百勝餐飲集團 (YUM) 2015 Q3 法說會逐字稿

Good morning.

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

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

Brands' third-quarter 2015 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

Mr. Steve Schmitt, Vice President of Investor Relations and Corporate Strategy, you may begin your conference.

Thanks, Susan.

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'll 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 at Yum.com 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 future use of the recording.

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

investor event.

Our 2015 Investor and Analyst Conference will be on December 10 in Dallas, Texas.

And our fourth-quarter earnings release will be on Wednesday, February 3.

And with that, I'd now like to turn the call over to Mr. Greg Creed.

Thank you, Steve, and good morning, everyone.

Delivering 14% EPS growth in today's environment would normally be considered a very good result.

But these are not normal times and our performance is anything but satisfactory.

I know that you all want to hear about China today and have many questions that we are going to answer for you.

But before I spend most of my time today on China, I do want to talk about the performance of our three global brands.

Taco Bell, as you have rightfully come to expect, had another great quarter: same-store sales growth of 4% rolled over, plus 3% from a year ago, and with another 3% sales growth from new units.

Year-to-date, this is double the number of new units from last year and margins are now over 21%.

This brand is doing all the right things in all the right places.

KFC had another solid quarter: same-store sales growth, plus 3% with another 3% from new units.

We saw notable standout performance in Australia, Russia, and Japan, and some underperformance versus trend for South Africa and the UK.

While KFC in the US is still a small component of the global brand, it continued its steady progress with transactions plus 4% to the category, as the innovation pipeline is now starting to be a force.

Pizza Hut was relatively flat, which we could argue was pretty much in line with expectations.

But let's be honest -- we are still significantly lagging the performance of our nearest competitors, and we clearly have much urgent work to do for this brand to fulfill its potential, which brings me on to what we all want to talk about, which is China.

Let me start by being really clear.

We all, and I personally, take full accountability for our results in China.

And while there is clearly a macro softening going on -- including headwinds from unexpected foreign exchange pressures, and yes, the online ordering aggregators who are delivering for mom-and-pop's are in a death battle for supremacy with heavy discounting, and the malls look more like fancy food courts than shopping centers -- the simple facts are that the economy there is still growing, and there is every reason and no excuses for why we should not perform better.

I also want you to know that our new China CEO, Micky Pant, and his team also get it, and as I'll detail, are taking significant measures to get sales, traffic, and profits back to historic levels.

If I step back and look at our own research and independent research, they both show that KFC and Pizza Hut have very strong positions.

KFC is the undisputed leader in QSR and Pizza Hut owns Western casual dining.

And both own the hearts and minds of the Chinese customer.

And as I said before and I'll say again, we wouldn't trade places with anyone.

So the obvious question is, what's going on?

Why is this taking way too long to recover?

And, in particular, what happened over the past six to seven weeks, particularly in Pizza Hut casual dining?

Let me start with KFC, which did see sequential improvement, and is on trend to continue that improvement into the fourth quarter and beyond.

With Micky Pant now at the helm, we have a fresh set of eyes, and we are taking the following immediate actions.

First, we are sharpening our brand positioning, and we will position and market KFC as the unequivocal Chinese favorite, Always Original, Always Chinese.

Second, we are rejuvenating the product pipeline, and dramatically improving our discipline and effectiveness around product testing.

We have also begun to test new simplified menu boards that will speed up the ordering process, and importantly, return and celebrate our core chicken products.

Third, we will introduce more disruptive value innovation.

We will drive transactions -- which we know we can do profitably -- with box meals and Day of the Week specials, like we have done in the rest of the world.

And fourth, we will take our proven pipeline of successful chicken innovation from around the world and adapt it to Chinese taste.

Both Micky and I are confident that these actions will reinvigorate the KFC brand and help us fully recover and more, over time.

So this leads me to Pizza Hut Casual Dining in China.

Historically, we have delivered amazing growth by revamping 25% of our menu every six months.

However, it's clear to all that recent promotions have not performed at historical levels.

And let me give you a couple of examples.

In mid-August, we launched a premium-priced steak product -- in hindsight, just as the macro started to weaken.

Furthermore, in recent weeks, we've seen companies cut back on parties, dinners, and entertaining.

So, while our weekend business is doing okay, this has impacted our weekday dinner results significantly.

So, what are we doing about it?

We are adding a weekday value dinner promotion on top of the scheduled menu revamp that starts October 19.

And if I look back at our previous success, it's when we've offered five-star service at three-star prices.

The calendar this year has had things that are more like six-star products, such as fajitas and premium steak, at six-star pricing, at a time when consumers are seeking value.

So we're going to get back to what made us great -- five-star pizza, pasta and wings at three-star pricing.

I know that we are rightfully in show-me time versus tell-me time, but I'm confident that our current performance is no indication of our future potential, and that our best days are still ahead across China, India, and the three global brands.

So, in conclusion for Yum!, this is proving to be a more challenging second-half, driven by a slower recovery in China and foreign exchange headwinds.

However, we believe in the long-term strength of our Company.

As further evidence of this, we announced a 12% increase in our quarterly dividend last night.

This marks the 11th consecutive year we have increased our dividend at a double-digit rate.

In summary, we are in a unique position at Yum!

with three category-leading brands that we will strengthen and grow into three iconic global brands that people trust and champion.

We remain focused on the three keys to driving shareholder value -- new unit development, same-store sales growth, and generating high returns on invested capital.

We believe this combination of efforts will enable us to generate consistent shareholder value in the years ahead.

Now, before I hand this over to Pat, some of you may want to ask today about our views around corporate structure, and whether any of the news we've shared with you today has any bearing on how we think about our Company.

The fact is we have a great collection of businesses and they have produced excellent results over the long-term.

As I've said before, the Yum!

Board of Directors regularly reviews strategic options to optimize long-term shareholder value, including those involving our corporate structure.

We are not going to comment today on any strategic options with our Company.

As usual, we will discuss our growth plans for 2016 and long-term strategies at our investor conference in December.

And I hope we'll see you there.

And with that, I'll turn things over to Pat.

Thank you, Greg, and good morning, everyone.

Today, I'll discuss our third-quarter results and share some details behind our current full-year outlook.

As Greg mentioned, Taco Bell continues to be strong, KFC is solid, and Pizza Hut remains in turnaround mode.

But the big story is our China division, which is recovering but obviously and disappointingly at a much slower pace than we previously expected.

Recent weak sales in China have significantly dampened our balance-of-year outlook, particularly at Pizza Hut Casual Dining.

I'll spend a fair bit of time on China.

But to quickly recap financial results for the third quarter, earnings-per-share, excluding special items, increased 14%, a marked improvement from the 7% EPS decline we delivered in the first half of the year.

Same-store sales not only turned positive in China but were also positive in all three of our global brand divisions.

Worldwide restaurant margins at company-owned stores were 18%, an increase of 3 percentage points versus prior-year.

Foreign currency translation adversely impacted our EPS growth by nearly 6 percentage points in the quarter, including an unexpected devaluation of the RMB in mid-August.

Here are the highlights of each division's results and the implications for full-year performance.

China division operating profit increased by 64% prior to foreign currency translation, with restaurant margins approaching 20%, nearly 5 percentage points better than last year.

The China team continued to do an excellent job of managing costs, and I'm confident that the team's sustained productivity improvements will yield meaningful profit upside as sales recover over the long-term.

As expected, sales turned significantly positive as we lapped last year's supplier incident, which occurred in late July.

Specifically, in the first seven weeks of the third quarter, leading up to the supplier incident lap, same-store sales for the division averaged minus 11%, and then, for the next four weeks, averaged plus 31%, representing a 42 point swing to the positive, giving us optimism that the recovery was underway.

For the entire quarter, same-store sales grew 2% for the division, including 3% growth at KFC and a 1% decline at Pizza Hut casual dining.

So that's the past.

But what about the future?

More specifically, now that we are in the fifth week of China's fourth quarter, how are China sales trending?

And how does that shape our perspective on full-year results?

And, as importantly, how could we have missed our previous forecast by so much?

I'll answer both questions.

Encouragingly, KFC same-store sales in China are continuing to recover, as evidenced by our most recent sales results.

As a point of reference, KFC China same-store sales were plus 9% for the month of September, which is the first month in China's fourth quarter.

Based on what we know today, we expect Q4 will be another quarter of sequential improvement for KFC in China.

To be clear, however, this recovery is occurring at a slower pace than we previously estimated and this is a weighing on our prior outlook for fourth-quarter results.

At Pizza Hut Casual Dining, the situation is much more severe and impactful.

In late August and continuing into September, we witnessed a very substantial deceleration in same-store sales versus our forecast.

The loss of sales momentum is causing significant deleverage in our Pizza Hut Casual Dining business, which represents about a third of China division profits.

Based on our current assessment, we believe the drivers are three-fold.

Number one, extraordinary volatility in financial markets, the surprise currency devaluation, and overall softer economic conditions are weighing more heavily on the higher-ticket casual dining sector in China.

Number two, we are experiencing what we believe is a short-term but significant impact of online ordering aggregators entering the casual dining space.

And number three, and most importantly, our marketing promotions materially underperformed our expectations, as Greg said, and we lost significant momentum in the business, which we are now working to recover and believe we can fix.

We did not foresee this confluence of events, and quite frankly, were very surprised by the business trends that began to unfold at the end of August.

As another point of reference, Pizza Hut Casual Dining same-store sales were actually down 3% for the month of September, demonstrating a very rapid downturn in the business.

This was 25 points below our previous expectations, a major miss, and something we didn't see coming in August.

Based on current trends, now about one-third of the way into China's fourth quarter, we expect Pizza Hut Casual Dining sales in China will remain negative through the end of the year, possibly into the low-double digits.

On that basis, we now estimate that China division same-store sales will be mid-single digit positive for the fourth quarter and low single-digit negative for the full-year.

This is obviously a very disappointing result and well below our previous expectations, even as the China team is working with urgency to improve sales momentum at both KFC and Pizza Hut.

So, what's our current outlook?

So, that's our current outlook, but why didn't we forecast this?

As I mentioned earlier, the deceleration in China sales was led by Pizza Hut and the drivers behind that decline emerged very rapidly and without much warning.

In today's volatile environment, with the recent macro and competitive pressures we've mentioned, it continues to be difficult to forecast sales in China for both brands.

We make our best judgment at any point in time based on the information available.

We will provide another update on China sales at our investor meeting in December.

Turning to our KFC global division, we saw another quarter of growth in sales, margin, and profit prior to foreign currency translation.

Sales were particularly strong in Australia, Japan, and Russia, and we were pleased with same-store sales growth of 2% in the US, as it included same-store transaction growth of 3%, demonstrating continued improvement in this business.

These results were partially offset by softer sales in South Africa, Thailand, and the UK.

Despite the benefit of sales leverage, division operating margin decreased 20 basis points, primarily due to increased advertising expense associated with our US turnaround program, which also impacted the division's profit growth by 2 percentage points in the quarter.

Division operating margins were also impacted by 1 percentage point due to strategic investments in G&A and increased pension expense.

All-in, KFC's operating profit grew 3%, excluding the impact of foreign exchange.

Importantly, KFC new unit development remains strong, with 335 new international restaurants opened year-to-date.

And on a net basis, we've opened over 40% more new international restaurants in the first three quarters of 2015 versus 2014.

This gives us great confidence in the strength of the KFC brand and its growth-oriented franchisees.

At Pizza Hut, same-store sales grew 1%, including growth of 4% in emerging markets, offset by flat sales in developed markets, including the US.

Total operating profit, excluding foreign exchange, was unchanged versus last year despite same-store sales growth and lower cheese prices.

This is primarily due to strategic investments in international G&A.

As Greg mentioned, we clearly have our work cut out for us at Pizza Hut.

However, we are taking positive steps and making necessary investments to improve Pizza Hut's brand position, operations, and digital experience.

From an international development perspective, we opened 105 new units in the quarter, bringing our year-to-date number to 206.

Finally, Taco Bell continued to post excellent results, with same-store sales growth of 4% overlapping 3% growth from last year.

A strong combination of value and innovation drove this result.

We were also pleased with the performance of our breakfast daypart, which contributed 6% sales mix and gives us a great platform from which to grow.

Restaurant level margins of 22% were 140 basis points better than a year ago, helped by a tailwind in commodities, as beef and cheese prices both declined about 13%.

From a development perspective, we opened 111 net new restaurants year-to-date, which is nearly double our number at this point last year, and demonstrates a compelling economic model and strong franchisee investment in the brand.

So, how does all of this ladder up to a revised full-year outlook?

I'll start by acknowledging that this is well below our previous guidance led by a much lower sales outlook at Pizza Hut Casual Dining in China, and exacerbated by incremental foreign exchange pressure.

As outlined earlier, we now estimate that China division same-store sales will be low-single digit negative for the full-year.

As a result, we expect China division full-year profits will grow versus prior-year in the mid to high-single digits, excluding the impact of foreign exchange.

Collectively, our global brand divisions are largely in line with our previous expectations, with better-than-expected performance at Taco Bell compensating for lower-than-expected performance at Pizza Hut.

And finally, stronger-than-expected foreign exchange headwinds, including the mid-August RMB devaluation, are putting an incremental 1 to 2 percentage points of pressure on our EPS growth rate for the year.

On a full-year basis, we now expect foreign exchange in total to be about 6 percentage points of EPS headwind, significantly more than what we expected as we entered the year, and the most pressure that we've ever experienced in the history of our Company.

With all of this in mind, we are lowering our guidance for 2015 and now expect EPS growth to be low-single digit positive.

To be clear, the key drivers are a significant reduction in China sales and a meaningful increase in foreign exchange headwinds, neither of which we saw coming at the time of our last forecast update.

In terms of new unit development, we expect to open about 2,000 units outside the US this year.

Now I know many of you are wondering why we're continuing to open new restaurants in China at a fairly rapid pace, and I'll share a point of view on that, because we continue to expect about 700 new unit openings in China this year.

First of all, cash paybacks in our current new units across both KFC and Pizza Hut continue to be in the range of three to four years, which we believe provides an attractive return on invested capital.

Obviously, this assumes that current conditions are temporary, which is what we strongly believe and are continuing to monitor.

Now when it comes to development, we take a long-term view of the growth opportunity in China, which, despite recent volatility, continues to be the fastest-growing major economy in the world, with strong long-term tailwinds for the restaurant industry, including a doubling of the consuming class.

When you step back and look at what the industry will be 10 to 20 years from now, we believe we are still in the early innings.

We have leading brands with strong competitive positions and unmatched development capability in this market.

Remember, new unit development has been the number one driver of China division profit growth over the years, and we expect this to be the case in the future.

And one thing we know about development is that once you lose momentum in terms of identifying and securing retail sites, it's tough to regain it.

Now, don't think we have our head in the sand regarding recent results and their implications for development.

We absolutely take account of these results and evaluate each new unit development opportunity in a very disciplined fashion.

And we are certainly taking a very close look at the situation that has unfolded at Pizza Hut Casual Dining in determining how that may impact near-term development plans, similar to how we scaled back on KFC development in recent years.

At the same time, we are just getting started with Pizza Hut Home Service and continue to be confident that Chinese consumer demand for delivered meals will rise rapidly.

We are still in the process of shaping our plans for 2016, so it's premature to give guidance for next year's development in China.

However, it's quite possible that we will temper the pace of Pizza Hut Casual Dining development until we are absolutely sure that we have a solid understanding of what's happening with the brand, and how that may impact our investment returns for the long run.

We'll provide an update on this at our December investor conference.

Outside of China and India, nearly 90% of our new units this year will be opened by our franchise partners.

And we are building momentum around the world to evolve to the more franchise-owned model we talked about at last year's investor conference.

This refranchising activity will gain momentum over the next couple of years and will vary by brand.

But in the aggregate, we still expect to achieve a mid-90's franchise ownership percentage by the end of 2017, excluding China and India.

Before I conclude, I'd like to point out that our business continues to generate a significant amount of cash.

Year-to-date, we've generated EBITDA of almost $2 billion.

And importantly, we remain disciplined in how we use this cash, and have a good track record of returning all available cash to our shareholders.

As evidence of this, we announced a 12% increase in our quarterly dividend last night.

As Greg mentioned, this marks the 11th consecutive year we've increased our dividends at a double-digit rate.

With this latest increase, we also raised our long-term dividend payout target to 45% to 50% of annual net income before special items.

You might have also read about some good news we received from Moody's recently.

With the change in their rating methodology, whereby they've reduced imputed debt from eight times annual rent expense to six times annual rent expense, we've gained nearly $2 billion of additional debt capacity while maintaining our investment-grade credit rating with Moody's.

We are pleased with this decision and are evaluating its implications for our capital structure holistically.

We've consistently been very disciplined about optimizing our capital structure for our shareholders.

And, as usual, we'll talk about our capital structure and any potential changes at our investor conference in December.

So, in conclusion, 2015 is now on a very different trajectory than we had previously expected, largely due to slower than expected sales in China, particularly at Pizza Hut casual dining, and higher-than-expected pressure from foreign exchange.

However, we remain confident in the long-term health of our business, we have a path to double-digit EPS growth, and we look forward to sharing our plans to get our whole business back on track in 2016 at our December investor meeting.

And with that, I'll open up the line to Q&A.

(Operator Instructions) David Palmer, RBC.

I realize you are going to be reticent to talk about structure changes with the business, but I mean, one fundamental observation about Yum!

today is that the last three years have been one where the Company is no longer hitting the 10%-plus EPS growth, and the combination of growth rate and consistency is broken down.

You know, thinking about Yum!

going forward, obviously structure change could be part of the solution there, but if the Company doesn't make a structure change, as you are observing the business today, what can you do to restore the consistency in growth?

So, David, let me just start.

I think, as you know, over the last three years, particularly in China, we had two food safety incidents.

And obviously, we've had marketing missteps.

So clearly, what we've got to do is primarily turn around China.

I think where we do perform well, we've got the following in place.

We've got very clear brand positioning; we have insight-driven product innovation; we have disruptive value; we have upgraded assets; we have social, mobile and digital at the cutting edge; and we deliver the customer a superior experience.

So we know those are the things that when we deliver, we deliver outstanding results.

So, I think the thing we have to do in all of the divisions is to get back and execute against those basics.

And so that's what I've got the organization absolutely focused on.

So, my number one priority is to turn around China using all of those, I guess, tools or directions that I've just articulated.

And just to follow up on the China business, the -- that low-double digit decline for Pizza Hut, if that's in the low 20's percent of that China business, that low-double digit decline would imply, with a mid-single digit system same-store sales, something like mid-teens comp for the KFC brand.

Is that math about right?

And how do you feel about two-year trend and the momentum on the KFC China side?

No, David, that math actually isn't right.

We are expecting mid-single digit same-store sales positive for KFC -- for the division, excuse me -- in the fourth quarter.

So with negative same-store sales for Pizza Hut that could be in the low-double digits, the KFC number could be in the range of high-single digits to low-double digits.

Okay.

Thank you.

And how do you feel about that momentum on a two-year basis?

Or just versus your plan before, is KFC part of this guide-down at all?

Well, obviously, it's well below our previous outlook.

There is no question whether you look at a one-year or a two-year or a three-year, relative to where we were as of our Q2 earnings call, there's been a substantial reduction in overall momentum.

The important thing is that the recovery is continuing with KFC, albeit at a slower-than-expected pace, and we have evidence of that.

The real issue we have is with Pizza Hut Casual Dining, where we saw a very sudden and sharp deceleration take shape at the end of August and persist now into the fourth quarter.

Thanks, David.

Next question, please, Susan.

Karen Holthouse, Goldman Sachs.

Karen?

Thanks for taking the question.

Sorry, I was on mute.

Taking -- looking at the unit growth in China instead of the comp growth, we've seen another tick-up in unit closures at KFC.

Could we just get a little bit more color on where those are coming from?

Is it more higher-tier cities where you might be coming up against lease renewals?

Lower-tier cities that might have some more macro issues?

And the rates doubled sort of since last quarter and more than doubled year-over-year, so what's driving that step function?

Yes, definitely there has been an uptick in China unit closures relative to our original expectations.

Part of that is Little Sheep.

There continue to be closures in Little Sheep and that is placing a drag on net unit growth.

We do expect about 60 closures there this year.

But every year we have a base of store closures, including forced closures, relocation opportunities and lease expirations.

So, even if we had no underperforming stores, we would report closures.

But at KFC, it is true that performance-driven closures have been higher than we anticipated coming into the year, and that's really the cumulative effect of three years of softer-than-expected sales.

We do look at these on an individual basis, and there are unique circumstances supporting each one of those decisions.

As to how the mix may have shifted or where the closures are coming from, for KFC, about 70% have been in the higher-tier cities.

And we are seeing a higher mix in the lower-tier cities, but that only involves a handful of stores.

From a trade zone perspective, we are not seeing material shifts between commercial, residential and retail; although within retail, we are seeing a higher proportion of closures at hypermarkets and malls as opposed to department stores.

And then I guess the last thing I would point out is that, in terms of the mix of closures based on the year that the stores were open, we are seeing a slight uptick in the percentage of stores that are being closed that relate to the ramp-up in our development in 2011 and 2012.

And we think that that may continue.

But I just want to reinforce that with what we see by way of new unit returns, and the confidence that provides us around development and how that creates value for shareholders, we continue to expect to open about 700 units this year.

All right, great.

Thank you.

Thanks, Karen.

Next question, please, Susan?

Diane Geissler, CLSA.

Another question on China.

I wanted to talk about the online delivery, which seems to have been sort of a cutthroat this year and probably the source of the biggest surprise maybe in disruption.

I know there are some rumors in the media about one of the big 020 and restaurant review apps merging, which maybe reduces the number of players.

But how can investors have confidence that the situation will improve in 2016?

Because it just seems so competitive.

And I guess, as you look at your Pizza Hut business in China, what are you doing specifically to get yourself where you need to be to either -- to be more active in delivery or have a bigger slice of that?

Because it just seems like the 020 players are pushing the mom-and-pop restaurants, and that's obviously to your competitive disadvantage.

Can you talk a little bit about what you plan to do specifically to address the competitive pressures in the delivery business?

Yes, let me answer that holistically.

First of all, delivery is -- we have about 300 delivery units, which is a small part of our overall business compared to Pizza Hut in China.

But as you said, there is definitely a -- what we would call a savage battle for supremacy going on about -- around the aggregators, who are obviously heavily discounting.

We are actually putting our foot in the water and playing with them, but it's a very small part of our business.

So I think the answer is that we don't believe that the economics will sustain all the people that are currently in the market playing at these discounted prices.

And I think as we've seen these aggregators in other parts of the world -- because China is not the only place where this is occurring -- what tends to happen is they are all fighting for market share, dropping the prices.

But then eventually, the prices have to go up.

And secondly, the actual delivery experience from these aggregators, we would argue, is not as good as the delivery experience that we deliver from Pizza Hut.

So I think the answer is there's a lot of savage market share fights going on.

We don't believe in the long-term that they can sustain these discounts.

We know when the rest-of-the-world prices go up.

We know that their performance -- their delivery performance is not as good as ours, but that does not mean that we haven't -- we aren't dabbling in this area.

Obviously, testing is part of the Pizza Hut strategy.

Thanks, Diane.

I guess if you --

Go ahead, sorry.

May I ask a follow-up?

Yes, go ahead.

Go ahead, Diane.

If you look at -- sure.

If you look at the experience sort of outside of China when this has occurred before, what has been the average length of time that it's taken for the industry to sort of shake itself out?

Well, I think that it's very early as this is occurring -- you know, it's very early days for this whole aggregator business.

But I can assure you that we are monitoring it on a global basis, whether it's Europe, Asia, North America, Australia, wherever it's going on.

It's way too early to call how long it's going to take, but it is very clear that, where I guess it's a little more mature, we've seen these businesses move from burning a lot of cash or heavy discounting into taking price increases.

And obviously, that's going to stunt consumer demand.

Thanks, Diane.

Okay, thank you.

Next question, please, Susan.

Sara Senatore, Bernstein.

I have two questions.

One -- both follow-ups on China -- one is really a communication question.

Back in late August, when you were about 10 days before the end of the quarter in China, you put out a filing that remarked on the significant recovery.

I guess a lot of us are really surprised that the 3Q number came in so much below our own expectations, given that the language or what would seem to be a message is that things are on track.

So did we misinterpret the filing?

Did something happen in the last week and a half?

I guess I'm just trying to reconcile what seems to have been positive commentary fairly late in the quarter with the 3Q results, and setting aside maybe what may have happened in September and subsequently in 4Q.

And then I'll have another question.

Thank you.

Okay, thank you, Sara.

Well, I can't speak to how you or others interpreted what we said.

But as I said in my remarks earlier, the facts are that in the seven weeks leading up to the lap, the average same-store sales for the division were minus 11%.

And then for the next four weeks, swung 42 points to the positive to plus 31%.

So in fact, same-store sales had turned significantly as we lapped last year's supplier incident.

But were you then expecting low-single digit comps for the third quarter?

Because the second-half guidance implied low-double digits for the both halves.

So I guess I'm just trying to figure out, to your point, maybe it was our interpretation, but did the third quarter surprise you?

Clearly, third-quarter results in total were below the expectations we had as of our second-quarter earnings release.

So, at the time of our second-quarter earnings release, based on results we saw at the time, we expected, as we mentioned, that the recovery would continue across the second-half of the year.

And I believe, on the call, we effectively affirmed, for the second-half, double-digit positive same-store sales growth.

And that was our strong belief at the time based on what we were reading in the business.

As of the date of this announcement that you mentioned, we referenced that sales turned significantly positive as we lapped the supplier incident from last year, which was a fact supported by the numbers that I shared with you.

Okay, all right.

And then my other question -- this goes back to -- again, I know you are not going to discuss strategic actions -- but I think pretty much every quarter, we've been disappointed by top line versus expectations at an increasingly wide gap.

So there's some question about the strategy, and you've talked about that.

Clearly, the stock market is saying that Yum!

is not creating a lot of value right now.

At what point do you decide -- if it's not three years of flat earnings, at what point is it time to reconsider the view that you are absolutely the right people to run the day-to-day operations of Yum!

China or to have the structure that you have right now?

Well, the key for us is to turn this business around with particular focus on China.

I think that anything else is speculation.

But I can absolutely assure you that we have three great global brands; that we are absolutely focused on doing the things that I talked about earlier -- brand positioning, product innovation, disruptive value, upgraded assets, social mobile digital and a superior customer experience.

We have to get that in all five divisions.

When we get that in all five divisions, then we will obviously earn the right to have the share price that we believe this business deserves.

So that is my absolute focus.

Having said that, we are always open to looking at alternatives.

And I've said we are looking at alternatives.

But right now, my absolute focus is on getting these five divisions firing pretty much like I'd like them, firing like Taco Bell is firing right now.

Thanks, Sara.

Next question, please, Susan.

Brian Bittner, Oppenheimer & Co.

I know I'm probably not going to get an answer to this, so maybe it's just more of a statement than anything.

But look, I acknowledge that China has fit historically into the long-term growth plan.

And as everyone's been talking about, it has been hurting the model and the valuation of your stock for three years now.

But the problem here is the visibility looking forward is no better today than it was last year or the year before.

And Greg, you started the call talking about everything but China, because you really wanted to highlight the strength in that business.

But you know the way Yum!

is structured today, China is all that matters.

And we all know that.

And at some point, I wonder when the Board and the management team believes that the China turnaround story no longer makes sense to completely dominate the investment conversation for Yum!

Brands?

And at some point, when they would believe a separation is a more realistic option, I think, for the sake of what appears to be an undeniable opportunity for value enhancement, not just in the near-term but the long-term?

I mean, you are basically getting no credit for having the China business in your portfolio today.

I could argue you are almost getting zero dollars of value for that business.

And at some point, a China turnaround may happen and could happen, and there could be a plan where investors still participate in that upside, but also get the choice to participate in that upside, and can invest in the ex-China business, which is performing beautifully.

And I'm just wondering if there is any timeline or more focus in the Board room on understanding that and thinking about that?

Yes, I think what I can say is, we are always going to believe in China and we are always going to participate in its growth.

Let me be really clear.

I think we've also got a new leader on the ground in China, and with a new leader, comes fresh ideas and a fresh perspective.

And there's no doubt that he is taking a lot of the ideas that we know have proven and worked around the world, and we are putting those into tests aggressively, whether it's KFC or Pizza Hut in China.

So, that's what I believe is the best answer, which is -- we continue to believe in China.

We'll always participate in China's growth.

We've got a new leader.

He is bringing massive action to bear, which is great, because he ran the global KFC and Pizza Hut businesses in his prior job.

He knows what works.

He knows what's resonating with customers.

He knows how to adapt certain tastes to local tastes.

And that guy is doing everything he can do.

I mean, he has been incredibly well-received by the China team.

People are saying he's incredibly smart, he's incredibly experienced, he's incredibly humble, he's incredibly collaborative, and he has an action agenda.

So, as far as I'm concerned, we've got a new leader in place who's going to bring all of the -- all of his ability to bear to turn it around.

And, as I said, we will always believe in China and we're always going to participate in its growth.

Thanks, Brian.

Next question, please, Susan.

Jason West, Credit Suisse.

Just I guess going back to the competitive issues, particularly on the order aggregators and I guess if there's anything else that's really surprised you.

But that seems to be one of the bigger surprises that's emerged more recently.

And you talked about the impact on sort of delivery at Pizza Hut, but you also mentioned that Pizza Hut casual dining was impacted by this.

But are you saying that the older aggregator sort of delivery model would impact Pizza Hut casual dining specifically?

Or is this also not going to be an issue for KFC, which also offers similar type meal occasions?

No, I think it's clear that right now with the massive discounting that's going on, you can get a meal that you would traditionally go out for, delivered to your house at a very low price.

But as I said, we know these economics are not sustainable.

We know they are burning through all this cash.

That's why, on the Pizza Hut delivery side, we are experimenting with it.

But I think that we feel and we've seen, as we've tracked this in other markets around the world, eventually these prices go up.

And when these prices go up, demand wanes.

It's the fact of life.

So we are watching it, we're monitoring it, we are doing it on a global basis.

We've got our toe in the water.

And as you also know, we are testing delivery with Taco Bell in the US.

So, we're not just limiting our testing to either KFC or Pizza Hut.

We're also adding some testing with Taco Bell.

Okay and thanks.

So just one follow-up.

Going back to the store growth outlook and new store performance, it sounds like store performance is holding up reasonably well in the new stores, but you also mentioned some closures in some stores that were open a few years ago.

I guess can you talk broadly about the portfolio, particularly at KFC, if you have pockets of stores that maybe were opened in regions that were expected to be economically developing that really haven't come along yet?

And there may be pockets of large store closures that could really help alleviate some of the comp pressure?

Or is it really not -- the comps really aren't broken up in that way?

Hi, Jason, there really hasn't been a significant shift in the mix of closures, as I mentioned earlier in response to Karen's question, whether we are looking at type of trade zone or city tier.

I mean, there's some changes around the edges but nothing really meaningfully different.

But what is meaningfully different versus prior-year is that because of the cumulative effect of three years of underperformance at KFC, we are looking at more closures this year versus last.

But the composition is largely in line with what we've seen in last year.

Thanks, Jason.

Next question, please.

Keith Siegner, UBS.

My first question, I just want to tease out a little bit more of this macro versus aggregators issue.

So is the aggregator issue prevalent across all tiers?

And let's just talk KFC, for example, on this too.

Is it present across all tiers?

And then maybe to add to that, how is the tier performance doing?

Are you still seeing tier 1 and tier 2 do better?

Is KFC weakness more concentrated in those three through six?

How are those two pieces playing out?

Thanks.

Yes, I don't think the aggregator impact in China is having a huge impact on our KFC business.

I think what we've got to do in our KFC business is introduce what I would say is disruptive value and get our positioning much clearer, go on the offense, talk about all the positives, get back to the core products -- which, every time we go back to the core around the world, we know it works.

So I don't believe that is a huge impact on the KFC business.

And then, as I said, on the Pizza Hut business, obviously the aggregators are more active in the higher-tier markets than they are in the smaller-tier markets.

And again from a Pizza Hut perspective, it's clearly having some impact on our performance along with the macros.

But, as I said, I think whether they can sustain this discounting to sustain this performance, I think we all believe is very questionable.

And Keith, in response to the second part of your question, very similar to last quarter, when we look at same-store sales growth across city tiers, the higher-tier cities are performing better.

And it's largely because, among the lower-tier cities, we have some markets that are very heavily dependent on industry.

And industry, as you know, has been soft in China.

And so that's weighing on consumer confidence and spending in those regions.

So, Keith, I guess if you had to sort of prioritize it, I would say, first of all, marketing missteps; second, the softening Chinese economy; and third, the impact from malls and aggregators.

And obviously, we're going to take massive action to turn around certainly the marketing missteps that we've taken.

And then one quick follow-up, Pat.

You mentioned earlier the change in Moody's analysis of your implied debt in the $2 billion of extra capacity.

Is it safe to assume that you leverage this, that you tap into that capacity?

And if not, why not?

Thanks.

We have not.

However, as I mentioned earlier, we look at our capital structure holistically.

So we consider a number of different things before making a decision to take on more debt, as an example.

Last year, we increased our borrowings through our short-term credit facility, so we are certainly not averse to doing that.

But we look at these things holistically.

And we'll provide a further update at our December investor conference in how we are thinking about this.

Thanks, Keith.

Next question, please, Susan.

John Glass, Morgan Stanley.

First, if I could just go back to the KFC and draw the dotted line in sales between the 31% increase you experienced, let's say, ending in mid-August, and the 9% in September, was that a linear deceleration?

Did it happen all at once around -- for example, I think the devaluation happened around then?

And are you -- how did September trend?

Where are we, I guess, in that continuum now, just to get the expectations right for the fourth quarter?

Yes.

Well, John, first of all, the 31% was a division number.

So, that was not a KFC number.

And I'm not going to give brand-specific numbers around those data points.

But you'll have to bear in mind what we were lapping from last year and the overall shape of that, as is the case any time we experience some event, which is, the impact is sharpest at the beginning and then it begins to diminish over time.

And so the reverse applies to when you are lapping that.

Right?

So you have the easier compares in the early weeks following the event, and then those compares become tougher.

And I would say that generally follows the shape of our expectations into the fourth quarter.

Okay.

So when you -- just to be very clear, when there was an event like the devaluation that did not abruptly slow sales, it wasn't a specific macro event you saw that bent that curve, for example?

Well, what we did see was, in the last one to two weeks of August in China, I think -- we've all read about -- what were very significant events.

And remember, it was in mid-August that the currency was devalued quite significantly and a surprise to everybody.

And it was less than two weeks later that there was a significant change in the stock market, which, again, was unprecedented and caught everybody by surprise.

And that does coincide with when we saw a material change in the shape of Pizza Hut Casual Dining's same-store sales.

And just to remind you also, the impact of Forex, apart from the impact that it had to our business in China, a very significant impact to our earnings-per-share -- 1 to 2 points in the quarter, and full Forex impact of more than 6 points on the year.

And then, Greg, could I just ask, what is the right timeframe to look at this recovery?

Right?

You've got a new CEO in place.

Are we going to hear next quarter that, look, it's going to take some time to rebuild the product pipeline?

And how much of this will be revolved -- or resolved with pricing?

How much of this is maybe resetting pricing?

Or is that not what you are really contemplating as this recovery takes shape?

No, John, as I speak to Micky, and I -- as you can probably imagine, I'm speaking to Micky an awful lot -- the discussion we've had is that there are some clearly proven ideas that we've had success around the world, whether it's box meals for lunch, day of the week specials, product innovation, and he is in the process of putting all of that into test into China as quickly as he can.

So I think that in December, what we'll be able to do is give you an update, a much clearer update of the things that we've taken that have been successful around the world that we've put into China with a KFC or Pizza Hut.

We will hopefully have some preliminary numbers, even if they are just early test market days.

And I think we'll also have the overlap benefit.

So, the way I look at it is, a lot of proven things about to go into test in China.

They include disruptive value.

So, the equivalent of the $5.00 box meals, the $20 dinner meals, as well as product innovation around core.

So, they're probably going to have more tests going on in the fourth quarter in China than we've seen in a long time in China.

And I believe that Micky will be able to give us an update, some progress on those tests, when he presents at the December conference.

Thanks, John.

Next question, please, Susan.

Paul Westra, Stifel.

I know you don't want to give too much color on the outlook for 2016, but my question is, how lasting should we think about what your implied fourth-quarter combined China margins could be?

And, I guess, Pat, your full-year China profit growth guidance of high to mid-single digit implies a fourth-quarter profit number that might be slightly above $100 million, which represents a 65% drop in profits from your actual third-quarter performance.

That's about double what it normally is historically.

And frankly, the cause of that drop is not really coming from the top line miss, because your fourth-quarter comp guidance pretty much matches your third-quarter comp miss, at least for us on the sell side.

So at least on paper, given that math, it seems as though Pizza Hut casual dining's profitability is almost being wiped out here in the fourth quarter.

Assuming these numbers are even remotely close, are there massive turnaround investments planned for fourth quarter?

And if not, are there contingency plans at least in place, so that this margin degradation doesn't flow too much into next year?

Well, you asked two questions, so I'll respond to them in turn.

First, with respect to 2016 outlook, it's premature and we're not going to give any guidance on 2016, other than, as I said in my prepared remarks, our overall goal is to get our whole business back on track, and we'll provide more specific plans around that, and set expectations at our investor conference in December.

Specifically with respect to China's fourth-quarter profit outlook, you'll have to remember that the fourth quarter is one of the lowest seasonal times of the year.

So absolute profits historically for China have been very low, whereas -- or relatively low, whereas the third quarter is the peak summer season when profits are relatively high.

So, it's not fair to draw those sorts of comparisons between Q3 and Q4 on an absolute basis.

But the outlook we've given for China division profit performance for the full-year takes full effect of what we've guided by way of same-store sales growth for both KFC and for Pizza Hut Casual Dining in China, and the corresponding impacts to their levels of profitability, bearing in mind that it's a low seasonal period for the business

Thanks, Paul.

Next question, please, Susan.

David Tarantino, Baird.

First, Pat, could you give us some perspective on what KFC was cycling in the month of September so we have a good understanding of how to frame up the plus 9% comp?

And then I have a follow-up.

Well, we didn't provide monthly comps last year.

And I don't know that it would be necessarily helpful to do that at this stage.

Okay.

Thank you.

On the -- my real question has to do with the KFC business.

And I guess if I look back to the 2012 since -- the business since the 2012 supplier incident and following this most recent one in 2014, it doesn't look like the traffic has really rebounded much following either of those incidences.

So I guess the question is, do you think you are seeing a step change in the transaction counts that just represents a lower base from which you'll have to grow going forward?

Or do you see something in your consumer metrics that would suggest an outsized recovery or an outsized rebound is really possible at this stage?

Because I guess the trendline would suggest it's more of the former than the latter.

So, I was just curious to hear your thoughts on that.

Yes, well, David, the one thing we are sure of is that the business is going to fully recover over time.

We can't be precise about the exact timing of that.

It is very difficult to call, and there's no denying the fact that the shape of the recovery today is weaker than we had previously expected.

But we do have good evidence of the recovery in terms of both absolute transaction counts and how they've improved from last year's event, and consumer -- key consumer -- metrics or brand perception metrics, which have improved versus a year ago.

So we do have different indications that substantiate our view that the recovery is continuing, and remain confident in the long-term that we will fully recover those transactions.

I would just add that, as I talk to the brands around the world and I look at the businesses around the world, where KFC or Pizza Hut or Taco Bell are successful, we've got a very good value platform as part of our brand offering.

And I think it would be fair to say that we probably should have played and could have played value -- and I don't mean at the expense of margin, because we know how to do both.

And that's why, as I said earlier, Micky is taking proven things, like the box meals for lunch and the day of the week specials that we've run very successfully, particularly in the markets that we continue to do well in -- Australia, Japan, South Africa, Russia.

So, you will see us play more disruptive value.

And you will see us be much clearer around our brand positioning, Always Original, Always Chinese.

So I do believe that those will help our transaction growth, both as we enter the fourth quarter and obviously next year.

So, let's be honest -- we have an incredibly strong brand.

You know?

This is -- it's really up to us.

We know that this is a retail business and we know how to get consumers to respond.

So we're going to do all the things that we know we'd do -- when we do it, it will -- they'll respond and it will work.

And as I said, the discussions that I'm having with Micky are all around that fact.

Thanks, David.

Next question, please, Susan.

Joseph Buckley, Bank of America.

Based on a number of the comments, it sounds like you think your brands in China are lagging the overall industry.

Would you comment about that?

Is that the case?

What do you think is going on with the restaurant industry as a whole in China?

Sorry, I missed the -- I actually missed the -- can you just repeat the question, Joe?

Sorry, but I missed it.

Sure, I'm sorry.

Let me pick up the handset.

The comments you've made about your brands in China, it sounds like you think you are lagging the overall industry in China.

And I'm curious if that's the case?

And what you think is going on with the restaurant industry as a whole in China, kind of compared to your sales results?

And then I have one more, please.

Yes, it's not as easy in China to get an accurate picture of the category or the market like it is in Australia or the US or the UK.

So it is difficult to get an absolute number.

Look, there's no doubt that we are the number one QSR brand in KFC and the number one casual dining brand in Pizza Hut.

And as I said earlier, both our research and independent research suggests that the brands are still in incredibly strong positions.

As I said I do think we can tighten up the positioning.

I do think we need more core product innovation.

We do need more disruptive value.

So I think all of those things, which are things that Micky and I are working on, we need to put in place in order to take advantage of the strong brand positioning that we've got.

Okay.

And then I'm going to sneak two into one for this question.

Could you share checking traffic metrics for the quarter in China?

And then my other question is, as we look at some of the costs in China that are contributing to this great margin performance, the labor costs per store have been down pretty significantly.

And that's, in nominal terms, probably down even more in real terms, assuming labor cost inflation is still there.

Is there -- should we be concerned that the cost management is so tight there that it might be crimping the ability to get sales recovery?

Joe, we absolutely do not believe that the significant productivity initiatives undertaken by the China team are impacting the customer experience.

We have very clear measures that we use to assess how the customer experience is improving and we don't see impact to that.

We are delighted with the significant productivity initiatives undertaken by the team.

We mentioned on the last call that there were a variety of things they were doing to drive improved labor efficiency.

We have seen those gains sustained, and that is driving the result you're seeing in terms of cost per labor hour.

Yes, Joe, just to build on that, I think the scores that we get suggest that we've not impacted the customer experience.

But equally, Roger Eaton spent a week in China as the COO touring a lot of stores.

And then, obviously, Micky has also been out in a number of the markets in a number of the tiers also visiting the stores.

And his feedback -- or both their feedback to me was, this is not impacting the customer experience.

So I think given Roger having been the world-class operator and now running the KFC brand, and Micky, their first-hand experience gives me confidence that I can trust the numbers that we are getting, which is that we are not impacting the customer experience.

So, I think there is this -- it's interesting coming from either two what you'd call high-labor markets, certainly Australia, probably a very high labor market in the US, there's always been this thing that when labor is cheap, you tend to use too much.

And I'm not the world-class operator, but that's sort of been my observation.

So, I think what we are doing is we are using mature -- what I would call mature market productivity.

And this was something that Roger really championed as the COO, which was to take all the learnings from markets like Australia, where minimum wage is like $17, $18, and apply the same rigor -- even though the labor is cheap -- to apply the absolute same rigor, transactions per labor hour and all this sort of stuff, that he has brought to China.

So I'm confident we're doing all the right things.

I'm very confident we are not negatively impacting the customer experience based on these productivity gains.

And Joe, the first question you asked -- this is Steve -- around the mix of the comp, transactions for the division were down about 3 points.

So we got about 5 points combined from pricing and mix benefit.

Thank you.

Thanks, Joe.

Next question, please.

Karen Short, Deutsche Bank.

Thanks for taking my question.

I just want to try to understand something.

So I guess I'm hearing two comments that I guess I think are somewhat contradictory.

You seem -- I think you seem to believe that the higher margin structure in China is sustainable, but also have indicated that you need to have a greater focus on value, both at KFC and Pizza Hut.

So I'm wondering if you could just maybe give a little color on those both?

Yes, sure.

I think from a -- I'll talk about it from a brand and marketing perspective.

I'll use two examples.

Obviously, one is Taco Bell.

We have the lowest average prices and probably the highest margins.

But the second one and more relevant one would be a market like KFC Australia.

I mean, in KFC Australia, we have average unit volumes around $2.3 million.

This year, our sales growth is about 9%.

We are obviously in a very high labor market, but yet we've got margins in the high-teens.

And so, we leverage obviously the sales that we've got.

We are very smart around how we put these box meals and these Day of the Week specials together.

We've become a lot more sophisticated around our pricing metrics and analysis on how to execute.

And even in the box meals, driving a lot of drink into the box meals actually improves the perception of the box meal but also improves the margin.

So I think we've got clear brand positioning.

We know -- and we've demonstrated in markets like Australia -- that we can have disruptive value and high-teen margins.

And I think that Micky is taking all that knowledge and applying that to the China business.

And the other thing I would say, Karen, just to build on what Greg has said, is that we know that the biggest driver of margin improvement for China long-term, to get us back to the 20% range -- which we still believe is a reasonable target and will be achieved -- is transaction leverage in the business.

Because you have to bear in mind the extent of the transaction losses of the last couple of years.

And so as we restore average unit volumes to where they were in 2012 -- which will happen at some stage -- then there's significant upside in the business.

And I would say even more so in light of all of the significant productivity gains that the team has delivered over the last couple of years.

Great, that's helpful.

Thanks.

Next question, please, Susan.

Andrew Charles, Cowen and Company.

Most of my questions were asked, but, Pat, can you just give the pushes and pulls in the China margins that you've provided in the past?

Certainly.

Very happy to do that.

So, as you know, margins improved by about 5 percentage points for the quarter.

Productivity drove about 3.5 points of margin improvement.

And then our pricing actions in the quarter drove about another 2.5 margin points.

Offsetting that was inflation, which shaved off a point and a half margin, and then the transaction decline, as Steve referenced, which took off about another point.

And then we had about a point of benefit from other things, including lapping an inventory provision from last year.

Got it.

Was the productivity really related to labor?

Yes.

Thanks.

Thanks, Andrew.

Next question, please, Susan.

Jeffrey Bernstein, Barclays.

Just -- Greg, I guess with the backdrop of the 90%-plus franchise model around the rest-of-the-world that you talked about, clearly I think people appreciate the high-margin annuity stream of royalty income that it generates.

And being that, Greg, you came from Taco Bell that had that stability, I'm just wondering whether you could talk, at least holistically -- rather than any plans you might have or would ever consider -- but if you could refranchise the entire China business or the China portfolio today, it would still allow you to kind of participate in China and participate in the growth.

But what would be the pros and cons?

I mean, it just seems like the China volatility just remains so outsized and the franchise model is so much appreciated.

I'm just wondering how you size up the pros and cons if you were able to do something like that.

Well, Jeff, it was a nice try.

I think that, as you know, we -- as you said, outside of China and India, we are currently 90% franchised; we are moving to 95%.

As I said earlier, I think that our key objective, or my key objective, is to take three global brands and make them global iconic brands, with all the things that we've talked about.

And then I think the decision about whether we run them or we put them in the hands of a franchisee is really not what this is all about.

The value is really in the value of the three brands.

So, obviously, if you -- to hypothetically answer your question, the cons are that you would lose leverage, but the pro is that everything the franchisee pays for, and you get a fee.

So I think there's nothing new around why you would franchise or why you wouldn't franchise.

And that's why, as I said earlier, my focus is on getting the brands in all the countries, improving in their performance, making them iconic, and doing all the things that I've talked about that I know we need to do, and I know that we can do, in order to get this thing.

But in any case, as I said, we obviously consider all alternatives.

And the focus right now is on getting this business back on track.

Thanks, Jeff.

Next question, please, Susan.

Howard Penney, Hedgeye Risk Management.

I have two questions.

The first one is when you were going through your three-quarter routine, whatever that may be, and did you think the stock was going to be down?

And did you think it was going to be down as much as it is?

And then the second question is on the China strategy.

I understand you laid out the case, if you will, for China and why you want to continue to grow in China -- not that you can't continue to grow in China.

But it sort of feels like -- and I apologize for this analogy because I can't think of a better one -- kind of a bull-in-china-shop strategy in the sense that the economy has gone from 10% to 7% to 6%, and probably going to 3%.

And you've got volatility in currency and the stock market causing volatility to your business.

Do you have an internal economist or somebody that is guiding you on what's going to happen in China for the next five years, in saying the economy is going to go from 6% to 9% or --?

Like, I still don't understand -- I understand the consuming class is growing in China, but I guess I don't -- I haven't heard from you a reason why ownership and owning those assets in China is still the right way to go.

Because it feels like China is headed in one direction and yet you are going in another.

Thanks.

Why don't I have a first crack at it.

Obviously I have no idea what's going to happen to the share price.

If I could predict that, I'd be a very wealthy man.

So I'm going to leave that to others to do.

I think on the question of what's happening in China, look, we are in 126 countries around the world.

And in the 126 countries, we have either growth, no growth, lots of competition, no competition.

I mean, value is important -- there's so many permutations and combinations.

I think in China, we've still got growth in China that's still greater than it is in most of the markets we operate.

We do believe that the consuming class will go from about 300 million people to 600 million people by 2020.

And whilst we can certainly look at the competitiveness of the China market compared to a few years ago, if I compare that to the competitiveness of the market in the United States, it's not even close.

So, I'm still bullish on China.

I still believe it's a place that we can get significant growth both for ourselves and for our shareholders.

And I think we are still on the ground floor of what is a huge opportunity.

How we take advantage of that opportunity, that's what we'll decide over time.

But the most important thing is to position these two brands to capture all the potential growth that we can.

And, Howard, just to build on that, I think what you are highlighting is the difference between a short-term perspective and a long-term perspective.

And we've always taken a long-term perspective on our business.

And our thesis on China and its long-term growth potential is unchanged, notwithstanding the significant volatility we've seen in the market, and that our brands have experienced in the last couple of years.

Because I mentioned -- we do take a close look at investment returns.

Our paybacks on -- our cash paybacks on new units remain in the range of three to four years.

It's an attractive investment return opportunity for our shareholders.

And, as Greg mentioned, our focus is on continuing to drive significant improvements in the business.

We have new leadership in place to help deliver that.

And so we remain optimistic for the long-term.

And, as we've said many times over, despite the challenges we've experienced, we wouldn't trade places with anybody.

We have leading brands in the world's largest growing economy, and we are on the ground floor of growth.

So, if you don't mind, can I just try asking the same question again?

So, the China economy has gone from, in the last four years -- call it beginning of 2012 -- from 10% -- I don't have these numbers right -- from 10% to 6%.

And you've opened 3,000 units over the same timeframe and your stock has gone nowhere.

And if the China economy goes from 6% to 3% and you open up 3,000 units, are you going to be able to turn -- with the economy declining at an accelerating rate, are you going to be able to turn this business around in that environment?

Well, I mean, the way I would answer is we've had two incidents, two massive incidents in China, which obviously we are still recovering from.

We've got a new leader in place who, as I said, has a fresh perspective and who has -- knows what proven ideas have worked in other parts of the world for both KFC and Pizza Hut.

He is already, and the team there, are already starting to put a lot of that into test, and we'll continue to do more of that in the fourth quarter and going forward.

And I think that when we get to December, we'll be able to update you on just the progress that those tests are making.

We won't have a massive sort of result changes in a revolutionary sense, but I do believe the huge -- the sheer amount of testing that is now going to happen in China, and the process and the discipline that we are reapplying to that testing in China, I look forward to being able to present with Micky to everybody in December.

Great.

Thank you so much.

Thanks, Howard.

I think we have two questions left.

Susan?

Michael Barbarula, JPMorgan.

It's John Ivankoe.

I think you just touched on this in the previous question, but I wanted to get a sense of how -- Micky was really going to run the business differently than Sam.

Certainly, Sam would've told us years ago, sharpening the focus of the brands is something that he probably would've always done.

And I think it would have been assumed by everyone on the call that the idea that China was putting in products made for the Chinese consumer, that were proven successful elsewhere in the world, would have always been done, not just in the past three years, but probably in the last 15 years.

So what I wanted to get a sense -- and, Greg, I guess you'd probably be the best person to answer this -- is, how much really is going to tactically change with Micky running the market versus Sam running the market?

Not just from a tactical product development and brand focus point of view, but even how the China market is managed and structured.

In other words, are we a little bit too early to be talking about a complete reorganization in terms of who does what in the organization?

And do you think that's something that, in fact, should be executed in the relatively near-term?

Well, look, I think Micky has been on the ground for less than six weeks.

I mean, he came over with us after the Sam retirement announcement.

And he has stayed there.

So -- I mean, he and I have obviously been in constant contact.

So the first thing is, obviously, he is looking at the business through new eyes.

I think that's the most important thing.

That's what you always get when you get a new leader.

Secondly, whether the business is performing good, bad or indifferent, there's always unfinished business to look at.

I do think that the always original positioning around KFC that Micky has led around the world, we are going to bring to China with a tweak of Always Original, Always Chinese.

I think the discussions I've had with him around we probably need to simplify the menu, get more focus back on the core product, introduce this disruptive value that's worked elsewhere.

And I think in a brand positioning sense, play more offense.

So, I would say that, look, it is really early days.

I'd probably -- you know, he and I are in constant dialogue.

But he has new eyes.

He's got seasoned professionalized eyes.

And so he sees the business as he's looked through the businesses that have performed elsewhere.

We know we've got unfinished business.

We know we have to make the positioning clearer.

Right?

We both believe we need more disruptive value, and we have to start playing offense when it comes to brand positioning -- all of that.

And with respect, Greg, I mean that sounds like the kind of things that a CMO would do or perhaps the President of the brand would do.

But the CEO job for the CEO of China -- the job, the scale, the responsibilities is -- it's much bigger than marketing and positioning.

So if you could talk about the organization, how it's run, what the responsibilities are, how it's structured, what have you?

As I said, his job right now is turning around the business.

So I don't care whether he's the President, the CEO, the CMO or whoever he is.

He and I both realize that what we've got to do is turn around the sales and transactions of this business.

And so, those are the roles that he has really focused on in his first whatever 30 or 40 days that he's been there.

He and I pretty much talk almost every day.

Now, will we get to structure in China?

And does he have the right structure?

And has he got the right people?

Look, we've got a seasoned leadership team there that has a new leader that's looking at the business through new eyes.

And I think you can call it whatever you want to call it, but I think he's doing all the right things.

And certainly the feedback I'm getting from the other team in China is that they think he's doing all the right things.

And certainly the things that I know he is putting into test, he has my full support on.

In fact, those are the things that he and I talk about pretty much on a daily basis.

So, getting sales and transactions turned around is his number one priority.

Thanks, John.

We have one last question.

Susan?

Of course.

Your last question comes from the line of R.J. Hottovy of Morningstar.

Your line is open.

One final follow-up question on brand positioning.

And I respect that you can't give away all the internal metrics that you used to measure brand's strength.

But I was wondering if you could give us a little of at least directional color on what metrics?

And what gives you confidence that the brand perception hasn't diminished in China?

I think that would be particularly helpful.

Thanks.

Yes.

I think a lot of the customer metrics that we measure are obviously making progress since the two supplier incidents.

I think the one that we've not made the progress on that we need to make progress on is value.

So I think that as the economy turns, as the macros become tougher, and your value score is the one that's probably lagging in a recovery sense, I think it indicates that we need to play disruptive value more aggressively.

But I want to reassure everybody not at the expense of margin.

Because we do know how to do this and we've done it successfully in many other markets.

So, do we continue to improve our metrics on food safety, favorite QSR brand, trustworthy all of our brands?

Yes, we do.

But on value for money, we clearly have a lot more work to do.

So, any more questions?

Thanks, R.J.

Okay.

So I want to thank everyone for being on the call.

I think it goes without saying we've obviously had a very disappointing quarter.

And as I said, I and we and everyone at Yum!

take responsibility for it.

I think what I don't want you to do is count us as out.

We will come back.

And as I said earlier, this is really up to us to execute.

We know what we've got to do.

We've got to have very clear brand positioning.

We have got to have innovation that is driven from inside.

We've got to have disruptive value.

We've got to be strong and great in the whole social mobile digital space.

We've got to upgrade our assets and we've got to deliver a customer -- a superior customer experience.

We know what we have to do.

What we all know we have to do is execute better than we've done.

The long-term potential for this business is huge -- whether it's emerging markets, developed markets, it doesn't matter what it is.

We have three great brands.

We are going to turn these into three great global iconic brands, and take advantage of all the emerging opportunities that exist for us.

So, it's on us.

Yes, there's some macro headwinds, and yes, other things happening, but at the end of the day, around the world, I know what we have to do to be successful.

In a number of the markets where we do that, we are incredibly successful.

What we've got to do is not just do it in a number of markets; we've got to do it in every market, including China in which we participate.

And I can absolutely assure you -- everybody at Yum!

knows we have disappointed you and our shareholders this quarter and this year, and we are going to come back stronger and better than ever.

Thank you.

And this concludes today's conference call.

You may now disconnect.