百勝餐飲集團 (YUM) 2016 Q3 法說會逐字稿

Good morning.

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

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

Brands third-quarter 2016 earnings conference call.

(Operator Instructions)

Keith Siegner, Vice President, Investor Relations and Corporate Strategy, you may begin your conference.

Thanks, Amy.

Good morning everyone and thanks for joining us.

On our call today are Greg Creed, our CEO; David Gibbs, our President and CFO.

Also on today's call is Micky Pant, Yum China CEO, and Ted Stedem, Yum China CFO.

Following remarks from Greg and David we will open the call to questions for the entire team.

Please keep in mind Micky is dialing in from Shanghai, so there could be a slight delay in some of his responses.

Before we get started I'd 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, www.Yum.com, to find disclosures and reconciliation 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 this recording.

We would like to make you aware of the following upcoming Yum investor events.

Our 2016 Investor and Analyst Conference will be next Tuesday, October 11 in Midtown Manhattan.

Live webcast will be available at www.Yum.com/investors and will be available for playback within 24 hours after the call.

Now I'd like to turn the call over to Mr. Greg Creed.

Thanks, Keith, and good morning everyone.

Yum!

Brands delivered third-quarter core operating profit growth of 11% and EPS growth excluding special items of 9%.

For 2016 we are raising our core operating profit growth guidance from at least 14% to at least 15%, owing to continued strength in our business outside of China and solid profitability in China despite sales headwinds which I will discuss shortly.

Today I'll give you an overview of each of our operating divisions and then David Gibbs, our President and CFO, will walk you through the financials.

After that the team and I including Micky Pant, CEO of Yum China, and Ted Stedem, CFO of Yum China, will be happy to take any questions you might have.

For those of you who don't know Ted he joined the Yum China team in August.

He has been with Yum for the last seven years and served as CFO of KFC Australia and New Zealand and most recently as the General Manager of our KFC Asia business outside of China.

Ted brings significant financial and operational expertise to Micky's leadership team as they prepare for the separation.

Now let's begin today with China.

As we mentioned on our second-quarter call we were pleased with the results we saw through the first six weeks of Q3 as sales were ahead of our plan.

However, tougher laps in the second half of the third quarter, which we built into the forecast, were compounded by an international court ruling regarding claims to sovereignty over the South China Sea.

The ruling triggered a series of protests and boycotts, intensified by social media, against a few international companies with well-known Western brands.

At its peak the demonstrations significantly impacted store traffic in certain trade zones, and this was during our busiest season.

The impact to our sales was sudden and while difficult to pinpoint the exact magnitude of the impact on the quarter our best estimate is there was a 400 to 500 basis point impact to the division's same-store sales in the quarter.

Most importantly, as we got further away from the incident in July sales improved.

Fourth quarter, which began in September, has seen improvement continue with quarter-to-date sales down modestly.

We are encouraged by recent trends through the important Golden Week holiday, which is currently ongoing, and optimistic about a strong product and promotional calendar for the balance of the quarter, which Micky will discuss.

Given these trends in the business we expect same-store sales to be positive for the balance of the quarter.

In spite of the external headwind the team was able to execute well and manage costs, resulting in solid profitability with core operating profit up 14%.

It is, unfortunate, that something outside of our control impacted our sales.

But thanks to solid execution it appears to be mostly behind us at this point, and we are moving forward with excitement about the balance of the year with confidence in the long-term potential of this business.

As we prepare to separate the China business there is a lot to be excited about.

First, the strategic partnership we previously announced with Primavera and Ant Financial is a tremendous asset and competitive advantage.

Both are well-respected China institutions that are ideal partners for Yum China as a standalone public company operating in China.

Second, we are the undisputed category leader in digital engagement.

We are building the world's greatest loyalty program with a large and growing database to help us drive future sales.

Our mobile payment has doubled from 10% to 20% of sales over the last year.

And with Ant Financial's Alipay we will continue to grow.

Third, delivery.

We currently offer delivery from more than 4,000 units across China.

This is an unmatched and growing platform that affords further growth opportunities.

And, finally, idea sharing.

As we get closer to separation what is ironic is Yum and the China Division have never been closer from a know-how and idea sharing perspective.

This will continue post-separation.

You will hear a lot more about all of this next week.

Now on to our three brand divisions, where I am excited to say we are on track to deliver another year of strong operating profit growth, which is a testament to the talent and capabilities within the global team.

For the third quarter we are very pleased that in aggregate our business outside of China produced 11% operating profit growth ahead of our expectations.

In what has been an overall sluggish environment for the QSR category, particularly in the United States, two of our three bands have been delivering solid results and have continued to do so into the fourth quarter thus far.

Our KFC Division excelled.

Same-store sales grew 4% in the third quarter or 7% on a two-year stack.

Core operating profit grew 19% in the quarter and the division opened 138 new international restaurants in 42 countries.

70% of our new international openings were in emerging markets.

System sales in international developed markets grew 4% and international emerging markets grew 12%.

This brand continued to perform in nearly every market globally with particular strength in Russia, Continental Europe and Africa this quarter.

And we remain on track to open at least 475 net new international units this year and the U.S. is full steam ahead on its remodel program.

In particular, I'm pleased with the third-quarter results out of the U.S. which were driven by the Extra Crispy campaign.

We continue to gain traction with our strategy here and our 6% same-store sales growth lapped 2% growth in the prior year.

Two-year comps of plus 8 in the quarter are category leading.

And this is our ninth consecutive quarter of same-store sales growth in the U.S. and speaks to the importance of an aligned franchise system and strong marketing adhering to core innovation and value.

The KFC U.S. team in partnership with the franchisees have really turned this brand around in the last two years.

And the brand's continued strength in a sluggish QSR market is commendable.

This achievement in the U.S. gives me confidence in continued global success as we share best practices across the system.

Pizza Hut system sales in constant currency were flat and same-store sales declined 1% in the third quarter.

The U.S. market was influenced by an unsuccessful promotion and the competitive environment.

As we saw earlier this year we know the brand can perform when the right product is combined with compelling value and the messaging is distinctive and disruptive.

Now I am confident in our ability to turn around the Pizza Hut U.S. business.

We believe the fundamentals are being put in place and now execution is the focus.

Our international business of Pizza Hut saw system sales growth of 3% in constant currency and flat same-store sales growth in the quarter.

Across our international markets we are leveraging a wealth of proven, own-able value bets to address specific consumer needs and rolling them out rapidly from one market to another.

In Thailand, for example, we took a bold approach to value, leveraging in any construct in tandem with significant product and operations improvement and have seen double-digit sales and transaction growth since launch.

Other markets now are taking learnings from this significant turnaround.

This traction gives us confidence that the international Pizza Hut turnaround is underway.

Finally, I am very pleased with Taco Bell's strong performance in the third quarter.

Core operating profit grew 9%, U.S. same-store sales grew 3% even as we lapped a plus 4% from the prior year.

This included 1 percentage point of growth in transactions or over 2 percentage points better than the industry.

Our strategy of bracketing value with $1.49 steak flatbread sandwiches and $5 Boxes, which provided abundant value, allow us to grow transactions and boost check.

Furthermore, we saw impressive results with our breakfast offering in the quarter as transactions grew 14%, driven by our $1 breakfast menu.

We are now taking the learnings from this success and promoting our alternate dollar menus.

This all goes to show that when you remain committed to the core and value the results follow.

In addition to being a clear leader in offering low prices, we are now the-- leading the category in good value for money.

As for Taco Bell development we remain on plan with at least 300 new restaurant openings for the year.

Taco Bell international is an area of enviable growth potential and we are excited to see the momentum behind this strategic objective.

While it's early days we believe this could be a meaningful driver of long-term growth and look forward to continued progress.

So 2016 marks the beginning of a massive transformation for Yum!, a transformation that has been years in the making.

The first step is the October 31 separation of the China business.

This business began with the first KFC in Beijing nearly 30 years ago and has grown to over 7,000 restaurants in over 1,100 cities.

Today it is one of China's largest employers with over 400,000 employees serving over 2 billion customers every year.

In short, this business is a powerhouse with unrivaled growth opportunities in the world's fastest-growing major economy.

As we announced on September 2, investments by Primavera Capital Group and Ant Financial brings strategic value and additional local and digital know-how immediately and over the long term.

In addition, on September 15 we announced a world-class Board of Directors for Yum China with Dr. Fred Hu, Chairman and Founder of Primavera Capital Group to serve as Non-executive Chairman.

I have the utmost confidence that this board will offer the market insights and strategic vision required to enable Yum China to reach its full potential.

Including the Primavera investment, Yum China will have a very strong financial foundation: over $900 million of cash and no external debt on the balance sheet at spin.

I couldn't be more optimistic about the future of this business or the great foundation that is now in place for them to begin their journey as an independent company.

And I look forward to watching them succeed for many years to come.

So in conclusion, at new Yum!

the massive transformation will continue as we become a unique and focused world-class franchisor.

Following the separation we will be roughly 93% franchised with a clear path to reach our stated goal of becoming at least 96% franchised by the end of 2017.

We've given a great deal of thought towards creating a high-growth, asset-light efficient company best positioned for accelerating growth in global system sales, operating profits and cash flow.

We are excited to share more details behind our thinking here next Tuesday.

So stay tuned.

With that it gives me pleasure to hand over to David Gibbs.

Thank you, Greg, and good morning everyone.

In my remarks today I will cover three areas: our third-quarter operating results, our outlook for 2016 and an update on our recapitalization and the separation of our China business.

Let's start with a high-level overview of our third-quarter performance.

We're pleased Yum!

Brands delivered year-over-year core operating profit growth of 11% in the quarter.

In aggregate our three brand divisions, excluding China, delivered 11% core operating profit growth in the quarter led by 19% growth at KFC, partially offset by soft results at Pizza Hut.

This growth is especially impressive given how competitive and sluggish the QSR category has been recently, particularly in the U.S. Combined our brands are outperforming the category and we're pleased to see relative out-performance continuing thus far in the fourth quarter.

In our China Division core operating profit grew 14% despite a 1% decline in same-store sales.

The implementation of a value added tax and continued tight cost controls materially benefited unit economics and enabled us to offset inflation and sales deleverage primarily resulting from the South China Sea ruling.

As Greg mentioned tougher back-of-quarter laps were compounded by the incident.

While it is very difficult to be precise given all the moving pieces in our China business right now, our best estimate is this had a 400 to 500 basis points impact to our same-store sales in the quarter.

It was most severe in July, primarily affecting our stores in lower tier cities where the protests were more intense.

The impact continues to dissipate and sales have recovered off their lows.

Overall for the quarter EPS before special items grew 9% including a 6 point negative impact from foreign currency changes.

Now I'd like to discuss our 2016 outlook.

As Greg mentioned we are raising our 2016 full-year core operating profit growth guidance to at least 15% from at least 14% including the 53rd week.

This increase is supported by strength in our overall business outside China and healthy profitability in China despite temporary sales headwinds as we discussed.

As expected, third-quarter margins in the China Division benefited due in part to the diligent effort across our entire China team in implementing the new VAT.

In each of the last two quarters we highlighted the changes to China's retail tax structure which became effective on May 1. The benefit to our business continues to fluctuate from month to month as we refine our ability to get input credits and as the interpretation of the new tax code becomes clearer.

As a result, we will not provide precise guidance for the future benefit of this tax change other than to say that we expect it to be worth at least 2 points of margin upside on a go-forward basis.

We still expect full-year China restaurant margins of at least 17%.

This reflects the ongoing benefit of the VAT offset by labor and commodity inflation as well as our investment back into generating sales.

Now let's talk about development.

Yum!

remains one of the leading global retail developers.

In the third quarter we added over 475 total new units, taking our year-to-date global new restaurant openings to nearly 1,150 units.

Consistent with prior years, development will be weighted more towards the fourth quarter as we expect to accelerate our pace of development balance of year, further laying the groundwork for future growth.

For the full year, we expect China to add about 525 gross new units and for new Yum!

Brands to add over 2,175 units which will continue to include China.

With regards to refranchising, we've committed to becoming at least 96% franchised by the end of 2017.

Once we finalize the separation of our China business we will be 93% franchised.

Over the last four quarters we've refranchised nearly 470 restaurants.

In the third quarter specifically we refranchised 94 stores, 48 of which were Pizza Hut restaurants.

Refranchising allows us to return significant amounts of cash to shareholders while reducing G&A expenditures as field level employees are typically absorbed into our franchise system.

We look forward to sharing our strategy for improving overall efficiency at Yum!

with you next week.

One housekeeping item.

Unallocated corporate G&A in the quarter, excluding special items, was $44 million with the increase versus last year largely due to timing.

For the full year we expect this to come in closer to $205 million excluding special items.

Now I'd like to talk about our capital structure.

In connection with the pending separation of our China business we are optimizing the capital structure of Yum!.

We closed the previously announced $2.5 billion new senior secured credit facilities and $2.1 billion senior unsecured notes offering on June 16, which was five days into our third quarter.

As a result, we have total debt outstanding of $9.2 billion.

Our intention is to maintain leverage equal to about five times EBITDA at new Yum!

while Yum China should have over $900 million in cash and no external debt at separation.

In the quarter we also swapped a portion of our floating-rate debt to fixed, resulting in about 90% of our debt fixed for a total current blended rate of 4.75%.

With this in mind, we expect interest expense of about $300 million in 2016.

We are fully committed to returning cash to shareholders.

Last December at our Analyst and Investor Day we committed to returning approximately $6.2 billion of capital excluding our ongoing dividend payments between separation announcement and completion, which assumed a year-end 2016 separation of our China Division.

In connection with this we have repurchased approximately $5.3 billion in shares at an average price of $81, reducing our share count by approximately 15% as of October 4. We plan to return the remainder of our previously committed $6.2 billion of capital before year-end.

Including our recently increased quarterly dividend we have returned $5.2 billion to shareholders year to date.

Now I'd like to quickly update you on our China separation plans.

We are on track to complete the separation after the close of business on October 31.

On September 23, the Board approved the separation of our China business via a dividend distribution of one share of Yum China common stock per each share of Yum!

Brands common stock held at the close of business on October 19, the record date for the distribution.

We expect to complete the distribution of Yum China common stock to shareholders on October 31.

When-issued trading for both Yum!

Brands and Yum China will begin on the NYSE on October 17 and Yum China will begin trading regular way as an independent company on November 1.

As Greg mentioned we were pleased with the announced investment in Yum China by Primavera Capital and Ant Financial.

They will make a $460 million strategic investment, reflecting an 8% discount to the volume weighted average trading price in days 31 through 60 following the separation of Yum China.

Additionally, they will receive two warrant tranches, representing approximately 2% of equity value in each tranche with strike prices equating to Yum China equity values of $12 billion and $15 billion.

This is an attractive structure for shareholders as it minimizes upfront dilution and highlights the long-term value in Yum China as an investment.

More importantly, we are thrilled with the strategic partnership and the benefits this offers Yum China.

Both Primavera and Ant Financial are well respected Chinese institutions that are ideal partners.

Dr. Fred Hu, who leads Primavera, will become the Non-executive Chairman of Yum China and Ant Financial will have on observer seat.

Given the value of these ideal partners will bring to the table we believe Yum China is set up for success immediately and over the long term.

So to wrap things up, we had an exogenous and temporary event hit China sales mid-quarter.

But we're able to hold the line on operating profit in China and with the strong performance of our brands outside of China in aggregate we have line of sight to at least 15% core operating profit growth for the full year.

As Greg said, 2016 is a truly transformational year for Yum!.

We are nearing completion of the separation of our China business and have secured strong strategic partners.

We have enhanced our capital structure and we've made progress on refranchising.

We look forward to sharing additional details on these matters and more with you at our New York Investor Conference next Tuesday.

And with that the team and I are happy to take your questions.

Operator?

(Operator Instructions) Sara Senatore, Bernstein.

Thank you.

Thanks very much.

I would like to ask just quickly about China and the protest.

And in the context of I think you've laid out comps that over the long term you would target in the mid single digits.

But it feels like we've had a hard time getting there with periodic things that are outside of your control.

So I guess the question I have is twofold.

One is, is there just a higher country risk now?

And does that mean that the long-term targets of 4% to 5% maybe are going to be harder to reach?

The second point, is there an opportunity to make up some of that top-line gap with faster unit growth?

Because it looks like unit growth gross units has continued to come down a little bit.

Thanks.

Micky, we will let you take that.

Yes, thank you Sara.

I think the first point, nobody likes giving weather and politics and reasons like that for sluggish sales.

So trust me we are very disappointed with the negative comps number.

But this was a very unusual.

As you know, the first half of the year we were trending very nicely.

In fact, third quarter -- second quarter this year was the fourth straight quarter of same-store sales growth.

And in Q3 we were trending through the middle of the quarter very strongly.

And then right around July 13 this matter started.

And we saw a very sharp and sudden decline in sales.

The good news was that thereafter the recovery started almost immediately, within 10 days or so.

But it did have this impact.

Two things.

First is that unlike a food safety incidents, research that we've conducted has shown that there has been no damage whatsoever to the brand.

Our trends have continued to improve.

And I think the other point, which was mentioned by both Greg and David, the spin-off coupled with the two very strong strategic partners who have very deep respect in China I think that will help us in the longer term in issues and matters like this.

I think if you are at the October 11, Tuesday Investor Meeting in New York we will give you more comfort as to why we feel that we can grow comps into the future.

But had it not been for this incident, we would almost certainly have had comp growth in Q3.

And we are expecting from this point onwards through the rest of the year to get back to growth.

As far as new unit development is concerned I think for the quarter I think the impact -- I don't see any particular reason why we will not have strong new unit growth.

Again, we will share more details on the 11th.

This year, as you know, we did take our Pizza Hut Dine-In build rate down from last year's 280 to about 150 and that was done 150 still on a base of 1,500 is about 10%.

We felt that was the responsible thing to do and to get Pizza Hut comps back which are trending upwards.

And once that is done I think we can get back onto a strong growth path.

So we don't see really an ongoing decline in our unit build rate in China at all.

Brian Bittner, Oppenheimer.

Thank you.

Good morning guys.

The question on the non-China business.

The Taco Bell and KFC businesses are going to be I think a little over 80% of new Yum!'s profits after the separation.

So it is really nice to see the comp acceleration in the sales at both of those brands.

I guess this has seemingly happened without an industry acceleration underneath you.

So what was it that changed so quickly in the third quarter for both of these brands to really divert from the industry so dramatically?

And how much follow-through does this have going forward, the strategy that drove that?

Thanks, Brian.

I wouldn't necessarily say it was an abrupt change.

I think certainly if you take the U.S., KFC U.S. has just delivered its ninth consecutive quarter of same-store sales growth.

There's no doubt the plus 6 rolling over plus 2 and the plus 8 definitely means we are growing share in the category which is great.

I put it down to, and if you think about what we ran in the quarter we essentially ran Extra Crispy chicken which we've had for over 40 years in the $5 Box and the $20 Bucket.

I think what it demonstrates is when you have distinctive and disruptive positioning and breakthrough advertising with great product quality and very good operations, I think what you will see is you can get the customer to actually come in more often.

And so I think that was certainly the KFC story.

I was particularly proud of what the Taco Bell team did, how quickly they reacted to their Q2 minus 1 number to change the calendar for Q3.

It's not easy to do, so a huge callout to the Taco Bell team for basically getting us back, $1.49 flatbread, the Triple Double Crunchwrap which did incredibly well and, obviously, then putting it in the $5 Box.

So I think the answer is we are back to the core selling great core products.

We've got distinctive and disruptive advertising and positioning.

And I think that's the cornerstone for success.

And the $1 all day menu at Taco Bell that you talked about, is that the same as the $1 cravings menu that you've had or is there something incremental coming on the all day $1?

Yes-no.

So they ran a $1 breakfast menu through the quarter and that, as you saw, delivered a really impressive 14% transaction growth in that daypart.

What they've done is they have now taken that to an all day value menu play which has only just started in the marketplace.

I think, as I said, what was impressive is not only do we have now the market leading position for low prices, we now have the category leading position for every day great value.

And so I think that you are seeing these brands, particularly both these brands, strengthen in the marketplace.

Thank you.

John Glass, Morgan Stanley.

Thanks very much.

Micky, I wanted to maybe just go back to you and talk a little bit more broadly about how your strategy in China is evolving.

I think when you came in you focused more on the core, the buckets and the value boxes.

So what is working now in China?

Do you need more -- and how have you used this crisis and how have you responded to it maybe differently than you have done in prior periods if there has been any response?

Can you talk a little bit about product evolution and price evolution?

And I think in the past you've given some sort of breakdown in China between traffic ticket and pricing.

If you could provide that for this quarter, thanks.

Sure.

Firstly, what's working is I was struck by when Greg was talking about the KFC U.S. business is very similar things.

As you probably know, we did divert capital to our store refurbishment in a very large way.

So we will give more details on the 11th, but we have improved the look and feel of our stores quite considerably, especially in the larger cities.

We did focus on our core bestsellers.

So we did simplify the menu just a little bit.

But the core bestsellers, including fried chicken and our Zinger sandwich were dialed up and that is having a beneficial effect.

Key price points, especially the crucial RMB29, RMB39 price points, which are the last two price points in this market.

And, lastly, digital.

I think digital has been probably the most significant growth area for us.

Our cashless payments have grown from 10% to 20% in a very short period of the time.

We expect that to continue as we partner up with people like Alipay to expand it.

And our loyalty programs are significant now.

So the percentage of transactions that are being scanned at the till for loyalty points is very significant.

And overall spend on digital has become a very large part of our total marketing spend.

All this put together is having good results.

And we've accordingly geared our calendar for the balance of this year as well as for next year.

So both on KFC and Pizza Hut considerable attention to core product, key price points and continued in-store execution.

That really is what's working.

And just the breakdown between --

We believe that, that strategy is - sorry, the second part of your question.

Sure, to give you the breakdown, we had a pricing impact of plus 1%.

We had a mix impact of plus 3%.

And we had transactions down 6% to deliver our same-store sales.

Thank you so much.

John Ivankoe, JPMorgan.

Yes, hi, thank you for the question.

This is Michael on for John.

Just on G&A in the context of being a 96% franchised business and post-spin how is the Company going to think about G&A?

Will you look at G&A on a per store basis or a percent of system sales?

We're just trying to get a sense of what the right metric is and if there's a target or a benchmark.

Thank you.

Yes, that's something that we plan on addressing in great detail at the Investor Conference next Tuesday.

And we will probably give you a couple different ways to think about it and some frameworks.

But we will mostly be focused on G&A as a percentage of system sales.

Joe Buckley, Bank of America.

Thank you.

The question is on China, as well.

I know you said that the sales impact is dissipating and you expect to be positive in China for the balance of the quarter.

Does that mean that for the full quarter you are expecting China comps to be positive?

And then also on China you mentioned the VAT tax having at least a 200 basis point benefit on a go-forward basis.

Was that the benefit in the third quarter, can you share that with us as well, please?

Let's take the first (multiple speakers)

There was a benefit in the third quarter and it's an ongoing benefit and it's significant.

And I will let Ted answer that question.

So maybe Ted do you want to start with that and then I can get to the other part.

Sure.

On the VAT as David said we are still in the early months of the implementation of the VAT and the impact has fluctuated since it was implemented.

In the third quarter it is fair to assume that the VAT was the primary driver of our margin improvement.

And this is David.

Just on the question about the guidance for the quarter, we don't as you know, we don't typically provide guidance for sales on the quarter.

But we did, obviously, mention that we feel better about the balance of the quarter.

We've got some great promotions on the calendar in November and December that we are really excited about and that's why we feel bullish on the balance of the quarter.

But I'd let Micky talk a little bit more about some of those promotions and the impact we are expecting on the business.

Yes, well, as you know, it's a four-month quarter and we've passed September which is a tough lap for us.

We are in the middle of the Golden Week which is the second most significant holiday after the Chinese New Year.

And that is going well this time.

It's a peak selling period and comps are good.

Thereafter, what we've got in the month of November is a winning item that's been tested very well and has done well in the past, extended through November which is the snack platter.

Which is a good example of how KFC in China is unique in the sense that the snack platter has got four parts to it and three of them are familiar to people from anywhere in the world which is french fries, popcorn chicken and hot wings.

But the fourth part is squid, fried squid which is quite unique to here.

It's done very well in the past and we have got that at a very keen price point of RMB29.

So we feel very good about our November calendar.

And then in December for the first time last year we started a Christmas promotion.

Christmas is not a traditional holiday in China.

And the response is pretty good.

So we are taking that to another level this year with covering the entire gamut from low-end meals at RMB35 to buckets for families at RMB98 and with a lot of innovation taken from winning items from around the world.

So December I think for the Christmas promotion looks particularly strong.

That's what gives us confidence in the balance of the quarter.

So, obviously, we can we report Q4 when Q4 is done, but at this time felt the incident we feel is behind us.

And the Golden Week is going quite well and the calendar looks really strong.

David Palmer, RBC.

Thanks.

Good morning.

A couple of questions.

The third-quarter with China restaurant margins were very close to peak levels even with well below peak AUVs.

With the help of ongoing sales improvement and the VAT where do you think margins can go over time for restaurants in China?

And using your previous comments, just a quick clarification on the cash back to shareholders, it looks like you've got almost $1 billion left and I assume that that will go to the new Yum!

and add to that the $4 billion less to get to your $10 billion target it looks like you might have $5 billion over the next two-plus years.

Is that right and will that likely be share repurchase?

Thank you.

Just taking the second part of that question, it is correct.

I think we have about $900 million to return to shareholders for the balance of the year in terms of cash buybacks.

And some of that will be completed between now and spin.

And the balance of it will be after spin, as well.

Right.

I think our original guidance was we would get this all done by spin, but they spin has actually moved up a couple of months from when we thought it would be done at the end of the year.

Then on the second question on margin, future margin guidance for China, obviously we're getting a VAT benefit as Ted mentioned that we estimate to be at least 2 points.

Of course, that's going to help our margins, but at this point in time we're not going to provide margin guidance for next year.

But I think as the China team becomes a separate public entity they will certainly providing more detail on those kinds of issues.

Great, thanks.

Your next question comes from --

Yes, to add to that, David, on the profitability overall for the quarter, even though the sales were not where we wanted them, operating profit grew very well.

And our cumulative operating profit in three quarters is about equal to what we did all of last year.

So in some ways the fourth-quarter profit is going to be growth.

And that's a big credit to our teams where, as you know, we own our entire supply chain, control it very carefully.

So we have very good control on input, taxes, etc., and that's all helped us to get a strong margin profit performance.

David Tarantino, Baird.

Hi, good morning.

I have a clarification question on the recent sales trends we have seen in China.

Micky, do you think the issue around the protest is still impacting the sales?

I know you mentioned sales are modestly negative quarter to date.

Is that issue still lingering, and if so how are you measuring that and what do you think the underlying trend really is quarter to date?

Well, we've done two rounds of research where we actually measured sentiment and we had percentage of consumers reporting, less inclination to go to one of our restaurants on account of the protest specifically.

That number came down quite sharply.

Now remember the year - quarter-to-date includes all of September.

And with that month gone behind us I think it's safe to say that the protest impact is now very small if not negligible.

So I think that we can put behind us now.

It always takes a little while to regain momentum once you get going in operations and everything else.

So this October holiday is going to be quite crucial in determining that.

And our intention then is to keep the momentum.

Great and then maybe just a quick follow-up.

You mentioned, I think David mentioned in his script that there was some investments in driving sales planned in the fourth quarter.

I know you mentioned some of these promotions, but can you maybe elaborate on what the investment side of that equation looks like?

Yes, we expect our overall AMP to be at the same level that we have always budgeted.

We have made, because we had this margin benefit we did invest some of it back.

Some of it has gone into increased advertising spend on Pizza Hut.

We feel Pizza Hut has got a good chance to recover momentum.

We got soft laps for the fourth quarter.

And we've got some very good promotions in November and at Christmas, and we are putting additional money in advertising promotion behind both.

We've also got some unique China-only deals with international IP on films, movies.

And also we've got maybe three of the best celebrities available in China across the two brands.

So that's where we've made investments.

But it's all within what we'd originally budgeted.

So if your question implies that there will be any deterioration of profitability on account of that, that's not going to happen.

Thank you.

Key leverage will still be sales and that is what we are focused on.

Karen Holthouse, Goldman Sachs.

Hi, good morning this is actually Greg Lum on for Karen today.

I was just wondering if you could provide a quick update on the pace of remodels in China?

And then based on the current units, what is the current average sales lift that you are seeing?

I think on the 11th we will give a lot more detail.

I don't have the number of the top of my head but maybe Ted you can help.

We have accelerated the rate of refurbs quite dramatically, and we will give you more numbers on the 11th.

And I think what happens with refurbs is that it's very difficult to quantify exactly the impact until you get the estate fixed.

And when a certain percentage of the estate becomes current then you get quite a substantial benefit and that's what we are expecting in time to come.

We are very keen to keep the estate current because China architectural standards, especially in the bigger cities, have gone up dramatically over the last several years with a lot of international entries.

And we have been left behind a little bit.

So that has been corrected quite substantially.

Sure.

On the remodels we're planning to do about 780 remodels this year and this is going to be about a 50% increase versus what we did in 2015.

And year to date we've completed a little over half.

I think we'd say we are getting great feedback from our consumers.

We have contemporarized the experience.

We've made the restaurants more youthful, more energetic.

And overall I think it's a very positive effect on the image of the brands.

And we will give you more updates at our conference next week.

Jeffrey Bernstein, Barclays.

Great, thank you very much.

Just two questions.

One, maybe David on the new Yum!, I mean just looking at the operating margins this past quarter for proxy, they expended a couple hundred basis points at each brand despite the mixed results and you are running from a low to the high 20% range in each of those brands.

I am just wondering directionally perhaps how you think about the opportunity there with presumably the refranchising?

It seems like there is modest further refranchising from here, but where you think those margins or what gating factors are there on that margin?

And another question, Greg, just on Taco Bell, a very strong result and it sounds like you attribute most of that to product news and more so on the value front.

So with that as a backdrop, I'm just wondering whether Taco Bell still aspires for more of that premium push and why you think the QSR category has been sluggish recently?

I think you mentioned the category softness.

I am just wondering what you attribute that to.

Thanks.

Yes on the first question on operating margin.

Obviously as we move to an asset-light model we are excited about a significant expansion in our operating margins.

We will give you a lot more color on the exact refranchising plans and how that would play out in terms of operating margin next week.

And I will turn it over to Greg for the second question.

Yes, I think Taco Bell is doing a lot of things right.

It is not just the core products, it's not just the great value.

Their assets are in great shape.

The customer experience they are delivering is really I think as good as you will find in the marketplace.

They are, obviously, trying to make -- this is becoming an incredibly culturally relevant brand.

I think being part of a millennial culture is what's really driving this performance.

So I'm very excited at all the things they are doing I think sets us up for continued long-term growth just across the broad front of all the things you want great brands to be doing.

And in terms of the sluggish category, any thoughts on what you can attribute that to?

Look, it's hard to say, we've been doing a bunch of work just talking to different to millennials, Gen X, Gen Y, Boomers.

I think we are what five weeks away from the general elections.

I think there is just great uncertainty as to what's going to happen in the U.S., in particular, as a result of the outcome of the election.

It goes without saying people are sort of trying to decide who to choose and what the impact will be on the economy.

And I think people are maybe just hunkering down a little bit.

But that said that's why I think I'm even more pleased with the performance of KFC and Taco Bell in the quarter because despite that uncertainty those two brands, I think, in being incredibly distinctive and disruptive and going back to the core, delivering great experiences, making sure the value was right.

Those -- that is how you win even in the sluggish market.

And I think they are lessons that we are also applying around the rest of the world.

KFC outside of the U.S. had just a gangbuster quarter.

Probably with the exception of Japan, developed markets, developing markets, you can ask me any country and I will show you incredible sales growth.

So I think the global growth of the KFC brand and the momentum it has and the strength that we've now got in the U.S. sets that up for particular strength.

Taco Bell, as I said across, all the facets you want a brand to be strong at is just powering ahead.

And I think once we get through the election and then that uncertainty is removed hopefully the market will find some momentum.

But I'm really confident that our brands can grow in either strong markets or markets that don't have the momentum we'd love to have.

Matt McGinley, Evercore ISI.

My question is on the full-year guidance of 15% for operating profit growth.

I know that includes a 53rd week which I think in the beginning of the year you said was around 1.5, China for the full year I think you said would be 20 and you always have that fourth-quarter step down just based on seasonality, and I think you said the full year would be 17.

So my question is on the new Yum!

business which they've been running 9, 4 and 4 respectively for the three brands you are going to have a step-up.

Part of it is going to be from the 53rd week, but there's also something else in there that I think implies you are going to have a bigger step-up.

And I guess my question is what inflects within the new Yum!

outside of the 53rd week to get you to that full-year 15% operating profit guide?

Well I guess we'd always anticipated the fourth quarter to be the best quarter of the year in terms of core operating profit growth.

And that gets into a lot of features about how our business performance last year, expenses that we're lapping and things like that.

So I can't give you a precise answer other than to say the guidance was raised because we do feel confident that the fourth quarter with the momentum that our brands have and the plans that we have for the fourth quarter and how they are tracking against those plans gives us lots of confidence in our ability to generate more profit than we thought at this time last quarter.

Andrew Charles, Cowen and Company.

Thank you.

Just to clarify, was Taco Bell traffic ex-breakfast positive?

And then my question was Taco Bell performed well on a difficult industry backdrop and obviously the competitive promotional environment continues to be pretty fierce.

But I was wondering about the decision to launch a $1 all day menu as you guys seem to be seeing success with the $5 Box strategy and, Greg, the core value strategy you outlined earlier.

Presumably these $1 menus, obviously $1 offerings have better margin -- excuse me, obviously, the core value offerings seem to have better margins than the $1 menu deal that you would be launching from the context of an inflationary labor environment.

So I guess my answer is I think transactions would have been slightly positive.

Obviously, we had the significant growth, as we said, in breakfast.

But I think without breakfast transactions would have been slightly positive.

I think the key to Taco Bell's success is it is not just a one show pony.

We didn't just do $1 menus, we also did Triple Double Crunchwraps and $5 Boxes.

So I think it's our ability to have great value and value isn't just what you pay, it's what you get.

I think if you look at what's in the boxes or if you look at now the Sony promotion we're doing right now, which from a millennial point of view is an incredibly attractive promotional offer.

And I know the Sony box, the team is very happy with the performance of the Sony box as we get into the fourth quarter which is why we said we have momentum.

So I think transactions were probably slightly up ex-breakfast.

Margins in the quarter I think were well over 21%, close to 22%.

I've been talking to some Taco Bell franchisees and I can assure you they love those sort of margins.

And I think as I see it with the work that Brian and the team are doing we are set up for continued success at Taco Bell going forward.

Brett Levy, Deutsche Bank.

Good morning.

Can you dive a little bit deeper into the U.S. competitive landscape?

Obviously, we've talked about value in premium, but what are your thoughts with respect to traditional and non-traditional competition, especially with all the talk that's going on about food at home and away from home deflation?

I think we are all reading the same reports whether they are industry reports or the newspaper or what's online.

There is no doubt that food from the grocery stores has declined.

That's not to say, therefore, some people aren't choosing to cook more at home.

I think the fundamentals of what QSR offers, which is always convenience and value, will always be there.

And as I said, in any market, strong markets or sluggish markets, there will always be winners and losers.

And I think having the right tactics in order to ensure that you win is what's critical.

And, obviously, in the quarter two of the brands delivered and we've got lessons from that.

And I'm very confident that we can continue to apply those lessons to KFC and to Taco Bell and that we can apply those lessons to Pizza Hut.

And there will be a lot more on the Pizza Hut story that we will talk about next Tuesday.

And I know the Pizza Hut team is looking forward to telling you about their plans to reignite growth in that brand, as well.

Dennis Geiger, UBS.

Hi, thanks for the question.

Greg, off the back of what you just said about Pizza Hut and more detail next week, is there anything that you can share on the strategy in the U.S.?

Specifically if you could provide the U.S. company-owned number relative to the system, which I think you provided last quarter as a way to kind of see some of the traction from the initiatives?

And anything you could share on the easy and better initiatives or the local value message would be helpful.

Thanks.

Yes, sure.

Well, I think the good news is next Tuesday Artie will take you through a lot about the whole easy and better strategy for the U.S. And, obviously, Milind will talk about what's happening internationally.

What I can tell you is that in the quarter the Company same-store sales were 3 points ahead of system and transactions were 6 points ahead of the system.

So, again, the Company outperformed the system.

And, obviously, we are working with the franchisees to bring them along to deliver that improved performance across the entire brand.

We have time for one more question, please.

Jeremy Scott, CLSA.

Hey, good morning.

Can you update us on the competitive activity in the O2O space in China?

I have to assume that after about two years or so promotions and consolidation within the industry these offers and incentives would start to wind down.

So if you could just comment on that.

And then secondarily, what percentage of your system sales are now moving through delivery channels?

And then which -- what percentage of those delivery sales are moving through third parties?

Yes, well, I think the fact the space is still growing.

We tracked, we repeatedly tracked this through industry monitors as well as we are looking at it very closely just internally to make sure we don't miss an opportunity.

The gross merchandise volume is still growing.

For us the total delivery volume is approximately 10% of our sales.

So circa $600 million, $700 million a year will go through delivery.

The percentage that goes through aggregators I don't have, it's not a very large percentage of what we have.

Pizza Hut Dine-In is significant in both growth to aggregate, but for the rest of it it's mainly our own delivery systems.

We are listed with the major aggregators.

So we are present in all of them.

It is true that there has been a lot of fallout because the profitability of the aggregators reportedly is very negative.

So, of course, the big three companies are still continuing to support their delivery engines.

But their rate of discounting, etc., I think has moderated over time.

But it still is a growth area.

This concludes our question-and-answer session.

I would now like to turn the call back over to Keith Siegner for closing remarks.

All right, great.

Thank you everyone for joining us on the call today.

Once, again, please remember to mark your calendars for our upcoming Analyst Investor event.

We look very forward to speaking with you next Tuesday.

Thanks.

Thanks for being on the call, everybody.

This concludes today's call.

You may now disconnect.