百勝餐飲集團 (YUM) 2017 Q4 法說會逐字稿

Good morning.

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

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

Brands Fourth Quarter 2017 Earnings Call.

(Operator Instructions) Thank you.

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

Thank you, Kim.

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

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

Following remarks from Greg and David, we'll open the call to questions.

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, including -- 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 reconciliations of non-GAAP financial measures that may be used on today's call.

Please note the following regarding our basis of presentation for today's call.

First, system sales results exclude the impact of foreign currency, but include the impact of lapping the 53rd-week, unless otherwise noted.

Second, core operating profit growth figures exclude the impact of foreign currency and special items, but include the impact of lapping the 53rd-week, unless otherwise noted.

We're 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 this live conference and in any future use of the recording.

We'd like to make you aware of the following upcoming Yum!

investor events.

First quarter 2018 earnings will be released on May 2, 2018, with the conference call on the same day.

The remainder of our 2018 key earnings dates are available on our website.

David Gibbs will be presenting on March 8th at the JPMorgan Gaming, Lodging and Restaurant Management Access Forum in Las Vegas, Nevada.

Roger Eaton, KFC's CEO, will be presenting on March 14 at the Bank of America 2018 Consumer and Retail Technology Conference in New York City.

Lastly, disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the fourth quarter Form 10-K filing.

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

Thank you, Keith, and good morning, everyone.

The fourth quarter was a solid ending to the first full year of our transformation journey.

For the full year, Yum!

delivered 5% system sales growth, excluding the impact of the 53rd week.

This is comprised of 2% same-store sales growth and 3% net-new unit growth.

We reached a significant milestone in 2017, as we closed the year with over 45,000 global restaurants in 139 countries and territories.

We are excited about the long-term growth potential of Yum!

Brands, and are on track with our strategic transformation initiatives.

Today, I will talk to you about 2 of our 4 growth capabilities: Distinctive, Relevant & Easy Brands and Unrivaled Culture & Talent.

Then David will follow up with the second 2: Bold Restaurant Development and Unmatched Franchise Operating Capability.

He will also discuss our 2017 results, 2018 guidance and progress towards our transformation initiatives.

I'll begin with our Distinctive, Relevant & Easy Brands.

There's no better way to make a brand Easy than having it delivered right to your door, and I'm very excited to announce a new U.S. partnership with Grubhub.

As the nation's leading online and mobile food ordering company, Grubhub offers delivery in over 1,300 U.S. cities.

This partnership will rapidly expand KFC and Taco Bell's ability to offer online ordering for both pickup and delivery to our customers in all existing U.S. Grubhub markets with many more to come.

Making it easy to access all of our brands is important and the partnership with Grubhub is a key component of making our brands distinctive, relevant and easy.

Now onto the brands.

Starting with KFC, where system sales grew 6%, excluding the 53rd week, with 3% same-store sales growth and 4% net-new unit growth in the fourth quarter.

Internationally, we had several standout markets, and I'd like to highlight 2, Russia and Brazil.

In our Russia market, system sales grew 26% in the quarter with 9% same-store sales growth and 18% net-new unit growth.

The market's strong growth has been supported by their marketing focus on value and the core.

Unit development is also strong, with 2017 being the fourth year in a row that the Russia market opened at least 100 new stores.

This success is driven by the utilization of technology-based development strategies, controlled growth through development agreements and new asset formats.

In Brazil, same-store sales increased 21% for the quarter and 18% for the year with significant media coverage, value offerings and an operational focus on win on taste objectives, the market delivered strong results.

Brazil also focused on reducing costs and enhancing the supply chain distribution to ensure value products are financially feasible.

Now to the U.S., where we saw increased pressure from competitors on chicken innovation and value in the fourth quarter with same-store sales declining 1%, but still finishing the year with our fourth consecutive year of same-store sales and traffic growth.

While disappointed in our results for the quarter, we are bullish on 2018 with marketing plans around both value and innovation.

We started the year with our Value Colonel and now have our first female Colonel, Reba McEntire, showcasing innovation with our new smoky mountain barbecue flavor.

This builds off the other familiar flavor that you've already seen, such as Nashville Hot and Georgia Gold, and it gives an exciting and operationally easy way to bring new flavors to existing products.

Additionally, we continue remodeling our asset base with plans to remodel another 600 stores in 2018, resulting in nearly 40% of the asset base being at current image by year-end.

We are excited about our plans for 2018, and confident this will be our fifth consecutive year of positive same-store sales growth.

Next to Pizza Hut.

In the U.S., same-store sales grew 2% in the fourth quarter, demonstrating the strength of aligning the system through the transformation agreement and building momentum in the business.

Pizza Hut remains committed to ensuring every customer has a hot, fast and reliable experience.

The hot experience begins with 145,000 new thermal pouches, which deliver your pizza 15 degrees hotter.

The fast experience is enhanced through the 14,000 delivery drivers hired in 2017.

The delivery times are improving, and we remain committed to being the employer of choice for delivery drivers.

In addition, there are now over 24,000 new car toppers on the road.

The reliable experience is enhanced with key digital features implemented during the fourth quarter to our mobile and online platforms, which significantly enhance the user experience.

We are encouraged by initial trends in the Hut Rewards loyalty program launched in August and are confident our investment in loyalty will pay off in the long run.

As another example of Pizza Hut innovation, we recently announced a partnership with Toyota to bring Pizza Hut to your door through a driverless vehicle, showcasing the innovation and forward thinking at both companies.

We are excited about the future for Pizza Hut U.S. and confident our investment in hot, fast and reliable experience will drive positive results.

Internationally, we are pleased with the 6% net-new unit growth during 2017, opening nearly 500 net new restaurants in the year with strong growth in Asia, including Indonesia and India.

Fast-casual pizza is one of the fastest-growing segments, and we continue to align our delivery-centric asset strategy to meet this global trend.

The repeatable model for value continues to show success in several of our international markets, including Korea, Thailand and the Philippines.

And we continue to make great strides with our digital and technology ventures to make it easier to get a better pizza in our international markets.

Finally, at Taco Bell, system sales grew 3%, excluding the 53rd week, with 2% same-store sales growth and 4% net-new unit growth in the quarter.

A key differentiator for Taco Bell is the ability to innovate and elevate.

In the quarter, to showcase the abundant indulges of our $1 value menu, we launched the Belluminati ad campaign to strategically elevate Taco Bell as a not-so-secret society, where anyone with $1 can unlock 20 satisfying and innovative menu items.

And to highlight our unique ability to drive buzz around new products, we recently launched a faux movie trailer, Web of Fries, to introduce you to our new nacho fries, which were added to the $1 value menu.

Served with a dippable side of warm nacho cheese, the bold Mexican-seasoned fries are the perfect example of Taco Bell's belief, you shouldn't apologize for value, but celebrate it.

As further commitment to becoming an easy brand, Taco Bell recently announced All Access, an initiative focused on technology designed to make Taco Bell easier for our consumers to access.

This includes installing self-service kiosks in all of our restaurants by the end of 2019; delivery initiative, such as our newly announced partnership with Grubhub; group occasion offerings; and order ahead for scheduled pickup, either in store or curbside.

We understand the importance of technology and know there is great potential when we make it easy to order Taco Bell.

Taco Bell development remains robust.

2017 was a record-setting year for both domestic and international restaurant openings.

Internationally, we entered 5 new countries and reached a significant milestone with over 400 international Taco Bell restaurants.

We continue to see great success in several markets.

In Canada, same-store sales growth is strong with 11% growth in 2017, making it 4 consecutive years of at least high single-digit same-store sales growth.

Building on our domestic repeatable model, India introduced new innovation with the successful launch of the naked chicken taco.

In Brazil, we opened 20 units in 15 months.

And additionally, we signed development agreements in both Brazil and Spain to open more than 200 restaurants over 10 years in each country.

The international growth of Taco Bell is just beginning and has great potential over the long term.

Now moving on to Unrivaled Culture & Talent.

I'd like to highlight the recent talent additions we have made, specifically to drive Distinctive, Relevant & Easy brands.

Julie Masino joins us as Taco Bell U.S. President and is responsible for driving innovation, new store development and a frictionless customer experience through digital and technology initiatives.

Andrea Zahumensky joins us as KFC U.S. Chief Marketing Officer responsible for developing and executing innovative marketing strategies as well as the brand's digital initiatives.

Additionally, Marianne Radley joins us as Pizza Hut U.S. Chief Brand Officer and is responsible for building the brand with today's consumer, overseeing marketing and food innovation teams.

We are able to attract this great talent, and so many others because of our global iconic brands, growth agenda and a world-class culture.

I firmly believe our culture gives a competitive advantage, and we are excited to welcome these leaders to Yum!

and are confident they will help drive results throughout our organization.

In summary, the fourth quarter was a strong close to the year and a huge leap forward towards achieving our transformation objectives.

The focus on our 4 key growth capabilities is the strong catalyst behind our successful results.

And now, it gives me great pleasure to introduce our President and Chief Financial Officer, David Gibbs.

Thank you, Greg, and good morning, everyone.

Today, I will discuss our 2017 results, 2018 guidance, progress towards our transformation initiatives and 2 of our 4 growth capabilities, Bold Restaurant Development and Unmatched Franchise Operating Capability.

First, our 2017 results.

I'm especially pleased to report we've met or exceeded each component of our guidance.

We delivered full year core operating profit growth of 7% despite headwinds from refranchising dilution, lapping of 53rd week and incremental media spend associated with the Pizza Hut Transformation Agreement.

Same-store sales growth of 2% and net-new unit growth of 3% delivered system sales growth of 5%, excluding the 53rd week, all within guidance.

Before I talk about 2018, I do want to discuss our effective tax rate, excluding special items, for the fourth quarter and full year.

Both rates were lower than anticipated due to the timing of planned repatriation of earnings and the impact of tax reform.

The majority of our expected repatriation was back-end loaded for the year, largely reflecting the timing of international refranchising transactions.

Given that most of our foreign entities have a November 30th year-end for U.S. tax purposes, any earnings repatriated subsequent to this date will be required to be taxed as part of the onetime toll charge included in U.S. tax reform.

Our ex-special rates for the fourth quarter and full year were lower than anticipated because they did not include tax on those earnings repatriated after November 30.

Instead, that tax was included in the toll charge that is part of our onetime special items charge for U.S. tax reform of $434 million that we recorded in the fourth quarter.

Now looking at 2018, we do not expect any change to the underlying base operating profit growth of high single digits.

However, there are several items, which will affect our core operating profit growth in 2018.

First, and similar to 2017, we expect operating profit dilution as a result of the timing difference between refranchising restaurants and the associated G&A savings, which is consistent with our transformation plans.

This is expected to negatively impact operating profit by approximately 6 to 7 percentage points.

Second is a revenue recognition accounting change, which is required to be implemented beginning January 1, 2018.

It's important to note that this does not reflect any change in our business model, the strength of our brands or our cash flows.

It is solely a GAAP required change adjusting the timing of recognition of upfront fees received from franchisees and incentive payments made to franchisees, the most significant driver of the changes requiring upfront fees received from franchisees to be amortized over the life of the franchise agreement.

Previously upfront fees were recognized in full when received.

As a result, and because this is a prospective application, we expect approximately 2 to 3 percentage points of negative impact to our operating profit.

All in, we are forecasting 2018 core operating profit to be about flat.

Again, I want to reiterate, we continue to expect underlying base operating profit growth to be strong and up high single digits.

However, 2018 will be affected by these onetime items I discussed.

Next, we expect same-store sales growth of 2% to 3% and net-new unit growth of 3% to 4% for system sales growth of 5% to 6% in constant currency.

This builds upon our system sales growth of 4% during 2016, 5% in 2017 and is a step towards achieving our long-term bold goal of 7%.

We anticipate CapEx will be between $200 million and $250 million.

Note, this is a step down from our 2017 CapEx of $318 million and is tracking towards a run rate CapEx of $100 million, beginning in 2019.

All details of our 2018 guidance can be found on the Investor section of our website.

Finally, as a result of tax reform, we anticipate an ongoing effective tax rate of approximately 20% to 22% compared to our historical rate of mid- to upper 20s.

While we are able to take advantage of the lower U.S. tax rate, our benefit is somewhat muted by the cap on interest deductibility.

The move to a territorial tax system is a positive for us, given the high percentage of our taxable income that is earned outside the U.S., but this is largely offset by the impacts of a new tax on global intangible low-taxed income.

Please note that we expect our 2018 tax rate to be slightly below the anticipated range I just provided.

This is due to delayed applicability of the new tax on global intangible low-taxed income as well as a higher amount of interest deductibility in 2018, primarily given refranchising gains which will drive higher U.S. pretax earnings.

Turning now to our transformation initiatives, designed to make Yum!

Brands more focused, more franchised and more efficient to deliver more growth to our shareholders.

First, the focus on our 4 key growth capabilities has helped us accelerate net-new unit growth and drive sustained positive same-store sales growth.

This focus is a big reason why we have increased confidence in achieving our long-term bold goal of 7% system sales growth.

Second, on our journey to becoming more franchised, we sold 896 equity units during the fourth quarter for pretax proceeds of over $1 billion, ending the year at 97% franchised.

We remain confident in our ability to reach at least 98% franchised by the end of 2018 and exceed $2 billion in after-tax proceeds from our refranchising efforts.

Third, as a more efficient company, we ended the year with G&A, excluding special items representing 2% of system sales, on our way to our goal of 1.7%.

And as previously mentioned, we continue to expect run rate CapEx beginning in 2019 of $100 million.

Each of these initiatives are designed to deliver more growth to our shareholders.

During 2017, we repurchased 26.6 million shares for $1.9 billion at an average price of $72.

Additionally, we paid $416 million in dividends for a total capital returned of $2.3 million -- $2.3 billion in 2017.

Further, we were pleased to announce a 20% increase to our quarterly dividend for 2018, increasing from $0.30 a share to $0.36 a share.

We value returning capital to our shareholders, and we remain committed to returning between $6.5 billion and $7 billion from 2017 to 2019 through both share repurchases and dividends.

After evaluating the impacts of tax reform, revenue recognition and our strategic partnership with Grubhub, we continue to expect that we will deliver at least $3.75 in EPS in 2019.

Now before moving onto our growth drivers, I want to provide you with some details of the investment with Grubhub.

Yum!

is acquiring $200 million in primary common stock, an investment expected to provide Grubhub with additional liquidity to, in part, accelerate expansion of its industry leading U.S. delivery network, drive more orders to Yum!

restaurants and further enhance the ordering and fulfillment experience for diners, restaurants and drivers.

We are excited for this unique partnership, which includes having a seat on the Grubhub Board of Directors and aligns with Yum!'s long-term strategies to make our 3 brands easier for customers to access.

Next to our growth drivers.

We've talked about our 4 key growth capabilities fueling our decisions and results and Greg talked to you about 2 of them.

Now I want to provide you with an update on the remaining 2, Bold Restaurant Development and Unmatched Franchise Operating Capability.

First, Bold Restaurant Development.

During 2017, we opened over 2,600 gross units.

If you think about it, this means across the globe, we opened over 7 Yum!

Brands restaurants every single day or 1 new restaurant approximately every 3 hours.

On the net unit basis during 2017, we opened over 1,400 restaurants.

This is more than 200 additional net-new units than last year and nearly 2,600 total net-new units over the last 2 years combined.

We are very proud of the teams and franchisees that make this happen and commit to continuing this growth.

Next to Unmatched Franchise Operating Capability.

At KFC U.S., the team utilizes a voice of the customer program to measure operational results and better understand guests' needs and feedback.

The metrics are standardized amongst participating competitors and since launched in 2014, KFC U.S. has moved from near the bottom to above average on key metrics, including overall satisfaction, taste, perception of speed, friendliness and value, with each of these metrics improving at least 10 percentage points.

The significant improvement can be attributed to integrated back of house pack lines from the 2015 acceleration agreement with franchisees, focus on value with the $5 Fill Up, $10 Chick 'N Share and $20 Fill Up, and technology improvements to aid operations and labor deployment.

Regarding our ops metrics at Taco Bell, both customer satisfaction and speed scores improved during our highest growing day part, after 5 p.m., with customer satisfaction scores achieving a record high and up 2 percentage points over prior year.

Pizza Hut International continues to leverage technology to deliver superior customer experience and is testing GPS tracking of delivery drivers to enhance the customer experience.

In markets with GPS tracking, customer satisfaction scores are over 10 percentage points higher.

We understand the importance of an exceptional experience at our restaurants and are pleased with these operational improvements.

To summarize, 2017 was the first full year of our transformation journey, and we are very pleased with the progress made towards our goals, while also achieving each components of our guidance for the year.

We remain confident in our future and look forward to updating you throughout 2018, as we become a more focused, more franchised and more efficient company, delivering more growth to our shareholders.

Now the team and I are happy to take your questions.

(Operator Instructions) Your first question comes from the line of David Palmer.

This is Eric Gonzalez on for Dave Palmer.

I just want to touch on development for a second.

I think you mentioned 3% to 4% unit growth is your expectation this year, which is an increase from, I think, 3% in 2017.

Do you feel like you have the building blocks in place to accelerate development across your 3 brands?

And maybe if you could touch on any development commitments that you're excited about?

And then as a follow-up to that, how much development commitments from refranchising could contribute to unit growth this quarter?

And how much do you expect it to contribute in 2018?

Yes, well, obviously, we're excited about the progress we're making on development.

As I mentioned, the 2,600 gross new units is really a record for the last decade or so.

And in the quarter itself, we opened up a net of 732 units compared to the 661 we opened last quarter -- in the last quarter of 2016, so that's a quarterly increase of 71 units.

So you can see we're making progress on the full year numbers and quarterly numbers.

There's momentum behind development.

As far as how the refranchising plays into this, we've talked repeatedly about the fact that we're getting development commitments in the refranchising deals, but we -- up until this last quarter, we hadn't done the majority of our franchising, with close to 900 units being refranchised in the fourth quarter.

Those all came along with a lot of significant development commitments.

So we're starting to see the benefits of the development commitments creeping in to the numbers that we're reporting, but I still think there's a lot more to come from those development commitments and because they're typically made over a multi-year period, so we think this sets us up with momentum on the development front for several years to come.

Your next question comes from the line of John Ivankoe from JP Morgan.

I have a couple of questions, I think, relatively small on the Grubhub partnership, if I may.

And I'll just kind of do them 1, 2, 3, so you can address them all at once.

Firstly, what percentage of KFC and Taco Bell would currently have Grubhub delivery coverage?

In other words, how much of a system could be covered as Grub stands today?

Secondly, do you have a plan for point-of-sale implementation with the Grubhub platform and the point of sales at KFC and Taco Bell?

And then the third point, Artie Starrs on the board is certainly a very -- interesting for a lot of different reasons to be on Grubhub.

Do you think that there might be a longer-term opportunity to either outsource or perhaps augment your current in-house delivery to more of an outsourced model with Grub?

So if you don't mind, just those 3 points on the Grubhub partnership.

Let me take the first couple.

As you know, in the U.S., we've got a couple of tests done with KFC.

So right now, I think by the end of the year, we'll have -- Grubhub will cover probably about 80% of all the restaurants that could deliver.

From a KFC perspective, we're not delivering at the moment.

We're just in a couple of test markets with KFC delivery.

So we have a lot of work to do, obviously, as we complete those tests, expand those tests and start delivering.

I think we've said in the past that we've got close to 1,500 Taco Bells already delivering, but this will expand, obviously, the capability for Taco Bell.

So what we're excited about is for both KFC and Taco Bell, this really is an opportunity to expand the presence that we've got and the number of stores that we can, obviously, bring closer to our customer.

On the POS system, obviously, we're aligning the back-of-house systems.

That work is, obviously, underway.

It will be critical as a part of making it seamless for our customer, whether they order off our apps, website or the Grubhub's apps and website, all that work is ongoing.

And I think on the last question was...

Just Artie joining the board and what the possibilities are for the Pizza Hut brand as a result of that?

And I think that's one where the ongoing conversations about how both Grubhub and Pizza Hut can leverage the partnership, if there are ways to do so.

But right now, this is mostly about the Taco Bell KFC relationship with Grubhub.

And I would also point out that this isn't just about delivery, it's about the ability to order online in Grubhub and pick up products at our restaurant.

And Grubhub and Taco Bell and KFC are working diligently to integrate the POS, as you mentioned, to make the ordering process very quick, to get the orders into the restaurants and to the consumers.

And we have certain coverage ratios and targets in our agreements that when we hit them, we'll really unleash the power of the partnership.

And is there a time line for that technological marriage, if you will?

I think it's just been more difficult for a lot of brands over the past couple of years.

I mean, do you have a feel like you have an edge on that?

Yes, certainly that's a big part of this agreement.

It's having an integrated POS system.

And yes, there are all sorts of internal timelines and schedules to get all of this work done.

And I think we'll reveal details as we go on the journey with Grubhub.

But for today, this is all about the announcement and the intention of having this to be a really unique partnership with the board seat, the investment and what we think is a great partner for us on the technology front.

Your next question comes from the line of Brian Bittner from Oppenheimer & Co.

I had 2 questions and like John, I'm just going to ask both of them at the same time and then listen to your answers.

First, you talk about refranchising dilution being 6% to 7% headwind to operating profits in '18, and this follows a headwind from '17.

And you had said at the beginning of this process that refranchising net of G&A reductions will be neutral in totality.

So is this still you're thinking?

And does that mean that 2019 naturally is a year where all this dilution reverses to accretion?

That's just the first question.

Second question is just a simple one.

On the comp guidance for 2018, how does Taco Bell fit into that comp guidance for overall Yum!, just given we can see it as difficult comparisons and its operating in a pretty intense U.S. environment?

Okay, on the refranchising question, obviously, there's lots of different factors in how refranchising plays out in our P&L.

For example, we've gotten ahead of ourselves in terms of selling Pizza Huts, which are tend to be lower volume stores and have less dilution.

And therefore, we've cut a lot more G&A of Pizza Hut as a proportion of their targeted cuts.

So now we have higher volumes stores to sell at Taco Bell and KFC to finish of the refranchising process in 2018.

And I think the comment that will this flip to being -- is this still a net neutral exercise between the G&A and refranchising?

Absolutely.

We've done all the math on that, and they all balance out.

But we probably got a little bit more benefits from the organic G&A cuts up until this point.

Now those 900 stores we sold in the fourth quarter will, obviously, have an impact on our operating profit in 2018.

So taking all those factors into account, yes, it's still a net neutral math exercise between the refranchising dilution and the G&A savings.

And as you said, 2019, we'll start to see more benefits of it versus the headwinds it's presenting for us in 2018.

On the comp guidance, as you know, yes, we have provided the global comp guidance, but we're not going to break out it by brand.

But as far as Taco Bell sales, I'll let Greg comment.

Yes, I would just say that I think Taco Bell is set up to be competitive in a competitive market.

And as we saw with the Belluminati $1, which we just started the year with and as you have all seen, we have launched nacho fries at a $1.

So obviously, it's a competitive marketplace.

But what I like about the Taco Bell team is they are, obviously, quick to respond to changes in the marketplace.

And I feel good about what we've got on our calendar for 2018.

I just want to go and clarify one earlier comment, there was a question about coverage at Grub -- with Grubhub.

Obviously, there's 2 ways Grubhub will be covering our restaurants, one will be through click and collect in the pick-up process and obviously -- and we expect that we can get very good coverage on that very quickly once we turn all the systems on.

And then there's a different measure for delivery coverage.

We have specific measures by brand.

We'll share more of that over time.

But I think the 80% is more -- that Greg quoted was more of a general number, but I think we'll give you more specifics on that as we get into the relationship with Grubhub.

Your next question comes from the line of Sara Senatore from Bernstein.

So just a couple of questions, please.

First is on the tax benefits and all the moving pieces there.

You retained the total amount of the expected return to shareholders, and I was just trying to understand if there's any extent to which you're reinvesting some of those tax or benefit or if it was sort of contemplated in the initial guidance.

And then I do have a question also just about the Grubhub partnership.

We hear from other companies that franchisees need to see a certain level of incrementality to -- for these partnerships to work.

Is that something that you've worked through from your perspective?

It's just interesting for me to see a company like Yum!

that has so much experience with in-house delivery from Pizza Hut partner in sort of an outsourcing way.

So just trying to understand the economics for you and the franchisees.

Thanks, Sarah.

On the tax savings and returning to shareholders, as you know, we're in the process of transforming Yum!

into a free cash flow machine.

So we don't have any needs on cash that we can -- that we haven't been able to meet with our own cash generated.

So consistent with the transformation, the plan is to return the incremental cash from tax reform to shareholders.

On the Grubhub deal and the franchise economics, we did a thorough process in terms of understanding the economics to franchisees, understanding the different options for us.

And it was a really important part of the -- this process for us to make sure that we ensured our franchisees had good economics.

We leveraged our scale and our marketing clout and what we can bring to our partners, and we think we have a deal.

We're not going to go into the commercial terms, but we think we have a deal set up that our franchisees will absolutely embrace and it will drive incremental profitability and sales for them.

Yes, I think in the test markets, we think we've got a couple of test markets going in the moment, Indianapolis, Louisville, Omaha about to expand, I think, to Orlando, but having -- I was talking to the restaurant general managers in those tests, and the good news is that they do believe they're seeing incremental occasions, and they do believe they're seeing much higher check.

So I think what delivery promises in these very early test markets, the guys and the girls are actually running this on a daily basis are seeing that benefit.

We're encouraged by that, and we're encouraged by expanding those tests.

Your next question comes from the line of Chris O'Cull from Stifel.

I also have a couple of questions.

First, Greg, are you concerned that Grub having a stronger competitive position with your investment allows more non-Yum!

chains to start using delivery, which would add delivery competitors for Pizza Hut?

No, look, I think that certainly the investment that we're making in Grubhub, we believe, allows them to expand their coverage.

And obviously, expanding their coverage gives us more access, as David has pointed out, to both pickup and delivery, which, obviously, benefits us.

We spent a lot of time, obviously, on this partnership.

And I think, as we said, we love the management team, we love their business model, we see it as an opportunity for both companies.

And we're excited about the opportunity for us to use Grubhub to get our brands easier access to our customers.

And obviously, our brands are benefiting -- Pizza Hut included are benefiting from the consumers embracing delivery.

We're seeing the Pizza Hut delivery business climb as a percentage of the Pizza Hut business.

So we're excited about delivery for our Taco Bell and KFC brands, and very confident in the model that we had the Pizza Hut with today being one that can benefit from this change in consumer's taste.

Thank you.

And then David, how many -- I may have missed this, but how many development commitments came with the stores that were refranchised during the fourth quarter?

That's not a number that we're going to start to get into reveal other than to say, it varies by deal.

Some deals where we have lots of development opportunity, obviously, we attach a lot more commitments to it.

Other deals where they're in mature markets and we're fully penetrated, you can imagine we put less in.

And these -- our experience with the development commitments is that you don't get 100% follow-through on every single one of them, so I don't want to start releasing numbers and then having to revise them constantly.

But it's a sizable amount.

These aren't -- this isn't just a few commitments.

These are very significant commitments to building stores, typically over the next 3 to 5 years.

Your next question comes from the line of Jeffrey Bernstein from Barclays.

This is Pratik Patel on for Jeff.

A lot of questions have been asked about corporate tax reform, but if I could just shift to the standpoint of the consumer, wondering if you guys had done any research or analysis in the past in instances where consumers saw a significant increase to disposable income, be it from past tax rate benefits or maybe the lower gas prices we saw a couple of years ago.

Just any color you might have would be helpful.

I mean, we haven't done any specific research around the tax reform but, I think, as you said, it's fair to say that in the past with lower gas prices and people having more disposable income in their pockets, they tend to spend it.

So I think anything that ends up with people having more money in their pockets is a good thing.

Last question, please, operator.

Your last question comes from the line of Jason West from Crédit Suisse.

Yes, trying to see if you guys can hear me okay?

Yes.

Hello?

Yes, Jason.

We can hear.

Hello?

Can you guys hear me?

Yes, yes.

We can hear you, Jason, yes.

Okay, sorry.

Yes, just going back to the guidance, it sounds like, excluding the revenue rec change, it's about a 2% to 3% increase in EBIT embedded, which is a little lower than the guide for '17.

Just want to clarify, I mean, is that primarily because, like you said, that the brands are being refranchised?

Or is there anything else kind of changing in your view in terms of the '18 growth rate in the business?

Well, I can walk you through the guidance again on operating profit.

The refranchising headwinds are about 6 to 7 points.

Revenue recognition is hitting us for 2 to 3 points, so that -- together, those things are 8 to 10 points of headwinds.

We actually get a little bit of a benefit from lapping the Pizza Hut and KFC Transformation Agreements year-over-year, '17 to '18.

So you can see how that 8 to 10 effectively ends up being high single digits with what we've been very consistent on for the transformed Yum!

growth model.

Okay.

So the refranchising headwind would have been a little less maybe in '17 than 6% to 7%, is that fair?

Exactly.

That's fair, exactly.

And Jason, just to clarify, we outlined the headwinds from refranchising dilution in our 2017 guidance, and we've talked about that as in terms of percentage points and that was 1 to 2 points of headwind.

So that should give you the walk.

1 to 2 in '17 versus the 6% to 7% in '18.

Okay, that makes sense.

And then just for our knowledge, can you explain again the tax issue with the intangibles that you mentioned and how that sort of holds back your -- the downside, I guess, on your tax rate?

And is that a cash issue?

Or is that really a noncash type item?

Yes.

It is a cash issue.

And obviously, it's a part of the tax code that's fairly complex and some people have talked about it a little bit.

But essentially, it's designed if for income that you have offshore that is not coming from tangible assets, it's coming from intangible assets.

And it's an offset to the benefits we get from the territorial tax system.

We're obviously digging into all of this, trying to better understand it.

As I mentioned, it will have delayed applicability to us because of a lot of our international entity tax year.

So we'll have more to share of that as we go forward.

All right, thank you very much, everyone, for joining us.

And with that, I'll turn it back over to Greg.

Yes, thanks, Keith.

So thank you all for joining us on the call today, appreciate it.

I think in summary I'd say that Q4 was a solid finish to a strong year.

We've made great progress on our transformation.

I think the key is that the underlying growth remains strong in the business.

We're obviously very excited about our strategic partnership with Grubhub, and that's all to ensure that we are distinct, relevant and easy.

Thanks for joining us everybody.

This concludes today's conference call.

You may now disconnect.