百勝餐飲集團 (YUM) 2014 Q4 法說會逐字稿

Good morning.

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

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

Brands' fourth quarter 2014 earnings and 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. Steve Schmitt, Vice President of Investor Relations and Corporate Strategy, you may begin your conference.

Thank you, Cheryl.

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

On our call today are Greg Creed, our CEO; and Pat Grismer, our CFO.

Following remarks from Greg 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 investors section of the Yum!

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

We are broadcasting this conference call via our website.

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

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

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 21st; and our China investor conference will be held Wednesday, May 13 to Thursday, May 14 in Shanghai, China.

And with that I would now like to turn the call over to Greg Creed.

Thank you, Steve, and good morning, everyone.

I'm pleased that you could all join me on my first earnings call and I'm honored to share with you the opportunities ahead for Yum!

as well as a review of our results.

Before we get started, I want to underscore what I presented at the investor day in September.

Our goal is to continue to build three global iconic bands that people trust and champion.

I believe that's critical to delivering sustained growth, and I will share some views during my comments about 2015.

But before I do, I would like to comment on our 2014 results.

As you saw in our release last evening, we grew full-year EPS 4% in 2014 despite a 29% decline in the fourth quarter.

These results were heavily skewed by the challenges handed to our biggest division as we suffered two highly publicized supplier incidents in two consecutive years in China.

However, we continue to believe this setback is temporary, as evidenced by the bounceback we delivered in the first half of 2014 following the first supplier incident.

As proof of our conviction, we continue to invest where our belief is.

We are building 700 new units in China this year because we absolutely believe the market offers strong unit economics and return on investment.

Based on our expected recovery in China and the positive momentum across the rest of Yum!, we expect EPS growth of at least 10% in 2015.

As outlined at our investor conference in New York, this will be a first half/second half story with EPS growth negative in the first half of the year, then turning strongly positive in the back half of the year.

I would like to reiterate that we are firmly committed to restoring our track record of at least 10% EPS growth and consistently achieving our division targets.

So how are we going to do this?

Well, today I'd first like to update you on what's happening in China since we last met in December.

I will then discuss what gives me confidence in the future for each of our businesses.

And after that, Pat will walk you through the financials.

First, China.

Following the successful menu revamp out in 2014, China operating profit increased 116% in the first half of the year and Yum!

EPS grew 27%.

We were convinced that 2014 would be a year of at least 20% EPS growth.

The Shanghai Husi supplier incident changed all of that.

We know KFC and Pizza Hut are beloved brands in China with a huge advantage, not just in scale but also innovation, quality and people capability.

Despite this, our recovery at KFC is not occurring at the pace we expected.

The good news is that our consumer perception scores have shown continued improvement.

Metrics at KFC including food safety scores and reliable brand scores have improved every month since their August lows.

From what we can tell, the biggest setback to this recovery is that we incurred two supplier incidents in such a short time span.

And so what are we doing to address this?

We've learned from other setbacks that we must innovate our way out, and that's what we're doing.

We have two menu revamps scheduled this year, one in the first half and one in the second half.

This proved successful in the first half of 2014 and we will leverage the success this year.

And of course, we will continue to offer compelling value.

We've also started our initial rollout of premium coffee in Shanghai KFC stores in December.

The initial results are encouraging and our freshly ground coffee has contributed solidly to our breakfast and afternoon dayparts.

We expect this to add an incremental sales layer that we can grow.

By the end of February we will have coffee in more than 1,000 of our stores and by the end of the year we anticipate we should have coffee rolled out into over 2,000 stores.

This is a significant achievement.

And, said in a different way, we will have premium coffee in more stores by the end of the year than Starbucks had total stores in China in 2014.

I want to assure you it's my top priority and all hands are on deck to get the China business back on track as soon as possible.

Prior to our investor meeting in December Joey Wat, KFC China President, spent several days in Irvine working with the Taco Bell team to learn more about Taco Bell's innovation process, mobile app and digital customer engagement.

Joey has taken those learnings and is looking to improve KFC China in these areas.

This is just one example of how we share know-how and best practices from teams around the world as we address this setback with a sense of urgency.

Now let's step back and look at where we are.

KFC China average unit volumes in 2014 were $1.35 million or 20% off their peak levels.

But despite this, margins held at 15%.

These fundamentals demonstrate we can still open stores with confidence, offering attractive returns for our shareholders.

We know we still have work to do to regain our customers' trust.

But once we do, the opportunities are tremendous.

Just recovering average unit volumes to 2012 levels at KFC will result in $1.7 billion in incremental revenue, and that doesn't even include the new units we're building.

Pizza Hut Casual Dining is recovering more quickly.

The brand was not as severely impacted by the supplier event as KFC.

Many consumer metrics are back to close to where they were in the second quarter of 2014.

And we attribute this to the fact that Pizza Hut has only been impacted by one supplier incident, not two.

By no means are we out of the woods, but we are trending in the right direction.

And we are continuing to build the brand by expanding sales layers like breakfast and late night.

I want to assure you that we remain committed to new unit development and plan to open 700 new units in China in 2015, which builds on the 737 we opened in 2014.

In addition to the massive new unit opportunity we have with KFC and Pizza Hut Casual Dining, we continue to expand Pizza Hut Home Service as well.

We have a tremendous sales leverage opportunity in China as sales recover, and we fully expect to realize this over time.

There's a $600 million profit opportunity by simply returning our existing assets to the volumes we had in 2012.

And I have great confidence in Sam Su, our Vice Chairman and China Division CEO, and his ability to get the China business back on track and capture this enormous upside.

Now for the other two thirds of our business -- first, KFC.

Our KFC business model is incredibly strong.

I love the combination of being the emerging markets leader, being franchise-led and having a line of sight to double-digit operating growth well into the future.

We expect to open 700 new international units in 2015 after a record year in 2014 of 666 new units.

We are clearly entering the year with same-store sales momentum as comps grew 4% in our last quarter.

We saw continued excellent systems sales growth in Russia of nearly 40% and double-digit growth in Africa and Thailand, all in constant currency.

The new news for KFC is our US business is performing much better.

US same-store sales grew 6% in the fourth quarter and the division is poised for its best year in some time.

All of this sets the KFC division up for a strong 2015.

Micky Pant, our KFC CEO, deserves a lot of credit for leading this incredible brand.

And with this brand positioning of Always Original, I'm confident the best is yet to come.

Now to Pizza Hut -- we opened a record 465 new international units in 2014 and expect to improve on this number in 2015.

Our focus brand structure is clearly paying dividends with Pizza Hut development.

However, Pizza Hut is more than a new-unit story.

As you all know, Pizza Hut launched its new menu in the US, driven by the Flavor of Now brand positioning in December.

I would be remiss if I didn't tell you sales were softer than we expected with our initial launch.

But I absolutely believe our product and brand positioning are right, but we struggled to get our communications balance to build a new brand positioning while still connecting with our core customers.

However, this is a long-term strategic initiative.

We are excited by the fact that the people who have tried it love it.

Repurchase intent is greater than 90%.

Look, this is just the first inning.

We are working to drive more customer trial as our advertising campaign evolves to drive sales through sharper product and pricing offers.

And impressively, we've seen no operational hiccups from the new menu.

I know new Pizza Hut CEO David Gibbs and his team are focused on getting the advertising and pricing right to ensure that their brand building efforts pay huge dividends.

We also enhanced the Pizza Hut mobile app back in late November.

For the fourth quarter, over 40% of delivery and carry-out orders were via digital.

Over 50% of all digital orders are occurring through the app or mobile devices, and digital sales grew 40% year-over-year in the fourth quarter.

Just this past Super Bowl Sunday we sold over $10 million worth of pizza via our digital devices, marking the single biggest digital sales day in Pizza Hut's history.

Believe me, we absolutely understand the importance of digital to compete effectively in the pizza category and are making significant investments in this area of the business.

There is no doubt in my mind that the Flavor of Now is instrumental to building a more relevant consumer proposition for Pizza Hut.

We have a long runway ahead of us.

We are making necessary decisions to drive future returns both domestically and globally.

And finally, to Taco Bell -- Taco Bell continues to fire on all cylinders.

The breakfast launch last spring was a success and we continue to report strong margins.

Breakfast was again 6% of the daypart mix in the fourth quarter, and we expect to further grow the layer with additional product innovation.

I believe a lot of the momentum witnessed at Taco Bell is attributable to its insight-driven brand positioning, product development, advertising and social engagement with core users.

We are applying this to the other two brands and across the globe.

And, vice versa, all ideas don't have to come from the US or from Taco Bell.

For example, we are taking a page from the success of our open-kitchen Taco Bell restaurant in Bangalore, India, and are planning to open a similar restaurant in the US in 2015.

This sharing of ideas globally is especially important as we work to spread good ideas worldwide and across brands to make the brave decisions necessary to lead this food revolution.

Our mobile app launches off to a solid start at Taco Bell.

We've seen 2 million downloads so far.

We expect 2015 to be another solid year as we focus on furthering our breakfast offering, generating more innovation across all dayparts and optimizing our presence with next-gen footprint.

I am thrilled to have Brian Niccol leading this brand and taking it to the next level through the Live Mas positioning.

The opportunity that lies ahead for Taco Bell is really unmatched as we start to expand internationally.

And who better to take the brand global then Yum!?

We have the infrastructure, supply chain, franchise relationships, fixed brand, to expand this brand's domestic success on a global scale.

As I see it, we are just in their early days of taking this brand to a new level.

So in conclusion, we have an incredible growth opportunity ahead of us.

Without a doubt, we are disappointed by the results out of China.

But we are addressing the issue head on and I believe the upside from this business is tremendous.

Yum!

is in a unique position.

We have three iconic brands and I think we have an opportunity to make each of these brands stronger.

My vision as CEO is to build three global iconic brands that people trust and champion.

In order to do that, we have identified each brand's true north positioning that is the clear, compelling and relevant guidepost.

As you saw at our New York analyst meeting, each of the brand leaders is using these brand positionings and underlying principles to drive results through brands that are more relevant, more engaged, more connected and ultimately more caring.

I believe this will ultimately translate to consistent results that will reward our shareholders.

And so now it gives me much pleasure to hand over to Pat to take you through the details on the financials.

Over to you.

Thank you, Greg, and good morning, everyone.

In my remarks today I will cover three areas -- our fourth-quarter results, our outlook for 2015 and our ownership strategy.

For the fourth quarter, EPS -- excluding special items declined 29%.

Reported EPS was negative, primarily due to a non-cash Special Items charge of $361 million related to further impairment of Little Sheep assets in China, which I will cover in a minute.

I'll start with a broader discussion of our China business and then move into our other divisions.

As we outlined at our December Investor Meeting, same-store sales at KFC China are recovering at a slower pace than we initially expected and declined 18% for the fourth quarter, which for China Division includes the last four months of the year.

Same-store sales at Pizza Hut Casual Dining were more in line with our original estimates and declined 9% for the fourth quarter.

These sales declines weighed heavily on restaurant profitability, particularly as the fourth quarter is the seasonal low point of China's fiscal year, yielding a restaurant margin of 7.1% for the quarter.

In addition to significant sales deleverage, we were also impacted by food inflation of 3% and labor inflation of 9%, which combined had a negative 3 percentage point impact to restaurant margin.

While we are not pleased with these results, we expect the combination of sales improvement, modest pricing and responsible cost management to dramatically improve our China Division's profitability as the year progresses, with a particularly strong second half.

Given our long-term positive outlook for China and our continued belief that the current sales issues are temporary, we opened 737 new restaurants in the world's fastest-growing economy.

We also continued our disciplined approach to development, shifting our new unit program towards higher-return investments.

As evidence of this, Pizza Hut Casual Dining is still delivering 18% restaurant margin in a year when same-store sales declined 5%, comprised nearly 40% of our new-unit openings in 2014.

Now, before moving to our other divisions I want to provide some color on the impairment charge we took in the quarter related to Little Sheep.

Due to sustained same-store sales declines, significant store closures and the evolution toward a more franchise-led business we determined that it was appropriate to further write down our investment in Little Sheep and therefore recorded a non-cash special item net charge of $361 million.

We are extremely disappointed with the performance of Little Sheep since we acquired the business in 2012.

It has clearly fallen well short of our expectations and hasn't yet achieved the unit level economics necessary to justify the expansion we had envisioned for this concept.

We have a small, dedicated team focused on improving this business.

And, pending the outcome of these efforts, we will evaluate our options with Little Sheep later this year.

Now moving to our global KFC division, which posted its strongest quarter of the year with solid improvement in sales, margins and profits.

System sales growth was especially strong in the emerging markets, up 12%, led by Russia, Africa and Thailand.

International developed markets also delivered solid system sales growth, up 5%, led by the UK, Continental Europe and Australia.

And the US posted its strongest quarter of same-store sales growth in nine years at 6%.

Operating profit grew an impressive 19% in the quarter before the impact of foreign currency translation.

This included a benefit of three percentage points from the favorable resolution of a pension matter in the UK.

Importantly, KFC set a new record for international development in 2014, opening 666 new restaurants, demonstrating the global power of this iconic brand.

Our global Pizza Hut division posted flat same-store sales growth for the quarter.

Although this was below our expectations, it represented another sequential improvement in quarterly sales performance since the start of the year.

Despite this improving sales trend, operating profits declined 11%, driven by a 2.7 percentage point decrease in restaurant margin coupled with strategic investments in international G&A to lay the foundation for future growth.

On the positive side, the quarter capped a year of record-level developments for the Pizza Hut brand, opening 465 new international units, capitalizing on the continued strong growth of the pizza delivery category globally.

And finally, Taco Bell, which posted their best quarter of the year with operating profit growth of 20%, global same-store sales grew 6% including 7% same-store sales growth in the US, driven by breakfast, the launch of our Dollar Cravings menu and our recent Sony big-box promotion.

Restaurant margins improved 0.3 percentage points to 20.6%, raising full-year margins to approximately 19%.

Additionally, we opened 236 new stores this year, our strongest rate of development in more than a decade.

Almost 90% of these new restaurants were opened by franchisees, further demonstrating the attractive investment returns that the Taco Bell brand generates.

I'd now like to talk about our 2015 outlook.

We are fully committed to delivering EPS growth of at least 10% this year.

And, consistent with the plans we laid out in early December at our investor meeting, we have a path to achieve this target without profit growth from our largest business, KFC China.

The pace of sales recovery in this business remains difficult to predict and we will have much better visibility to this trajectory and the implications for KFC China's profit growth and Yum!

EPS growth as the year progresses.

Along these lines, our path to at least 10% EPS growth has become tougher.

The major change is foreign currency translation.

We initially estimated exposure of at least 1 percentage point of EPS for the year; but, based on current spot rates and projections, that could now be around 4 percentage points of full-year EPS headwinds.

To be clear, this exposure is largely one of profit translation and does not impact our competitive position as it relates to how we price our products around the world.

The vast majority of our input costs are in local currencies where we operate, so swings in foreign-exchange rates have no real impact to our pricing or our competitive value.

With respect to China, Pizza Hut sales are about where we thought they'd be, but KFC continues to recover at a slower pace than we anticipated.

Same-store sales for KFC did not improve in the months of December and January, as we expected, as recent promotions were too narrowly focused from a consumer perspective.

We've taken swift action to develop new advertising and new local store marketing programs to strengthen our overall promotions with broader appeal to our core customers during the upcoming Chinese New Year period.

We expect these actions will deliver improved results in the coming weeks.

In spite of these headwinds, we remain committed to delivering at least 10% full-year EPS growth for 2015 with the first half negative and the second half strongly positive, just as we outlined in New York.

However, based on current trends, we expect China same-store sales for the first quarter, which is limited to the months of January and February, will be in the negative mid-teen range.

Combining this with our new expectations for foreign exchange, we estimate that Yum!

EPS in the first quarter of 2015 will be about 20% lower than prior year.

So, with the weaker than expected start to the year, why am I confident that we will deliver at least 10% full-year EPS growth for 2015?

Here are the key reasons.

Number one, we expect China Division to have a very strong second half, bolstered by, A, the gift of time and the demonstrated resilience of our brands, including the upward trend in our key consumer metrics; B, two menu revamps including new breakfast innovation and the continued rollout of premium coffee at KFC; C, two menu revamps and the expansion of our breakfast, afternoon tea and late-night programs at Pizza Hut Casual Dining; and, D, new product and digital innovation at Pizza Hut Home Service.

We are also continuing prudent new-unit development of all three businesses while making the investments necessary to contemporize our brands to keep pace with a changing China.

We have enormous profit leveraging our China business.

So when sales recover, as we expect they will, we are positioned to realize a significant uplift in division operating profit similar to what we achieved in the first half of 2014.

In fact, as sales recover to 2012 levels we believe there is $600 million of latent profit potential just with our current assets in the ground.

Number two, we expect positive momentum to sustain at both KFC and Taco Bell divisions, which together account for about 55% of our global operating profit, supported by more breakthrough product innovation, solid franchise-driven new unit pipelines plus the rollover benefit from last year's record development, and continued progress on digital.

Number three, we expect Pizza Hut division sales and profit to strengthen across the year as we accelerate the pace of international development, particularly in emerging markets, building on last year's record-level additions, which benefit this year; improve the execution of our brand relaunch in the US with more targeted product news, promotional offers and marketing communication; continue to improve and expand our digital platforms and leverage our best product innovation ideas from around the world.

Now I'd like to quickly cover our ownership strategy and how we make decisions where to invest equity.

First, from a global perspective we lead with franchise development with our franchisees opening over 1,500 restaurants around the world including the vast majority of new units opened at our KFC, Pizza Hut and Taco Bell divisions.

Second, we maintain purposeful equity investments on the basis of financial and strategic criteria.

On the financial side, we own equity where we generally have high growth, strong returns and strong operating capability.

On the strategic side, we have equity positions that allow us to innovate our concepts, build capability and lead the growth of our systems.

And third, we re-franchise when we believe the franchise model creates more shareholder value.

In fact, after conducting a comprehensive review of our equity businesses, we announced in December our intent to become even more franchised as a company.

Currently, we are slightly more than 90% franchised outside of China and India and we are going to take that to approximately 95% franchised over the next three years.

With this, we expect operating margin for these businesses to improve from 24% in 2014 to over 30% in 2017.

For China and India, we realize there are opportunities to unlock shareholder value through re-franchising as well.

We will be picking up the pace of refranchising and franchise development in these divisions and expect to be approximately 10% franchised in China and 85% to 90% franchised in India by 2017.

We expect the profitability and capital efficiency of our businesses will improve with this re-franchising; and, importantly, these actions -- along with the China sales recovery -- will boost our return on invested capital, which we expect to reach at least 22% by 2017.

Finally, we pay a dividend which we've grown at a double-digit rate every year since we first paid a dividend in 2004.

This equates to an annual dividend yield of about 2%, which is very competitive for a company with our growth profile, and we are committed to that.

So let me wrap things up.

While we see additional headwinds for 2015 and the recovery at KFC China is taking longer than we anticipated, we're committed to EPS growth of at least 10% and restoring our track record of double-digit EPS growth going forward.

We are also committed to ensuring that our ownership model creates shareholder value and will be increasing our franchise mix in the years ahead.

And with that, I'll hand things back over to Greg.

Thanks, Pat.

Before we begin the Q&A, let me just tell you why I'm passionate about this Company and believe in the future of Yum!

Brands.

First, we have three iconic brands with incredible global infrastructure and franchise capability to facilitate growth.

That's a strong competitive advantage to start with.

Second, we have a China business with leading brands, supply chain development expertise and, of course, people.

Other companies would kill for what we have.

Yes, we have had some challenges over the past couple of years which have been painful for our shareholders.

But that doesn't erase the Company we've built over the years or the enormous opportunity ahead of us.

We are going to turn this business around.

And when we do, we have a tremendous sales leverage opportunity to capture and I'm confident we will.

Our KFC division is an emerging market powerhouse.

As strong as this business is, I know we can get stronger.

The top 10% of our restaurants are generating sales that are more than double the average KFC.

Our assets are underleveraged.

We are going to remedy this by expanding operating hours, leveraging digital and strengthening the core.

And we expect our recent improved performance in the US to continue.

Pizza Hut -- it's a powerful brand that quite frankly has underperformed over the past few years.

But we have just set a record in new unit openings.

Think about this.

If we can set a record in new unit openings when the brand is not growing same-store sales, just imagine what we're going to do when we get sales going.

We are making digital our top priority and we are going to perform much better.

Taco Bell is accelerating new unit openings, launch breakfast and mobile ordering, has fantastic innovations and high-teen restaurant margins.

And with more focus and investment behind Taco Bell international, I know we are going to make a significant progress in taking Taco Bell global.

As an organization, we are going to build stronger brands.

We are going to have sharper brand positioning and inside-driven marketing programs.

And we are going to focus on the following areas -- more product customization, more transparency, leading innovation and much more engagement through social media and digital.

And finally, we are going to continue to give back to the community and deliver on our social responsibility commitments.

All of this will lead to my goal of having brands that people trust and champion.

It's going to take courage to do the right thing and it's going to take time.

But we have the scale and resources to do it.

I firmly believe we are going to build stronger brands, and all of this will lead to strong returns for our shareholders in 2015 and over the long term.

I will now hand it back to Steve and we will commence the Q&A.

Okay.

Cheryl, we are ready for Q&A.

(Operator Instructions) John Ivankoe from JPMorgan.

I just want to see if I caught a comment and then I'll have a question on that.

It sounds like refranchising in China and India would actually be additive to profits in the near-term.

Is that what I heard?

John, I would say not meaningfully additive.

Okay, but at least not dilutive.

And then when we talk about cash flow and returns in some of these other things, it would clearly be accretive.

So I guess there are two schools of thought with re-franchising, one of which, you know, you sell stores at a relatively low margin because you can, as we talked about, have these sales not be dilutive to profit or maybe even modestly accretive to profit and let the franchisees turn around the system from a fairly low base.

And there's another school of thought that you re-franchise stores once the brand has regained strength and is showing increases in same-store sales and margins and what have you, so you can put new stores in the hands of franchisees with some momentum behind them.

So do you subscribe to either one of those schools of thought?

Or how should we be thinking about re-franchising, broadly, especially when we think about the existing base of margins, for example, of Pizza Hut globally or especially China on a systemwide basis?

Well, John, generally speaking we love the franchise model.

We think it's a powerful way to create shareholder value and we've demonstrated that over time.

Our equity positions have been quite purposeful, as we've talked about.

But we've always guided our ownership with the belief that we earn the right to own.

And in those instances, where we are not continuing to earn the right to own and where we believe those units will create more shareholder value in the hands of franchisees, capable franchisees who can continue to build the brand and develop alongside us as equity operators, that's the direction we are headed.

So our strategy hasn't changed at all.

We're guided by the earned the right to own.

If anything, I would say building on what we presented in New York, our goal is to be even more disciplined in that regard.

So just to understand, you have no problem re-franchising stores at a relatively low price at a relatively low margin, if that's what you think is right for the long term of the business?

When we restructure our re-franchising deals, we structure prices that we believe are fair based on the current operating performance of those units and what we believe is their potential in the years ahead, fair prices.

Thanks, John.

Thank you.

David Palmer, RBC Capital Markets.

You mentioned consumer perception scores are improving in China.

Have those scores continued to improve even in recent weeks and months, or are those stalling out lately?

And versus the competition, are you seeing a divergence in perceptions?

Because it does appear that perhaps competitors are recovering more quickly.

And what is that telling you about the business?

And then lastly, is there anything competiti-, in terms of your comparisons in the first quarter, perhaps marketing, media weights and other, that we should know about?

Thank you.

Well, David, let me just say the good news is that there has been sequential improvement in the metric.

Obviously, we get KFC on a monthly basis.

So we are seeing a month-to-month improvement in KFC.

Obviously, on Pizza Hut we get it on a quarterly basis.

But the good news is that, whether it's food, safety or trustworthy or reliable brand, all of those metrics are improving on a month-to-month basis.

So that's the good news.

The second part of your question was?

About how does that compare to the competition and perhaps what does that tell you about how you handled it and perhaps how the consumers view you competitively on those trust scores.

And then lastly, in terms of the comparisons on your marketing and media weight, is there anything to note there in terms of how we view this first quarter?

I think the good news is that the consumer metrics are in line with our key competitor in China.

They are all trending about the same direction at the same time.

So I think in that sense there's not really a disconnect between the improvement in our metrics and our key competitor's metrics.

I think, as you know, our key competitor had better sales recently then we had.

I put that down to the performance of the promotions that we were running in both December and obviously as we started running to the new year.

And I think what's really important is that I think we're sequentially getting better.

And I think that we've learned that, as Pat actually referred to in his commentary, we've tried to be useful and contemporary.

And maybe we've gotten a little bit too narrow and walked away from our core.

What I am excited about, and the discussions I've been having with Sam and Joey is that I've already course corrected.

We have changed the advertising for the Chinese New Year promotion.

We've also added some local store marketing for what will be the Chinese New Year promotion.

So what I'm really happy about is that we are course correcting very quickly.

When the promotions aren't working, we realize where we can get better and we are making those changes immediately.

Thank you.

John Glass, Morgan Stanley.

If I could just ask one other question on China sales recovery, and then I have one on margin, is there anything to read into the fact that the Pizza Hut business is stronger than KFC, other than that supplier issue?

In other words, does it say something about how the consumer is changing there?

How do you know that's not the underlying or one of the underlying issues?

Maybe can you speak to is it maybe is there an asset base issue at KFC that needs to be addressed as well as some of the promotions?

I think as we look at everything from the consumer metrics and everything else, we do believe that, as you know, KFC had two incidents consecutively.

Pizza Hut has had one.

Pizza Hut is recovering in line with other people recovering in the marketplace.

And we really do believe it's down to the fact that, unfortunately, KFC had two things.

Now, let's not forget KFC is the number one brand in China.

And obviously, the growth that we've had from Pizza Hut is over the years and continue to have, as Pat talked about.

so I remain incredibly confident in both KFC and Pizza Hut in China and I am just totally, totally confident that we are going to turn this thing around.

And John, to the second part of your question around the role that the asset plays in all of this, as we outlined in New York, we see asset image being a critical component of our overall strategy to contemporize the brand.

Last year we remodeled a bit more than 300 units.

We will do more than twice that number this year as we look to move more aggressively to contemporize our assets, recognizing that a fair portion of the estate was built just in the last five years.

So overall, it's a fairly contemporary estate.

But for some of our older assets we will be moving more aggressively over the next year with a different remodeled package in order to make better progress there.

Thank you.

Next question, please, Cheryl.

Keith Siegner, UBS.

Just to follow on the China theme a little bit longer, at the modeling session at the analyst event there was a 2015 guidance for what was hopefully 16%-plus on restaurant-level margins in China for the year.

Given the updated thoughts on the top line, does that margin still hold or can we have an update to that margin outlook, please?

Thanks.

On the margin we still expect for the full year for the division to be at least 16%.

Restaurant-level margin, right?

Yes, that is correct.

And if I could just sneak in a second one, is there any way you could give us some color?

Are there pockets of weakness, pockets of strength?

Is it tier 1 and tier 2, driven either above or below the average?

Is it tier 4 through 6?

Any kind of color you can give us to any potential pockets of weakness or strength in that same-store sales recovery would be helpful.

Yes, Keith, in the most recent quarter we did see tier 1 stores outperform the balance of the market but really nothing to report other than that.

And our best assessment of that is that the tier 1 consumer seems to be maybe a little less phased by the supplier publicity this time around.

We are continuing to monitor this and at present we have nothing else really meaningful to share on that.

Thank you.

Jeffrey Bernstein from Barclays.

Two questions -- just one on the China side.

You mentioned, Greg, that you've had two supplier issues in two years and that's what you attribute the slower recovery.

I was just wondering, first, if you could talk a little bit about the potential of the damage that might have caused to the consumer and what gives you confidence that there isn't necessarily a third?

What are you doing in terms of improving the supply chain, since the frequency of that has picked up and might have caused damage to the consumer perception of the brand?

And the second question was just on Taco Bell.

I'm just wondering if you can give us an update on the value versus premium side of things.

It seems like we are hearing less about the higher end, maybe more on the lower end.

I'm just wondering how you view that higher end opportunity, especially with fast casual doing so well.

Well, first of all, the good news is, as I said, all the consumer metrics are improving both on KFC and Pizza Hut.

And obviously, they are an early indicator of what's going to happen.

They are also an early indicator of consumer confidence.

So the good news is that those are improving, all moving in the right direction.

And that's what obviously, I think, really underpins the confidence I have that when we combine that with promotions that -- at our core user with better marketing and better value, we are going to see the quicker turnaround of the performance in China.

So those are the things that give me the most confidence is the consumer metrics just moving in the right direction.

On the Taco Bell story, I think Taco Bell had a great quarter, as we all know.

And it was a combination of really everything.

We had a $5 box promotion with Sony.

We had the launch of the value menu.

And I think that plus -- I think advertising that really is resonating with the core user.

It is driven out of great consumer insights and human truth.

So I really believe that Taco Bell is firing on all cylinders, whether it's a $5, whether it's a $1 or whether it's just engagement with the customer.

So very confident in the future of Taco Bell.

But any efforts to prevent a third type incident?

Is there any changes in terms of the supply chain?

Oh, yes.

Sorry, my apologies.

Obviously, as you can imagine, we've put a lot of things in place.

We've now got whistleblower programs.

We've obviously stepped up -- obviously, the order thing that's going on with our suppliers.

I think the one thing I can't promise is it will never happen again because if people are going to lie and cheat and do the wrong thing -- but you've got closed circuit TV, whistleblower programs and extensive auditing going on.

I think we are doing all the right things you would expect of a leader.

Next question please.

Joseph Buckley, Bank of America.

Also on China, could you just talk a little bit more about the December-January promotions?

You described them as being too narrow, and just kind of what that means.

And put perspective -- the planned menu revamps, how extensive will they be compared to the late March 2014 brand relaunch at KFC China?

Sure, okay.

Well, I think the first promotion -- there's no doubt that the team is rightfully trying to make the brand more youthful and contemporary.

That's a really good thing to be doing.

But I think in the promotion that we ran, which was around the Korean band EXO, we actually just made it too narrow.

And so it didn't really appeal to our core customers.

So, whilst the intent was great and we are youthful and contemporary, the expression, which was this Korean band, is actually just much too narrow.

And I think the good news is the team has learned a lesson.

That's the great thing about when you have these things happen.

And as I said, having spoken to Sam and Joey, they were already course corrected.

The advertising for the COB part of the Chinese New Year has already been changed.

We've also added extra resources to local store marketing.

So I'm really confident that if this didn't work, their intent was right, the execution wasn't.

And we learned and we've already changed the execution going forward.

So in that sense, I feel really good.

The two menu revamps -- obviously, the big one will actually happen in the first half.

The second one is not as quite as big as the first one.

But I think we have a lot of confidence in menu revamps.

We know they've worked for us in the past.

The first half of last year they've worked and I have a lot of confidence that, with the innovation and the products and the improvements they are going to make, that we will see a profound effect from this menu revamp.

Sara Senatore from Bernstein.

One follow-up on China and then I have a question about Pizza Hut, if I may.

Just on the China outlook it seems to me that January maybe got actually worse than December, based on what you are guiding to.

And frequently as we are getting updates, it does feel like every time we get an update it's slower than expected or worse than expected.

Can you just talk a little bit about is there a point at which you will entertain the idea that maybe you don't get back to peak volumes or you don't get back to peak margins, and maybe you think about the ownership structure a little bit differently?

Just if we are sitting here in seven -- six, seven months from now and it doesn't look like you are getting the big bounce back in the second half, does that change your thoughts?

And then my question on Pizza Hut is really, Greg, you did a great job with Taco Bell, I think really changed perception there.

Can you just compare that to what's going on with Pizza Hut and what -- if the problems or the issues facing the brand are similar to what you saw, and how you think about that business?

I'll let Pat handle the first one and I'll take the Pizza Hut answer.

Sarah, on January sales in China I think the comps can be deceiving.

Right?

So I always like to look at the underlying transactions.

And so we look at underlying transaction volumes on a weekly de-seasonalized basis.

And January was about in line with December, so we didn't necessarily see the business deteriorate but it didn't improve to the extent that we were expecting.

And so that's why I said we entered the year with less momentum than we had anticipated when we were all together in New York.

As to what the pace looks like going forward, as we have said, the pace of recovery is slower than we had expected.

Our best reason why is it we've had the two incidents in two consecutive years.

But there's no denying the fact that the business is recovering.

We step back and we look at where things were at at the end of July, where things were headed in August, where things are today.

And they are a heck of a lot better.

We would have liked to have seen it.

We had anticipated a stronger recovery.

But it's going to take longer.

But what we need is the gift of time.

And we have strong beliefs in the program that the team is lining up, which they are sharpening, as we've talked about, to sustain the upward momentum.

So that, I would say that by the time we lap the OSI incident in late July we expect comps to turn positive.

That is a longer recovery period than we've seen before.

But we do see that recovery continuing and we know with that is substantial profit leverage.

So we do expect that with the improving sales in the back half of the year, we will have improving margins and substantial improvement in overall profitability, very similar to what we saw in the first half of 2014.

So we don't have to go back too far in history to find good, hard evidence of the resilience of our brands and our ability to bring the profit back in that business.

As it relates to long-term ownership, again, we take a long-term view of our business.

We are in China for the long term.

And the last two years of volatility, while, yes, painful, don't erase more than a decade of substantial value creation.

China remains the biggest retail development opportunity in the world and we are the leaders in that market.

So our view on the markets long term -- do we look at opportunities to refine our ownership model?

Yes.

As we've indicated, we are pivoting to slightly higher franchise ownership where it makes sense, where we can sensibly do that, given the nascency of franchising in China today.

But we have strong belief in the power of our brands and the strength of our teams and our leading position in that market.

And we believe that that recovery is going to progress across this year.

So on the Pizza Hut story, it's the Flavor of Now I love.

I think it's a positioning that is so right with what's happening in the entire food market.

So I think that's to start with.

There's no doubt we want to make Pizza Hut more youthful.

Now, that's not Taco Bell type youthful, but it's a little bit more youthful.

And the good news that's come out of the relaunch so far is that things like web users aged 18 to 24 have gone from like 6% of our business to 24% of our business.

So we know that this whole new Flavor of Now positioning has resonated with them.

Unfortunately, we weren't talking to our current abundant users.

And as you can tell, we are now back on air with the Rex Ryan, Tony Romo.

So I think we are doing the right thing, which is the Flavor of Now has really resonated with a younger customer audience we have really been going after, which is great.

At the same time, we've got to make sure we don't lose our abundant customer.

We want to make sure that we offer great sort of pepperonis at a great price.

And what I'm excited about is we got 90% repeat on those who have tried the new products.

So getting more trial with those new products will also be critical.

So I'm very happy with, I think, where we are going to take this brand and the position that we've anchored it around.

Thank you.

David Tarantino from Robert W. Baird.

I'm going to give this question on China one more shot.

My question is, how do you conclude that the recent trend was more related to those promotions you mentioned and not some structural issue with the brand that's happened post these two events?

And said differently, how do you get confident that this recent trend in the sales volumes isn't more of just a new reality from which you have to grow from?

I would say our best indication, David, is the consumer metrics that we are seeing -- brand I trust, food safety.

We've seen, as Greg mentioned, steady improvement month on month in those scores.

As we discussed, the recent promotions underperformed from a sales perspective.

But consumer metrics continue to show improvement.

So, in our view it's a matter of getting the promotions right, and we have taken swift action to shore those up in the next several weeks here ahead of the first of our two menu revamps this year.

So we have not seen anything at this stage which would give us reason to believe that what we have here is a new normal.

We think that this situation is temporary.

And again, we faced a similar set of circumstances a year ago.

And we had the dramatic recovery in our China business just in the first half of 2014.

So there's recent evidence that our brands are resilient.

They will bounce back.

It's harder this time around because we've had the two incidents in two years.

So that's why the recovery is taking longer.

But as we've said, the recovery is progressing -- not at the pace that we'd like.

But it's progressing and we continue to believe strongly that we will have a strong second half.

David, let me just -- having run Taco Bell for a long time, I've had my share of incidents.

So I know what these are like.

They are not linear.

They never recover on a linear basis.

But we do know that great iconic brands always recover.

And we know what to do.

We have to do innovation, we have to get our core customer back engaged.

And we had a very frank assessment of the promotion in January and December.

And we didn't get it right.

But the most important thing is we are making changes going forward.

And that, to me, is really important.

So having been in this same situation that Sam and the team are in, I've been in this situation.

I have absolute confidence that iconic brands come back in the come back stronger than they were even, sometimes, before they went into it.

I think Taco Bell is living proof of why I have absolute confidence we will do that in China.

Thank you.

Karen Holthouse, Goldman Sachs.

So sorry to ask the same question in another way, but one of the things I think we've been seeing in general consumer reports about China is that health and wellness is becoming a bigger concern and a bigger focus for the average consumer there.

Have you done anything in terms of your positioning in perceptions of health and wellness and/or just your sense of whether that is becoming a bigger focus of the Chinese consumer?

And maybe potentially that's an overhang on the brand beyond new brand scores and whatnot that sounds like, say, everything should be getting better.

I think that what you talked about we are seeing on a global scale.

Right?

We are not just seeing it in China, we're not just seeing it in the United States.

We're seeing it everywhere.

Clearly, what you would call health and wellness -- the importance of that is clearly growing.

So I think that, in a sense, just like at Taco Bell we offer Fresco and at Pizza Hut we offer Skinny Pie and at KFC we offer grilled, and in China we offer congee, and vegetables and soup and milk and all that sort of thing.

So I don't think China is ahead of anyone else.

I don't think China is behind anyone else.

I think that at the end of the day we've got choice for our customers to make.

But at the same time, we've got to make sure that the promotions that we run are relevant and appeal to our core audience.

And we've just simply got to do a better job of that in China.

But if you look at some of the products you just mentioned, how big are they actually as a percent of sales versus the core menu that's more fried chicken and fries?

And then I have to imagine if you were to look at the overall market, kind of Yum's share of what you would consider traditional, not necessarily healthy fast food is a lot higher than your share of more traditional congee, vegetable soup, that sort of thing?

The way I look at it, these things mix around 2%.

It doesn't matter whether it's Fresco at Taco Bell, it doesn't matter what it is.

These things don't have huge mixes but the key is for us to give the customer a choice.

And I think that's what we do.

It doesn't matter what brand, in what country.

What we've got available for our customers is choice.

But the mix is probably settling around 2%.

I think that there are much bigger things at play.

Making sure that we've got great tasting food, making sure that we've got great food at great value, making sure that our brands are relevant, making sure that they are share-worthy -- all these sort of things are as important.

There's not one thing that's driving any of this.

And as I said, we are seeing all these on a global scale and we are reacting to them on a global basis.

Great, thank you.

Brian Bittner, Oppenheimer Company.

You talk about unlocking shareholder value in China by leveraging the recovery into significant earnings growth and maybe taking a more disciplined franchising approach there.

And that's definitely going to serve your shareholders well.

But at the same time, the business outside of China -- it's very franchised, very highly franchised.

The business is very under-levered and performing very, very well.

Taco Bell, KFC -- just great results.

And your peers are getting really strong appreciation in the public markets for similar type business models that you guys arguably are not.

I'm just wondering if there's anything you can do to capitalize on that dynamic to unlock shareholder value, not necessarily from a business operations standpoint.

But maybe is there an appetite to maybe take on more leverage?

Or anything that you can talk about, your way of thinking there would be helpful.

Well, let me start.

And then I'll hand it over to Pat.

We will always have the optimum structure to drive shareholder value.

Let me be really clear.

Right now obviously, we believe that turning China around is the key.

And obviously, we believe China is a long-term play for us.

I think that that's very clear.

Pat, you might want to add something?

Yes.

Certainly, as it relates to ownership levels outside the US and how that relates to our capital structure, I think everyone understands, based on what we outlined in New York, that we are pivoting to a more highly franchised model going forward and we expect those franchise percentages to edge up over the next three years.

With respect to capital structure we look at things at the enterprise level.

So we don't segment our balance sheet by division.

And we look at our capital structure at the enterprise level based on the adjusted leverage ratios that ratings agencies look at and how that relates to our cost of capital.

As I outlined in New York, having taken the advice of three large independent banks who have checked our analysis to make sure we're thinking about this the right way, we believe that, at our current leverage ratio, which is the lowest rung of investment grade credit, we optimize our weighted average cost of capital.

If we were to take on additional debt to an extent that would take us to jump on to territory, as we do the numbers, we see what I would characterize as a modest amount of accretion.

And frankly, given the trade-offs in terms of reduced flexibility and our ability to optimize that weighted average cost of capital across economic cycles, we don't think that that's a good result.

It's not in the best interest of our shareholders, in our judgment.

But we do look at it, as I know you expect, we do look at it a couple times a year.

We put a lot of rigor behind it because we are very concerned about making sure that our capital structure is the right one for our shareholders in the long term, the one that supports our ability to return cash to our shareholders the way that we have consistently, through a combination of growing dividend and substantial share buybacks, while also having the cash necessary to continue to invest aggressively behind growth opportunities.

Yes; I would just summarize and say, look, we've got a great track record of driving shareholder value.

And we honestly believe our model will deliver outstanding returns going forward.

Thanks, guys.

Jeff Farmer, Wells Fargo.

Just following up on several recent questions, specifically a lot of those about the recent products and promotion stuff that's going on at KFC in China -- so I'm just curious.

Are you guys able to test a lot of that new product and promotion strategies before you implement them?

And if not, I'm curious what gives you confidence that you are making appropriate strategy shifts as we get deeper into 2015?

Well, the good news is we have a very rigorous and disciplined process in China.

And we can't test everything; I don't think you can go out and test rock bands and boy rock bands and those sorts of things.

They get a little bit more difficult to test.

But I think the repositioning of current products or the new products in the more traditional sense, we can definitely test.

And in fact, I would say that China has probably had one of the most rigorous testing methods, and in fact a lot of us have adopted those methods outside of China amongst all the other brands.

So I'm confident that all the right testing is going on when we can test, but sometimes you just can't test every possible promotion.

Thank you, Greg.

Peter Saleh, Telsey Advisory Group.

I just wanted to come back to the China menu revamp.

If I recall correctly, last year there was more of a check benefit from the revamp of the menu.

And there wasn't a traffic increase, but more of the comp came from increases in the average check.

When you think about the revamp this year, at least the first one, are you targeting more of a traffic or maybe more of a check increase similar to last year?

Peter, we expect with all our innovation to build transaction momentum.

Now, with the construct of the menu revamp with some more premium products, we also expect a check benefit that will improve profitability.

But our goal over the long run is to rebuild the traffic that we've lost.

And so we do expect that with this menu revamp, there is going to be sufficient innovation and continued focus on value to sustain the traffic momentum necessary to recover the business and realize that full upside profit potential.

R.J. Hottovy from Morningstar.

Just one more quick question on China -- I appreciate the comments about the consumer perception scores improving and your blueprint for sales recovery in the region.

I wanted to get a sense on your take.

Have you seen any change in demand among potential franchisees in the market following the recent supplier issues?

I know you are building towards a 10% franchise goal by fiscal 2017.

I just wanted to get any color on any potential changes among franchisees you are targeting.

Yes.

No changes, R.J. We remain the number-one brand even with the issues that we've experienced.

And our pipeline of franchisees comes from our restaurant general managers and area managers.

So we continue to develop strong capability there.

And among our stable of RGMs and general managers are entrepreneurs who remain quite eager to take on the opportunity to own and operate our KFC restaurants, predominantly in our tier 1 cities.

So that continues to be the strategy.

We have not seen any slackening of demand in that regard.

Greg?

Yes, so thank you, everybody.

First of all, thank you for being on the call.

I'd just like to finish, I think, by saying I was personally delighted to see Taco Bell have a great fourth quarter.

And I think a lot of the things that we've done at Taco Bell, whether it's a very clear trend or whether it's really very insight-driven, whether it's we've got really amazing innovation, advertising that connects and a social-mobile-digital that really engages with our customers, I think that's what has really helped Taco Bell have a great fourth quarter and a great year.

So it probably should come as no surprise to anybody, those are going to be the things that I am going to be driving.

As I go further and I visit countries and I'm talking to the brands that -- don't be surprised to see me focusing on exactly those same things because I know they've worked at Taco Bell.

I absolutely believe we can do them at KFC and Pizza Hut in every country around the world.

So with that, I really appreciate you all being on the call and I look forward to speaking with you soon.

Thanks very much, everybody.

Thank you very much, ladies and gentlemen.

This concludes today's conference call.

You may now disconnect.