in the third quarter?

Or I mean do you think a large part of kind of the upside in the comp was market share gains because of the box?

We haven't gotten some of the detailed pieces.

I would say we didn't see a huge -- of the stuff I have seen, I haven't seen huge changes in the overall category this quarter.

Thanks.

Andy Barish, Jefferies.

Can you talk about the inflation, particularly the food cost commodity side of things?

It seems as if there is something more than just the raw material input cost easing up a little bit.

I wasn't aware of some of the changes in the US distribution side of things or maybe it is more full-priced product being sold, a DLT at $1.29 instead of a regular taco.

Can you give us little bit more flavor, color on sort of that benefit for commodities and maybe an initial look at 2013?

Well, I will certainly comment on 2012.

Again, any guidance on 2013 we will defer to our December analyst conference.

As far as 2012 is concerned, we have seen significant benefit from what we call our restaurant margin initiatives focused on supply chain efficiencies.

And you see that rolling through the US.

So to recap what our quarterly commodity inflation trend has been in the US, Q1 at 4%, Q2 at 1% deflation, Q3 2% deflation, we are expecting for Q4 1% deflation.

So you can see a nice trend there, which to your point reflects not only what we are seeing as a general softening in commodities prices, but the added benefit of the supply chain efficiencies we are gaining through these initiatives.

And that is what takes us to flat on commodity inflation for the year.

So it is market price movement along with the advantage we are gaining through our supply chain initiatives.

The supply chain initiatives is a good example of what David has talked about quite a bit on some of the previous calls.

We are doing a much better job of sharing learnings between divisions, either between the US and international or even within US divisions, so this is actually an initiative that was spearheaded by Pizza Hut that we have now taken to the other US businesses and now to other markets around the world.

So we brought in a consultant and just looked at how we could be more efficient in some of the supply chain opportunities that we had.

We have seen some benefits of that this year and I expect to see some benefits for that next year as well.

And any guess at selling more full-priced product, whether it is Taco Bell or China now kind of lapping the big value platforms that you put in place in 2011 in terms of the benefit of higher gross margins?

Well, obviously as you look at what we want to do in all of our brands in the US and around the world, we are always looking at what we call menu mix management.

What do you take for pricing and how do you offer value to the consumers and at what prices are your new initiatives?

We have benefited this year.

To the point that you are making, the Doritos Locos Tacos we think in some cases people are probably trading out of regular tacos for those and those are priced at a higher level.

As we look at 2013, at the least in one of our divisions that I have seen some detail, we probably will have more of our initiatives, the higher priced items, which should help us on menu mix.

So we want to make sure we can stay focused on core value in some of the main parts of our menu.

I think one of the things that we are very pleased about in terms of our competitive positions with Taco Bell and Pizza Hut in the US is that we are very competitive on an everyday pricing basis.

Taco Bell is the renowned industry leader for price value and Pizza Hut, with its $10 large pizza pricing structure that we continually reinforce, is competitive on an everyday basis.

So when you have that everyday pricing in place, when you come in on top of that with the innovation you're able to do the menu management that Rick is really talking about.

And that is a formula that we are going for all around the world.

We believe in that low everyday pricing, entry pricing and then you innovate the heck out of the business.

And I think we do a pretty good job of that.

Greg Badishkanian, Citigroup.

Great, thanks.

Just two quick ones.

First is how much of the China slowdown, besides the 200 basis point tougher compare is due more to the economy versus pricing?

I mean, what do you see as kind of the biggest factor there?

Then just on the US side, the Cantina product, sounds like it is having some good moment.

Is that due to more trading up or are you getting more new customers from that product?

On the China comps, Greg, it is really difficult to segment the change quarter over quarter into how much is driven by the economy versus the comps.

The comp piece is pretty clear, but we have acknowledged that there has been a slowing trend in the China economy that is impacting the retail space broadly and we are feeling some effect of that.

Regarding the Cantina Bell product, we don't have a lot of breakdown mathematically on new customers, etc.

It is difficult to get in the QSR space.

We do have anecdotally is a few things.

First of all, we are seeing more people at lunchtime and the people who by Cantina products have higher ticket, which is obviously expected given the price point of the product.

So we are seeing that benefit on that product.

We think that the fast casual guy sort of taught us a lesson, which is if people want very high quality food that they are willing to spend more money for if they get speed and convenience.

Obviously, with the distribution that we have of restaurants around the country, we are able to do that.

One of the other things that is great about that product is that our team loves it.

First of all, Lorena Garcia, the chef who created it, has a very effervescent personality and she has been very visible through the product launches to our teams through videos and personal appearances.

And the team just loves serving the product and getting new customers in.

The other antidotal thing I would say this is that the product is skewed a little bit more towards lunch and female customers.

Again, that is anecdotal, I don't have math behind that, but that is what we are hearing from our folks.

Just a little bit more perspective on China.

I think when you think about the economic slowdown in China think about our business in the context of that, because keep in mind we are overlapping 19% same-store sales growth with transaction growth of 27% during the third quarter of last year.

So I think -- that is two-year same-store sales growth of 26% and two-year transaction growth of 26%.

That is pretty amazing.

Then think about we have added over 750 restaurants.

So I think, admittedly, the economy is slowing down, but when you look at our business performance in this environment I think you would have to say it has transcended any kind of economic headwind or whatever phrase Tim always likes to use.

Thank you very much.

Jeffrey Bernstein, Barclays.

Great, thank you very much.

Just two follow-up questions, one I know in your prepared remarks you talked a little bit, Pat, about the returning of cash to shareholders, the balance between I guess repo and dividend.

Just wondering, one, whether you would consider shifting the balance more from share repurchase to perhaps pushing the dividend -- I know it is currently just south of the 2% yield level -- and whether or not you would separately consider increasing leverage, obviously with rates where they are today.

Then just as a follow-up on the US Taco Bell side of things, just wondering whether you can give any kind of color in terms of the -- whether it be the Doritos mix in terms of what you are selling or whether you think kind of early read on the Garcia in terms of mix or any kind of data points you could provide there?

I know everyone is focusing on Doritos and Garcia, but perhaps if you are seeing broader strengths that you think will be sustainable beyond those two products.

Any color would be great.

I will address the question on cash payouts.

We are very happy with the mix of cash return that we are providing our shareholders today.

We are delighted to have taken up our dividend by 18% and to be on track to complete another year of significant share repurchases.

In our view this is a good mix.

We do look at our capital structure and determine whether or not a different approach is going to be better for shareholders.

At this stage, even given low borrowing rates, we don't think that it makes sense to lever up to position ourselves to pay either higher dividend or to repurchase more shares.

We believe that the strength of our operating cash flow and the growth in our cash flow year over year positions us well to continue to grow our dividend and to continue to accomplish significant share repurchases.

There are no plans today to shift that strategy, but it is something that we do look at from time to time.

Regarding your question on mix at Taco Bell, traditionally a lot of our product at a particular point in time does come from new products that we introduce.

The overall taco mix has gone up considerably, so we know that the Doritos Locos Tacos piece was largely when we launched it.

Our total taco mix is in the mid teens to low 20%s, so we took that up with the launch of Doritos Locos Tacos and that product right now is having about a 7% mix or so.

Cantina Bell is about a little under 5% mix right now and obviously we want to grow that over time.

Those are very high mixes for Taco Bell.

I think the thing that -- we just came back from the franchise convention in Colorado where they are celebrating their 50th anniversary.

I think people are very excited, the franchisees are excited about just the quality ingredient upgrade and the fact that we are seeing more upscale consumers and we are seeing more females, as Rick pointed out.

So this is something I think we will build over time.

So I think one factoid is over 200 million Doritos Locos Tacos have been sold.

So this is probably the most talked about product in our industry right now and people can't wait for the Cool Ranch Doritos.

We really feel like Cantina Bell just puts us into a whole different vein of target and relevance and price value.

I mean this product is a third of the price of what you get at some of these places, so it is -- two-thirds of the price, excuse me, and consumers recognize it.

So we think that will grow over time.

Thank you.

Bryan Elliott, Raymond James.

Good morning.

I guess I would just like to get your thoughts on sort of the reality of $7 to $8 corn globally for 2013 and what you are thinking about that might mean, both for purchasing power of your emerging consumers as well as obviously the cost of goods side.

I know you don't want to make any specific comments about 2013, but just your general thoughts on that significant issue.

As you say, Bryan, it is a significant issue that is relevant to our business.

We will provide guidance at the December investor conference.

But just to provide a little bit of perspective, over the years we have seen commodity peaks like this and we have dealt with them.

We have dealt with them through a combination of pricing and productivity measures, and we don't expect that 2013 is going to be any different in that regard.

Do you see a risk to purchasing power given the percentage of sort of -- in emerging markets a percentage of income of those new middle class consumers that still goes to food overall potentially being a purchasing power decreaser?

Nothing material that we see.

As you have heard us say before, in these emerging markets we are continuing to see expansion of the consuming class overall that will more than make up for any impact there might be to purchasing power as a consequence of a shift in commodity prices.

All right.

If I could sneak one more in.

The YRI slowdown was pretty meaningful from first half to third quarter across a broad range of geographies.

Could you peel that back a little bit?

Is it average ticket?

Is it traffic?

Is it competition reducing, increasing the amount of sales maybe that are at lower ticket or promoted items?

Can you give a sense of what the competitive landscape is there; how much of it is maybe competition versus consumer behavior change?

I don't think competition has changed much so I don't see that any of the change is really due to that when you look at it on a total YRI basis.

Just do want to remind a couple of things that we did talk about is that Ramadan had about a 1 point swing for the overall business, so on the emerging market business we said was plus 5% for the quarter we think that had a 2 point impact.

If it wasn't clear from my comments, Ramadan moved forward in 2012 so we expect a bounce back in those markets in the fourth quarter and so far we have actually seen that.

And we gave Middle East as an example where it had a big impact negatively in the third quarter.

It will have an impact positively in the fourth quarter.

All right, thank you.

John Glass, Morgan Stanley.

I wanted to revisited the China unit opening schedule question again and two parts to it.

One is I understand you want to be cautious in terms of not outrunning your resources, but it looks like your history in China is that there has only been one year in the last decade where you have opened fewer units in a subsequent year versus a prior year.

That was 2006.

So why wouldn't 750 be the new run rate just based on that history and based on your willingness or desire to manage your business in a fairly constant level?

That is question number one.

Number two, during these periods of rapid expansion or acceleration of unit growth the question often comes up about new store productivity.

The easiest way for us to measure that is just store volumes.

Not returns because we can't look at the cost as easily as you can, but just the store volumes.

What factors are going to drive and move around the store volumes as we calculate them?

In other words, are third through sixth tier markets lower volumes?

It doesn't look like it from the most recent materials, but if they are.

And then also, would there be brand mix shift?

For example, is Pizza Hut home delivery going to be a bigger piece of your unit openings next year and will that change volumes materially for the overall blended?

If you can comment on those two I would appreciate it.

John, I will respond to the first piece first with respect to new store volumes.

To your very point, we have seen very high volumes in the lower tier cities so any shift in the mix of development across the tiers is not going to have an impact to new store productivity.

And the same would hold for brand mix shift.

While, yes, we will be picking up the pace of Pizza Hut delivery or Pizza Hut Home Service development over time, it is not going to be an extent that it's going to have a material impact to new store productivity.

Then as it relates to new unit openings, again we will provide guidance on next year at our December analyst conference.

Certainly given the pace of development this year and how we have grown our capability in China to support a new store program of this magnitude it gives us a lot of confidence that we have reached a new level, but we are not providing guidance on next year development at this stage.

John, we have our annual operating plan.

We will be going to China in the next couple weeks.

We will go into more detail on this, but the message to the team is going to be to just building the quality business and the number will be what it is.

But obviously, look, we are not building this business to open up 750 restaurants a year.

We want to get to over 1,000 capability, so that is our -- we want to just keep getting bigger and bigger and better and better, but doing it the right way.

So we will give you more color at the upcoming meeting.

And just you mentioned 1,000 units.

Over what timeframe do you think you will require to get to 1,000 units a year?

I don't know, sometime in my lifetime.

I don't have any answer to that.

If you have followed our company since the very beginning, we had never really given a number and never really told people that we were going to try to get to that, but the whole thing has been build people capability so that we can grow.

Build the brands.

Our brands -- what gives you the ability to grow fast is when you got great brands with a great economic model, which we do.

I think the good news for us is that we still have less than three-year cash-on-cash cash payback, so we got a great business model.

I think the thing that gives us a lot of confidence is when you can match that business model with the people capability you can do very amazing things like a team has done this year.

We went into this year with a target, I think, of 600 and the previous year we had opened 656 and the number is going to be over 750.

I kind of like that approach to the business.

I would rather have a number that is going to force us to go through all the disciplines to make sure that we are doing the right things and then I would like to surprise you with performance that is the right kind of performance.

And that is kind of our approach.

Everybody has their own models and everybody builds their own kind of forecasts into this stuff.

We kind of lay out what we lay out; you guys can do your own math.

But we are trying to run the business on the basis of giving our shareholders great returns and at the same time making sure we are building our brands the right way.

Thank you very much.

Mitch Speiser, Buckingham Research.

Great, thanks very much.

And, yes, I do have another question on China.

I guess maybe what a lot of the questions are alluding to, and I will ask it a separate way, is that with unit growth accelerating can you maybe give us a sense of what the cannibalization factor maybe has been in years past?

And do you expect that cannibalization factor to increase or remain steady or perhaps even decrease just, say, over the next few quarters?

Then, separately, just on KFC versus Pizza Hut, if you can give us what the comps were for each concept in the third quarter.

It looks like maybe -- is Pizza Hut maybe suffering more of a or having more of a slowdown than KFC?

And maybe how we should look at the outlook, just given that Pizza Hut has a higher price point; if perhaps KFC might potentially comp better than Pizza Hut.

Pizza Hut has been comping a lot better than KFC over the past several quarters.

Thank you.

Mitch, this is Tim.

By brand it was 6% for KFC and 8% for Pizza Hut in Q3.

Sorry, we didn't put that in there; that was my call.

Because they were virtually identical I figured it wasn't necessary, but clearly it is.

So we will be sure to put that in there from now on.

Cannibalization, you were in China for the investor conference.

I think you got a sense for what we were doing.

I think they basically reiterated so where are we getting these additional new units that David was talking with the 750 versus 600 target coming in and 656 last year?

It was really a lot of what Lily Hsieh, our former CFO, said last December.

It was the government is building out infrastructure and they are building out these mega-city clusters.

We are getting more locations in lower tier cities.

There is more transport hubs, which they identified, Lily identified in the presentation, and then also Pizza Hut casual dining.

As we have been saying, that is a new opportunity for us in going beyond Tier 1 and Tier 2, which is what it had been pretty much up until like 18 months ago.

We have actually opened up over 170 over the last four quarters of Pizza Hut casual dining compared to 115 last year.

And by opening up Tier 3, 4, and 5 to Pizza Hut casual dining that is basically almost 1 billion people that now we can add distribution to for that brand versus where it wasn't before.

In terms of the cannibalization, what we had said before was about one in five new stores of KFC had cannibalized in the past, up to maybe as much as 20%, but I haven't seen anything lately on that, Mitch.

My guess would be the number is lower just because we are building so many more in new cities and we are building so many more Pizza Huts where the cannibalization factor is probably a lot less.

So it was a factor maybe three, four, five years ago, but it is not really that much of a factor today from what it looks like.

Great, thanks.

I am sorry, if you could just maybe just comment on the Pizza Hut comp versus KFC in terms of the -- it looks like Pizza Hut might be slowing on a year-over-year basis at maybe a faster pace than KFC.

Is that something that you think we should expect given that the ticket is higher or should the fact that there is less competition for Pizza Hut that the outperformance of Pizza Hut can continue or you think it can continue when you look at the outlook?

Well, I think for one thing, we can add more color but just to give you a little bit of background on that.

I think Pizza Hut had 11 straight quarters of double-digit same-store sales growth coming into this quarter and its lap was even more significant than KFC in Q3.

It was lapping like 30% growth over the past two years.

So, yes, it is a slowdown but those are still big numbers.

And I think importantly for us, which is what we have been saying, it has moved that brand into a very growth oriented position where now we can really grow this with great unit economics at least equal to KFC.

And the average unit volumes are comparable to KFC.

So, yes, it is plus 8% but it is lapping some big, big numbers over the last three years.

Okay, thank you.

Joe Buckley, Bank of America.

Thank you for bearing with us.

A couple of questions on China and then one on food costs.

So in China did the timing of the openings vary much this quarter?

Were they very backend loaded?

That would be my first question.

Then, secondly, the transaction count decline presumably includes the benefits of breakfast and delivery and 24 hours, so in the core dayparts how significant was the transaction count decline?

Then just the last one, you talked about 4% pricing in China going into 2013.

If food costs are moderating and if you expect them to continue to moderate at least in the early part of next year, what is sort of the rationale behind the pricing given softer transaction counts?

Joe, I'm happy to respond to questions in order, starting with the timing of the openings.

I don't know that the distribution of our new store openings this year is any different or materially different from last year.

With respect to the transaction decline, I don't know what it is for core dayparts when you strip out the new sales layers so I really can't respond to that question.

And then finally, with respect to next year's pricing versus inflation, as I said in my remarks or in response to another question, we could take pricing next year.

There are no definite plans at this stage to do that.

You are right that given what we are seeing by way of commodity deflation in China in the fourth quarter those trends will likely persist into at least the first half of next year.

We will provide more context to you at the December conference in terms of our views on same-store sales and how much pricing and when we might take it.

But the fact is that the new pricing strategy that we implemented over the course of Q2 and into Q3 is one that the China team is very happy with.

It increased the level of sophistication and the way that they are able (technical difficulty) and segment their market and determine variable pricing.

And that will likely continue into next year.

Joe, on the transaction piece, just one point on that.

When a look at the daypart mixes they didn't change, so while we don't have what the core was it doesn't look like it was something in particular related to any particular daypart or core.

That is best I can tell from what I have seen.

That is helpful.

Thank you.

R.J. Hottovy, Morningstar.

Thanks and good morning.

Just one quick question and it is kind of an ancillary question to the unit development growth that you are planning for the next couple years.

How comfortable are you in terms of the unit growth with what we have seen in terms of bank and potential constraints for franchise financing right now?

Just wanted to get your take on the overall state on financing to franchisees at this point across YRI and potentially China as well.

Thanks.

We haven't seen any issues of getting access to credit for our international business.

A lot of our international franchisees are pretty big players and they have been in the business for a while, so a lot of the growth they are able to fund through existing cash flows as well.

So we don't see that as a hindrance in any way to our growth going forward.

Thanks.

John Ivankoe, JPMorgan.

Thank you.

Obviously you guys have demonstrated I mean so much success in emerging markets.

I mean more examples; necessary to mention China being the highlight.

But then we look at developed markets and so I want to really relate these two points.

Last year we talked about maybe taking Taco Bell re-franchising more down than what it had been in previous years.

You are obviously having success with the brand this year and it looks like Taco Bell re-franchising is all but stopped.

So, firstly, the question in the US is why not put Taco Bell in the hands of franchisees with the economics are so strong and allow them to grow and develop the brand really as franchisees can?

Then, secondly, having been with McDonald's recently in Europe and studying the markets over the years, the demographics in the competitive markets of France and especially Germany really are perceived as being very good by a lot of people.

So I mean, why not take that risk and put it solely in the hands of the franchisees and pursue a rental model at all?

In other words, why not pursue development in continental Europe on a pure capital-light franchise model versus directly or indirectly investing your own capital?

Let me make sure I have the first part of this right; I will clarify my comments on re-franchising.

In the US we are basically done with hitting our targets for KFC and Pizza Hut, which we said we wanted to get down to about 5% ownership level in both of those brands and we will be close to those numbers actually now.

On the Taco Bell side, our goal was to take the Taco Bell ownership level down from sort of the low 20%s to about 16% by the end of next year.

We are continuing along that path, so we have been doing modest re-franchising for Taco Bell over the last year and a half and we will continue that over the next year and a half.

So that is what we are doing on the US side.

Regarding the question on France and why we have pursued a business rental model versus franchising, the first piece that we did is that was the way to get growth.

When we were looking at France, the great news about Francis is that we have the highest average unit volumes in the world.

The bad news about France is that it's very expensive so not that many franchisees who when you had the brand that was new in the market had several million dollars that they were able to put down on a new unit.

What we found as we started the business rental model is we have been very pleased with the quality of the franchisees who are good operators who maybe didn't have access to as much capital as what was required there.

So we found that we are happy with the way the restaurants are being operated.

We believe we could have a big business there from an opportunity standpoint that we talked about before, and we believe that we are having the right level of pace of growth there.

So we feel pretty good about how things are developing in France.

We do have a few franchisees who were there at the beginning and they are doing some growth of new units, but we expect a fair amount of our development to stay in the business rental model.

If I can ask Rick, in Germany, which is perceived as being the more competitive global QSR market, and might there be a shift over time in both of those markets to a pure franchise model when the franchisees get established and the economics get to be more proven?

We will always look at what we think the right mix is between company, and we will probably have all three there.

We have some company ownership there, we have the business rental model, and we have straight franchising.

We will probably continue to have the blend, continue to look at that over time, but right now we are pretty happy with the current mix that we have.

Okay, thank you.

I think one of the amazing things for us on this, John, is how little of business we have there already.

I mean yet we have now economics that we think are scalable.

So I think that what we try to do is we try to learn from each other and we also try to learn from competition.

And I think McDonald's has shown us that the business rental model is a way you can expand with good returns over the long in continental Europe.

I think we have gone to school on that model and we think it can work for us.

The good news for us is we are just really ground floor; we are ground floor on this.

We have a capital monitoring system that we put into place and I'm sure we are going to monitor new unit economics.

If something says that we shouldn't be going that way we can always pull back, but right now we are really talking about a business that is pretty insignificant that we think can become very significant.

And I think that is the real point for our shareholders.

I think it is upon us to really do whatever we can, as Rick said, to really grow the business.

We think that the business rental model unlocks that growth for us a hell of a lot faster than if we were just working with a pure franchise business given where we are at at such an embryonic stage.

And to your point earlier is that if things change down the road we can always look at the mix of our ownership.

That is something that we have done throughout our history and I think pretty well.

And with respect, it is an interesting contrast (multiple speakers) okay, I understand.

I'm sorry, we are running out of time.

We got to get more callers in, sorry.

Next question, please, Ashley.

Sara Senatore, Sanford Bernstein.

We have only time for one question from you, Sara.

And she has come out of queue.

Okay, one more question, please.

Keith Siegner, Credit Suisse.

Thanks.

Question for either Pat or Rick; could you please give us an update as to the status of the efforts to sell the Pizza Hut UK business?

And then just to add to that a little bit, does your guidance for what company restaurant margins in YRI might look like post that divestiture still remain intact, especially given the strong margin performance in YRI this quarter?

Thanks.

Yes, we are in very active discussions with a buyer for the business and we remain optimistic that that deal will close by the end of the year.

As we have said before, we expect that that will be -- or when we complete that re-franchising that YRI will see 2 points of margin improvement.

Now you know how these deals go and it is possible that the deal could slip into the early part of next year, but we are optimistic that we will see it close by the end of the year.

As Pat said, we are in active negotiations where are -- we believe it will close this year.

But we are going to have the right deal, so if it slips into next year we are okay with that, too.

Thank you all for being on the call, so let me wrap up the Yum!

story.

Overall we are having another solid year and we are raising our full year EPS guidance to at least 13%.

11 straight years of at least 13% EPS growth is something we are really proud of.

With record international new unit development we are confident in our future growth as well.

So as we look to 2013 we are confident our international businesses are set up for continued growth and our US business is on more solid footing to drive more consistent results going forward.

We have a track record that proves how powerful our growth model is.

With the expected opening of 1,750 international new units this year and our strategies in the base business we definitely feel we are in good position for next year and expect to continue our track record of double-digit earnings growth in 2013 and beyond.

We have got our December analyst meeting coming up investor conference and we can't wait to sit down and talk to you about how we are on the ground floor of global growth, China and a whole lot more.

So talk to you soon.

Thanks.

That concludes today's conference.

Thank you for your participation.

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