百勝餐飲集團 (YUM) 2012 Q4 法說會逐字稿

Good morning.

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

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

Brands fourth 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 for Yum!

Brands.

Sir, you may begin your conference.

Thanks, Mishay.

Good morning, everyone, and thanks for joining us for our earnings call.

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 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 statements in our earnings release and the risk factors included in our filings with the SEC.

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

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

Finally, we would like you to please be aware of the following upcoming Yum!

investor event -- basically our next earnings, Tuesday, April 23, 2013, first-quarter earnings will be released.

On our call today is 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.

Okay, thank you, Tim.

Good morning, everyone, and thank you for joining our call.

This is clearly an interesting and challenging time for Yum!

Brands, immediately following another year of at least 13% earnings per share growth excluding special items during 2012.

This marks the 11th consecutive year we exceeded our annual target of at least 10% growth, which puts us in an elite group of high-growth companies.

Our 2012 highlight was setting a record for international new unit development which will strengthen our foundation for even more long-term growth.

In fact, we opened nearly 2000 units outside the United States as well as positioning the United States business for more consistent returns.

Overall, there is no question in our mind that our organizational capability is stronger than ever and our long-term growth opportunities have never been better.

However, I know for sure the issue at the forefront of everybody's mind is what is going on with China and the government's recent review of China's poultry supply and the corresponding sharp sales decline that began in our KFC business during the last two weeks of December.

Today, we want to provide some additional color around how it has impacted our business and how we plan to restore confidence with our customers and get them back into our restaurants.

But first, here's what happened.

There was an investigative report broadcast on a program similar to 60 Minutes by Chinese Central Television, CCTV -- that's a Chinese state-owned enterprise -- which aired on December 18, 2012.

It was carried throughout China and was clearly linked to the KFC brand.

The report showed that a few poultry farmers were ignoring laws and regulations by using excessive levels of antibiotics in chicken.

Regrettably, some of this product was purchased by two poultry suppliers of KFC China.

The CCTV story led to an investigation by the Shanghai FDA which caused further media attention, intensifying negative, sensationalized social media commentary.

These events significantly impacted consumer confidence in KFC.

This onslaught of negative media coverage has been longer lasting and more impactful than we ever imagined, lasting over six weeks.

The media coverage is beginning to wind down because on January 25 of this year, the Shanghai FDA reported its concluding findings of the investigation.

The Shanghai FDA identified issues and provided supervisory recommendations to Yum!

China to strengthen our poultry supply chain practices, including improved voluntary self-testing procedures, improved reporting and communications and enhanced supplier management.

It is important to note that Shanghai FDA did not bring a case against Yum!

China, and no fines were assessed.

We have wholeheartedly accepted these recommendations and appreciate the thorough review by the Shanghai FDA.

Now, hindsight is always 2020 and history is only good for two things -- first, to learn from it; and, second, to inspire your belief about what can be done in the future.

We are applying our learnings and findings from the Shanghai FDA to further strengthen our QA processes.

Our customers expect high-quality, safe food, and they feel that we have let them down.

To restore consumer confidence in KFC, we will launch an enhanced product quality assurance program, along with an aggressive marketing campaign shortly after the Chinese New Year.

Now, looking back, history gives us confidence that we have the capability to fully recover and grow.

We have faced SARS, avian flu, Sudan Red, and in every case we have bounced back.

As an example, in 2005 when our China business was severely impacted by Sudan Red and avian flu, our same-store sales in KFC China were down as much as 40% during the crisis.

Our full-year operating profit was down 5% but we stayed the course and kept building new units.

In 2006, we bounced back and reported system sales growth of 28% and our profits grew 47%.

I think this demonstrates the historical resilience of the brand.

Now, no two crises are the same, and we don't know how long it will take us to recover.

However, we expect to weather this storm and come out stronger.

So let me be very clear.

We will stay the course in China.

We will continue to grow the business with leading brands in every significant category.

We will continue to build our two big brands, KFC and Pizza Hut Casual Dining, and we will continue to invest behind Pizza Hut Home Service, Little Sheep and East Dawning.

Our new unit targets remain unchanged.

Now, Pat Grismer will give you more color around our near-term sales expectations and our underlying assumptions in a moment.

However, because our China business accounted for 42% of our profits last year and because it is clear it will take time for sales to recover, there is no question we will fall well short of our targeted growth of at least 10% earnings per share growth in 2013.

In fact, under our current broad assumptions, we estimate a mid-single digit EPS decline in 2013.

We obviously hope to do better, faster.

Putting our current short-term China sales issue aside, we will continue to build shareholder value by aggressively developing new units around the world, driving same-store sales growth and generating high returns on invested capital.

At Yum!

Restaurants International, India and the United States businesses, we are well-positioned to deliver against our operating profit targets and drive future growth in the years to come.

I'm confident our China business will bounce back strongly and lead the way to restoring our track record of double-digit EPS growth in 2014, 2015 and beyond.

So now let me turn it over to Rick, who is going to further outline the highlights of Yum!

Restaurants International and our US business.

Thank you, David, and good morning, everyone.

I am going to focus most of my comments today around why we believe that Yum!

Restaurants International and our US businesses are well positioned for a successful 2013.

Let me start with YRI, the division that is 90% franchised and that generates nearly half of Yum!'s valuable $1.8 billion annual royalty stream.

I'm optimistic that YRI will have a strong 2013 which should benefit from strong development momentum, from reaching scale in some key markets and from some improvements in our ownership portfolio.

Overall, we are poised to capitalize on our advantage of being the global restaurant leader in emerging markets.

First, let's address development.

During 2012, YRI developed a record 949 units with over 65% of them in emerging markets.

We will continue our rapid expansion in 2013 and hope to set a new record by building over 950 new units.

These new units, both in 2012 and 2013, should provide about 5 points of profit growth for YRI in 2013.

One of the characteristics of Yum!

is its strength in emerging markets.

As a Company, we relish the joint challenge of delivering in the short term while building for the long-term.

This is true in YRI's approach to emerging markets, where our goal is to continually improve our foundation for future growth while also growing the business year after year.

In 2012, the emerging markets grew system sales 12%, including 7% new unit growth.

In 2013, we are targeting similar growth, building an even stronger foundation.

I will use Russia and Africa to provide some brief examples of what I mean by this.

Russia is a market with huge potential.

For the past two years, Russia has had the highest same-store sales growth out of our 20 business units around the world.

System sales grew 46% in 2012.

We opened nearly 40 new restaurants.

Some of these are now Company-owned units yielding good returns.

After buying the business in 2010, we have converted nearly all the Rosticks units to KFC.

When you look at the new branding and consider the quality of the people we have added to the Russian team, we believe that our business isn't only getting bigger, it's getting better.

We are gaining more and more confidence that Russia can become a sizable, high-profit business for YRI.

Let's move onto Africa, a continent with endless possibilities.

As [Mickey] Pant said in New York, Africa could become the next powerhouse economy in the world.

Africa has over 1 billion people and we currently have nearly 1000 restaurants there.

That's less than one restaurant per million people compared to our 58 restaurants per million people in the US.

During 2012, we opened almost 60 restaurants and ended the year with restaurants in 14 countries.

We intend to further expand across Africa in 2013 by building restaurants in Tanzania, Uganda and Zimbabwe.

By the way, these three countries combined have a population of about 90 million people.

At the same time, we expect to grow our core business in South Africa, where we have about 690 KFC restaurants today.

Our breakfast expansion is doing great and we now have more than 270 restaurants offering breakfast and plan to add another 100 restaurants this year.

Africa is one of the world's fastest-growing regions and KFC plans to be the clear restaurant leader on the continent.

We are also building scale in some very large developed markets where our concepts today are significantly under-penetrated.

For example, we have been working hard over the past decade to reach scale in France and Germany.

We have about 150 KFC's in France and about 150 KFC's in Germany.

We know that we have a long way to go, because McDonald's has over 2500 restaurants in these two countries.

However, the good news for us is that we are now large enough to advertise in both the countries.

In France, we already have our highest average unit volumes in the world at $3.5 million a year.

The France team hopes to increase this level by increasing the televised advertising from 20 weeks to 32 weeks in 2013.

Germany now has enough KFC presence to justify national televised advertising for the first time.

To give some perspective, when France began national advertising, their sales went up over 10%.

We expect strong results this year from France and Germany, and together they could help drive meaningful growth for YRI in 2013 and beyond.

Over the years, Yum!

has always sought to improve its Company ownership portfolio, and the evolution of this portfolio has been an important part of our success.

We sold our Pizza Hut UK dine-in business to a strong franchise partner late last year.

While consistent with our ownership strategy, this move also has the benefit of improving YRI profits in 2013.

I'm very pleased to announce today that we recently agreed to terms to acquire the operations of our franchise partner in Turkey.

Turkey is another high-growth emerging market with a population of 75 million people.

This population is mostly urban and the median age is 29 years old.

Today, Yum!

has about 100 restaurants in Turkey, 60 KFC's and 40 Pizza Hut's.

This acquisition is subject to Turkish competition approval but is expected to close by the end of March.

I thank our Turkey franchisee and our Dubai and Dallas-based YRI teams for their efforts in developing this market and reaching this agreement.

This transaction advances our strategy to increase ownership in high-growth, high-return businesses and helps to solidify our leadership in emerging markets.

Overall, the Yum!

Restaurant International business is on track.

We had a solid 2012 and expect another year of strong performance.

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

Now on to the United States.

The US, as you know, is an extremely competitive QSR market where you have to play your A game every day.

While the economy is certainly not robust, it is strong enough to control our own destiny.

We believe that the US is set up for success in 2013 because Taco Bell has the momentum, because new units are now working in our favor and because we have meaningful innovation plans at all three of our brands.

Our three US businesses are significantly stronger now than they were a year ago.

At Taco Bell, what a difference a year can make!

During 2012, Taco Bell sold 325 million Doritos Locos Tacos.

That's more tacos than there are people in the United States and makes it one of the most successful product launches in QSR history.

Cantina Bell was also created in 2012, inspired by celebrity chef Lorena Garcia.

This has helped broaden the Taco Bell brand beyond its core user.

I hope you all enjoyed the Taco Bell commercial during the Super Bowl, which showed the country that you are never too old to Live Mas.

We know from our almost 10 million Facebook fans and from comments on social media that Taco Bell is a beloved and much talked about brand today.

What is important is that our 2012 Taco Bell successes should pay dividends again in 2013.

Cool Ranch Doritos Locos Tacos will be introduced in March and Cantina Bell innovation is also coming.

All of this will be backed with solid operations and more media weights.

As you heard in New York a couple of months ago, Taco Bell aligned with their franchise system to reallocate local media to national media, which will result in more efficient advertising.

For the US to have a successful year, it is important for our most profitable US brands to have a successful year, and we believe we have a lot of things going in our favor at Taco Bell.

Taco Bell is also following Pizza Hut's lead in going after more rural new units.

The combination of a new smaller building asset design and a franchisee rural incentive should provide Taco Bell with more new units by 2014.

We are also very proud that Pizza Hut added 150 net new units in the United States last year.

This marks the second consecutive year of positive net unit growth after a decade of decline.

The Pizza Hut brand is positioned to add a similar number of new units in 2013, given the low investment cost and high returns of our Delco Lite units.

It is great to see that new unit growth is now positively contributing to our ability to grow US sales and profits.

In the quick service restaurant business, you need value and innovation to succeed.

While I talked about some of innovation at Taco Bell, I would rather not go into much detail at Pizza Hut and KFC for competitive reasons.

However, I will tell you that I believe we will have strong innovation at both Pizza Hut and KFC during 2013.

I will also provide one example of product news today.

Get ready for the launch of Pizza Sliders this week.

Like burger sliders, this smaller pizza product has the potential to add new occasions to our brand.

We will initially sell them in packages of three sliders and nine sliders, and once consumers buy the product, they will be hooked.

I believe that the product will exceed our customers' expectations of quality and value.

Anyway you look at it, 2012 was a banner year for our US business.

Same-store sales grew 5%, margins improved by over 4 points and operating profit grew 13%.

All three brands grew same-store sales.

Profits grew at all three brands with very significant profit growth at Taco Bell and KFC.

However, we recognize that 2013 is an important test for us.

We have said that we have positioned our businesses for more consistent results and we look forward to demonstrating that we can back up a strong year of performance in 2012 with another one in 2013.

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

Thank you, Rick.

I'm pleased that 2012 marked the 11th straight year we delivered at least 13% EPS growth before special items.

I'm also very happy with the quality of that growth, as it was largely driven by positive same-store sales growth and strong operating profit performance from each of our major divisions.

I'm even more excited about the progress we made with the new unit development as we not only set a new record for international store openings, laying a strong foundation for future growth, but also achieved positive net unit results in the US for the first time in over 10 years.

Additionally, we returned over $1.5 billion in cash to our shareholders in 2012, including nearly $1 billion in share repurchases and the eighth consecutive annual double-digit percentage increase in our dividend rate.

We take great pride in each one of these accomplishments, as they individual drive shareholder returns.

More importantly, these accomplishments collectively demonstrate the confidence we have in our ability to sustain double-digit growth over the long-term despite the setback we will experience in 2013 due to the current sales situation in China.

Today, I will share my thoughts on three key items -- our 2012 fourth-quarter and full-year results, our updated outlook for 2013 and, finally, actions we are taking to drive long-term growth.

First, our fourth-quarter results -- during the quarter, we delivered 10% EPS growth excluding special items.

Adjusting for the additional week in our 2011 fiscal calendar, which provided a $26 million operating profit benefit to Yum!

Restaurants International and the US combined, we achieved 16% EPS growth on a like-for-like basis despite a very challenging quarter for our China business.

I will first make a brief of a few brief remarks on the fourth-quarter performance of our YRI and US businesses, and then go into detail in China.

Yum!

Restaurants International had a solid quarter, opening a record 473 new units, including 309 new units in emerging markets.

Same-store sales grew 3% with broad-based growth across our portfolio, with the exceptions of continental Europe and Japan, where same-store sales were generally soft.

We were especially pleased with very strong same-store sales growth in Russia, Africa, Thailand and our Pizza Hut business in Korea.

This new unit development and same-store sales growth led to operating profit growth of 15% excluding the impact of foreign currency translation and the impact of our 53rd week benefit in 2011.

Fourth quarter results included an $8 million insurance recovery related to Thailand flooding in 2011 which partially offset $11 million of closed store expense related to the refranchising of our Pizza Hut UK dine-in business.

Moving to the US, we had another strong quarter with 3% same-store sales growth and margin improvement of 3 percentage points.

Excluding the impact of our 53rd week benefit from 2011, US operating profit grew 5% versus prior year.

The fourth-quarter capped an absolutely outstanding year for Taco Bell with same-store sales up 5% and restaurant margin up 2 percentage points.

Additionally, we made very good progress with our US development strategy, increasing our unit counts by about 100 Pizza Hut's and 15 Taco Bell's during the fourth quarter alone.

With improved unit-level economics and our new ownership strategy, our US business is now firmly positioned for more consistent profit growth in the years ahead.

And now, China -- China operating profit declined 5% for the fourth quarter prior to foreign currency translation, driven by a 6% decrease in same-store sales.

Given the importance of this business measure, I would like to describe how China's same-store sales evolved over the course of Q4.

As a reminder, China's fourth quarter encompasses four months, September through December.

For the month of September, same-store sales were positive for both KFC and Pizza Hut.

Despite a positive start to October, both brands posted negative results for the month in the face of increasingly difficult prior-year comparables and a weakening retail environment.

In November, Pizza Hut responded well to a signature promotion and turned moderately positive, but KFC's slowing trend continued from October.

These trends continued into the month of November -- or December, and then KFC turned sharply negative as events unfolded in the last two weeks of the month.

Our 6% same-store sales decline for the quarter was composed of KFC down 8% and Pizza Hut up 7%.

For the fourth quarter, China restaurant margin declined 1.9 percentage points, primarily due to KFC's sharp sales decline during the last two weeks of December as well as the dilutive impact of accelerated new unit development over the year.

On the subject of development, China had another exceptional quarter, opening 369 restaurants.

That's nearly three restaurant openings per day.

For the full year, China opened a record 889 new units with almost half of these new units built in rapidly growing tier 3 through tier 6 cities.

Our new unit development program demonstrates our strong belief in China's long-term growth potential and our confidence in the capability of our China team to create significant shareholder value through these investments.

Now our full-year results -- this year's EPS growth of 13% excluding special items was driven by quality growth from all three major divisions, China, YRI and the US.

Each division had same-store sales growth for the year and we built a record 1976 new international units.

Something we are very proud of is strong operating profit performance from each of our major divisions, which drove 12 points of EPS growth.

The strong performance at YRI and the out-performance in the US offset the fact that we had lower-than-expected performance in our China Division in 2012.

This demonstrates the unique power of our Yum!

portfolio with three global brands covering a diverse set of geographies with particular strength in emerging markets, which collectively account for about 60% of our operating profit.

Our overall business model is further strengthened by the $1.8 billion pre-tax royalty stream we generated last year, providing steady cash flow that enables ongoing investment in growth initiatives.

Once our China sales rebound, we expect the unique characteristics of Yum!

Brands will again support earnings growth consistency in years ahead.

As KFC China's significantly negative same-store sales have continued into the new year, our 2013 results will be significantly impacted.

So let me provide you with an update on our China sales and outlook for 2013.

Because we cannot predict how long it will take for KFC China sales to recover, we hesitate to provide specific financial guidance for 2013.

Instead, we will estimate 2013 results based on broad assumptions.

To be clear, based on the strength of our KFC brand equity in China and based on the demonstrated resilience of our brands over time, we do expect these sales to recover.

However, we simply cannot predict the recovery period with a high degree of accuracy.

As you saw in our release, we estimate that our January same-store sales declined 41% at KFC and 15% at Pizza Hut Casual Dining in China.

We estimate the timing of Chinese New Year had a negative mid-teen impact on January same-store sales growth for our China Division.

We expect this negative impact of Chinese New Year to reverse in February.

So, assuming no change to current trends, that is, no improvement in seasonally adjusted KFC China sales through the end of February and giving effect to the Chinese new year holiday shift, we estimate that China Division's same-store sales will decline by about 25% for the first quarter with KFC significantly negative and Pizza Hut Casual Dining about flat.

Remember, China's first quarter is composed of January and February alone, and the Chinese New Year is a seasonally strong period for our business.

Last year, Chinese New Year started on January 23, whereas this year it will start February 10.

Given the uncertainty of KFC sales recovery in China, we plan to release China monthly same-store sales until KFC recovers.

We will begin this process with February sales, which we expect to report on March 11.

This brings me to our earnings expectations for the first quarter.

Even though we expect solid results from our US and YRI businesses in Q1, the significant decline in China same-store sales will weigh very heavily on EPS growth.

For the first quarter, we estimate that EPS will decline approximately 25% before special items.

As you would expect, we are very disappointed with this result, but we view this as a temporary setback from which we will ultimately recover strongly.

Now let me share my expectations for full-year EPS.

Our portfolio of businesses collectively models 13% annual EPS growth, including 7 percentage points from China, 3 from YRI, 1 to 2 from the US and 2 from financial strategies.

As I mentioned earlier, our franchise business model, primarily driven by our YRI and US businesses, contributes a study source of cash flow of around $1.8 billion a year and we remain confident that these businesses will achieve their growth targets.

If you add it up, our model delivers 6% to 7% EPS growth, excluding China.

Now, due to the sustained sharp decline in KFC China sales, we will fall well short of our annual target of at least 10% EPS growth in 2013.

Although my confidence in our China team and the growth potential of our KFC China business is undiminished, it is difficult to predict how long the sales recovery will take.

Assuming that KFC China sales improve gradually throughout the year and will be positive in the fourth quarter, we estimate that China restaurant margin will be in the mid-teens and that China operating profit will be negative versus prior year.

Importantly, we will stay the course on our China strategy, including investments in new unit development as we build leading brands in every significant category.

Taking all of this into account, we estimate a mid-single-digit EPS decline in 2013 versus prior year.

Obviously, this is very disappointing news for all of us, but we view 2013 as an aberration and we are confident that we will rebound strongly with time.

We are confident because we have endured setbacks before.

David already mentioned how in 2006 we rebounded strongly from a sharp sales decline in China in 2005.

Additionally, we saw Taco Bell bounce back strongly in 2012 following a very weak 2011 affected by a bogus lawsuit and the sensational media attention that followed.

Taco Bell's sales and profit resurgence in 2012 clearly demonstrate that, in time, innovation and intentionality can return a brand greatness.

It's also important to note that new unit development will help to sustain the growth of our China business despite the temporary setback in same-store sales.

We added 889 units in 2012 and we expect to open at least 700 new units in 2013, as we indicated at our investor conference in New York.

If you assume that we will add another 700 units in 2014, the 2014 impact of all this new unit development alone will add about $2 billion to our current China system sales, or an increase of about 25%.

While it is way too early to know what will happen to same-store sales or margin levels in 2014, it sure is good to know that the China development engine will help to blunt the impact of the same-store sales decline we will experience in 2013.

Finally, let me talk about the actions we are taking to drive our long-term business model, including our continued focus on new unit development.

First, as in any year, our primary focus is building shareholder value, so we will continue to invest behind future growth opportunities.

We are staying the course and will not change how we grow our businesses while doing everything possible to reverse the negative sales trends with KFC in China.

Although this will be a very challenging year for Yum!, we will make the right decisions for our business long-term.

What we will not do is sacrifice our long-term growth model in an effort to make one year's bad EPS number a little bit better.

Our growth model is driven by new unit development, same-store sales growth and high returns.

We are staying the course with our long-term growth strategy and we will continue to use excess cash to invest behind the growth we see in the business and then return all remaining cash through dividends and share repurchases.

Our investment in new unit development is skewed towards high-growth emerging markets such as China, India, Russia and Africa, and we will use 2013 to further strengthen our foundation in all of these markets, including China.

We continue to believe that China is the number one retail opportunity in the world and we will continue to capitalize on this growth opportunity.

However, as outlined at our December investor conference, we are shifting our China development focus toward lower-tier cities where restaurant margins and investment returns are highest.

In our India division, we built 138 new units this year, including 80 KFCs.

This is the second year in a row we have built over 100 new units and we expect that number to grow as we build even more people capability in India.

We will continue to invest behind our powerful brands in India and we expect this business to be the next big growth engine for Yum!

within the next 2 to 3 years.

At YRI, we will invest behind high-growth markets and accelerate new unit development of both KFC and Pizza Hut, particularly in the rapidly growing pizza delivery space.

And, finally, driven by the powerful economics of our Pizza Hut Delco Lites and the improved returns on Taco Bell units, we expect the US will be net unit positive again in 2013.

In conclusion, we realize 2013 will be a very challenging year for Yum!, but our brands are resilient and I am confident that KFC sales will recover in China as we rebuild consumers' trust in our brand.

Despite this setback, our growth model remains intact and is designed to deliver double-digit EPS growth for many years to come.

And with that, I will turn it back over to David.

Okay, thanks very much, Pat.

Appreciate it.

So let me wrap up, leaving you with our three key messages.

Number one, in the short-term, any way you look at it, 2013 was an extremely disappointing year from an EPS standpoint because of KFC China.

We ultimately expect a full recovery but can't tell you exactly when.

We will post you over sales progress every month until we get KFC China back on track.

At the same time, you need to know, given our confidence, it's full speed ahead with development this year in China.

I said in New York, when you think of KFC in China, think about McDonald's in the United States.

Everywhere you go in the United States, in every county seat in America, people see a McDonald's in the very best location.

I'm talking about towns like Chillicothe, Missouri; to Hutchinson, Kansas.

McDonald's is literally everywhere and is clearly the QSR leader in the United States.

They have first-in advantage and everyone pales in comparison.

In the United States, McDonald's has 14,000 traditional units in a population of over 310 million.

We expect to have at least that many units in China with the consuming class growing from 300 million to 600 million over time and disposable income growing along with it.

We will be everywhere that matters in China and have the best locations in every town.

Now, as I said before, we will inevitably have a challenging year in China, and unfortunately, 2013 is that year.

But every day I wake up, I'm glad we have the business we do.

I wouldn't trade places with anyone.

Our strategy and capability to build leading brands in China and tap into the number one growth market in the world is simply unparalleled.

Number two, in the longer-term, we fully expect to return to achieving our annual target of at least 10%.

With 2014, the expectation will be a big bounce-back year.

We believe as strongly as ever Yum!

is uniquely positioned to grow aggressively around the world.

Importantly, we continue to strengthen our brands and the processes that ensure success so we become an even stronger company down the road.

And number three, the business, this business is a business with endless possibilities.

We have growth opportunities staring us in the face in China and emerging markets, and now the United States.

We will continue with confidence our quest to build the defining global company that feeds the world.

So thank you very much, and we look forward to answering any and all questions that you have.

(Operator instructions) John Ivankoe, JPMorgan.

(technical difficulty) a sense of what you really could have done differently in this case, in terms of antibiotics that were entering into your chicken supply at all, and what prevents that in the future.

In other words, are you being asked to do inspections at the farmer level, which I can't imagine?

Are you responsible for inspection at the supplier level, which, quite frankly, I thought was the responsibility of different authorities?

Or, is there just -- is it just a process to where you and the government need to communicate more?

In other words, what really is the process of remediation that prevents this from happening in the foreseeable future?

Hey, John, I think the beginning of your question got cut off on our end.

Can you -- sorry to ask you to redo that, but if you could restate your question, that would be helpful to us.

Okay, apologies.

The question really centers around what you could have done differently to prevent this.

David, you made a comment about learning from history.

Is it, gosh, if we had more people in the field from an inspection point of view, you're doing inspection at the farmer level, which I have a hard time believing that's your responsibility?

Was it your responsibility to do more inspections at the supplier level, which I thought was the responsibility of different authorities?

So the question I have is, what is changing specifically within Yum!

for an issue like this, whether it's chicken or related to anything else in your supply chain, for not occurring again?

Well, okay, John, I think first of all, I want to make it really clear that food safety is our top priority and we do everything we can to make sure our food is safe and is of the highest quality.

We have a global protocol for auditing suppliers on food safety and quality assurance.

And if issues are identified in any case, we always take appropriate measures to require our suppliers to immediately rectify the problem.

If a supplier does not meet our strict QA standards, we simply will not do business with them.

What we are doing is we are continuing to invest in QA around the world and work with suppliers and world-renowned outside QA experts to improve our practices.

And we are doing this all around the world, and what we are doing in China is we are going to take our processes to an even higher level and strengthen our QA processes going forward.

And I'm sure you can appreciate me pressing on this.

That was, I think, everyone's understanding and belief.

And I thought it was fact, that that was already done in China, and in fact what you were doing in China was considered to be best in class at Yum!, or best in class, quite frankly, relative to anyone.

So it's -- what prevents this from happening in the future, just doing more of what you have been doing?

Or are you being asked to do some of the job of, quite frankly, what I thought was the responsibility of the authorities?

What we are doing is -- first of all, KFC is the leader in China, as you say.

We have been the leader in food safety protocols and practices in the past, and that's a high responsibility and one that we take very seriously as we go forward.

Our objective in China is to strengthen our poultry supply chain practices, and this will include improved voluntary self-testing procedures.

We do self-testings.

We are going to improve that and do it even better.

This is above and beyond anything that is required by any laws or regulations.

We are going to improve our reporting processes and communications, and we are going to enhance our supplier management.

What we're working on right now with our suppliers is a comprehensive QA program that will be even better than what we think was the world-class process.

And the bottom line is we will focus on making sure we do everything we can, that it be the very best in this area.

So we will be announcing that shortly after Chinese New Year, the comprehensive QA program, and a marketing campaign that will also supplement it.

Okay, thank you.

Jeff Omohundro, Davenport & Co.

My question relates to the branding efforts to rebuild consumer trust in China.

You've mentioned a couple of times you have dealt with similar issues, both in China and the US.

Could you talk a little bit further about the specifics around the efforts, around the spending against these efforts and how broad these efforts might be including, for example, social media and other revenues?

Alright, well, first of all, it starts with the basis, that we have a powerful brand that's extremely popular and people love our food and they love the experience and we've got a great strength to build on.

I think as far as the marketing goes, one of the things we have to realize is that on any occasion, regardless of how strong your brand is, it's going to take time because consumers have lots of options that they can go to.

And I think what we have right now is we literally have to weather the storm of a lot of adverse publicity that is clearly top-of-mind with customers.

So I don't think there's any marketing we can do today that is going to change what's going on right now because we do need the gift of time.

Having said that, we are working very aggressively to develop a superior program with our suppliers on the quality assurance front and we are working on an advertising and marketing approach that will communicate this to the customer, from everything to tray liners to ways that we (technical difficulty) social media, everything that you can basically imagine.

One of the things we do have with KFC is we have a big budget.

Last year, we opened up 900 more restaurants.

So we have lots of media, we have all the capability we need to continue to build the brand the right way, and we will do that.

So we will be launching a new program around quality, and what we are doing with our suppliers, communicating in the press, communicating it over all the social media, and we will launch that shortly after the Chinese New Year.

But in terms of marketing clout, we go in with more marketing clout just simply by the nature that we do have 900 more stores as we go forward.

And we have all the marketing clout to make us one of the top advertisers in China and we have every capability to be able to get our message out.

But I did think what we need more than anything, and Sam Su and I have looked at lots of different options and we've talked about this daily, is we really need the gift of time.

And I think, over time, we will come back because this is a powerful brand that is loved by consumers, and we will prevail in the end.

David Tarantino, Robert W. Baird.

A question on China.

As you think about the actions you need to take to restore confidence in the consumer picture and what is needed to strengthen the business model there, are there any structural changes to the expense structure that need to be made, for example, maybe greater spending on quality assurance or perhaps more focus on value and less margin at the restaurant level?

Anything along those lines would be helpful.

We don't see anything that is material at this point to talk about.

Okay, great.

And then maybe a quick follow-up to last question.

David, you mentioned that the marketing picture -- you had plenty of dollars to spend.

Just curious to know your thoughts on whether you would actually allocate a higher level of spending temporarily to try to accelerate the recovery.

We don't think that there needs to be a material change in our overall marketing spend to make that happen.

Okay, thank you.

I think, just to put it in perspective, I think we have a marketing budget of around $400 million.

So that's a lot of PR rating points you can buy and a lot of things that we can do.

So like I said, we have all the capability to come back over time.

Keith Siegner, Credit Suisse.

A question for you, maybe a little more color on the mid-teens Company restaurant margin target for China for this year.

Just maybe some details on the big moving pieces, like if we think about pricing to start, should we think of pricing or incremental pricing as off the table for this year?

And then in terms of inflation, what is the update to the commodity outlook?

Is chicken cheaper now, given that there is so much less demand?

Has the labor inflation picture changed?

And if there is anything really stand out in terms of things like sales-based rent contracts and that flexing either way, any of the big picture moving pieces on the margins would be really helpful.

Thanks.

Absolutely, Keith.

First of all, on the cost side, we are not seeing any material change to the guidance we provided in New York, specifically with respect to food, labor and rent.

The biggest driver of margin pressure is the same-store transaction decline.

That weighed heavily on us in the fourth quarter and we see that continuing into 2013.

What we have said, as you know, is that we expect same-store sales to be down 25%, about 25% in the first quarter, and that we expect those sales to turn positive in the fourth quarter.

I won't get into the exact slope of the recovery or the extent of the rebound in any given quarter because I don't think it makes sense here.

But what all of that implies is that on a full-year basis, same-store sales will be down in the mid-single digits.

And as you would expect, the impact to same-store transactions is more significant, probably high-single-digit decline.

And it is the transaction deleverage associated with that sales outcome that is putting the most pressure on margins, and it contributes to what we have guided under this scenario is a mid-teen margin.

Now, you asked specifically about pricing.

That is something that we will evaluate throughout the year simply based on the actions we took in 2012.

There is a rollover pricing benefit of about 2 points.

There could be opportunity, depending on what we are marketing throughout the year, to take additional pricing, but we have not made any specific assumptions at this time around that.

So the primary driver in addition to what we guided in New York around inflation, principally for labor, but also for food, combined with the transaction deleverage because of the same-store sales decline is what will yield what we have outlooked is a mid-teen margin for our China business in 2013.

Thank you.

John Glass, Morgan Stanley.

Can you talk about what else is going on in China?

Specifically, obviously, before this happened, there was a 4% decline in sales.

There was something else going on underneath it.

And then when you look at the Pizza Hut numbers you are expecting in the first quarter flat ex the Chinese New Year shift, that's a deceleration.

One, is that just -- do you think there's a brand spillover that is occurring to that brand, or is there no association?

If there is no association, what else do you think is going on there at that brand?

Is there a macro issue as well?

John, we don't see any spillover effect of the KFC crisis onto Pizza Hut.

You will recall from our New York investor conference that we talked about the decelerating trend we saw across our business in the back half of last year, and that was implicit in the updated sales guidance that we provided ahead of the investor conference.

We attributed that, as you recall, to the fact that we were facing increasingly difficult comparables from the prior year on top of the fact that we were seeing some weakness in the broader retail environment, and that was impacting both brands.

We saw the decelerating trend across the back half of last year.

Now, in addition to that, you have to bear in mind that as we enter 2013, we are continuing to face a significant comparables from prior year.

For Pizza Hut alone in the first quarter, we recorded 18% same-store sales growth in 2012.

Okay, that's helpful.

And then just on the question about your anticipation of commodity inflation, labor, etc., why wouldn't you see greater commodity pressure?

I'm assuming there are going to be other suppliers that are either going to raise their prices because they've got some higher burden, regulatory burden.

They are going to have chicken that's compliant with new regulations, and that's going to be more valuable in the marketplace.

So why wouldn't you expect to see an uptick in commodity inflation due to this episode?

We have taken a look at the situation with our team in China, and we don't expect, at this stage, that there's going to be a material effect.

Okay, thank you.

Andy Barish, Jefferies.

Maybe a shift over to the US business and Taco Bell.

Can you give us the broad brush strokes again on the relocation and the increases in marketing?

Obviously, 2Q is a big lap with the DLT rollout from last year.

Anything we should be thinking about in terms of quarterly volatility at Taco Bell, or are you planning for that with new products?

Well, again, what we did at Taco Bell -- we used to have 2.5% national advertising and 4.5% total advertising.

The deal that we struck with the franchisees is we lowered the total cost of 4.25% advertising, but that it all goes towards national.

And when you do the math on that, that increases the media weights considerably because of the greater efficiency of national advertising.

So we think that will be a good tail wind throughout 2013.

Regarding quarterly stuff at Taco Bell, I'd say the one thing to keep in mind is that we had a very strong second quarter last year when we were, one, lapping the bogus lawsuit for 2011, but also launching the Doritos Locos Tacos.

So we had a very large Q2 last year of 13%.

So that will be the toughest overlap.

In the rest of the quarters, I don't see a lot of necessarily movement right now.

As I said at the beginning, and this would impact Taco Bell, but also some of the other brands, we are not seeing a robust economy right now.

But we think it's good enough -- in the quick service industry, we think it's a good enough economy where, if we have the right innovation, the right value, we will be successful.

But it is also what I called the rocky recovery.

As an example of that, the last week of January, we saw the industry we think was down about 4 points because you were at the end of a pay cycle, both monthly payers and biweekly paychecks were both coming due at the very end of January.

So that's just sort of a heads-up that you have to play your A game in this business.

And I believe Taco Bell, in particular, is playing their A game.

Joe Buckley, Bank of America Merrill Lynch.

Again, couple questions on China.

Looking again at the fourth-quarter negative trend before the chicken supply kicked in, it seems like it was more concentrated at KFC.

Do you think there were pricing value differences year-over-year that contributed to that softness, kind of pre the chicken supply issue?

Well, as we said in New York, Joe, we don't believe our pricing really had an impact on the traffic growth.

We measure very carefully the impact of pricing as we roll over -- we had a new pricing system we rolled out, increasing the numbers of tiers to 12, if you recall, and rolling through the price increases in a very targeted fashion and somewhat slowly.

And this was spent deliberately in order to really assess the impact on the transactions.

And over that period of time, we did not see a slowdown in the transactions.

At the same time, we look at consumer metrics every single month, and our consumer metrics in 2012, the metrics on value really hadn't changed.

So we're maintaining a very strong value position, so we don't believe that pricing is really in play in terms of what we saw in terms of our transactions.

So that's how we are looking at it.

Okay, again, kind of a broad question, and a couple of slices of this have been asked.

But how do you think about the implications of this event, this experience with the chicken supply issue, beyond 2013?

Will there be changes in the supply chain or government relations or public perception of brand or even Chinese consumer behavior around chicken?

Well, I think, as I said before, we are basically -- we are not really looking to add vertical integration.

We are concentrating ourselves in the sense of us owning and running chicken farms and chicken supply.

We are concentrating on vertical integration at the supplier level with world-class suppliers because, frankly, given our scale, we need multiple sources for chicken.

I think what we are doing is we are working 24/7 right now to develop an even more comprehensive, even more enhanced QA system that will give our customers the products that they are looking for from KFC.

Okay, and then just one last one -- the YRI fourth-quarter comp -- I think you guided to plus 4, it came in plus 3. Does that variance reflect any spillover of the China issue into other Asian markets?

No.

No; it was sort of close between 3 and 4. We guided 4 and we ended up at 3.

Okay, thank you.

Howard Penney, [Research Edge] Management.

(technical difficulty) months it took you to recover from (multiple speakers) --

Howard, can you start over again?

We didn't hear the beginning.

Sorry; that seems to be a pattern here.

Do you happen to have a number of months it took for you to recover from SARS, Sudan Red and avian flu in order to benchmark your progress on recovery for this debacle?

Yes, Howard, as we have looked back at how events unfolded in 2005 into 2006, we saw recovery from Sudan Red over a period of 6 to 7 months.

But it was at that time, then, that we were hit with the SARS crisis, which extended the recovery out to 12 months.

So there were a couple of events happening at that period of time.

And, as David has said, there are no two crises that are the same.

Each one is very unique.

And as we have come up with a scenario to provide you for how this might play out over the next year, we have landed on the scenario of 9 to 12 months, which is why we suggested as part of this scenario that gets us to a mid-single-digit EPS declined that we will see same-store sales turn positive in the fourth quarter.

Thank you.

Brian Bittner, Oppenheimer.

I think we all definitely appreciate this enhanced disclosure that you guys are going to be providing on a monthly basis and also definitely appreciate your attempt to, I guess, still guesstimate your 2013 EPS guidance.

But with this lack of visibility, why even communicate potential positive comps in the fourth quarter?

Because, given that's about a third of the year, that's going to be so impactful to what you ultimately end up doing this year on the EPS front.

And it seems as though, with comps still down 25% despite you facing a much easier comparison, a lot of optimism goes into that.

So where does the confidence really come from just to throw out positive same-store sales expectations for the fourth quarter?

Well, we feel that it's important to provide some direction versus no direction.

We've said before that it is very difficult, if not impossible, to predict how this is going to play out.

We do look to history to see how our business has performed during other crises.

Again, no two crises are the same.

But, as I mentioned in response to the last question, as we looked at 2005 and to 2006 we felt that it was reasonable to make assumptions that establish a basis for a scenario to give some indication as to how EPS might play out, and that includes an assumption around when same-store sales turn positive.

And we do take into account, as you mentioned, what we are lapping from the prior year from one quarter to the next.

That is our base case assumption, if you will.

We are not necessarily characterizing that as a prediction.

Great, thanks very much.

Diane Geissler, CLSA.

So I wanted to ask about the thought process was about the delay between when you receive the final signoff from the government and when you plan to be back with the media campaign.

It just seems like you missed an opportunity to get some message out before the Chinese New Year.

And then, also, could you comment on what you might have seen in terms of traffic patterns sort of outside of the Shanghai radius, where I think most of the media attention was focused?

Maybe you could talk about other tier 1 and tier 2 cities, and then tier 3 and lower, what did traffic patterns look like since the start of the year or following the media reports?

I will respond to the second half of your question, then David will follow with a response to the first part of your question.

As you expect, the impact to our business was much more pronounced in Shanghai itself, which was the focus of the media attention and, generally speaking, was more pronounced in the higher-tier cities than in the lower-tier cities.

Okay, and I think, first, we totally underestimated the impact of this incident, then we very quickly launched a free beverage and ice cream promotion that had very little impact.

And the reality is, we concluded, is the consumer needs time.

And I think the team, you should know, is working 24/7 with all kinds of urgency on a comprehensive QA and marketing campaign we will launch shortly after Chinese New Year.

So I think we have done a lot of things.

We have been on top of this situation daily and I think basically there's not a whole lot we can do right now that's going to turn the tide.

We need some time.

History has also told us we need time.

And I think we could be wasting a lot of money doing marketing right now.

We need to get the time.

Okay, I appreciate your candor.

Jason West, Deutsche Bank.

So on the margin outlook for China, just getting to that mid-teens restaurant margin, I'm struggling to get there on a negative comp for the year and just wondering if there are some cost offsets that we are not aware of.

Maybe there's some management of G&A or labor that you guys can control.

Just in light of the inflation that you guided in December, it's tough to get to a mid-teens margin on these kind of comps.

As I mentioned, the transaction deleverage is significant, and you have seen the effect on our Q4 margin.

You may recall that we had expected to see improvement in Q4 margin versus prior year, and instead we saw a pretty significant decline.

And it was the transaction de-leverage associated with the same-store sales decline in the last two weeks of December that contributed heavily to that result, and we expect that that will persist into 2013 as long as we are seeing that same-store transaction decline.

Bear in mind that the downside leverage is significant, but at the same time when our sales rebound, the upside leverage is equally significant.

But that is the primary driver, along with the inflation that we already communicated with respect to both labor inflation being in the mid-teens and food inflation being in low-single digits.

So that explains or helps provide some additional color around why we feel under this particular set of assumptions or this sales scenario that China restaurant margin will be in the mid-teens.

As it relates to overall profitability, the other thing to bear in mind is that we are staying the course as it relates to investment behind growth, and that applies not only to the investment in new unit development -- again, at least 700 new units in China in 2013, as we guided in New York; but also investments in G&A to continue to build the capability necessary to unlock those growth opportunities.

Thank you.

Larry Miller, RBC.

Just two quick questions -- I think you guys mentioned the media intensity has subsided.

Have you seen same-store sales bottom and begin to recover?

And then, secondly, is there any way for you to give us a sense of chicken consumption in general in China, or is it just your belief that it's more centered on you guys?

Larry, first of all, with respect to the sales trend, as I mentioned in my remarks earlier, we are not expecting to see a change in trend from what we saw in December into January.

We are assuming for the moment that that continues through to the end of February.

So the way I would read that is that, while the sales situation hasn't gotten better, it hasn't gotten any worse, either.

With respect to impact to poultry consumption generally, I don't know.

What we do know is that KFC has received a lot of attention, has been the target of a lot of negative media attention, and that has driven the result that we saw in the last two weeks of December, and that has continued into this year.

Okay, thanks.

Jeffrey Bernstein, Barclays.

Great, thank you very much.

Just specific to China as you think out over the next number of years, obviously the returns have been strong historically in the Company-operated model; allowed you to benefit from the returns and you built the long-term brand and the infrastructure to take advantage of the opportunity.

But I think most people think of you as a global franchisor over time, and investors obviously appreciate the YRI model which you have talked about on a couple of occasions of the installation.

And I think people would expect a shift over time, maybe, in China, to that type of model.

So the question being, with the scares unfortunately more frequent than desired and the volatility that we've seen from that Company-operated model, does it give you any reason to consider at least removing some of the Company-operated exposure and related de-leverage?

Or if this type of rationale doesn't do it, would there be any rationale that would lead you to perhaps start to refranchise and just benefit from that installation?

From day one, we have always had a strategy to earn our right to own.

And where we want to put Company equity is where we have great returns.

We continue to have great returns in China and three-year cash-on-cash returns even in tier 1 cities, 3 to 4 years now.

So across the board, we have outstanding returns in China.

We have great operating capability and we expect to be predominantly, predominantly equity in China.

Having said that, we are doing some franchising selectively with really good operators, many -- some with people who have worked in our system, a store-by-store kind of model.

But we don't see that as a -- we don't see a big shift whatsoever, because we are just so confident in the long-term returns that we have in China.

David Palmer, UBS.

This is Eric Gonzalez in for David Palmer.

I just have a question about maybe how is this antibiotic issue being such a big deal with Chinese customers?

What is being said in the Chinese press about KFC and its chicken supply that is true and untrue?

And what can Yum!

China specifically say that can help restore the trust in the brand?

Well, I think some -- there have been some questions about the growth cycle that we have for our chickens, or our suppliers have for our chickens, which is 45 days.

And, frankly, these things come up from time to time everywhere.

But the 45 days is basically our global standard.

Frankly, we simplify thought this was a non-issue.

Then, the CCTV story broke and things started to spiral down when it was shortly followed up by the Shanghai FDA investigation.

So I think anytime you have any kind of questions anywhere about your food, it creates an issue and a doubt in consumers' minds.

The bottom line is, there's lots of places to eat.

As much as we love KFC, you don't have to go there tomorrow.

You can let this thing settle in or take some time to reflect on this, and then you go back to the brand and the products that you love and you want to have as a part of your life.

So I think, once again, what are we doing about this is, number one, is that we know we need some time.

The team is taking this as an opportunity to develop an even more enhanced and an even more comprehensive QA program, and then we are going to begin communicating to consumers what we have done to make our processes and systems even stronger.

And as we do this, we are going to continue to market the brand.

We will have product innovation like we always do.

We will have marketing commercials.

We still have Jeremy Lin, we have a lot of things that really make us a cool, hip brand in China and we are going to -- we have been locally relevant for years and we are going to stay locally relevant as we go into the future.

So I think what we are going to do is just what I told you.

And just real quick, as a follow-up, have you considered maybe making some fundamental changes to your supply chain, consolidating your suppliers, using fewer suppliers?

Well, I think what we're concentrating on, as I mentioned, is vertical integration at the supplier level with world-class suppliers.

And we are going to home in on the real core suppliers, developing that network, making sure that they are world-class, investing with them, helping them, sharing whatever we can to ensure that we get the very best product.

So that's how we are handling it.

Thanks, Eric.

Mishay, before we go to the next questioner, I just wanted to clarify one thing for all those on the call.

The mid-teens margin that Pat mentioned earlier is Company restaurant margin.

So I just wanted to clarify if that.

So, Mishay, can we take the next question, please?

Michael Kelter, Goldman Sachs.

I wanted to ask for a little more of a history lesson about your China experience in 2005, you know, the Sudan Red/avian flu issue.

You mentioned in the prepared remarks negative 40% same-store sales, I think.

How long was that sustained for?

And what was your plan to improve the brand image at that time?

And when you did recover to positive double digits, was it driven by any Company-specific initiatives, like new product news, or was it just the benefit of time elapse and just the brand image recovery?

Michael, just to provide a bit more color around that, the negative 40% was the lowest point that sustained for maybe a couple of weeks, and we began to see improvement in the first 30 days or so.

And then, as I mentioned, as we were finally turning positive from that event about six months later, then we saw the impact of avian flu.

In terms of what we did at the time in order to bring back sales, very similar to what we have in store now, as David mentioned, which is product news, demonstrating innovation that will bring customers back into their restaurant while also talking about the strength of our brand and rebuilding trust and the quality of our food.

So the plans are generally similar to what we had done seven years ago.

Michael, just -- Rick, as the historian in the room, one of the differences is when Sudan Red occurred, the media attention was very significant, probably -- maybe even worse than this, but for a shorter period of time.

It was in the news for about a week or two.

As David sort of have said in his remarks, the media attention this time lasted a lot longer than we expected with the combination of CCTV and the Shanghai FDA and social media, which was not prominent back then.

So we are glad that that's beginning to wind down, but that is a difference in the two events.

And then I wanted to revisit one more time a question that was already asked, but maybe ask it in a little different way.

The updated guidance or estimate of down mid-single digits seems -- earnings, which is underpinned by the assumption of positive comps in China in the fourth quarter -- since only two weeks of the four-month quarter are easy compares from this chicken issue, doesn't that assumption imply that you are thinking the 25% of consumers that you've lost mostly all come back before the end of the year?

And doesn't that base case invite the risk that you have to come back to us with another downward revision in the future?

Well, as I mentioned to you, what we have provided is an assumption to explain some basis for an outlook we are not, again, characterizing as a prediction, because it is impossible to predict in this environment.

But as we expect sales to turn positive in the fourth quarter, which we think is a reasonable assumption, again, based on what we've seen in the past and based on the strength of our KFC brand, that's how the numbers come together.

But I think, Michael, bottom line is we don't know what we don't know.

But I think -- we talked about should we even give any guidance.

We felt that we would be better off giving you broad assumptions.

Okay?

And that's what we've done.

Okay, thank you very much.

Thanks, Michael.

We have time for one more question, please, Mishay.

Mitch Speiser, Buckingham Research.

I'd like to ask about the new store performance.

Obviously, there's a lot of noise right now, but you did maintain your unit development target for 2013.

I guess I would think that the new store sales have been affected somewhat.

Can you comment; is it the same degree as the existing stores?

Maybe bigger picture, could you just give us a sense of how you assess new store performance in this environment to give us a sense that maintaining this level of unit growth is the right move?

Well, Mitch, we have always taken a long-term view on our business, so as we expect this situation to be temporary or short-lived; while, yes, the impact to sales will affect the near-term returns we are seeing on these investments, we don't see that as a reason to deviate from our long-term growth strategy.

We have not seen a material difference in the sales impact to new units versus core units.

Although, as I said earlier in response to a question that Diane raised, we did see a more pronounced impact on units generally in Shanghai, as you would expect, and broadly more pronounced in higher-tier cities versus lower-tier cities.

But, again, fully expecting that the sales will recover, we see this impact to new unit returns in the near-term to not be reason to deviate from our long-term growth strategy for China.

Great, thanks.

And if I could just slip one last question in, just to follow up on a previous question, it sounds like that we should not expect any step-up function in supervision or advertising as a percent of sales on an ongoing basis.

Can you maybe explain how that could be?

It just seems like that you will have to invest in these types of things to restore confidence.

But it doesn't seem like you view it as a step-up function; you're just going to reallocate other resources.

I think that the fact is, Mitch, we have a $400 million marketing budget.

That's a huge amount of effort, and we always believe that your money is best spent when you focus it on what consumer perceptions have, its beliefs, you have to change, build or reinforce the business.

So we think every dollar we spend behind reinforcing what we are doing to enhance our quality, and it's a dollar well spent that will drive the best possible return for our investors.

So we are very comfortable that we have everything we need.

Great, thank you.

Okay, thank you guys for your questions.

Appreciate it very much.

Let me wrap this up.

There is absolutely no question we have taken a tough blow, but we have performed well in adverse situations in the past and we are committed to do it again.

This is the same business with the same opportunities we talked to you about at our investor conference in New York just two months ago.

Any way you look at it, we are still on the ground floor of global growth in China, and a whole lot more.

So we are very confident about the future and thank you for taking the time.

I appreciate it.

This concludes today's conference call.

You may now disconnect.