Yum! Brands, Inc. (YUM) Q4 2006 Earnings Report, Transcript and Summary

I would like to welcome everyone to the fourth quarter 2006 earnings conference call. (Operator Instructions) I will now turn the conference over to Mr. Tim Jerzyk, Senior Vice President of Investor Relations and Treasurer. Sir, you may begin your conference. Tim Jerzyk: Good morning, everyone and thanks for joining us this morning. This call is being recorded and will be available for playback. We are broadcasting this conference call via our website, www.yum.com. Please be advised that you if you ask a question, it will be included in both our live conference and any future use of the recording. I would also like to advise that this conference call includes forward-looking statements that reflect management's expectations based on currently available data; however, actual results are subject to future events and uncertainties. The information in this conference call related to projections or other forward-looking statements may be relied on subject to the Safe Harbor statement, which is included in our earnings release last night, and may continue to be used while this call remains in the active portion of the company's website at www.yum.com. On our call today you will hear from David Novak, Chairman and CEO and Rick Carucci, our CFO. I will remind you that we will make remarks using the term like-for-like basis. Basically, what we have done is adjusted the prior year for the extra week last year, or the 53rd week for the full year. Also I wanted to give you an update on our investor days coming up for this year. We'll provide that information with an email update coming up soon. But April 4th we'll have the KFC team available in Louisville; August 15th we'll have the Pizza Hut team available in Dallas; September 5th through the 7th we will be in China again, in Shanghai, to meet with the China team. October 30th, a chance to meet with the Taco Bell team in Irvine, and then also we're in the process of arranging a date sometime in October for a YRI day in Dallas. Then December 12 and 13 we'll be in New York with David Novak and Rick Carucci for an update. That will be your chance to meet with the various members of our management team this year. With that we'll have remarks from both David and Rick. Now I would like to turn the call over to David Novak. David Novak: Okay. Thank you, Tim, and good morning, everybody. As you may have seen from our release last night, we reported solid fourth quarter results with operating profit growth on a like-for-like basis of 7%. This capped off a strong year overall with operating profit growth of 12%. For the full year 2006 each of our business segments, including the U.S., contributed to our like-for-like operating profit growth of 12%. China's growth was 37%, YRI's 11%, and 3% in the U.S. Overall this lead to EPS growth of 8% for the fourth quarter and 14% for the full year 2006. I'm pleased to say that this marks our fifth straight year of double-digit EPS growth and meeting our annual commitment to shareholders for at least 10% EPS growth. We have built our business model around delivering this kind of consistency year after year. We believe we can continue to build on our track record given the strength of our global portfolio and unmatched opportunities for global growth. When you add our tremendous global cash generation and high returns, we are even more confident of continuing to build on our growth track record and growing shareholder value. Importantly, we are focused on getting even better at delivering consistent growth in all our businesses around the world. We believe we have a big advantage with our portfolio of brands and businesses and intend to leverage it even more going forward. We have the ability to take best practices from wherever in the world our teams innovate and create exciting new ideas for our customers, and then spread them to all of our brands and businesses around the globe. Now let's look at each of our three businesses. Importantly for 2007, I am pleased to report that we ended 2006 with very strong momentum in our two high growth businesses, China and YRI. Whether you look at top line or bottom line measures, you have to say these businesses ended the year very well. In Mainland China, fourth quarter system sales growth was 29% and YRI's was 11% in local currency terms respectively. This was one of the best quarters of growth YRI has ever had. Importantly, operating profit growth was equally impressive, 31% for the China division and 15% for Yum! Restaurants International. Again, we believe this bodes well for 2007. Clearly, our challenge in the fourth quarter was our U.S. business. Fourth quarter U.S. blended same-store sales declined by 2% for the company business and was flat for the system overall. Additionally, operating profits declined by 8%. Our primary issue in the fourth quarter was the Taco Bell incident in December, which severely impacted sales and profits. Prior to this incident, Taco Bell sales trends were on track with what we had communicated to you in our third quarter earnings call, down slightly. With the negative impact of the last three weeks of December, we ended the quarter down 5% at Taco Bell. Moving into 2007, we remain committed to delivering our full year target of 2% to 3% U.S. blended same-store sales growth and 5% U.S. operating profit growth. Even though we will definitely be challenged by a weak first quarter, given how we ended 2006 and the tremendously positive lap we had in the first quarter of last year, we expect to see this growth in the second half of 2007. Remember, we were up 19% in the U.S. first quarter last year. This tough overlap, coupled with Taco Bell's ongoing sales recovery, makes it tough sledding in the first quarter, but we expect much stronger growth in the second half. Looking at Taco Bell first, we were actually surprised with how rapidly the brand is recovering from significant sales declines in December. But let me be clear, we are still not all the way back, particularly in our northeast US markets. This is compounded by the fact that at Taco Bell we are currently lapping one of our strongest quarters of same-store sales growth in the last five years, plus 8% first quarter last year. However, what gives us comfort is that the strength of the brand with our core users is as strong as it was before the incident. The challenge is to get light users back in our restaurants. I would like to take a moment and recognize our Taco Bell and Yum! team members who very diligently and rapidly worked to solve the issues for our customers, and I personally want to thank all of those involved for their 24/7 efforts. You know, brands can either go forward or back on how they deal with crisis, and our customers have told us we definitely did a good job of restoring confidence. One thing I want to point out to our shareholders and customers is that we have rapidly put in place farm-level testing of lettuce supply to add another level of testing. We are the first company to do this in our industry, to go to this extra level of testing and increasing the safety of our products. Based on what we know today, we believe we can achieve 1% to 2% same-store sales growth at Taco Bell for the year. Hopefully we'll do better, and I know for certain our Taco Bell team is working hard to do better. We are excited about the calendar and innovation that we have in the year ahead, all supported by a very powerful brand, Taco Bell. The new product pipeline is full with some really good products including the new Taquito a great value at $1.79 that was launched with the Super Bowl ads. If you haven't tried these great portable grilled snacks, it offers great value, tastes great, you should go out and buy one today. There will be more great tasting great value items just like the Taquito coming to Taco Bell over the next several months. Before I wrap up on Taco Bell, I want to also add we just had our annual spring training event for franchise and company operators. We are pleased to report that there was record Taco Bell franchise attendance and the mood was upbeat for 2007. Overall we expect Taco Bell's sales growth to improve substantially during the second quarter and into the second half of 2007. At KFC, we finished the fourth quarter down 1% in same-store sales but up 1% for the year. As we mentioned in our last call, we remain very confident of our brand positioning, our advertising, and are very focused on steady improvement in our operations. Additionally, plans for 2007 remain focused on building bigger sales layers around the four new concepts we have launched in the past two years and new ideas later in 2007. These were the best new ideas we had previously targeted for 2008, and last fall decided to pull those forward into the fourth quarter of 2007. You will continue to see new ideas from KFC to grow the concepts of Variety Bucket, Snacker, Flavor Station, and our famous bowls. In addition, some exciting new products and some ideas imported from Yum! Restaurants International. Finally, we continue to expect to have our conversion of zero trans fat completed by the end of April, and believe this will generate positive news. Our tracking says only 30% of our customers are aware of this switch. We continue to expect that KFC will grow same-store sales by 2% to 3% in 2007 with the growth to occur beginning in the second quarter and strongest in the second half of the year. To update you on Pizza Hut, we continue to feel confident of the turnaround that we believe is in process. For the fourth quarter we were down 1% in same-store sales, we are in the transition phase now and expect to see some solid performance as the year progresses. You may have noticed in January when we ran our commercials focused on America's favorite and offered America's favorite pizza, Pizza Hut's Pan Pizza, for a special prize of $10 with any number of toppings. We did this while reinforcing why Pizza Hut is America's favorite versus the top chain competition and communicating that we offer more to the customer in terms of variety of pizzas, amounts of toppings, and innovation. This is based on all of the consumer research we did last year which reinforced for us that Pizza Hut was truly America's favorite brand. It also told us we needed to work on strengthening our everyday value proposition and improving our delivery operations. The fact that we are America's favorite and the fact that we deliver more than our competition is something that we believe will add additional power to our brand over time. Now time will tell on our turnaround, however, and we continue to have confidence in the short and long-term ideas our team is working on. That's about as far as I would like to go without being much more specific for our competitors. We do expect for the full year that will be up 2% to 3% for the year in same-store sales growth. On the development side in the United States, we continue to expect new unit growth to ramp up at Taco Bell. We added plus 1% growth to the system in 2006, and we should be closer to 2% growth in the Taco Bell US system for 2007. The new Bold Choice Taco Bell restaurant design continues to do very well with our customers. Additionally, we are continuing to make progress with both KFC and Pizza Hut systems, expecting several hundred asset upgrades to be completed for each brand in 2007. Importantly, we expect to continue to generate a lot of cash in the United States again this year. And with continued refranchise activity, our US EBITDA after capital expenditures should grow nicely again in 2007. To summarize, then, for the US businesses, we expect to meet our full-year targets for growth in sales and operating profit, and you should expect this will be driven by second half growth. It will be a story of opposites with a weaker first half, and a strong second half of 2007. Now, let's look at the other parts of Yum!. The great and most differentiated news from our Company lies in our two high growth, high return businesses, China, and Yum! Restaurants International. We are truly a global growth company. We expect another outstanding year in China for 2007, driven by our continued rapid development of multiple brands in Mainland China. As of the latest count, we are now in 402 cities in Mainland China with KFC, over 60 cities with Pizza Hut Casual Dining, and expanding into several new cities with broader development of Pizza Hut Home Service. We will also be expanding East Dawning our Chinese food quick service restaurant concept in Shanghai this year to gain scale and consider a TV test down the road. In terms of development in Mainland China, our brands are unmatched by competition, and we do not expect that picture to change for the foreseeable future. We have a huge advantage position unlike anywhere else in the world, particularly for a market of 1.3 billion people, growing personal incomes and the economy at a low double-digit growth rate. For KFC we expect to add nearly 300 new restaurants in Mainland China, which will continue to widen our lead over the nearest competitor, now more than 1,000 units and developing at a 3:1 pace to our nearest competitor. Our brand measures and returns remain very strong and KFC will continue to strengthen further it's QSR dominance in 2007. Our dominant position remains and continues to build for Pizza Hut Casual Dining. Now with over 250 restaurants and growing rapidly, there really is no large competitor in mainland China to speak of in this category. What has been a pleasant surprise is how well our units in the small Tier-3 cities are doing; a great testament to the strength and reach of the brand. We expect to open about 80 new restaurants in 2007, which would actually make our Pizza Hut Casual Dining concept in Mainland China one of the fastest growing casual dining concepts in the world that we know of in terms of significant scale, unit growth rate and absolute openings. For Pizza Hut Home Service, we will begin expansion in more cities to build scale after the successful test in Shanghai during 2006. We expect to add about 20 new Pizza Hut Home Service units in 2007. As I mentioned, we also continue to develop our East Dawning Chinese fast-food concept, which we have very, very high hopes for. You can see we remain very focused against our number one strategy of building dominant brands in China. We have a huge strategic advantage with our local team in place in Shanghai, our own distribution system which continues to improve by utilizing state of the art approaches, and our development team which is producing results that are unmatched by anyone in the country. We continue to expect that our China division will be our lead growth business with 20% growth in operating profit. Now on to Yum! Restaurants International. As I noted earlier, YRI had another really good year in 2006 with operating profit growth of 11%, driven by 9% growth in system sales. This is one of the best years YRI has ever had. Importantly, the business ended 2006 on a strong note, and enters 2007 with solid momentum. It is noteworthy that this strong year was delivered by Yum! Restaurants International despite a not so strong performance from our largest country in market, the United Kingdom. Let's look at where we are in that market, just briefly. I am happy to report that the KFC UK business since midyear last year has been doing extremely well. Our team did an excellent job of assessing their business, the consumer and then leveraged the power of Yum! by identifying what was new and exciting in other areas of the world for KFC. We quickly imported some exciting ideas from Australia and we have never looked back, with same-store sales growth consistently in the double-digit range, bouncing back from previous declines. Our Pizza Hut United Kingdom business has stabilized and is just beginning the turnaround process. We are optimistic the team is on the right path and expect to see improvement as the year progresses. We acquired the remaining 50% interest in the joint venture late last year and have put a new GM and leadership team in place. Overall our UK business should have a better year in 2007. The most important aspect of our Yum! Restaurants International business and achieving its annual 10% profit growth target is the continued development of the many markets around the world by our 700-plus franchisees where we are dominant players in QSR chicken with KFC and family or casual dining with Pizza Hut. We opened 785 new restaurants last year. That's the seventh consecutive year we have opened at least 700 new units. It's interesting to point out that Yum! Restaurants International is now one of the world's most profitable restaurant companies as a standalone entity, with operating profit of more than $400 million. Importantly, we have plenty of room to grow both KFC and Pizza Hut in the markets where we operate and much less competition from U.S. brands. In our YRI markets around the world we have an infrastructure of over 700 franchise partners that are expanding. Last year, our franchisees opened over 90% of our new restaurants. This really highlights the fact that the franchisees are getting solid unit economics in the new restaurants, both KFC and Pizza Hut. Additionally, our existing franchise business is very healthy with 7% same-store sales growth in the fourth quarter. The key is that the YRI team has done a great job not only in developing great new product pipelines, but they have also done well with best practice sharing within their worldwide business. As great new ideas are generated in various markets in the world, we are quickly adapting to them by their partners in the rest of YRI's markets. It is not too much of a surprise, then, that as we have really begun to get better and better at best practice sharing, that our YRI sales growth for 2006 was so strong. Most important of all, we continue to have a great operational focus that targets to get better and better with the objective of being the number one brand in terms of consumer preference in all our markets. To summarize, we are confident Yum! Restaurants International will have another great year in 2007, with at least 5% growth in system sales, local currency basis, and 10% operating profit growth. The new unit pipeline remains strong and development of our KFC and Pizza Hut brands will continue in many markets of the world. For the longer term, you should expect us to continue to build big businesses in India, Russia and Continental Europe. Now I'll turn it over to Rick Carucci, our Chief Financial Officer, who will take you through the numbers in detail. Rick Carucci: Thank you, David and good morning, everyone. I'm going to review four items today: First, Yum!'s fourth quarter results; Second, Yum!'s full year 2006 results; Third, our 2007 outlook; and Fourth, a brief update of our refranchising program and our full-year cash expectation. Now, let's talk about the fourth quarter, which was a solid quarter for us given the Taco Bell incident. Worldwide operating profit growth was 7% on a like-for-like basis. Quarter 4 EPS was $0.83, up 8% versus last year on a reported basis. Now let's look at Q4 by business segment. Needless to say, our China division had a great quarter with 36% profit growth and 12% same-store sales growth in Mainland China. Restaurant margin was up almost 4 points versus a year ago, and full year margin was over 20%. Importantly, we are generating these kinds of margins while opening about 400 new restaurants for the division. We are very encouraged by this performance. Both the KFC and Pizza Hut Casual Dining brands in Mainland China has strong sales growth in the fourth quarter. KFC growth was aided by a relatively easy lap versus 2005, which was impacted by the avian flu. You may note that our financials for the China division for the quarter’s G&A increased 50%. This larger than normal increase was primarily driven by continued growth in the business and the people needed for the development of our brands, as well as by higher incentive compensation as a result of a great year. One final point before I leave China division results: the rest of the division, excluding mainland China, is not performing at as high of a level as Mainland China. Our KFC Taiwan and Thailand markets together generated mixed results, and that is why you are seeing a higher sales growth rate in Mainland China than the division. This will likely continue in to 2007. To recap, China division fourth quarter operating profit was up 36%, or up 31% excluding the benefit of favorable currency. Yum! Restaurants International or YRI also had a very strong fourth quarter, with 15% operating profit growth on a like-for-like basis. As David mentioned, this operating performance was lead by very strong sales results, which exceeded our expectations. In addition, restaurant margin performance was solid with an increase of six-tenths of a percentage point. Same-store sales at both company and franchise restaurants increased by 7% for the quarter. As seen in last night's release, the acquisition of the remaining 50% interest in our Pizza Hut UK joint venture business had a large and expected impact on YRI results. The primary measures impacted are franchise fees, company sales and operating margins. We now report all the joint venture Pizza Hut restaurants that were previously paying franchise fees as company-owned restaurants. Therefore, franchise fees are reduced and company sales are higher, about 30% higher. With the G&A for the former JV restaurants now included in our P&L, our YRI operating margin was reduced. The impact of the acquisition on these key measures is reflected in the earnings release. To recap, YRI's fourth quarter operating profit was up 11% on a reported basis, or up 15% when you exclude the extra-week benefit last year, and the slightly favorable foreign currency benefit of $2 million. Turning to the US for the fourth quarter, we had slightly negative same-store sales exclusive of the impact from the Taco Bell incident in the last three weeks of the quarter. Overall the Taco Bell incident cost us $20 million in operating profit for the quarter. About half of that amount was from the lost sales, while the remaining portion was for extra consumer research, incremental marketing to get our message out to our customers that we had quickly resolved the issues, and legal and other expenses. Exclusive of this Taco Bell impact, U.S. operating profit for the fourth quarter would have been flat with last year on a like-for-like basis. Restaurant margins were solid given last year's extra week and considering a 2% decline in same-store sales. This was primarily a factor of lower insurance costs reflecting continued favorable loss trends thanks to the good work of our restaurant and safety teams. Lower commodity costs also helped out with over $7 million of favorability primarily from cheese, chicken, and beef. Utilities were also slightly favorable. To wrap up, the U.S. in quarter 4 had a 15% reported decline in operating profit while adjusting it to a like-for-like basis with last year, the decline was 8%. On the financial non-operating side for the fourth quarter, we experienced some positive and negative impacts to EPS. The positive impacts were a significant share buyback which reduced our share count by 5% and a lower tax rate partly due to reversal of reserves related to our regular US audit cycles. The negative impacts were an $8 million increase in interest expense due to higher rates and additional borrowing, higher closure and impairment expenses, up $15 million versus last year; and a refranchising gain of $17 million, which represents a $5 million reduction versus last year's gain. Together these non-operating items increased fourth quarter EPS by $0.01, so they mostly offset each other. Yum!'s full year 2006 EPS was up 14% versus prior year, exceeding our target of at least 10% growth. Importantly, it was a high quality year with operating profit up 9% on a reported basis, and 12% excluding the benefit of an extra week last year. Importantly, all three businesses contributed to this growth. The restaurant margin improvement was very good with a 1.2 percentage point gain worldwide and an increase in all three businesses. Our operating margin improved one full point worldwide and also improved in all three businesses. Top line performance was solid with worldwide system sales growth of 5% on a like-for-like basis. This result was driven by strong YRI and China performances. We opened over 1,500 new restaurants around the world including over 700 by our YRI franchisees and 364 in Mainland China. We opened 137 new Taco Bell restaurants in the US, and net Taco Bell restaurant growth was plus 1%. We reduced US company ownership to 23% of the system from 26% at year end 2005, by refranchising 452 restaurants. For YRI we continue to refine our ownership in some markets and refranchised 168 restaurants. Our Pizza Hut UK acquisition resulted in a temporary increase in YRI company ownership. The net of the YRI refranchising and the shift of the Pizza Hut UK business to company ownership, increased YRI's company ownership of the system to 15% at year end, from 12% last year. Yum! again had strong tax performance with an annual rate of 25.6%, slightly better than last year. The rate was also slightly better for the year than our range provided. The tax rate was positively impacted by adjustments to prior year's reserves and accruals. We have not yet changed our tax guidance for 2007, this range remains at 26% to 28%. We invested $614 million in our businesses for maintenance and growth capital. This level has held steady in the $600 million to $650 million range for six years. With this level of capital investment, we were still able to generate $1.1 billion of free cash available. We returned this all to shareholders, with $1 billion of share buybacks and our regular dividend. Hopefully you will agree that 2006 demonstrated some key themes from Yum!: consistent financial performance, impressive global growth and strong cash generation. With 2006 in the books, let's quickly cover our 2007 outlook. Our growth model remains unchanged from what we presented to you at our investor conference this past December in New York. The model includes 20% operating profit growth from our China division, 10% operating profit growth from YRI, and 5% operating profit growth from our US business. This adds up to 9 to 10% growth in operating profit. At our investor conference this past December we pointed out that the US business was already facing a challenge in the first quarter, lapping a huge first quarter in 2006, with 19% operating profit growth and 4% growth in same-store sales. The new news is we are in the midst of recovery at Taco Bell. The timing of the Taco Bell recovery will impact our overall US business. Therefore, we are confident in a strong second half of the US business after a weak first quarter and a transitional second quarter. We still believe that when taken together, the four quarters will add to the 5% operating profit growth target for the year. Based on the growth model we outlined earlier, we are confident we will again meet our annual commitment for at least 10% EPS growth or at least $3.21 per share. Let's now discuss refranchising and 2007 cash flow expectations. We detailed for you our refranchising plan at our recent New York investor conference, and we summarized this plan again in the release last night. Our target is to reach about 17% ownership of the overall US system by year end 2008. This will be achieved primarily through refranchising activity at Pizza Hut, Long John Silver's and KFC. Consistent with our earn the right to own principles, expect to see very little refranchising at Taco Bell where our margins are very strong. Over next two years you should expect to see continued proceeds from refranchising, increases in US franchise fees, positive impacts to U.S. restaurant margin and operating margin, positive impacts to Yum! ROIC and less demand on capital expenditures from the US business. We believe we made good progress in refranchising in 2006 by refranchising 452 U.S. restaurants. Still, we remain confident of reaching our three-year plan target. I will mention, however, that it is very difficult to accurately predict the timing of when deals will actually be completed and I would not look at one quarter's results to identify a trend. We will do this the right way for our brand, our operators, our franchisees and our customers. On the YRI side for 2007, you should expect to see some pick-up in new activity as the year progresses. We will begin to refranchise our Pizza Hut UK restaurants and bring our effective ownership levels back down to the range it was when the JV was in operation, about 40% company-operated. We expect this will take us through 2009. You can continue to expect us to take a hard look at our company ownership each year, using our earn the right to own principle as a guiding force. In 2007 you should expect another year of a strong balance sheet and substantial levels of free cash available for payout to our shareholders. We expect to return even more cash in 2007, or about $1.3 billion, up from $1.1 billion in 2006. I will remind you that our quarterly dividend will double to $0.30 with our second quarter payment as we announced last December. This will provide a more balanced payout to our shareholders. In 2007, we expect a 3% to 4% reduction in our share count due to share buybacks. So to wrap up, we expect another successful year for our shareholders, generating consistent financial performance, impressive global growth and strong cash flow. Back to you, David. David Novak: Thank you very much, Rick. Just to kind of repeat here a little bit. As you look this year, first our global portfolio will lead us to another year of consistent -- at least 10% -- EPS growth. Second you can expect global growth with 1,500 new store openings around the world. Last but not least, each of our businesses will generate free cash flow, giving us the global capability to return $1.3 billion to our shareholders, allowing us to reduce our share count significantly once again and pay an above-market dividend of approximately a 2% yield. So, our company is very strong. We are excited about 2007, and we welcome any questions that you have.

(Operator Instructions) Your first question comes from Victoria Heart - Merrill Lynch. Victoria Heart - Merrill Lynch : Could you give the thinking behind why the poison pill was removed from the bylaws and why the change to the board member election process? What was the impetus for that? David Novak: I think the board just stepped back and looked at all of our governance principles and just felt that this would better serve our shareholders over time. So I wouldn't read anything in to it other than that. Victoria Heart - Merrill Lynch : Do you also have the traffic mix and change in average check for us on the U.S. brands? Rick Carucci: Taco Bell was negative 5 in transactions, basically flat in check. Pizza Hut was down 2 in transactions, and up 1 and a fraction in check. KFC was down 1 in transactions, slight in check. Victoria Heart - Merrill Lynch : The breakout in revenue contribution from the brands? Rick Carucci: If you give us a call after the call this morning, we'll go through that with you. Victoria Heart - Merrill Lynch : My last question is on the multi-branding, why have we seen a deceleration in growth? I believe you had a 550 target for the year, can you give some color on why the unit growth fell behind expectations? David Novak: First of all, let me talk about where we did have the multi-brand growth because the mix was probably different than it was several years ago. The multi-branding growth that we had, the primary driver is Pizza Hut and Wing Streets, which is different than several years ago. Then the other driver, which is probably the most important combination for us on a go-forward basis, is Taco Bell and KFC. The Taco Bell/KFC combination is important for us because we think it can get us into new trade zones that we're not currently in, in terms of rural areas, which we have reconcentrated in 2006, and going forward both rural areas and in large metro expensive areas. The reduction that you have seen versus several years ago would have been in the Long John Silver, A&W standalone combinations. We had hoped that would be a big driver of new unit development. We have had mixed success with those, so we slowed those down in terms of new unit development. What will happen as well on a go-forward basis, is that KFC has a contractual commitment, as we mentioned earlier, to upgrade their system by June 2008. We think that will add some more multi-brand combinations as franchisees go to update their restaurants, some of them will want to do either LGS/ KFC combinations or KFC/A&W combinations. Rick Carucci: The only thing I would just add to this just strategically is when you look at what is going on in the United States in terms of rising real estate costs and just the difficulty it is to open new units, when we look at the quick-service restaurant category, we have come to the conclusion we really need to focus on new unit development with Taco Bell, which is obviously a growing brand and improving unit economics every year. But also Taco Bell and KFC because together when you bring those two brands you have got national scale in terms of advertising that gets us higher volumes and allows us to really go in with the kind of sales levels that we think we can penetrate new markets with. The other big multi-branding strategy is to really change the game for Pizza Hut with the Wing Street addition, which we're having very, very good success with our restaurant-based delivery unit. So, our franchisees are getting more and more excited about that and we're looking how we can scale up there. When we look at Long John Silver and A&W, our franchisees have had good success with both of those brands, but when we think about the real challenge there, the challenge is to build the strength of those brands first before we multi-brand a lot further, and we think we have a lot of work to do in that area as we go forward. So the big strategy we have in quick-service restaurants is to leverage our two power brands which gives us the highest sales, which is KFC and Taco Bell; and in the casual dining delivery arena for Pizza Hut, we think Wing Street gives us a differentiating edge. We really decided to hone in on those two and continue to develop the A&W and Long John Silver concept to strengthen those brands. Victoria Heart - Merrill Lynch : Is there a 2007 target for multi-branding? Rick Carucci: Victoria, I think it's in the several hundred range. Victoria Heart - Merrill Lynch : Is that 400 or 300? Rick Carucci: I don't have the details with me. You can call us later, and we can give you the details. Victoria Heart - Merrill Lynch : Great. Thank you.

Your next question comes from Larry Miller - RBC Capital. Larry Miller - RBC Capital: I was wondering, you have done so well in some other markets, as you see with Earn the Right to Own, reducing our equity, have you given consideration to maybe being more aggressively refranchising the U.S. business so that it has the same kind of cash flows that you get in the franchise-only international market. I know Taco Bell is doing well, but maybe even going to zero with Taco Bell? How did you come up with 17%? If you can just put some color around that idea. Thank you. David Novak: First of all our strategy is Earn the Right to Own. So any restaurant that we own we want to earn well above the cost of capital. So the restaurants that we're running today by and large really meet that criteria. The second thing is that we believe that we need to own at a minimum at least 10% of our system just to lead our system in the sense of being able to have control of our own destiny in terms of test markets for new products so that we can lead the way. The last thing you want to do is a franchiser is have to beg for the right to test things. We think with at least 10% of the system we'll have enough ownership be able to have the right number of test markets, and certainly we can run 10% of our restaurants at a minimum with the kind of returns that are well above the cost of capital. Right now we're at 17%. Do we look at U.S. franchising? The answer is absolutely yes, we look at it every quarter, every year strategically, just as we do with our international. That's the philosophy we have all around the world. If we're going to run stores, we have to get great returns. Larry Miller - RBC Capital: Thank you.

Your next question comes from John Glass - CIBC. John Glass - CIBC Markets: I was hoping you could maybe put a little more framework around Taco Bell sales trends, maybe where they bottomed in December, and where are they now, or at least what kind of magnitude of improvement? And then in your 1% to 2% comp assumption for the year, are you assuming they remain negative in the first half? Maybe some help there too, please. Rick Carucci: On the Taco Bell sales we disclosed everything that we intend to disclose. We gave you the point at which we had the lowest or the biggest decline which was the third week in December, and the recovery has begun since then. Then we also gave you a pretty good outlook on the year almost by quarter. The next data point will that 5% decline in sales for the fourth quarter, and the next data point will be first quarter. John Glass - CIBC Markets: If I could ask a question on the margins on China. I knew profits grew strong but you were lapping a very easy comparison from a margin perspective and you saw some pressure on both the payroll and occupancy lines. Are these signs of inflation in China or are they simply some one-time or some growth-related pressures? Could you define what our expectations for where restaurant margin ought to be, given the fourth quarter, going forward? Rick Carucci: First of all we are obviously very pleased with our China performance for the fourth quarter and for the year. If you look at the China division, as we mentioned earlier, the full-year margin was over 20% and that's for the division which includes Thailand and Taiwan, which had slightly lower margins, so we're very happy with where China margins are right now. In terms of inflation, if you see how our model has worked in China from a margin standpoint, what has occurred is we have had reductions in cost of sales and increases in cost of labor, which pretty much offset each other over time. We probably expect that trend to continue. At some point we're probably not going to get as high of reduction on cost of goods as we have gotten over the past. We have also taken very little pricing in China. So, when we have taken some modest pricing, we haven't faced an issue with the customer. So the mix may change a little bit as we go forward, but the general trends we have had will continue. David Novak: Just to do a little bit of a cock-a-doodle-doo here for our China team. We ended the year with record margins, 20.4%. So we're very pleased. One of the thing that's I'm really proud of in terms of our China development is we're trying to stay ahead of where the puck is going, so we are making investments strategically in people, and the fact that we have always stayed ahead on people capability, I think is one of the reasons why we're building such a power brand. Remember the cash investment for our new units is about $450,000 on sales of $1 million, and we literally have a one-and-a-half year cash-on-cash return on this business in terms of our new units. So anyway you look at China, you are looking at an economic power house, and that's because our consumer brands are so well received there, and we have been investing in the people capability to make sure that we operate well. That's going to be our strategy as we go forward. Rick Carucci: Just to add one more point, John, because you can see we're very proud of our China margins, depending on what you're looking at, if you look at Q4 for China division two years ago, if you remember we did change the timing of the reporting for China, we moved it forward to concurrent with the U.S. As a result that had an impact on the fourth quarter by moving the month of August from Q4 to Q3 which had a profit impact of shifting margin favorability and profit to Q3 from Q4. So if you are looking back at that that's one of the reasons. The other thing is, is you got to keep in mind that in terms of labor inflation there was a modest amount, just like about four-tenths of a point, but we also continued to have favorability in food cost, with lower beverage cost and just favorable efficiencies versus last year. Also, you have to keep in mind that we opened a lot of restaurants in the fourth quarter. We're opening up almost 400 a year, and when you open up new restaurants, you also have start-up costs, and that's in that margin. John Glass - CIBC Markets: That's very helpful. Thank you.

Your next question comes from Steve Kron - Goldman Sachs. Steve Kron - Goldman Sachs: First, on the acquired units, Pizza Hut units from Whitbread. I guess you guys set a timetable for refranchising those stores by year end '09. My question is since this business in the UK is in a bit of a recovery mode here, does this timetable reflect difficulties in attracting franchisee's or is this kind of the normal pacing that you would expect? Tim Jerzyk: Our experience has been that refranchising is something you want to not go too fast, not go too slow. We feel we'll have very strong demand for our franchise units. We have a history of franchising delivery units in the U.K., and we have always been able to find strong demand for those. Over time our dine-in businesses have been very strong performing businesses, so we expect to have a lot of interest in that, and we already have interest; a lot of calls, a lot of people interested in it. So we're quite confident we'll be able to get the interest, and what we want to do is make sure we have the right franchisees, the right pacing and sequencing, and also do it be the right geographical areas so that we can be efficient with what's left on the company side as well efficiency for franchisees. But three years to me, Steve, is a good timetable. If you just look at the math, we're about 80%; getting to 40% over three years is a pretty good clip. David Novak: Strategically we're very excited about the Pizza Hut business in the U.K.. I just had a conversation with Alistair Murdoch who is our new general manager there regarding the franchising. One of the great things when you have the kind of cash that we generated at YUM!, we don't need to rush to bring in the money, and I encouraged him to take a look all of the franchisees who are looking to come in to our business and make sure we get the right ones, and not to rush on this. So I think the three-year timeframe is something we can definitely do the right thing for the business strategically on. Steve Kron - Goldman Sachs: My second question is on the balance sheet. Rick, you have talked about this in the past, but I just wanted to get updated thought on leverage. Certainly you guys have increased a bit of leverage here in '06. Interest expense has gone up. As we move forward and we think about '07 and you continue to drive a higher franchise mix in units, what should our expectations be on the kind of debt front? Rick Carucci: Well, I'll answer first and transfer it to our new Treasurer. Some of you I'm sure have seen that Tim Jerzyk in addition to being head of Investor Relations is now also our Treasurer. I think our philosophy, to your point, Steve, is the same. Is that, we have worked very hard to pay our debt down. This is a history lesson for some of the other people; from $4.7 billion, we got it down to $1.7 billion, and this year we're at the $2.3 billion level. So we're starting to increase our debt and our current philosophy is to increase the debt consist with our ability to continue to raise cash. So we'll probably continue to see modest increases in our debt level, but now, like I said, I'll let you hear from our Treasurer. Tim Jerzyk: It's hard to add to that I have always believed our strategies are very good. I think what we're doing is very good in terms of our balance sheet and making sure we have a strong balance sheet. Certainly there's many things going on in the marketplace, and we're always going to be looking at what is out there and learn what we can do best and take advantage of that, but we like what we're doing in terms of returning more cash to our shareholders than our income level each year and taking up our debt steadily each year. Steve Kron - Goldman Sachs: Thanks very much.

Your next question comes from Jeff Omohundro - Wachovia. Jeff Omohundro - Wachovia: Could we get a little more detail on the expansion plans for the China home-service business? Just wondering if you could address the pace of development of that concept? How is this transitioning from test to a full roll out? Thank you. Rick Carucci: Well, in terms of what we have done so far with Pizza Hut home services, we mostly we haven't gone to a lot of cities yet, and what we tried to do is more build out cities, which given delivery trade zones, makes some sense. It's hard to have one delivery unit. So, you saw the numbers in the release, we now have 37 Pizza Hut home-service units. I think the majority of those are in Shanghai. The key is as we go to other cities, we're starting to go there now to try to replicate that model. What you'll see us do is to go to city by city and not go to a lot of cities yet. We'll probably go to a handful of cities between five and ten cities over the next year or so and try to build those out before we go down to the next year. Jeff Omohundro - Wachovia: Thanks.

Your next question comes from Joe Buckley - Bear Stearns. Joe Buckley - Bear Stearns : Could you give us a little more color on the China division and how KFC Taiwan and Thailand play in to it? Are those company-operated markets, franchise markets? I know in the past you have given us relative size from time to time. David Novak: I'll just try to put some dimension, Joe, and tell me if this answers it. First of all, in terms of number of units, Thailand and Taiwan together have about 500 units, a little bit more than that. It's KFC Taiwan, and Thailand for both brands. KFC Taiwan is mostly a company-owned business. We have some franchise business, but predominantly company. The bigger business is Thailand, who probably has about three-quarters of those 500 units, and they are about two-thirds company, and one-third franchise. Together if you look at a profit standpoint, those two markets for 2006 probably contributed about 10% to the China division profit level. Joe Buckley - Bear Stearns : A question on the US operating profits, if I look back to the December presentation, you pretty much hit the number in terms of full-year US operating profits, but that was with, as you described, a $20 million hit at Taco Bell. What were the other moving parts there that made that up? Rick Carucci: Well, I think what we said in our last release is we would go between 3% and 5% operating profit for the US for the full year, so we were near the bottom of that range. What will help is some of the margin things that I talked about in my speech, is we ended up doing well on some of our insurance costs. We did probably a little better than what we expected on commodities, and utilities were slightly favorable versus earlier in the year when the utilities were slightly working against us. So those were some of the key drivers, we did probably a little bit better on margin than what we thought and obviously we weren't expecting a sales decline. Joe Buckley - Bear Stearns : Just one more question, back to China. I think you mentioned Mainland China openings of 364 units. For the division did you make the 400 number that you were targeting? Rick Carucci: I think the final number was 396, Joe, so just about 400. Joe Buckley - Bear Stearns : Thank you.

Your next question comes from Glen Petraglia - Citigroup. Glen Petraglia - Citigroup: I was hoping maybe you can help me here. The comment was made that you had a hard time attracting light users to come back to Taco Bell. I'm curious if you can give us a break down of Taco Bell sales between core users and light users, and then the implication if Taco Bell is 1% to 2% for the year and Pizza Hut and KFC are 2% to 3% same-store sales for the year, the implication is you are at the bottom end of that full-year 2% to 3% range, if I'm reading that correctly. David Novak: Well, let me take the second part. I'm not sure if we can give you much exact information on the first part of your question, Glen. Regarding the US sales level, again, we're in February, trying to look at what we were. But yes, basically, just to reiterate, yes, we said 2 to 3 on KFC and Pizza Hut and 1 to 2 on Taco Bell so if you add that up that's over 2. So, that's where we are today. But, again, like I said we're in February. So when we have more information I'll share that. Tim Jerzyk: I don't have the exact numbers, but the Taco Bell user base is driven primarily from the core users, not the light users. But I think the challenge is to get those light users back in. David Novak: Losing those takes a little bit of the fun out of your business, okay? But the great news is that all of our consumer tracking says that we are on track, and we think we'll weather this and move forward. And like I said earlier, we're pleasantly surprised by the recovery. Glen Petraglia - Citigroup: One quick follow-up, I believe in the initial 2007 guidance, given at the time of the analyst's day, interest expense for the full year was guided to be up about $10 million versus 2006. Rick, does that still hold or Tim as Treasurer, does that still hold given that you are talking about perhaps modestly increasing the debt as we move through the year? Tim Jerzyk: Yes, we're still good with that guidance, $10 million is a good number for this year. Glen Petraglia - Citigroup: Thanks.

Your next question comes from Jeffrey Bernstein - Lehman Brothers. Jeffrey Bernstein - Lehman Brothers: First on the U.S. costs, specifically food and occupancy. On the food we have seen pretty significant favorability over the last two years in the US, I think some modest pressure in '07. Wondering if you can give us an update on where you stand in terms of the key commodity cost line items and the impact of recent pressure on wheat? Separately, US occupancy cost pressures have been significant through all of '06. Just wondering what the driver of the pressures are and what your outlook is for that for '07 as well. David Novak: Let me first start on the commodities side. We have really no change in overall outlook on the commodities. We guided in December 2% to 3% commodity cost increase versus 2006 with chicken about 1%, which we still see that holding as best we can tell. So we really don't have a change in to the commodity guidance at this point. Regarding labor, what we assumed for the year was that we would have about a 3% increase in labor. First of all there were some state minimum wage increases already assumed in that number, and we were assuming if federal minimum wage did occur would occur in the middle of the year with a fairly modest impact to us for '07. Tim Jerzyk: Jeff, I think you asked about wheat that was already included in the forecast and wherever it impacts us in Pizza Hut and Taco Bell, On the occupancy side, you asked about that in the U.S. on the upside, what are the factors, there's really not one particular factor. In fact, for the fourth quarter, if you look at it, there was a lot of different things going up a little bit for the fourth quarter in particular. For example, there was some modest inflation in property taxes, rent, advertising was a little bit higher, repair and maintenance was a little bit higher, and what we call semi-variables which was day-to-day; other store expenses was up modestly. So it was a lot of little things up a little bit, nothing in particular that you would say is a trend. In fact utilities were actually a little bit favorable. Rick Carucci: Just to build on that the biggest impact on that line about a half of point was marketing, and that relates to what we mentioned earlier on the Taco Bell side, trying to get our message out as quickly as we could given our December situation. Jeffrey Bernstein - Lehman Brothers: Just following on your comments, a little pressure on food costs and labor going forward. Just wondering if you could talk about the current environment pricing? Can you take some more menu pricing being more aggressive without negatively impacting traffic> With those type of cost pressures in terms of G&A, how should we think of that in terms of dollar growth or as a percentage of revenues, especially if you actively engage in refranchising? Thanks. David Novak: It's something we definitely continue to look at, so there's several things we're looking at. One is probably just good business practice, but we probably got more focus on it in the last year, just looking at what the inflation environment could be, because we put a lot more pressure on ourselves in terms of productivity. We're looking at productivity and cost design and we're even looking at what types of products do we try to get innovation around and then also looking at true cost efficiency. We'll continue to put a lot of pressure on ourselves on the productivity side. Regarding pricing, we took modest price increases essentially at the beginning the year, we'll continue to look at that and to see if we should look at small increases in the middle of the year. We obviously are looking at what the competition is doing. We seem to see a little bit more pricing occurring this year than in previous years, so we'll continue to keep our eye on that.

Your next question comes from Andy Barish with Banc of America Securities. Andy Barish - Banc of America Securities: On the YRI 10% profit growth for this year, anything implicit or unusual in the big equity markets? UK obviously excluding the Whitbread; Mexico or Korea, any improvements or deterioration in any of those markets assumed? David Novak: Not really. We're pretty much looking for trends. Obviously we want to improvement markets that didn't perform as well, so, the UK had a weak year in 2006, especially in the first half of the year. Korea had a weak 2006, so clearly, we want to try to improvement performance in those areas. Mexico had a strong 2006 and ended the year with strong momentum, so we're not expecting huge shifts in that business other than the recovery in the UK that we previously talked about.

Your next question is a follow-up from Larry Miller - RBC Capital. Larry Miller - RBC Capital: My question was answered. Congratulations, Tim.

Your next question comes from Steve Reese - JP Morgan.

I just wanted to ask about the overall pizza segment in the US. It seems like the overall category was pretty weak last year and we saw a lot of value promotions, as well as some more differentiated promotions, so I just wanted to get an update from you what your thinking of the strategy is in 2007? David Novak: I think the category has been soft. Our strategy is to continue to lead with pizza innovation, develop a stronger everyday value marketing approach, which we're working very aggressively on and then continue to improve our operations just in terms of delivering the basics in terms of speed of service, particularly on Friday and Saturday nights, where we think we're leaving a lot of volume on the table, just because we're not serving as many customers that are actually trying to access Pizza Hut. I think finally is to change the game in the economic model through the leveraging of the Wing Street brand, which we think can bring some vitality to the business. Those are the four things that we're working on, and, I think, that we're very optimistic about having a much better year at Pizza Hut this year.

As you look back over last year, do you think you could have had more value or do you think the value needs to play a bigger role this year? David Novak: I think last year we wish we would have had more compelling innovation. I think that would have had a bigger impact on our business, than just out and out value. I think that how you go against value, it has to be done from both an innovation standpoint, not just taking your prices down. So that's what we're go working on. I can't go through all of the details on this, I think taking your pricing down, and not getting a whole lot of credit for it is like a formula for disaster in the category, and it seems like when any of us do it, it doesn't do a whole hell of a lot of good for any one of us. We try to be a lot smarter on how we discount than just giving our pizzas away.

Thanks.

Your next question comes from David Palmer - UBS. David Palmer - UBS: Could you give any early feedback on Taco Bell breakfast tests, and the potential timetable if the tests go well? I guess you are testing it in southern California, for instance, could that be an early '08 type roll out? David Novak: Where we're at right now is we have basically done our in-store operations test. We're now moving in to a few markets. The only early feedback I can give you is we know that the consumers love our products, and how we stage this will depend on the learnings that we get in our test market. I think we really think that Taco Bell can change the game with breakfast in the category, because we certainly have a think outside the bun breakfast. David Palmer - UBS: I have two questions on same-store sales disclosure. With regard to US same-store sales growth by brand is the drill going forward going to be that we're going to find out during the conference call, and you are not going to disclose that in the release? If so, why not just disclose it in the release? Tim Jerzyk: That's a valid point, David. I think the way we viewed this quarter was same-store sales for the blended, which we think is the appropriate measure for our business, given that we have three brands, and that we have the advantage of the portfolio, given that we were down 2% in the fourth quarter, we identified to you the driving force of that, which was Taco Bell being down 5% and the other two brands were, if you excluded that were basically identical in terms of the results. That's how we thought a about it. We'll certainly take your thoughts into consideration going forward. David Novak: How we look at all of those is, what makes our Company unique? You know, what really are our key measures? When you look at it, we're very different than almost any restaurant company in the world. We have a global portfolio; blended sales are much more important us to than it would be to Jack-in-the-Box. We have got China. That's why we separated that business out. Nobody else has China. So now we have a separate division, which is primarily made up of Mainland China, so that really allows us to report on something that really makes us uniquely different. Obviously YRI is a business that is unlike any other in the world as well. So when you look at our business, it's China, the new unit growth in China, the 20% operating profit growth. It's YRI, it's the new unit growth there, we're doing over 700 restaurants a year, 10% operating profit growth. When you look at the U.S., you are looking at blended same-store sales measure, because that's what really differentiates us as a company and you are going to be looking at 5% operating profit growth. So those are our targets, that's what we try to report, and that's what we want to get people focused on. David Palmer - UBS: I guess, just harping on the topic, China same-store sales growth might be something that you would want to perhaps phase in given the rising importance there. Is that something you might consider starting to report in the near future? Tim Jerzyk: China same-store sales growth is in the earnings release, and it has been in there every quarter and it's our plan to include that going ahead for Mainland China. David Novak: My personal opinion is what you should really be looking at is system sales growth, because how many people have a unit base like we have that are opening up 400 restaurants a year? So I think the real measure there is our profit growth, our unit growth, and system sales growth. We're trying to focus and get investors to hone in on what really makes us unique, and what really makes our company different than the other companies. I have always said as you know, for the last five years we're not your ordinary restaurant company, so we're not going to report ourselves like the ordinary restaurant company.

There are no further questions at this time. Do you have any closing remarks? David Novak: Yes, I do. First of all, I want to thank everybody for being on the call. I just want to close by saying we're optimistic about the year. One of the things we're very proud of is our track record, and we think that our global portfolio will allow us to continue our record of consistency and we expect to achieve at least 10% earnings per share growth. We're also very proud of the fact that we develop a lot of restaurants around the world, so you can expect more global growth with 1,500 new stores opening around the world. The other thing that makes us very unique that I did not mention is just the fact that we do generate a lot of free cash flow, and each one of our businesses generate free cash flow when you look at the US, China, Yum! Restaurants International, that gives us the global capability to return $1.3 billion to our shareholders. Once again, we're going to be reducing our share count significantly, and remember, in December, we doubled our dividend, so now we'll be able to pay an above-market dividend or approximately a 2% yield. So, this company is very excited about this year and our future, and we are very committed to continuing to drive home the kind of consistency that I think we'll get rewarded for in the market. Thank you very much and I look forward to the next call.