百勝餐飲集團 (YUM) 2013 Q4 法說會逐字稿

Good morning.

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

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

Brands fourth-quarter 2013 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)

I will now turn today's conference over to Mr. Steve Schmitt, Vice President of Investor Relations.

Please go ahead, sir.

Thanks, Christie.

Good morning, everyone, and thank you for joining us.

On our call today are David Novak, Chairman and CEO; and Pat Grismer, our CFO.

Following remarks from David and Pat, we will take your questions.

Before we get started, I would 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 may be used on today's call.

We are broadcasting this call via our website.

It is also being recorded and will be available for playback.

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

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

investor events.

Our first-quarter earnings will be released on Tuesday, April 22, 2014.

And our Taco Bell investor and analyst conference will be in Irvine, California on May 15.

With that, I would now like to turn the call over to David Novak.

Steve, thank you very much and good morning, everyone.

While 2013 was clearly a challenging year, I'm pleased to report continued progress as we enter 2014 with fourth-quarter EPS growth of 4%, excluding special items.

If you've followed us over the years, you know one of the things we're most proud of as a Company is our ability to drive what we call dynasty-like performance, which is generating at least 10% growth in earnings per share year after year.

As you know, when a company does that, its stock price takes care of itself.

We did that for 11 consecutive years until 2013.

So 2013 was, frankly, a very humbling year.

However, we used it as an opportunity, I would say imperative, to take a step back and reevaluate and strengthen all aspects of the business so that we come out stronger and better prepared to win in the years ahead.

In fact, I would go so far as to say we did some of our very best work in 2013, including attracting and retaining the very best talent in the industry.

Our leadership and our bench have never been stronger.

Today, I want to highlight the work that we did in 2013 to set us up for a strong bounce-back year in 2014.

We expect to deliver at least 20% earnings-per-share growth this year and consistent double-digit EPS growth in the years to come.

First, let me start with our recent announcement to reorganize the business.

As of January 1, 2014, we combined our Yum!

Restaurants International and the US divisions into the three global brand divisions: KFC, Pizza Hut, and Taco Bell.

China and India will remain separate divisions given their strategic importance and tremendous growth potential.

This new structure is designed to drive greater brand focus and lead to even more aggressive global growth.

Going forward, our three new divisions will define and drive the strategic positioning and operating models for KFC, Pizza Hut, and Taco Bell, and we will work closely with our China and India teams to ensure tight integration on strategic brand initiatives.

We believe having 100% focused brand teams will enable us to more aggressively accelerate growth in a way that generates higher returns and enhances shareholder value.

We also believe [know house] sharing will be more powerful by bringing the US and international businesses together.

Let me now address KFC China, which was obviously our biggest challenge last year.

Before I talk about our results, I know you're probably wondering how the recent news around reported cases of avian flu in China might be impacting our KFC business.

Fortunately, while these things can be difficult to quantify, we haven't yet seen a meaningful impact on our national sales.

In fact, we have continued to make progress throughout the month of January.

Now clearly it's early days, and we don't know what we don't know.

It's also always difficult to predict sales during the Chinese New Year.

Nevertheless, we're pleased with the progress we're making, and we're confident we will bounce back strongly in 2014.

Here are some of the major actions we have taken to further strength our KFC business in China.

First, in an effort to build and reinforce positive consumer perceptions around the safety of our food, our ongoing Operation Thunder initiatives strengthen our poultry supply chain.

As you know, we are always in the process of improving our supply chain.

We also launched a powerful quality-assurance campaign called I Commit.

And as a result, I'm pleased to report we have made significant progress in rebuilding consumer trust at KFC.

We're happy to see our key brand attribute scores are nearly back to where they were in 2012.

Believe me, it's a lot more fun getting back to the business of creating and communicating positive news to our customers, and that's exactly what we intend to do.

The China team also deserves a lot of credit for doing an excellent job driving margins in a year of major sales deleverage.

We've sharpened our ability in the areas of sales forecasting at KFC, labor scheduling, and how to best optimize service levels with fewer labor hours.

This capability will help us drive profitability going forward.

Now, as I've always said, the bedrock of our success is our operations, which is getting stronger and stronger.

Here are some pretty impressive statistics that back this up.

In 2013, we hired over 8,000 new management training recruits in our Whampoa Management Training Academy, because we know we will be opening up thousands of new restaurants in the years ahead.

Almost 100% of our restaurant managers have at least a college degree.

And about half of our restaurant team members are university students.

With world-class operations as our foundation, we opened 428 new KFCs this past year, and now have almost 4,600 KFCs in over 900 cities in China.

That's more than twice the size of our nearest competitor.

KFC also has the largest home-delivery business in China, with 70% of our orders being placed online.

As a testament to our success, we were recently named the number-one foreign brand in China in a 2013 report published by the BBC.

There's no doubt KFC has been and continues to be a power brand.

As I said, our focus now is to bring more innovation and exciting news to our customers.

And the good news is we've already seen the impact of being able to go on the offensive.

Right now, we have a program with two huge Chinese celebrities, comparing our extra crispy and original recipe chicken, and asking consumers to decide which they prefer.

The campaign is getting lots of buzz, and we have received over 8 million votes online.

And as we said at our December investor meeting, we have an aggressive and comprehensive plan to restage the KFC brand in the second quarter.

It includes major initiatives across every aspect of the business, from new products to how we manage the menu and our marketing calendar, new advertising, new consumer touchpoints, and new ways of leveraging digital to further enhance the customer experience.

The goal is to bring new energy and dramatic news to the KFC brand.

Let me sum things up for KFC China.

We know we still have some work to do, but we're confident we're making progress with consumers and are pleased with the continued same-store sales improvement we're seeing so far.

Now on to Pizza Hut Casual Dining.

We once again delivered solid same-store sales growth in the fourth quarter, up 5% on top of 7% growth in the fourth quarter of last year.

While sales were down in the month of December, I wouldn't read too much into one month's results, as we already returned to solid, positive same-store sales growth in 2014.

And any way you look at it, 2013 was a strong year, as we grew same-store sales by 4% and opened 247 new restaurants, surpassing the 1,000 unit milestone.

We are clearly the number-one western casual dining chain in China, and Pizza Hut Casual Dining is arguably one of the great success stories in our industry the past three years.

If you follow this, you know Pizza Hut Casual Dining goes well beyond pizza, as almost two-thirds of sales are non-pizza items.

The facts are in the last three years, we have more than doubled our store count.

We have grown average unit volumes by over 30% and have achieved home-run economics with industry-leading margins of over 20%.

Today, we have over 1,000 units in almost 300 cities, which represents a six-to-one lead over our nearest competitor.

We also continue to leverage our assets throughout the day and have expanded our breakfast offering into over 120 restaurants.

This is a huge opportunity for us, as our long-term goal is to create and own the mid-scale casual dining breakfast occasion in China on a scale that matches what exists in the United States today.

In fact, we will be further expanding breakfast into an additional 200 units in 2014.

Now, all of this is leading to an amazingly strong economic model that generates two-year cash paybacks on new unit openings.

It's full speed ahead, accelerating our Pizza Hut Casual Dining new-unit development and aggressively expanding into lower-tier cities.

Now the other thing that is exciting about our Pizza Hut brand in China is our Pizza Hut Home Service business, or home delivery.

Pizza Hut Home Service now has over 200 units in 25 cities, and is the only all-meal replacement delivery brand in China.

Over 55% of our menu consists of Chinese-type food.

So not only are we delivering pizza, but we're delivering a full array of Chinese menu options.

We now have a proven economic model which positions us to begin to scale this brand rapidly across the country.

Now, obviously the Chinese food category in China is huge.

And as I said, we are beginning to capture this opportunity with Pizza Hut Home Service.

And we are developing our own Chinese fast-food concept, East Dawning, and are now testing it in lower-tier cities.

It's admittedly been a while in the making, but we believe our persistence will eventually pay off.

The same could be said for Little Sheep, the concept that we acquired in 2012 because it's the leader in the extremely popular hot pot category.

We've had some major setbacks, and we're working hard to improve the concept.

We still have much to do, but we remain optimistic that Little Sheep will become a significant growth driver down the road.

With East Dawning, Little Sheep, and Pizza Hut Home Service, our intent is to eventually become the dominant player in the massive Chinese food category.

Of course, the biggest opportunity we have in China is to penetrate the country with new stores.

Looking at China new-unit development in total, we strengthened our category leading brand positions with 740 new restaurants in 2013, exceeding our target of at least 700 new units for the year.

Going forward, we expect another strong year of development in 2014, with plans to open at least 700 units as we continue to deploy capital to these high-return investments.

Remember, Yum!

currently has four restaurants per 1 million people in China, where the consuming class is expected to grow from 300 million to over 600 million people by 2020.

This compares to about 60 restaurants per 1 million people in the United States, where the consuming class is about 300 million people today.

Clearly we're in the early innings of growth.

So let me sum up our China business in total.

Sales are continuing to improve at KFC, and we have an aggressive plan to reignite sales growth and improve margins further in 2014.

Pizza Hut Casual Dining is a growing powerhouse, and Pizza Hut Home Service is now poised for takeoff.

Along with Pizza Hut Home Service we have high intentionality with Little Sheep and East Dawning to participate in the huge Chinese food category down the road.

Make no mistake, we wouldn't trade our position with any other restaurant company in what remains the number-one retail opportunity in the world.

Outside of China, the balance of our portfolio delivered essentially on-target performance for the year.

We're also poised to deliver against our operating profit targets in 2014 and beyond.

In India, we have made the conscious strategic decision to invest ahead of the growth curve to best position KFC, Pizza Hut, and Taco Bell, so that we can expand even more rapidly as the country develops.

We expect to open 150 new units in 2014 on top of the 157 new units we opened this year.

There's no question India's macros and our 2013 results have not been as strong as we would like.

But we're investing in the future of a country with well over 1 billion people, and we know that investment will pay off over the long term.

Now, before I talk about our Yum!

Restaurants International and US divisions, it's important to note that our recent reorganization means that starting with our first-quarter release, we will no longer report results on these two divisions.

Instead, we will provide reporting for what are now five divisions: KFC, Pizza Hut, Taco Bell, as well as our China and India divisions.

So for the last time, let's review results at Yum!

Restaurants International.

The business delivered another solid year of profit growth led by high-growth emerging markets like Russia, Southeast Asia, Africa, and Latin America.

Yum!

is a clear restaurant leader in emerging markets, and we continued to build upon this position in 2013.

In fact, we entered four new emerging market countries this past year: Tanzania, Ukraine, Argentina, and even Mongolia.

And with each new opening, people lined up out the door to experience our brand.

It's clear our brands are loved around the world.

Having said this, we know emerging markets will have their ups and downs, and obviously, there are challenges in some markets today.

But we remain extremely bullish on our long-term prospects in emerging markets, as the consuming class rapidly expands.

Remember, emerging market economies are expected to grow at almost three times the rate of developed market economies for the foreseeable future.

So Yum!'s strongest businesses are located where the highest growth in the world is expected to occur.

This obviously bodes well for Yum!

Brands.

Importantly, the bulk of our emerging market business will continue to be capitalized by franchisees.

We now have about 1,000 international franchisees who are broadly enthusiastic about our business and passionate about our brands.

As evidence, YRI opened a record 1,055 new restaurants last year, 936 of which were developed by franchisees.

Looking ahead, our international franchise-development pipeline is extremely robust, as we expect to open at least 1,000 international new units in 2014 outside of China and India.

And as you know, the franchise business is about as high a return as any business you could possibly have.

We've also made targeted equity investments in emerging markets to accelerate growth.

These investments include the acquisitions of about 100 restaurants from a franchisee in Turkey, as well as the opening of our first equity restaurant in Brazil.

We also opened our first Pizza Hut equity unit in Russia and have made investments in South Africa to prepare for our first Company-owned Pizza Hut unit there later this year.

While it's still early, we believe these types of investments sets us up to achieve higher growth and higher returns.

Now, given our new structure, this will be the last time that we review results for the United States, which will now be reported as our Taco Bell, KFC, and Pizza Hut global divisions.

Let's start with Taco Bell, which represents two-thirds of our US products -- profits.

Taco Bell delivered another solid year in 2013, with fourth-quarter results representing the eighth consecutive quarter of same-store sales growth.

I want to congratulate CEO Greg Creed and the Taco Bell team for being named Advertising Age Marketer of the Year, in recognition of our Live Mas campaign.

And even more importantly, being the only restaurant Company to receive top-tier rankings from QSR Magazine's independent customer survey on the three operational majors that matter most: speed, accuracy, and hospitality.

Greg has done a sensational job leading the way.

The big news for Taco Bell in 2014 is we not only have innovation coming from our core products, we now have a winning proposition with our breakfast platform.

Our breakfast offering includes three terrific destination breakfast products at incredible price points, and we are now in the midst of training our teams for a national launch in the first half of the year.

I just talked to the team yesterday, and everybody is really getting pumped up about the launch.

Importantly, our economic model has continued to get stronger with restaurant-level margins now approaching 20%.

And with the strength of these unit economics, we are seeing an acceleration of new-unit development with 86 net new units in 2013 and an even better development pipeline heading into 2014.

We're confident we will ultimately achieve our goal of going from about 5,800 Taco Bell restaurants today to at least 8,000 in the United States.

Now, let me give you a brief update on Pizza Hut.

On the positive side, we opened 160 net new units in 2013, our third consecutive year of positive new unit growth.

However, we significantly lagged our competitors in same-store sales, as we simply weren't competitive enough on value.

We're aligning with our franchisees to tackle this issue and bring even more innovation to the marketplace.

After a slow start to the year, we expect to fare much better with competitive value in our plan to nationally advertise WingStreet for the first time, featuring our award-winning kitchen-fried wings, and later on, chicken strip meals.

We clearly have some catch-up work to do in the United States versus the competition for both Pizza Hut and KFC and intend to make significant progress in 2014.

All in all, the brand momentum at Taco Bell, net new unit openings, and the fact our refranchising program has been largely completed puts us on a path for consistent growth in the United States.

So to wrap things up for Yum!

Brands, on the whole, we believe we're stronger and better positioned to deliver on the three things that drive shareholder value in retail: driving new-unit development, building same-store sales growth, and doing these in a way that generate high returns.

We recognize that 2014 needs to be a show me, don't tell me year, and we're confident we have a strong bounce-back year ahead, growing EPS at least 20%, reestablishing our track record of consistently delivering double-digit EPS growth year after year after year.

Now, let me hand it over to Pat Grismer, our CFO, and I look forward to answering any questions you may have later on.

Thank you, David, and good morning, everyone.

While we're obviously disappointed with our overall results in 2013, we're pleased with the progress we have made in our China business, and at this point, all indications are that we will have a strong bounce-back year in 2014.

More importantly, we're confident our long-term growth model will sustain double-digit earnings growth for many years to come.

Today, I'll provide some additional perspective on our fourth-quarter and full-year results, the impact of our new organizational structure on our ongoing growth model, and our expectations for 2014 to deliver at least 20% EPS growth.

First, our fourth-quarter results.

During the quarter, we reported 4% growth in EPS before special items.

This increase was led by continued margin improvement and new-unit development at our China division, outstanding performance at Pizza Hut Casual Dining in China, and essentially on-target performance at YRI and in the US.

Reported EPS, which includes special items, declined 3%, as we recorded a $75-million after-tax special-items charge related to the refinancing of $550 million of existing debt.

Taking advantage of low borrowing rates, this transaction smoothed out our debt skyline, extended our average term, and will save us about 200 basis points in interest expense on refinanced debt, or approximately $10 million a year.

Now moving on to each division's fourth-quarter results.

In China, operating profit increased 5% in Q4, prior to foreign-currency translation, driven by a 40-basis-point improvement in restaurant margin versus prior year.

This margin increase is impressive when you consider that same-store sales declined 4% for the China division in the fourth quarter, with no real benefit from pricing.

This highlights the drive and determination of our China team to achieve new levels of restaurant productivity, which I'm happy to say we expect will sustain into 2014.

We also witnessed an improving trend in KFC China sales, with sequential improvements in monthly same-store sales growth across the quarter.

While these improvements were helped by progressively easier laps, it's important to note that we ended the year with a strengthening trend in absolute, seasonally-adjusted same-store transaction volumes, demonstrating upward momentum in our KFC business.

We also measured clear improvements in a number of key consumer brand attributes for KFC.

For example, one of the most important brand attributes that we track, reliable brand, is now approaching 2012 levels.

Additionally, one component of this score, food safety, is now above 2012 levels.

We believe that this demonstrates that the I Commit campaign launched in November has resonated positively with consumers.

We're pleased with the overall progress that we're making with our KFC business in China, and trends remain on track with our high expectations for 2014.

At Pizza Hut Casual Dining, same-store sales grew 5% for the quarter.

We reported solid same-store sales growth the first three months of the quarter, but ended the year with a 3% decline in the month of December.

While we never like to see a decline in same-store sales performance, we aren't seeing a negative trend at Pizza Hut, and in fact, have been solidly positive with this business in the new year.

We're confident 2014 will be another outstanding year for Pizza Hut Casual Dining, as we continue to accelerate new-unit development, expand breakfast into more and more cities, and leverage our assets even further throughout the day.

Overall, China division restaurant margin was 15.5% excluding Little Sheep, or 14.3% including Little Sheep.

It's clear our China team continues to work very hard to capture restaurant operating efficiencies, including optimizing operating hours at selected locations, delivering sequential improvements in margin performance versus prior year for the last two quarters.

And importantly, the team continues to accomplish this without compromising customer-service levels.

It's also clear we have a lot of work to do at Little Sheep to improve operating results going forward.

On the development front, we opened 282 new restaurants in China during the quarter, bringing our year-to-date total to 740 new units.

For the year, we built 428 KFC restaurants and 247 Pizza Hut Casual Dining restaurants.

Over half of these new units were built in tier three through six cities where our unit economics and returns are strongest.

So to summarize our performance in China, sales are improving at KFC.

Pizza Hut Casual Dining continues to deliver strong results.

The team is doing a terrific job of managing restaurant margins, and we're continuing to invest for the future.

At Yum!

Restaurants International, operating profit increased 11%, excluding foreign-currency translation.

YRI continued to accelerate its pace of development, opening 488 new restaurants in the fourth quarter.

For the year, YRI opened 1,055 new units, including 703 in emerging markets.

89% of these new units were opened by our franchisees.

This represents another record year of new unit growth, which is indicative of our robust development pipeline and our attractive investment model.

Same-store sales grew 2% in the quarter, including 3% growth in emerging markets and 1% growth in developed markets.

This also included a modest benefit from the timing of Ramadan.

These results were softer than we would have liked, as continued weak performance in Japan and our Pizza Hut UK business as well as a slowdown in Thailand and Africa offset very strong same-store sales performance in Russia and solid same-store sales performance with our KFC brand in Germany, France, and Australia.

YRI operating margin increased 2.5 percentage points for the quarter, driven by franchise development, and a refranchising of our Pizza Hut UK dine-in business, more than offsetting a 1.4-percentage-point decline in Company restaurant margin.

Moving to the US, fourth-quarter operating profit grew 2% versus prior year.

This included a 4-percentage-point impact of restructuring charges at KFC, as well as a 2-percentage-point adverse impact of refranchising.

In terms of our franchise ownership, I'm pleased to say that with the refranchising of 33 additional units in Q4, we have largely completed our US refranchising program.

Ten years ago, about 25% of our units were Company-owned, with about 75% franchised.

Through our refranchising efforts, we're now 90% franchised in the US, consisting of 5% ownership at KFC, 8% at Pizza Hut, and 17% at Taco Bell.

This has not only improved our return on invested capital, but should also help deliver more consistent performance going forward, given inherently lower profit volatility with the franchise business.

As a result of our refranchising efforts, our US business has become increasingly weighted toward Taco Bell, now representing two-thirds of the US division's operating profit.

For the quarter, Taco Bell overlapped 5% same-store sales growth from last year, with 1% growth this year, representing its eighth consecutive quarter of positive same-store sales growth.

Fortunately, this solid performance offset disappointing results from both Pizza Hut and KFC in the US.

For the US division overall, operating margin increased over 2 percentage points in the quarter, driven by refranchising and in spite of a slight decline in Company restaurant margin.

US Company restaurant margin was 16% for the quarter, led by Taco Bell with extremely healthy margins of nearly 20%.

Now to summarize 2013 full-year results: this year's EPS decline of 9% before special items was driven by significant underperformance of our KFC business in China.

Additionally, our full-year tax rate increased by about 2 percentage points as a result of a tax reserve adjustment, negatively impacting EPS by 2 percentage points.

Reported EPS declined 30%, primarily due to a non-cash special item charge of $258 million in the third quarter, to reflect the partial impairment of Little Sheep intangible assets.

This charge impacted EPS by 16 percentage points for the full year.

In addition, the refinancing I mentioned earlier impacted reported EPS by 5 percentage points for the year.

In China, operating profit declined 26%, excluding foreign-currency translation, driven by a 15% same-store sales decline at KFC and a 2.7-percentage-point decline in restaurant margin.

This was partially offset by 4% same-store sales growth at our highly profitable Pizza Hut Casual Dining business and by continued strong new-unit development.

Little Sheep negatively impacted restaurant margin by approximately 1 percentage point for the year.

Outside of China, our other major divisions delivered operating profit growth generally in line with our ongoing growth model.

YRI grew operating profit by 10%.

Operating margin increased about 3 percentage points, driven by franchise development and Pizza Hut UK refranchising, with the latter benefiting YRI's operating profit growth by 3 percentage points.

And in the US, operating profit grew 3%, including a negative impact of 3 percentage points from refranchising.

I'm especially pleased with the progress we made with new-unit development, where we opened over 1,950 new restaurants outside the US, laying a strong foundation for future growth.

Importantly 82% of this development occurred in emerging markets, which offer the greatest potential for long-term growth.

This past year also represented the second consecutive year of positive net unit growth in the US after a decade of annual declines, with about 80 net new units in 2013.

Additionally, even in a year when our operating cash flow declined, we maintained our rate of capital spending at over $1 billion, as we continued to invest for growth.

With the substantial operating cash flow that we generate, including approximately $1.9 billion of pretax franchise fees in 2013, our first priority has always been to deploy capital to high-return growth investments, and then return all available cash to shareholders through dividends and share repurchases.

And I'm pleased that despite our EPS decline in 2013, we increased our annual dividend payment by a double-digit percentage rate for the ninth consecutive year, 1 of only 10 companies in the S&P 500 to do so.

So when you add it all up, we returned $1.4 billion in 2013 to shareholders in the form of dividend distributions and share repurchases, and we did this while maintaining our investment-grade credit rating.

This further demonstrates the power of our portfolio and the size and reliability of our global franchise royalty stream.

Now, before I talk about our expectations for 2014, I would like to review our new organizational structure and its impact on our ongoing growth model.

As David mentioned, our new structure is designed to provide dedicated global leadership to each of our brands to ensure that we realize their full potential around the world.

However, I believe it will also make our performance and our opportunity for growth much clearer to the investment community.

Not only will we be providing reporting by brand, we will also continue to highlight our progress in emerging and developed markets.

Importantly, we expect the reorganization will be G&A-neutral on a Company-wide basis.

Starting in the first quarter of 2014, our reporting structure will change to reflect our three new divisions: KFC, Pizza Hut, and Taco Bell, as well as our current China and India divisions.

Based on this new structure, our ongoing growth model will look different as we consolidate our YRI and US businesses and re-segment them by brand.

Under this new model, we expect that KFC will grow operating profit by 10%, Pizza Hut by 8%, and Taco Bell by 6%.

When we combine the growth of these three divisions with an expected 15% operating profit growth in China and 1 point of EPS growth from financial strategies, we ladder up to at least 10% EPS growth for Yum!

overall, with a fair amount of contingency.

So now let me share our expectations for 2014, which will look different from our ongoing growth model due to some unique circumstances.

This year, we expect KFC's growth rate to be above its ongoing target and Pizza Hut's growth rate to be below its ongoing target.

This is due to significantly lower US pension expense, savings from the 2013 restructuring of our KFC US business, and substantial investments at Pizza Hut, including the launch of new businesses in Russia and Africa and the establishment of a dedicated leadership team for the brand globally.

We also expect China's growth rate to be significantly above its ongoing target this year.

As sales at KFC China continue to improve, we expect China-division restaurant margins will benefit from transaction leverage and also from productivity initiatives and pricing, including 3 points of pricing we took at the start of this year.

We also expect another strong year at Pizza Hut Casual Dining.

And on the development front, we added 740 new units in 2013 and expect to open at least another 700 new units in 2014.

It's important to note that while we remain confident sales will continue to improve at KFC China based on current trends and our balance-of-year marketing plans, including a comprehensive restage of the KFC brand in the second quarter, the shape of our upward sales trajectory remains difficult to call.

That said, with the strong momentum we've built with our restaurant margins, we don't necessarily need double-digit same-store sales growth to achieve our full-year operating profit growth target for China division in 2014.

Taking all of this into account, we expect a strong bounce-back year in China, with the divisions delivering total operating profit that will at least equal what was achieved in 2012, adjusted for RMB appreciation, or more than $1 billion.

This equates to approximately 15 points of EPS growth from our China division in 2014, or about 8 percentage points above our ongoing growth target.

When you add it all up, we expect at least 20% EPS growth in 2014, driven by approximately 15 points of EPS growth from our China division and 8 points of EPS growth from our combined KFC, Pizza Hut, and Taco Bell divisions.

For the first quarter, we expect EPS growth to be roughly in line with our full-year target of 20%, which includes the lap of significant one-time benefits realized by Pizza Hut and KFC in 2013.

Now, as David mentioned, we haven't yet seen a meaningful impact on KFC sales in China at the national level, as a result of recent reports of avian flu.

Having said that, same-store sales results haven't been quite as strong in some of the areas where reported cases of avian flu have been more pronounced.

As you would expect, we're monitoring the situation closely, but at this time, our overall sales results have generally been in line with the high expectations we had as we entered the year.

As in years past, daily and weekly comps have been affected by a shift in the timing of Chinese New Year, but we expect this to have a neutral effect on first-quarter results.

Although these dynamics make it more challenging to read underlying trends at the midpoint of our first quarter in China, we're pleased with what we have seen thus far.

Let me wrap things up.

While I'm personally disappointed with our overall results in 2013, I'm very confident in the strength of our business model and remain as bullish as ever on our long-term growth prospects.

We believe that disciplined investment decisions we're making today, coupled with the multiple actions taken in 2013, set us up for a strong bounce back in 2014, and importantly, success over the long term.

At our December analyst meeting, I pointed out that our business model remains strong and that we have a number of growth engines, or irons in the fire, that will sustain double-digit EPS growth for many years to come.

And we'll continue to allocate resources to underwrite future years' growth and build shareholder value in a very disciplined fashion.

I'm confident that we will have a strong business in 2014, in 2020 and beyond.

And with that, we will be happy to take your questions.

(Operator Instructions)

Your first question comes from the line of Brian Bittner with Oppenheimer.

Congratulations to you guys on this inspiring cost management you achieved in 2013.

It's very impressive from the outside looking in.

I have two questions, both China.

First on the sales and second on the margins.

First on the sales, you sound pretty bullish on current trends at KFC.

What is different about this avian flu event on your business?

And should we take your comments about the first-quarter trends to assume that trends right now are in line with that high single, low double-digit comp outlook that you have for 2014?

Well, first of all, as a reminder and as we discussed in New York, there are multiple paths to our profit-growth goals in China for 2014.

It is early in the year, but we're pleased with the trends that we're seeing in China.

And we're confident in our ability to deliver against that target.

And why do you think the avian flu event here is having a different impact on your business than the previous one?

I think it's always so hard to understand the consumer psyche in situations like this, but avian flu has been around for a long time.

I think people know that today that fully cooked chicken is safe to eat.

Having said that, if you have a really pronounced and dramatic amount of press on avian flu and it becomes pervasive in the consuming world, it can have an impact.

Right now, we're just not seeing much.

Okay, and then a margin question.

When you look at 2012, you did restaurant margins of 18%, with a food margin that was actually 100 basis points worse than what you're running at today, so really 19% margins.

If you get back to the same AUVs you had in 2012, given what you've done from a productivity perspective in this business, can we assume that there's opportunity to surpass that 18% margin on a similar AUV as 2012?

Brian, we're not giving specific margin guidance this year.

I think the important thing is the momentum that we have demonstrated the last two quarters, with our ability to drive higher levels of productivity, offsetting the transaction decline.

And that gives us nice momentum going into this year with what we're seeing in sales.

As you know, our goal continues to be in the long run, to get China margins back up to 20%, which we believe continues to be an appropriate target for that business.

Okay.

Thank you very much.

Thanks, Brian.

Next question, please, Christie.

You have a question from the line of John Glass of Morgan Stanley.

Thanks.

Can you talk about the brand relaunching, the timing of it?

Is that contained entirely in the second quarter, or does it just begin then and there are phases throughout the year?

Related to that, most of us would assume that your sales would be the strongest in the first quarter, given the laps are the easiest.

Is that not your view internally that you think maybe sales strengthen through the year as these new initiatives take place instead?

Our goal obviously, is to build off the momentum that we had coming out of last year, take it into this year, and continually get stronger and stronger in terms of building consumer news and excitement for the brand.

We're -- I think as I mentioned in my remarks, we're excited now to be able to take the offense and really start bringing forward lots of fun promotions and the news that we've been, I think, well known for in the past.

We think that the consumers will respond.

We will be restaging the brand -- begin to stage the brand in the second quarter.

It's going to include several initiatives that will span across the year, but the big thrust of the dramatic news will be in the second quarter.

John, the other thing I would remind you of is that the same-store sales for KFC were actually a bit worse in Q2 than in Q1, because it was in Q2 that we suffered the brunt of the publicity around avian flu at the time.

Can you just comment about what did happen at Pizza Hut?

It bounced back quickly, but there was still that anomaly in December.

Was it a promotional timing or some other calendar issue or was there an underlying consumer issue?

Did you ever identify what the cause of that weakness was?

We never had an underlying consumer issue.

Pizza Hut has been strength on strength.

The brand has never been more powerful.

We have very little competition.

We're in a space pretty much by ourselves.

We had a promotion that wasn't as strong as some things that we have done in the past.

But it was basically a blip on the radar screen.

We're back on path, and we expect to have another excellent year with Pizza Hut Casual Dining.

I think the thing that we're most excited about is the multiple variety that we offer.

We have a very unique space with Pizza Hut Casual Dining, in the sense that people can come in, eat like a rich man, eat like a poor man, everyday value.

We have one entree that is half price every day.

This is a place people love to come.

The ambiance is fantastic.

We're getting day-part leverage with our Tea Time.

We're excited that we'll have -- by the end of the year, we will have at least 300 restaurants with breakfast, which we think we can own that segment.

That segment is huge in casual dining in the United States.

And we think we can have a breakfast -- by the way, you can have a breakfast, you get two eggs, toast, and coffee with all the refills you want for the price of a Starbucks coffee.

So it's a pretty good value, and it's damn good breakfast, too.

And we're also testing a late-night program, where we sell liquor and other items.

So I think that this is a brand that we have been able to shape in a way that makes it totally relevant in so many different ways for our customers.

And we're very enthusiastic about being able to overlap this past year's results with another good year.

And John, we would definitely characterize December as an anomaly.

As we mentioned, we're back solidly in positive same-store sales territory with the Pizza Hut Casual Dining business.

You have a question from Keith Siegner of UBS.

A question to follow up on the China restaurant-level margins, given all the moving pieces, including the productivity stuff, I was wondering if you could tell us a little bit more about the pricing.

Talk a little bit about what fourth quarter saw from both a labor and commodity-inflation perspective.

And then also, has the guidance for 2014 labor and commodity inflation changed from the December analyst day?

Thank you.

Certainly, Keith.

First of all, no change to the guidance we gave in December.

With respect to the shape of our Q4 margin performance, what I would highlight is that there were about five margin points of headwinds in the quarter.

But we fully offset those with our productivity initiatives and with modest rollover pricing benefit.

To break it down a little bit further, the five points of headwind, we had about two points from the transaction decline, one point from inflation, which was essentially flat on food and high single digits on (inaudible).

One point to pressure with our advertising spend and a one-point drag from Little Sheep.

But that was fully offset with four points of productivity, and that's a combination of labor and other, as well as a point from rollover pricing.

Thank you.

Thanks, Keith.

Christie, next question, please.

You have a question from Joseph Buckley of Bank of America Merrill Lynch.

Two questions, could you put the 3% price increase that I think you were referring to KFC China that you took, in perspective and maybe give us, again, what you're thinking about labor and food costs in 2014?

And then, secondly, if you get China operating profits back to the 2012 levels, it looks like about 30% operating profit growth.

I think in early December, you were thinking 40%.

I realize you have got lots of ways to get to the full-year EPS number.

Maybe talk a little bit about that, if you would.

Certainly, Joe.

First to take the latter question, with the momentum we have in China entering the year, we have a very clear path to 20% Yum!

EPS growth for 2014.

We do continue to target about 40% profit growth in China, although our stronger-than-expected China-led finish to 2013 obviously makes that a bit more challenging.

But that said, it's early in the year, and we will continue to keep you posted as we always do.

With respect to the pricing, I did reference in my prepared remarks about three points of pricing that we took at the beginning of the year.

We have no definitive plans for pricing actions, new pricing actions, balance of year.

But I will point out that the last time that we took pricing with the KFC business was in December of 2012, early in the month.

So it's been more than a year since we have taken pricing and we absorbed all of the labor inflation.

And based on the strengthening that we have seen with the brand in market, importantly reflected in our consumer brand attribute scores, we felt that we were in a strong position to take that pricing.

And we did it in a way that we feel consumers can absorb.

With respect to what our inflation expectations are balance of year, entirely consistent with what we outlined in New York, which is low to mid single digits on food and paper and low double digits on labor.

Thank you.

Thanks, Joe.

Next question please, Christie.

You have a question from John Ivankoe of JPMorgan.

Quick follow-up.

Am I interpreting your comments right that the first-quarter China comp might be within your annual comp guidance range?

Is there a reason that that wouldn't be true, either positive or negative to that range?

We didn't comment on a range for China comps.

I understand that, but it seems like it's going well and at least it may be interpreted some positioning relative to the annual guidance, especially as the second quarter is easier than the first quarter.

Let me say this another way: I'm giving you an opportunity to comment on China 1Q comps relative to your annual guidance range for China.

We don't issue guidance on quarterly comps.

Okay, obviously, you mentioned that it was tough for you guys to forecast the Chinese New Year.

That makes it more difficult from our perspective, but okay, I'll drop that.

Secondly, we have seen businesses in developed markets that have really been transformed by technology, whether it's loyalty, whether it's mobile payment, whether it's digital ordering.

Could you give us a Yum!-wide update or maybe by brand update in terms of how some of those initiatives may influence your '14 or '15 results?

Absolutely.

Digital technology is one of the top strategic priorities for our Company around the world.

For all of our brands, for all of our divisions, the advances in digital technology remain important goals.

And to give you a sense for how we're attacking this, in China, 70% of our delivery orders come from online orders, and we see that percentage continue to grow with the advances we're making with not only our online but also our mobile platforms.

In our international markets, we currently have mobile ordering tests underway in three markets with our KFC business in France, the UK, and Australia.

As you know, we have a very large online ordering business with Pizza Hut here in the US.

It accounts for about 40% of our total delivery orders and is over $1 billion in total annual volume.

And then the other one I'd point out too is Taco Bell, where we are very actively in development and test in preparation for our roll-out later this year of a mobile ordering platform.

Make no mistake, technology is among the highest priorities that we have in our Company, and all of our businesses are focused on ways that they can harness the power of digital technology to further differentiate our experiences for our customers.

Thank you.

Thanks, John.

Next question please, Christie.

You have a question from David Tarantino of Robert W. Baird.

Good morning.

I just wanted to come back to the China sales improvement that you have seen and maybe ask this a different way.

I'm sure you can appreciate it's tough for us to interpret the comments when you talk about improvement, given the comparisons you're seeing.

So maybe it would be helpful if you could talk at a high level about your plan for the year and whether you expect that the comps in the first half will be meaningfully different than the comps in the second half.

Perhaps that would help us frame up how to think about the comparisons as you flow through the year.

As we have said before, there are multiple ways to get to our growth goal for the China business.

So anywhere from high single to low double-digit comps, and anywhere from 1 to 3 points of margin improvement.

With respect to how that plays out across the year, yes, we do benefit from easier laps in the first half compared to the second half.

But also don't forget that with the launch of our comprehensive restage of the KFC business, that we expect additional lift.

How that plays out across the year, we're not going to give quarterly guidance on our comps, but there are a number of moving pieces there.

And I think the important thing is that we do have multiple ways of getting to our number, to the point that, as I said, we are very confident that we are going to deliver that at least 20% EPS growth for Yum!, and we continue to target at least 40% profit growth for the China division.

Okay, understood.

And then maybe a follow-up or a different question.

Given you have a lot of exposure in emerging markets and there has been a lot of concerns about the macro conditions in emerging markets recently, I was wondering if you could comment on what your near-term outlook broadly is for emerging markets, as it relates to the macro conditions.

Well, first of all, I think we love the fact that we're the leader in emerging markets, and we also recognize at the same time that emerging markets will have their ups and downs.

But they're still going to be growing their GDP around the 5% rate in the foreseeable future, almost 3 times more than the developed countries.

So what we're focused on doing in the emerging markets is providing affordable everyday value, making our brands more accessible, more affordable to the emerging classes as the incomes rise.

I think the big story that we have for emerging markets is the development opportunity.

I talked about how we only have four restaurants per 1 million people in China versus the 60 we have in the US.

Well, it's about two in most emerging markets.

So, the development story is the big thing, and we have very little competition in the emerging markets as well.

I think our big challenge is to keep making the brand accessible, keep making the brand affordable, and recognizing that we will have some volatility in markets like that.

Now, one of the beautiful things about our business is that almost 90% of our growth outside the United States, excluding China, is capitalized by our franchisees.

We're very selective where we put our -- make our equity investments.

Now we have made some equity investments like in Turkey just to accelerate growth there.

We're sitting on a big growth opportunity, and we need to accelerate it.

And so we made an investment there.

We bought some stores in Africa so that we could help expand -- our African expansion.

We're in, I think, over 20 countries now in Africa.

We see big opportunities in that country.

So I think it's a little tougher right now in some of the emerging markets.

But we love where we're at, and we like being where the growth is going to occur.

That's helpful.

Thank you.

Thanks, David.

Next question please, Christie.

You have a question from David Palmer of RBC Capital Markets.

Good morning.

This is actually Eric Gonzales in for David Palmer.

As a follow-on to the last question, can you talk about emerging markets in the fourth quarter?

Were there any brand or fourth-quarter specific reasons for the slowing?

I think Pat -- Eric, Pat mentioned that we did see a slowdown, and you'll see it from our earnings release that we saw a slowdown in the Thailand and Africa markets.

Usually when that happens, it's typically a combination of two things: either not enough value or not enough new news.

So the team is looking at both of those areas to improve that.

But those definitely were the markets we saw considerable slowdown in the quarter.

And then back to China, a question about Little Sheep.

It seems like it was a big drag on the China margins, and it represents a small percentage of sales.

Were there any one-time issues in fourth-quarter loss inside that chain?

And what are the issues that plagued the chain and what same-store sales declines you're seeing at Little Sheep?

We don't report the results for the Little Sheep business separately.

There were some extra charges I would say, in the quarter which weighed on Little Sheep margins in particular.

And we're not going to report the results of that segment separately.

It's not material to our business on a stand-alone basis -- it's not material to our China business on a stand-alone basis.

Thanks, Eric.

Next question please, Christie.

You have a question from Jason West from Deutsche Bank.

Sorry to beat a dead horse, again on the current trends, but want to be clear that you guys are seeing an improvement in the business, particularly at KFC, that is independent of the shift in Chinese New Year.

Because we know the new year started about 10 days earlier this year.

It still didn't start until the end of the month.

I want to be clear that you guys were able to measure that, that it's a real improvement excluding that shift.

That is correct.

Okay.

And then on the margins on China, again, the much better than expected performance there against a tough comp.

You had talked about earlier in the year some productivity initiatives.

You talked again today about that.

Has there been another leg of productivity initiatives that have kicked in, say, during the fourth quarter that could carry you throughout 2014?

Or are you still lapping the -- still rolling in the things that had already been implemented?

Do we expect to see more of these initiatives that are needle-moving like this throughout '14?

Jason, as you know, our team in China is continuously looking at ways to drive productivity to higher levels.

So what we observed in the fourth quarter was a combination of a continuation of initiatives started earlier in the year, as well as some new initiatives.

We expect the same pattern across 2014.

Bear in mind one of the biggest benefits to China margin going forward, certainly in 2014, is the rebound in transactions.

And then much longer term, as we continue to add new layers to our business, including with digital.

It's about how we better utilize our assets to leverage the fixed costs of operating a restaurant.

Over the long run, it's first that transaction rebound as we lap last year's performance, and then as we build new layers, it's going to drive our restaurant margin to higher levels.

Our overall expectations on margins, if we look at Taco Bell, we're really pleased in the fourth quarter; our margins are 20% at Taco Bell.

That's on 1.3 million average unit volumes.

When you start getting your volumes back to $1.7 million and above, our expectation is we need to have very, very high margins.

We think we have tremendous upside on the margin front, and we're not going to quit until we get to that 20% goal standard.

And we think we can hopefully beat that overtime.

There is going to be a relentless quest to drive productivity out of leveraging our asset as it has been in the past and it will be in the future.

I think one of the great things about 2013 is that nobody threw in the towel in China.

We went after the productivity as hard as we could.

We have launched a lot of initiatives.

We'll have more coming and we're going to stay focused on it.

And as always, we recognize the importance of good customer service to maintaining our standing with customers broadly.

And so an important thing is that as we've undertaken these initiatives, we have not compromised.

I think that's why I brought up the fact that we have the operational excellence that we have in China, the quality of our teams, the quality of our restaurant managers, training programs, the initiatives that we put in place.

And I'm really pleased that Taco Bell's operational measures in the United States are top tier as well, while we've gotten this margin improvement.

Thank you, Jason.

Next question, please Christie.

You have a question from Sarah senator of Sanford Bernstein.

I wanted to follow up on China again.

A couple things, one is on the price increase.

I think in late 2012, we were all a little concerned that maybe the pricing was off.

You took a lot of price just as competitors were taking less.

And then you saw an issue, potentially a quarter later with traffic flowing.

I wanted to ask about that, the timing, what the competitive [set] is doing, whether you're worried about that.

And then my second question is about unit growth.

Historically, I know you've talked about China and you did plateauing and then stepping up again.

I wanted to see if 700 is the right number for the foreseeable future and what that requires in terms of tier one and two units in order to hit that number.

Thank you.

Absolutely, Sara.

First on the pricing, as we have said in previous calls, the timing of our pricing actions in 2012 were out of sync with what was happening with food inflation at the time.

It's possible that that created an issue for us.

We feel very good about the pricing actions that we took at the beginning of this year.

To our knowledge, others in the market are taking pricing, and we're comfortable with where things stand with our brand, given the consumer scores that we're reading and the overall momentum that we see in our business.

We don't have any concerns about the pricing actions that we have just taken.

With respect to our pace of development, we feel very good about the 740 units that we opened in 2013, and as we said, we expect at least 700 in 2014.

We continued to execute our development strategy as we've outlined in previous calls and in our investor conference, where we're being more selective with our KFC units in the tier-one and the tier-two coastal cities.

As we skew our development increasingly to the tier-three through six cities where the unit-level economics are better, where we see better investment returns, and then also, skewing our development program increasingly to the Pizza Hut brand, which is strong -- which offers strong returns, two-year cash pay backs, everywhere we operate.

To give you a couple of numbers to put some context around this, when you look at 2012, total Pizza Hut development, inclusive of both casual dining and home service was 20% -- 27% of our total development program.

In 2013, it was 40%, and we expect that number to go up further in 2014.

It speaks to the power of our Pizza Hut brand in China and the strong unit-level economics that we have with that business and how we are reorienting our capital investment program toward that brand.

That's not to say that we are not developing KFC, because we continue to develop KFC at a high level as well.

But we are skewing that development program increasingly to the lower tier cities, where again, we have better economics overall.

Thank you.

You have a question from Howard Penney of Hedgeye Risk Management.

In the past when you have provided guidance, the construct of that guidance has included a safety net, if I could use that, to where if something didn't go right during the year, you could still hit your guidance.

Does the China profit target of 40% and the overall profit of 20% include some kind of safety net to allow you to get to those targets?

When we construct our division targets, we do have what we call local contingency, so that is part of the plan.

So the teams have again, just as we do at the Company level, different ways of getting to our 20% EPS, they have different ways of getting to their number and they construct their plans in ways that give them a bit of breathing room.

Internally your plans are to hit above 40% and 20%.

Yes, Howard.

As Pat said in his comments, we feel good about the EPS of at least 20%.

To repeat on the 40%, because we came in the year stronger, it could be more difficult to get to that 40% in China, but we feel great about at least 20% EPS growth.

Thank you.

Thank you, Howard.

Next question please, Christie.

A question from Michael Kelter of Goldman Sachs.

I wanted to ask about the labor costs in China, because they were down about 10% year on year per store this quarter, and that's in spite of labor inflation.

So it seems your store hours are actually down a solid double-digit rate at a typical restaurant in China.

Does some of this need to come back when traffic comes back, or was it all slack?

And how do you gauge whether the reduced service is impacting the consumer experience as the traffic does come back?

Michael, the assumption would be that we would have to add hours as traffic comes back.

That's a safe assumption there.

Another piece of the mix is that we continue to look at operating hours.

In cases where we're operating potentially in late night where the trade zone is not completely ready, we have taken a look at that and pulled back a little bit on some of the late-night offerings that we have.

And then maybe switching to Pizza Hut, you said you're back to solid positive in China in January.

But the compare is really easy.

You're actually up against a minus 15% last January, which was a one-time thing that happened because of some calendar and stuff.

Are your current trends good enough to suggest that Pizza Hut could be robust throughout 2014 against normal compares?

It's January -- maybe it's February 2nd now.

It's really early.

We're not into making any predictions right now.

We feel comfortable about all of the planning assessments, our assumptions that we gave everybody in December.

We feel very comfortable that we're off to a solid start relative to what we expected, and we're confident that we can have a strong bounce-back year.

I don't think any of us are smart enough to tell you exactly how things are going to lay out for the balance of the year.

The big thing I would like all our investors to know we know this is a show me, don't tell me year.

This is a year where we've got to put up the numbers.

We've got -- we don't think any of these plans are easy; it's not easy getting 40% profit growth.

You never turn around a brand until you've turned it around.

We really feel like we've got the building blocks in place now to where we're set up to get this year back on the bounce back that we want.

We can keep growing at that -- at least 10 from here on out.

That's really what we're targeting to do.

I understand why there's all kinds of questions about China in January, and all those are totally valid questions.

And what we're basically telling you is we're off to a pretty good start.

We feel confident that what we talk about in December still looks like a high possibility to us.

And we will keep you informed as we go throughout the year.

But I wouldn't be jumping to any major conclusions.

If you don't mind, one last one, really just a big picture on the avian flu.

You said there was some impact in certain provinces, even if nothing national.

Given what happened last year, is there anything you're seeing that's different this time around that makes it the right base case that avian flu won't matter in 2014?

I would never say that.

I would never say that.

I guess --

What we have right now is the response that we just shared with you.

Okay.

It's early.

I don't think anybody in our Company or anybody in the world would be silly enough to make a statement like that.

We have to get moving.

Thank you, Michael.

Next question, Christie.

You have a question from Jeffrey Bernstein from Barclays.

Two questions.

One, David, the restaging of KFC, you talked about the most robust being in the second quarter.

You mentioned a lot of initiatives and I can understand -- I know you talked about products, menu, marketing and don't want to share too much granular detail.

But in order to prioritize what you think would be the most impactful or what the biggest opportunity is knowing where you are on your path to recovery.

For example, is the biggest challenge price value or is it more about brand positioning?

Trying to think about of all of those initiatives you laid out there.

I think first of all, the opportunity to get on the offensive, to really glorify the brand, have fun with the brand, bring in consumer excitement, overall, that's the big thrust that we have this year.

As we do that, we're going to have significant menu revamp.

Substance always is the name of the game, what you're really bringing to the marketplace that your customers can see and respond to.

We're going to have a very significant menu revamp that will bring forward products that we know our Chinese customers are going to love, and I think really bring some new energy and excitement to the brand.

I think it's being able to take the offense in combination with menu revamp.

Those are the two big things.

Then we are going to amplify what we're doing through all consumer touch points and keep the news coming for a long time.

And then --

Jeff, we have to get moving.

Christie, next question, please.

You have a question from Jeff Farmer of Wells Fargo.

This is getting back to the Chinese consumer, I think it was last week Tyson at least partially attributed some weaker demand for chicken in China the reemergence of the avian flu concerns in January.

Assuming this is true, why do you believe that consumer demand for KFC has proven to be a little bit more resilient than that we might be seeing from some other chicken occasions in China?

I think it's important to know we have nearly 30 chicken suppliers in China.

It's hard to comment on what one particular supplier might say.

We have commented as much as we can on what we're seeing on sales in China.

Okay.

Thank you.

You have a question from Karen Holthouse of Credit Suisse.

Thank you for taking the questions.

You mentioned in the comments on the fourth quarter that marketing spend was about a -point headwind to the margin.

As we look to 2014, and particularly, thinking you just had the relaunch of the brand in the second quarter, how should we think about that as a headwind or a tail wind this year?

I would say overall, Karen, it will be a slight tail wind on a percentage basis.

But we are expecting that in the aggregate, we will be spending more on marketing and advertising in 2014 than we did in 2013, because our system sales will be up with the benefit of all the new-unit development that we're doing.

Thank you.

Your final question comes from the line of Andy with Jefferies.

Can you address the G&A numbers in the fourth quarter, particularly, it looked like most of the decline came in the corporate unallocated.

I assume some of that was incentive comp.

How does that form a base, if you could, for 2014, say, off of that $1.4 billion of total reported G&A?

Are you still looking for that 4% dollar increase for this year?

We are.

And you're right, that the fourth-quarter favorability was largely due to lower incentive comp, consistent with our pay-for-performance culture.

As we said in New York, when you look at the 4% for 2014, it's important to look at that on a two-year basis because there was a decline in 2013.

And so when you look at the two years combined, it's more in the range of 1% to 2% annually.

Okay.

Okay.

I want to thank everybody for being on the call.

We recognize, as I mentioned earlier that 2014 needs to be a show me, don't tell me year.

We're very confident that we have a strong bounce-back year ahead for Yum!

Brands of EPS of at least 20%.

As always, we will keep you informed along the way.

If we have any new news, we will be clear and transparent, and we'll let you know what is going on.

I'm personally very excited about this year.

All of our teams, I can assure you, are really dedicated to bringing it home.

So thank you very much.

And thank you all for participating in this morning's conference.

You may now disconnect.