Thanks, operator. Good morning everyone, and thank you for joining us. On our call today are David Novak, chairman and CEO; Rick Carucci, president; and Pat Grismer, our CFO. Following remarks from David and Pat, we will take your questions. Before we get started, I would like to remind you that this conference call includes forward-looking statements. Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to the Investors section of the Yum! Brands’ website, www.yum.com, to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call. We are broadcasting this call via our website. This call is also being recorded and will be available for playback. Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording. Finally, we would like you to be aware of a couple of upcoming Yum! investor events. First, our 2th New York investor and analyst comes from will be Wednesday, December 4, in Midtown Manhattan. Second, our 2013 fourth quarter earnings release will be Monday, February 3. With that, I would like to now turn the call over to Mr. David Novak.

All right, Steve, thank you very much and good morning everyone. There are three key messages I want you to take away from our call this morning. Number one, we are very disappointed with our overall third quarter results, and the fact we now believe China same-store sales will unlikely be positive for the fourth quarter. Frankly, these results are well below the high expectations we have for our business. Number two, there were some bright spots in the quarter, and we’re pleased with Pizza Hut Casual Dining in China, overall China restaurant margin, international development momentum, and Taco Bell. And number three, despite current challenges, we remain as confident as ever in our ability to deliver strong, sustainable growth in the years to come. For the third quarter, earnings per share, excluding special items, declined 15% versus prior year. This included a 10 point adverse impact from a higher tax rate, driven by an increase in our tax reserves. Additionally, based on KFC China sales for September, which is part of the China division’s fourth quarter, and a less than expected sales lift from the launch of our new beef burger, it’s now unlikely that China division’s same-store sales will be positive for Q4, although we do expect to show improvement. Obviously, we are falling short of our Q4 guidance of positive same-store sales growth. We’re now estimating a high single to low double digit percentage decline in full year EPS, excluding special items. We also recorded a significant noncash special item charge in the third quarter for the writedown of Little Sheep intangibles. While we’re deeply disappointed with our Little Sheep results so far, the team is taking steps to strengthen the concept and improve operations and we remain confident that we’ll create a significant value over the…

Thank you, David. As David said, 2013 is a very challenging year for Yum! Brands, and our third quarter results were certainly below expectations. I’ll cover the details in a couple of minutes, but I first want to echo David’s view that we don’t consider these results indicative of Yum!’s ongoing performance or future growth potential. We’re confident that our global brands, competitive position, and investment opportunities remain compelling, and we’ll deliver double digit EPS growth for many years to come. One of the first things I want to do is to explain the timing of our revised guidance for fourth quarter same-store sales growth in China. We had very high expectations for the month of September, with an exciting new product introduction at KFC, the beef burger, and with a much easier comparison from last year. The fact is that we expected a much better result and in hindsight, we were wrong. When you step back and look at our business this year, there’s no doubt that the unprecedented decline in EPS before special items has been led by the temporary issues at KFC China, with the balance of our portfolio generally meeting full year plan. Remember, Pizza Hut has continued to deliver outstanding results in China, and our other major divisions, Yum! Restaurants International in the U.S., are generally on track to achieve their full year ongoing growth targets, generating significant cash flow. Importantly, we’ve been able to sustain high rates of investment and have even been able to raise our dividend despite the challenges in China. It takes a company of considerable strength and confidence to do that. Today, I’ll provide some additional perspective on our third quarter results, our full year outlook, and Yum! shareholder cash payouts. I’ll then share some initial thoughts on 2014. For…

[Operator instructions.] And your first question comes from John Glass with Morgan Stanley.

Pat, just on your commentary on China and the recovery, what’s the underlying comp assumption that would get you there? In other words, I can see a couple of paths. One, you could say margins are going to improve dramatically, and we expect just moderate comp recovery and then the upside is upside. Or you could say we’re banking on at least double digit comp improvements to get there. So how do you frame how you think you’re going to get to that 40% profit improvement in China, comps versus margin?

At this stage of the process, we wouldn’t provide a roadmap like that as to how we expect to realize growth. The fact is that there are many different ways we can get to that number. In the current context, given where we’re at with our sales recovery, I think it’s fair to say that we’re very balanced in our sales expectations for next year and we’re focusing on continuing to realize the productivity improvements that have given us the nice lift to margins this year.

Can you describe the sales productivity in a little bit more detail in China? It’s been phenomenal. We look at it on a per-store basis. You’re looking at it on transactions per labor hour. But are there any one-time elements to it in this quarter that may not recur? And maybe when you think about transactions coming back, have you permanently reduced the labor hours per transaction, or transactions per labor hour, so you don’t have to add that incremental labor back?

Well, as you can imagine, there are a number of things that we’re doing to drive restaurant level productivity. The fact is that the team is learning to operate very efficiently under unprecedented conditions. Bear in mind this is the third consecutive quarter of same-store sales decline, and when you think about that, we’re very pleased with the team’s focus to drive profitability. One of the ways that they’ve been able to be more efficient is that they’ve improved the way that they’ve forecasted sales in their labor requirements at the store level. They’ve become increasingly sophisticated in this area, and they’re developing new tools and techniques to deliver optimal service levels with relatively low labor. So we remain confident they’re going to be able to sustain these results into next year. And on top of that, they’re continuing to work through new ways of [inaudible] productivity. The other thing I want to point out is that clearly we’re very pleased with our performance, with China restaurant margin, in the third quarter. But I do want to set the right expectations for Q4, because there are some things that are a bit different in Q4 compared to Q3. The first is that we’re going to lose 1 point of margin benefit from rollover pricing when you compare Q4 to Q3. The other is that [AMP] [ph] will be a full point higher. That’s our advertising spending. A full point higher versus last year, whereas in Q3 we’re relatively flat versus prior year. And we do expect there to be some moderate amount of food inflation, whereas commodities were flat in the third quarter. So you add up these three things, and that’s about 3 points of margin headwind in the fourth quarter that we didn’t have in Q3. However, we do expect that same-store sales and same-store transactions will be better in Q4 than in Q3, and that will help to mitigate those impacts. So when we look at the full year for China margin, we’re 16% year to date through Q3. Given that we’re moving into a lower seasonality period, it’s reasonable to expect that we’ll be in the mid-teens on a full year basis. I think it is important just to understand what the near term outlook is for China margins. But I also want to reinforce that we couldn’t be happier with the effort of the China team to drive productivity at the store level, and we expect those efforts will sustain into 2014.

Just one broad question, which is how convinced are you that you know the answer to why sales declines in China have been related specifically to the incidents you talked about? November last year you saw some sales declines. It’s never really been fully addressed, at least in my mind, that those are occurring prior to this. And as we’ve gotten further away from these incidents, things haven’t gotten better. They’ve gotten stable, maybe worse, on a month over month basis. So what evidence do you have to offer that says it’s not cannibalization, it wasn’t pricing, it’s not competition, and that you’re convinced that it’s just the supplier and avian flu issue that just lingers?

I think the biggest evidence we have, John, is just the fact that our overall trust and reliability and safety measures are below what they were the previous year. And we think we really need to get those back at least level, and build from that point.

Your next question comes from David Tarantino with Robert W. Baird.

Just a follow up on that last question, David. I think there were some metrics shared at the China investor day that showed that the brand reliability scores had improved very dramatically from earlier in the year and are almost at levels that you saw in 2012. Yet the sales recovery seems to be lagging, the recovery in the brand scores. So just wondering how you reconcile those, and do you normally see the brand reliability scores as more of a leading indicator, or a coincident indicator when you’re looking at your sales trends?

You know, we really haven’t looked at it as reliability scores or trust as leading indicators. I think what we always look at is what perceptions [inaudible] do we have to change, build, or reinforce to grow the business? And what we see is that the biggest issues we have from a perception standpoint lie in the area of the safety, reliability, trust. And so I think that’s what we see as the biggest problem we have. The trend is moving in the right direction, we’re just not all the way back, and I think what we have to do is get all the way back. And also, I think what we think we need is we need more innovation. We need more innovation. We’ve done I think a very good job on the value front, but frankly we haven’t really presented the concept as innovatively as I think we’re going to need to to really take the business to the next level. And Sam Su and the team are working very hard on that, and I’m sure we’ll have something that we can be much more excited about next year.

I know you had talked about, in the past, kind of time will heal, the recovery process I guess. And I’m wondering if your thinking has changed on that at all, and whether you think you might need to invest some of the productivity savings you have, maybe in a more aggressive marketing approach to get the sales moving.

I think we have plenty of marketing to spend. And we have a leadership position, which gives us leadership advertising budget. And so I don’t think that’s a real issue for us as we go forward. I always tell our people it depends on what we’re talking about, okay? And I think what we have to do now is we’ve got this “I Commit” campaign to really drive home the reliability and trust issues. But as we move into 2014 next year, we think we’ve got a tremendous brand that we can glorify, magnify the role that we have in people’s lives, take the offense by being extremely positive, to bring forward the kind of news that we think will excite our customers more. And that’s what the team’s been working on. And to me, it’s taken us longer than what we’d hoped, but we always said that we would need time, and I think we still need the gift of time. But I think historically, if you look back at our brand, or at any other powerful brand, they come back. And we’re going to come back.

As an example of that, if you go back a couple of years, and look at Taco Bell, we had issues there a while back that were really fake consumer issues on a bogus lawsuit. And some news that would have normally propelled the brand forward, right after that, really didn’t do it. And some time has to pass. You’ve got a little bit of momentum, and then when we really hit new products like Cantina Bell and Doritos Locos Tacos is when the brand really took off. And now we’ve been able to sustain that performance as David said for now seven quarters. So I think we need something similar to that progression in China.

Your next question comes from John Ivankoe with JPMorgan.

First, Pat, you kind of gave a lot of different moving pieces for the margin in the quarter. Would you mind spoon feeding us exactly what you’re trying to communicate, not just necessarily for the full year, but the fourth quarter, whether it’s just like a data point or like a range, just to make sure we’re all in the right place?

We typically don’t provide margin guidance on the quarter. What I wanted to do, though, was indicate that Q4 will look different from Q3, because there are those moving pieces that I outlined. But we do expect the productivity benefits to sustain, and we expect the impact from sales to be less in Q4 than we experienced in Q3. So the full year number, as I mentioned, is in that mid-teen range, which is pretty consistent with where we’re at year to date, through the end of Q3.

And then secondly, it happens a lot, not necessarily with you guys, that a focus on cost actually becomes a circular reference, and actually influences transaction sales, ability to serve the customer, especially during peak day parts. So could you just kind of talk about this focus on labor in the third quarter, that just happened to correspond with sales being weaker than you thought in the third quarter, just to make sure those two are not related in some way?

There’s absolutely no relationship between those two things. We consider our best operators in the world to be in China, and as you would expect, they remain very much focused on customer service metrics, and they do not do things with their labor scheduling that would in any way compromise the customer experience. We don’t see that as at all related to sales performance.

I think if there’s one characteristic that I would give the Chinese team the most kudos for, if we have one group that thinks more long term, or more long term than them, I don’t know what group it is. We do things on behalf of the customer, we think about the brand for the long term. We went into this year knowing we were going to have a difficult year. Our direction to the China team was do the right thing, and that’s what we’ve been doing.

And the final question from me, if I may, is on occupancy costs, especially as rent renewals and other things come up in the market. How much of a negative, if it is one, is occupancy cost potentially to the model over the next couple of years? How big of a headwind could it be? Or might there be other offsets to keep that line in check?

We don’t see anything really changing going forward from what we’ve seen in the past. We do see some rent increases, particularly in tier one cities, that have been larger, but fortunately for us we’re a country-wide business with lower rental costs in lower tier cities, and that’s where we’re skewing our development. So we don’t see that as moving significantly going forward.

Your next question comes from Sara Senatore with Sanford Bernstein.

I just have a couple of follow up questions. One on China. I wanted to ask, are you still seeing wide gaps in performance between the lower tier and the higher tier cities with respect to comp? And the reason I ask is sometimes when you look at businesses in this industry, that’s one of the kind of harbingers of maybe a need to slow growth, is what you’re seeing in new units or performance. And I know in lower tier cities, new unit productivity and performance has been very good, but especially now, with the pressure on your top line, does that gap persist? And is there a signal there that maybe you do need to slow at least KFC unit growth in China? And then I had a follow up question on YRI.

With respect to same-store sales growth, city [tiers], unlike the first half of the year, what we saw in Q3 was pretty comparable to performance across the cities. So you’ll remember that the Shanghai region and other large cities were more severely impacted in the first quarter, and then avian flu cases being concentrated in Shanghai in the second quarter, we saw that disparity between city tiers. But that has not persisted into the third quarter.

And then in terms of the unit growth, is there any kind of signal here that maybe that needs to slow, given that presumably new unit volumes have come down along with the rest of the system?

No, not at this stage. We remain committed to opening at least 700 new units this year. We’re not providing detailed guidance on next year at this stage, but I’ll tell you it’s hard to imagine that we would open fewer units in 2014 than we opened in 2013. As you know, we have world-class real estate development capability in China. We’re very disciplined in the way that we make those new unit decisions, and those openings are decided one at a time. The one thing we’re doing, consistent with what we articulated in December, is that we are shifting our development focus. So yes, we are shifting more over to Pizza Hut casual dining from KFC, and within KFC, we’re shifting from the tier one, tier two coastal cities to tier three and below cities. And we’re seeing that with the development activity even in Q3 versus prior years.

And then if I may, on YRI, you talked about investing ahead of growth, but expecting to see emerging markets really drive performance. You’ve talked about how India, maybe the macro wasn’t as good as you expect, but you’re not generating a lot of profit there. I think Turkey was mentioned as one where maybe the environment hasn’t been as good. Can you just talk a little bit in broad strokes about when emerging markets, upside of China, really will start to drive performance? Do you need to refranchise the rest of the U.K. before we can see that? Or just is this kind of a one or two year, or is this more like a five plus year timeline?

I think if you look at the emerging markets, clearly the bulk of that business, again, is a franchise business. And overall, the economies in emerging markets are slowed a little bit from what they were a year ago, but are still pretty healthy. And you see that in the results we posted in the third quarter, where we saw system sales growth of 11%. If you look at the profitability we get from the equity markets, it will build over time. And most of those markets, the Russias, South Africas, and Turkeys as examples, they’re still sub-scale businesses from an equity standpoint. However, even I think in 2014, I’d expect us to make more money in those markets collectively than we did in 2013. So I’d expect that to be a little bit of a benefit in 2014 and that becoming an increasing benefit over time.

What I would add to Rick’s comments is that we’re continuing to invest aggressively behind our equity positions in emerging markets, because we love the unit-level economics that we see there, what we call home-run economics. We know that there’s enormous growth potential, and we believe that it’s important to maintain a leadership position to lead the system, if you will, to capture the potential. With respect to to your question around KFC U.K., we have always had a very strong, disciplined, earn the right to own mentality. We are always evaluating our ownership positions and making adjustments as we go. It’s not necessary that we reduce our ownership position there before we move more aggressively with our equity investment in emerging markets.

Your next question comes from Diane Geissler with CLSA.

I wanted to ask you about your commentary about new store openings next year. And I appreciate you’re not giving details on that, but in an environment where you expect to open at least as many next year as you did this year, do you think the supply chain in China is ready for that? Here I’m really concerned about the poultry industry and your ability to secure safe supply. I know you cut a thousand producers from your supply chain this year, but could you talk about that? Is the supply chain ready in China for this continued ramp of new store openings?

We are optimistic that the supply chain is there. We have developed very strong relationships with the large poultry suppliers in China, as we’ve, over the last year, tightened our quality assurance protocols. And based on the fact that we’re looking at a year when volumes are significantly down versus last year, there is capacity in the system today, and our poultry suppliers are partners with us to plan for the growth in the category. So we are confident that that capacity exists.

And you said you were shifting more toward Pizza Hut and more toward KFC in lower tiers. Is there a way to think about maybe the number of KFCs versus the number of Pizza Huts, if you’re opening 700 units on an annual basis?

Well, just to give you a sense for how we are shifting, I’ll just give you a couple of data points and maybe that will give you some indication of the types of changes we’re making in the shape of our development program. When you look at the units we’ve opened year to date in China, 31% of those were Pizza Hut casual dining. Last year, it was 24%. So there’s a clear shift toward Pizza Hut casual dining, given the very strong unit level economics we see, the very compelling investment proposition. Another data point is with our KFC brands. Year to date, this year, 13% of our new unit openings were in tier one cities. Last year, that number was 19%. So again, this is what we’re doing. We’re shifting our development activity, we’re shifting our capital investment towards the opportunities that offer the stronger returns.

Your next question comes from Michael Kelter with Goldman Sachs.

I guess first, I just want to ask you to talk about food inflation in China starting to show up again. How much of that is from the increased cost of an evolving supply chain in China versus pure food inflation? And the reason I ask is because China food PPI is very muted right now, while you’re talking about inflation.

Yeah, we don’t see the changes to our supply chain having a perceptible impact to food cost. And as I talked about, the food cost inflation changing from what we saw in Q3, it’s a moderate change. We saw basically flat commodity costs in Q3, and we expect modestly positive in Q4. It’s not a dramatic swing. And it’s unrelated to the changes we’ve made to our supply chain.

And then could you maybe elaborate more on the payroll expenses in China, and how we should think about separating out what might be a new re-based lower level of expenses with efficiencies you’ve found, versus what’s going to need to bounce back in ’14 when sales presumably return?

There’s no doubt that labor inflation has been much lower in China that we had anticipated. You’ll recall that we had guided mid-teens labor inflation, and what we now expect for 2013 is high single digits. Now, that has come through a favorable mix shift in our restaurant level employees, and some restaurant level wage control. But I do want to stress that we don’t necessarily see that continuing into next year. The fact is that wage growth had moderated across China, but the central government’s objective remains to double disposable per capita income by 2020. And as you know, that ultimately works to our advantage from the standpoint of growing our customer base. And it’s really on that basis that we are expecting China labor inflation in 2014 to move back to what we’ve traditionally guided, which is that low to mid double digit range.

Your next question comes from Joe Buckley with Bank of America.

I’m curious on the sales issue if you have a sense of what the industry in China is doing. And I guess the direction of my question is how much of this is macro-related versus tied to the chicken issues?

I don’t think we have any new category information to share. I think that first of all the macros, we don’t think it’s really healthy. But when we look at the Pizza Hut business, Pizza Hut, because it’s had the innovation, because it’s had the value, because it’s had the operational excellence, it’s performing well. So we think that regardless of what’s going on in the category, or with competition or whatever, with the strength of our brands, when we get things right we can move the needle. And that’s what we’re working on at KFC. We’re working on keeping Pizza Hut right, and we’re excited about everything we’re doing there on the innovation front, expanding breakfast, and then we’re working on revamping KFC to come at the market in a fresher perspective.

So the slower than expected recovery really is around the trust issues and sort of KFC brand perception issues as opposed to…

If you look at the consumer research, that’s what our take is. This is not a precise science, you know? I can’t tell you 100% for sure, but when we look at what do we have to target at KFC, what do we need to do at KFC to really get the business moving forward, we think it’s continuing to make progress on regaining the trust. We have made steady progress, we’re getting closer to where we want to be from an overall research standpoint, but we’re still behind. We like to do problem detection studies, and the food safety and trust issue remains our biggest problem that we need to deal with. And what I ask all of our divisions to do, wherever I go around the world, we want to know what perceptions [unintelligible] do we have to change, build, or reinforce to grow the business? And we think that the perception that we had to change at KFC, and enhance, and get it back to where it was, is the whole reliability and trust issue. But we’re not going to do that forever, okay? We’ve got this “I Commit” campaign, we’re going to get the message out there, and then it’s time to move on. It’s time to move on and tell people what we’ve got, and get people excited about our brands, and that’s my message to the China team. We’re going to deal with this, stay after it, keep building trust, do everything we can to earn that trust back, but we really think that we need to excite our customers with more innovation and more excitement about the brand. And that’s the real marketing focus for the future.

Your next question comes from Andy Barish with Jefferies.

Just one other expense question on China. Can you help me understand kind of the occupancy variable versus fixed, just on broad brushstrokes? And then one other question on the U.S. after that.

Just on the occupancy cost line, as you know we do have variable rents, which is unique to the China business in our system. And we have a variable component, in actually more than half of our leases in China. So that is a variable component that’s unique to China. And now in the quarter we did have, as you might imagine, the restaurants are looking at ways to control costs. So from a semi-variable standpoint, the teams are definitely doing what they can to guard profits in this environment, without impacting services.

And on U.S. restaurant level margins, you pointed to inflation as well picking up a little bit. Where do you see that in the third quarter in the U.S. business?

Generally very moderate. For the U.S. it’s relatively flat for the year on a commodity standpoint, and labor is in the low single digits.

Your next question comes from Jason West with Deutsche Bank.

Just one more on China. Looking back at the September number that you guys talked about kind of surprised you, can you talk a little bit more about what happened there? We don’t actually have the monthlies from last year, so I don’t know what the comparison was, in August versus September maybe. That would be helpful. And then was it just a promotional misfire that was a big issue in the month? Or were there other specific one-offs that maybe caused the weakness in September?

As I mentioned we had very high expectations for the month of September, not only because of the launch of this new product, but because we were lapping [unintelligible] performance in September versus August. And I’m not going to get into the extent of that difference, but we were anticipating that that was going to provide a lift to the month. And frankly, we weren’t going to call the month and the quarter, bearing in mind that September is the first month of China division’s fourth quarter, until we had read the full month. It was a big disappointment to us, to such an extent that we revised our guidance for Q4 same-store sales.

But can you talk a little bit about what was disappointing about it other than just sales were under plan?

Well, we launched the beef burger, which is a product innovation that we had some high hopes for. And while we had good success rate in the sense that the mix was good, we didn’t get the incrementality, which we think also gives us the belief that we’ve got to keep working on the trust side of the equation. So that’s basically what we had in September. I think that we always will call it like we see it, when we see it. And that’s what we’ll continue to do. We definitely missed on the fourth quarter, and that’s just the way it is. I wish we had a 1000% batting average. It’s a hell of a lot more fun to have these calls when you do, I can tell you that. But we missed, okay?

Your next question comes from Mitch Speiser with Buckingham Research.

Just following up on a comment that you made about the comps in tier one, tier two cities versus tier three to tier six, how it seems like they’re now comparable on the weakness versus earlier in the year where it seemed like the larger cities, which had more of the food safety issues, had weaker comps. That seems interesting to me. Can you maybe try to explain that? Why would the tier three to tier six cities start to soften? Is it the perception of the chicken supply moving to that area? Is it the macros, competition? Because that seems to be the stronghold, the lower-tier cities, and now that seems to be more emulating the tier one, tier two cities.

That’s actually not the right way to think about it. What happened was that the tier one, tier two cities were more significantly impacted in Q1 and Q2. All city tiers have shown significant improvement in Q3 versus the first half of the year, but there were significantly greater improvement in the higher tier cities off of their very low position in the first half of the year. So all of them are getting better, it’s just that given how very weak, by comparison to what the tier one, tier two cities were, that we’re now seeing that they’re all more or less coalescing around the same [expensive] same-store sales climate in the third quarter. It’s not that the lower tier cities are now getting worse, or that they’re underperforming the tier one.

Then maybe could you explain why the tier three, tier six cities are in line with the tier one, tier two cities? You have just a lot less competition. It does seem like the food safety issues were more concentrated in the tier one, tier two cities. It just seems like tier three to tier six is where the strength has been, and it seems like it’s more in line with the overall system, even though you’re much less saturated. And if the economy is the issue, that’s fine. It just seems like you’re playing down the macros, and it’s more company specific and food safety related issues.

We never have blamed the macros for anything. We don’t talk about macros, or weather, or anything like that. We just don’t. We just don’t believe in it. If I start, and I hear myself say that, I think everybody’s kind of going to look at me funny. So that’s one thing. I think what we really have here is a country wide issue of trust. And it’s in tier four, five, six cities, tiers one, two, three cities. That’s what we really think we have to address. That’s what our marketing folks have determined by listening to our customers, and that’s what we’re getting after. So I think that’s the issue that we’re really trying to deal with.

If I could just slip in another question on the U.S. business, with Taco Bell gearing up for breakfast going national in 2014, any sense of the time table? Should we expect that beginning of the year, mid year? And maybe the same with Pizza Hut and Wing Street. When should we expect these national initiatives?

Breakfast, we don’t know the exact timing, but I’d say roughly middle of the year next year. On Wing Street, we expect that to start at the beginning of the year.

Breakfast will be in the first half of the year for Taco Bell. We’re working on the details. It’s a competitive category.

Your next question comes from Jeffrey Bernstein with Barclays.

Two questions. The first one is a follow up on China. Having been there, I guess a month ago, there seems to be some confidence perhaps in pricing power in ’14 to offset labor costs, which it sounds like are going to be double digits. Food might be a lot more modest, but that there would be pricing power to insulate or drive the margin. And you said you’re lapping one point of price going into the fourth quarter. So can you give us an update on where we are now in pricing, and perhaps qualitatively how do you assess pricing power, whether you might be more cautious now and therefore we shouldn’t expect any kind of meaningful price increase next year, how you think about that?

Our expectation is that we will take pricing to offset inflation. Naturally, given current circumstances of the KFC brand, we’re very sensitive to how consumers perceive our value. But we believe that we can do both. We can offer strong value and we can take the amount of pricing necessary to offset inflation. Because we are very much focused on the profitability of our restaurants. :

But the pricing for the fourth quarter, should we expect that to be relatively flat for full year?

No, no new pricing actions. We’ll have about a point of benefit or so. And that’s strictly from rollover actions.

And the follow up question is just on that U.S. segment. With three big brands, you’re a great proxy for broader U.S. QSR. You addressed that inflation was relatively modest, but in the press release you also talk about promotional activities perhaps pressuring margins. I’m just wondering, on the promotional activity, is that more your own promotional activity, in which case what might it have been that would have pressured margin, or perhaps any kind of color on broader QSR, where you might be seeing some outsized pressure? Just wondering if maybe the competition is getting more or less rational with more modest food costs and a challenging traffic environment?

The short answer is I don’t think that Q3 is a trend or something that’s different than what’s been occurring in the category. The category the last month has been pretty flat in the U.S., so it is a competitive category and there’s not a lot of total growth out there. I would say that always in our category value is key, and we’re always playing it at the key brand. If you look at it on a year to date basis, we’re obviously very happy with the overall margins, and there’s nothing out there from a promotional standpoint that I think is going to dramatically change those margins in any way. I think it was almost just the timing of what we were running in Q3 this year versus Q3 last year.

Your next question comes from Howard Penney with Hedgeye Risk Management.

I have two questions. My first one is about the asset light model. You’ve bought two assets in the last year. You bought the assets in China, and then you bought Turkey, which kind of moves you away from the asset light model. And I understand that the returns are high in the emerging markets, but the returns are even greater in an asset light model. Is there a slight shift away from the asset light model, with your acquiring Little Sheep in Turkey in particular?

Not at all. We believe that one of the strengths of our business is that we are as heavily franchised as we are, which drives extraordinary return on invested capital for us. So we’re not moving away from that strategy. What we are doing is we’re shifting where we place our equity. So don’t forget that we’ve done some significant refranchisings in recent years, and we’ve taken that capital and we’ve put it into the high-growth emerging markets where we know we can get much stronger returns.

And then the second question is you alluded to, David, in the beginning, that each crisis is different. And Taco Bell’s recovery in the United States was not an easy one, but you didn’t have the capacity increases in the store base that you had, so you were just fixing existing assets. And in China, each situation is different, or each crisis has been different, and each year you’re facing increased capacity as you’re adding 700 stores this year. So you’re trying to turn around a base when your capacity is increasing significantly, and I know you were asked about the growth rate in China, but I was hoping you could maybe reiterate your confidence in the growth rate in China and that you’re actually seeing the returns in the tier one cities. You don’t know what you don’t know, but is 13% the right number of what your unit growth should be in those tier one cities? So there’s a lot of questions around sort of development and growth, and I would just, I guess, like to hear you, again, say with confidence that your growth rate is appropriate, and that we’re not going to be hearing in December or six months or 12 months from now that you’re going to be slowing it down.

Well, I think the exact growth rate we’ll need to get back to you on, and we’ll be able to talk, I think, more about that in December. We’re always evaluating our growth rate. We have our new unit tracking model, and making adjustments where we need to make adjustments. And Pat’s already talked about many of those. I think when we look at China, we think the big macro that is a positive is the 300 million, the 600 million consuming class. And so when you look at the long term, and what we think we can do in China, I think that nothing has really changed. We’re going to grow at the right rate to take advantage of the fact that we have the leading position in the dominant consumer market in the world, soon to be the fastest growing economy. So that’s really our strategy. We’ll only grow as fast as our people allow us to do it, and our returns justify it. And as we look to next year, we see opening up at least 700 more restaurants next year. And we think that the investments we’re making in our restaurants, and restaurant development, will pay off for us as we go forward. Because we still only have a thousand Pizza Huts and 4,500 KFCs, in a business where we think you could take it times four or five. So we’ll get there the right way. That’s what I would tell our shareholders.

I understand that you have a huge opportunity in China, and it’s a 10-year, 20-year, 30-year opportunity, but it’s the return on the incremental capital that you’re putting in the ground. And how do we know that 700 is the right number, and it shouldn’t be 500, or maybe it should be 900? And I guess I’m spinning my wheels here, but I just want to push a little bit harder on the rate of growth versus the absolute opportunity.

Well, as I mentioned before, we make these investment decisions one at a time. And we bring to bear unparalleled expertise and intelligence around retail development in China. We’re not chasing a number per se. We’re capturing an opportunity where we know we can create a lot of value for our shareholders.

And your final question comes from Paul Westra with Stifel.

One more time on China. I was wondering if you could share any further insights into the dispersion of the recovery in the comps beyond the tiers one and two versus three and six. In other words, is there any day part that has maybe rebounded almost fully now, that maybe gives you confidence, or maybe you expected business lunch to recover and maybe the family dinner weekends has not. Or is there anything that has any consumer, any location, any day part, mix that you can see that maybe gives you some green shoots that the leading occasion has recovered and the lagging occasion that you expected is going to take more time?

No real meaningful variances across the city tiers by day part, or any other occasion. Pretty consistent, pretty balanced across the market.

And is that what happened in other comparable crises? Is that what you expected?

Well, as I mentioned, the picture was very different in Q1 and Q2, because there were structural differences, if you will, between what was happening relative to social media, news stories, and so forth. So that’s why the tier one cities were more heavily impacted in the first half of the year. But as we mentioned earlier, what we now have is more of a country wide issue, if you will, pretty much a level playing field in that regard. And so we’re not seeing meaningful differences across the city tiers.

And on weekend versus weekday business?

No.

Okay, let me wrap this up. First of all, thank you for being on the call. We appreciate it. Obviously we’re disappointed with our overall third quarter results, but I’d just like to close by saying that we will be back, and we think 2014 will be a strong bounce back year, and we remain as confident as ever in our ability to deliver sustainable and strong growth in the years to come. So thanks again. :