Good morning. My name is Kim and I will be your conference operator today. At this time, I would like to welcome everyone, to the Yum! Brands Fourth Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions]. Thank you. Keith Siegner, Vice President of Investor Relations, Corporate Strategy and Treasurer. You may begin your call.

Thank you, Ken. Good morning, everyone, and thank you for joining us. On our call today are Greg Creed, our CEO; and David Gibbs, our President and CFO. Following remarks from Greg and David, we'll open the call to questions. Before we get started, I'd like to remind you that this conference call includes forward-looking statements. Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to the Investors section of the Yum! Brands' website, www.yum.com, to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call. Please note the following regarding our basis of presentation on today's call. First, System sales results exclude the impact of foreign currency, include the impact of lapping the 53rd week unless otherwise noted. Second, Core operating profit growth figures exclude the impact of foreign currency and Special Items but include the impact of lapping the 53rd week unless otherwise noted. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. Please be advised that if you ask a question, it will be included in both this live conference in any future news of the recorded. We'd like to need you aware of the following upcoming Yum! Investor events: First quarter 2018 earnings will be released on May 2018, with the conference call on the same day. The remainder of our 2018 key earnings dates are available on our website. David Gibbs will be presentation on March 8 at the JPMorgan Gaming Lodging and Restaurant Management Access Forum in Las Vegas Nevada. Roger Eaton, KFC CEO will be presenting on March 14 at the Bank of America 2018 Consumer & Retail Technology Conference in New York City. Lastly disclosures pertaining to our outstanding debt in our Restricted Group capital structure will be provided at the time of the fourth quarter Form 10-K filing. Now I'd like to turn the call over to Mr. Greg Creed.

Thank you, Keith good morning everyone. The fourth quarter was a solid earning to the first full year of our transformation journey. For the full year, Yum! delivered 5% system sales growth, excluding the impact of the 53rd week. This is comprised of 2% same store sales growth and 3% net new unit growth. We've reached a significant milestone in 2017 as we closed the year with over 45,000 global restaurants in our 139 countries and territories. We are excited about the long-term growth potential of Yum! brands and are on track with our strategic transformation initiatives. Today, I will talk you about two of our four growth capabilities. Distinctive relevant and easy brands and unrivaled culture and talent. Then David will follow up with this second too. While at the restaurant development and unmatched franchise operating capability, he will also discuss our 2017 results, 2018 guidance and progress towards our transformation initiatives. I'll begin with our distinctive relevant and easy brands. There is no better way to make a brand easy than having it deliver right to your door. And I'm very excited to announce a new U.S. partnership with Grubhub. As the nation's leading online and mobile food ordering company, Grubhub offers delivery in over 1300 U.S. cities. This partnership will rapidly expand KFC and Taco Bell's ability to offer the online ordering by pickup and delivery to our customers in all existing U.S. Grubhub markets with many more to come. Making it easy to access all of our brands is important and the partnership with Grubhub is a key component of making our brands distinctive, relevant and easy. Now on to the brands. Starting with KFC, where system sales grew 6% excluding the 53rd week, with 3% same store sales growth and 4% net new unit growth…

Thank you, Greg and good morning everyone. Today I will discuss our 2017 results. 2018 guidance, progress towards our transformation initiatives and two of our forward growth capabilities, bold restaurant development and unmatched franchise operating capability. First our 2017 results. I am especially pleased to report, we met or exceeded each component of our guidance. We delivered full year core operating profit growth of 7% despite headwinds from refranchising dilution, lapping a 53rd week and incremental media spend associated with Pizza Hut transformation agreement. Same store sales growth of 2% and net new unit growth of 3% delivered system sales growth of 5% excluding the 53rd week all within guidance. Before I talk about 2018, I do want to discuss our effective tax rate excluding special items for the fourth quarter and full year. Both rates were lower than anticipated due to the timing of planned repatriation of earnings and the impact of tax reform. The majority of our expected repatriation was backend loaded for the year largely reflecting the timing of international refranchising transactions. Given that most of our foreign industries have November 30th year end for US tax purposes, any earnings repatriated subsequent to this date will require to be tagged as part of the one-time toll charge included in US tax reform. Our ex-special rates for the fourth quarter and full year were lower than anticipated because they did not include tax on those earnings repatriated after November 30th. Instead that tax was included in the toll charge that is part of our onetime special items charged for US tax reform of $434 million that we recorded in the fourth quarter. Now looking at 2018, we do not expect any change to the underlying base operating profit growth of high single digits. However, there are several items…

[Operator Instructions]. Your first question comes from David Palmer, your line is open.

Hi thanks this is Eric on for Dave Palmer. Just wanted to touch on development for a second. I think you mentioned 3 or 4%-unit growth is your expectation this year which is an increase from I think 3% in 2017. Do you feel like you have the building blocks in place to accelerate development across your three brands? Maybe if you could touch on any commitments that you’re excited about and then as a follow up to that, how much is the development commitments from refranchising contribute to unit growth this quarter? And how much you expect it to contribute in 2018? Thanks.

Yes, well obviously we’re excited about the progress we’re making on development as I mentioned the 2600 growth new units is really a record for the last decade or so and in the quarter itself we opened up a net of 732 units compared to the 661 we opened last quarter of 2016. So that’s a quarterly increase of 71 units. So, you can see we're making progress on the full year numbers, the quarterly numbers. There is momentum behind development. As far as how the refranchising plays into this, we've talked repeatedly about the fact that we're getting development commitments in the refranchising deals, but up until this last quarter, we hadn’t done the majority of our franchising with close to 900 units being refranchised in the fourth quarter. Those all came along with the lot of significant development commitment. So, we're starting to see the benefits of the development commitments creeping in to the numbers that we're reporting, but I still think there is a lot more to come from those development commitments. And because we're typically made over a multiyear period, so we think this sets us up with momentum on the development front for several years to come.

Your next question comes from the line of John Ivankoe from JPMorgan. Your line is open.

Hi thank you very much. I have a couple of questions I think to relatively small on the Grubhub partnership if I may. And I'll just coming do only one Q3 if you can address small one. Firstly, what percentage of KFC or Taco Bell would currently have Grubhub delivery coverage, in another word how much of the systems could be covered as Grub stands today. Secondly, do you have a plan to point of sale implementation with the Grubhub platform and the point of sales at KFC and Taco Bell? And then the third point are these starts on the board that certainly very interesting for a lot of different reasons to be on Grubhub. Do you think that there might be a longer-term opportunity to either outsource or perhaps augment your current inhouse delivery to more of an outsourced model with Grub? So, if you don't mind just those three points on the Grubhub partnership.

Let me take the first couple. As you know, in the U.S. we've got a couple of discounts with KFC. So right now, I think by the end of the year, we'll have -- Grubhub will cover probably about 80% of all of the restaurants that could deliver. From a KFC perspective, we're not delivering at the moment, we're just in a couple of test markets with KFC delivery. So, we have a lot of work obviously as we believe those test, expand those test, and start delivering. I think we've said in the past that we've got close to 1500 Taco Bells already delivering, but this will expand obviously the capability for Taco Bell. So, what we're excited about is both KFC and Taco Bell is really as an opportunity to expand the presence that we've got in the number of stores that we can obviously bring closer to our customer. On the POS system, obviously we're aligning the [indiscernible] systems, that work is obviously underway. It will be critical as a part of making it seems for our customer whether they order of our apps website or the Grubhub apps and website all that work is ongoing. And I think on the last question was just, already joined the board and what the possibilities are for the Pizza Hut brand as a result of that. And I think that's one where the ongoing conversations about how both Grubhub and Pizza Hub can leverage as a partnership if there are ways to do so. But right now, this is mostly about the Taco Bell KFC relationship with Grubhub. And I would also point out that this isn't just about delivery, it's about the ability to order online to Grubhub and pickup products at our restaurants. And Grubhub and Taco Bell and KFC are working diligently to integrate the POS as you mentioned to make the ordering process very quick to get the orders into the restaurants and to the consumers. And we have certain coverage ratios and targets in our agreements that when we hit them, we’ll really unleash the power of the partnership.

And is there a timeline for that technological marriage if you will, I think it's just been more difficult for a lot of brands over the past couple of years. I mean do you have, feel like you have an edge on that?

Yeah, certainly that’s a big part of this agreement is having an integrated POS system and yes there all sorts of internal timelines and schedules to get all of this work done. And I think we’ll reveal details as we go on the journey with Grubhub but for today this is all about the announcement and the intention of having this be a really unique partnership with the Board CET investment and what we think is a great partner for us on the technology front.

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

Thanks, good morning. I have two questions in like John I’m just going to ask both of them at the same time and then listen to your answers. First, you know you talked about refranchising dilution being in 6 to 7% headwind to operating profits in ’18 and these falls of headwind from ’17 and you would said at the beginning of this process that refranchising net of G&A reductions will be neutral in totality. So, is this still your thinking and does that mean that 2019 naturally is a year where all this dilution reverses to accretion? That’s just the first question. The second question is just simple one, on the comp guidance for 2018 how does Taco Bell fit into that comp guidance for overall Yum! just given we see it as difficult comparisons and its operating in a pretty intense US environment. Thanks guys.

Okay on the refranchising question, obviously there is a lot of different factors in how refranchising plays out in or P&L. For example, we’ve gotten ahead of ourselves in terms of selling Pizza Hut which are tend to be lower volume stores and have less dilution and therefore we’ve got a lot more G&A in Pizza Hut as a proportion of their targeted cost. So now we have higher volume stores to sell Taco Bell and KFC to finish off the refranchising process in 2018 and I think the comment that will this flip to being -- is this still a net new neutral exercise between the G&A and refranchising absolutely. We’ve done all the math on that and they all balance out, but we’ve probably got a little bit more benefits from the organic G&A cuts up until this point. Now there was 900 stores we sold in the fourth quarter, we’ll obviously have an impact on our operating profit in 2018. So, taking all those factors into account, yes, it's still a net neutral math exercise between the refranchising dilution and the G&A savings and as you said 2019 will start to see more benefits of it versus the headwinds that’s presenting for us in 2018. On the comp guidance, as you know we have provided the global comp guidance but we’re not going to break out it by brand but just wanted Taco Bell sales to be there.

Yes, I would just say that I think Taco Bell has been competitive in the competitive market and as we saw with the Blueminatti $1which we just started the year with and as you’ve all seen we have launched nacho fries at a $1. So obviously it’s a competitive marketplace but what I like about the Taco Bell team is they are obviously quick to response to changes in the marketplace and I feel good about what we’ve got on our calendar for 2018.

I just want to go back and clarify one earlier comment, there was a question about coverage with Grubhub, obviously there is two ways Grubhub will be covering our restaurants. One will be through click and collect in the pickup process and we expect that we can get very good coverage on that very quickly once we turn all the systems on. And then there is a different measure for delivery coverage. We have specific measures by brand. We'll share more of that overtime, but I think the 80% is more -- that Greg quoted was more of a general number. But I think we'll give you more specifics on that as we get into the relationships with Grubhub.

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

Yeah, hi. Thank you. So just a couple of questions please. First is on the tax benefits and all the moving pieces there. You've retained the total amount of expected return to shareholders. And I was just trying to understand if there is any extent to which you're reinvesting some of that tax or benefit or it was sort of contemplated in the initial guidance? And then I do have a question also just about the Grubhub partnership. We hear from other companies that franchises need to see a certain level of incrementality for these partnerships to work. Is that something that you've worked through from your perspective? It's just interesting for me to see company like Yum! has so much experience with inhouse delivery from Pizza Hut partner in sort of an outsourcing way. So just trying to understand the economics for you in the franchises.

Thanks, Sara. On the tax savings, and the returning to shareholders. As you know, we're in the process of transforming Yum! into a free cash flow machine. So, we don't have any needs on cash that we haven’t been able to meet with our own cash generated. So consistent with the transformation the plan is to return the incremental cash from tax reform to shareholders. On the Grubhub deal, and the franchise economics, we did a thorough process in terms of understanding the economic to franchises, understanding the different options for us. And it was a really important part of this process for us to make sure that we ensured our franchises have good economics. We leveraged our scale and our marketing cloud and what we can bring to our partners. And we think we have a deal, we're not going to go into the commercial terms, and we think we have the deal set up that our franchises will absolutely embrace and it will drive incremental profitability and sales for them.

Yeah, I think in the test markets, we I think have got a couple of test markets going in the moment. Indianapolis, Louisville, [indiscernible] and to an extent I think to Orlando. But I was talking to the restaurant general manager in the test and the good news is that they do believe they are seeing incremental occasions and they do believe they're seeing much higher check. So, I think what delivery promises in these very early test markets, the guys and girls are actually running this on a daily basis are seeing that benefit, we're encouraged by that and we're encouraged by expanding those tests.

Your next question comes from the line of [indiscernible] from Stifel. Your line is open.

Thank you, good morning. I just have a couple of questions. So, first Greg, are you concerned that Grubb having a stronger competitive position with your investment allows more non-Yum! chains to start using delivery which would add delivery competitors for Pizza Hut?

I think that certainly the investment that we’re making at Grub Hub we believe allows them to expand their coverage and obviously expanding their coverage gives more access as David has pointed out to both pick-up and delivery which obviously benefits us. We spend a lot of time obviously on this partnership and I think you know as we said you know we love the management team, we love their business model. We see this as an opportunity for both companies and we’re excited about you know the opportunity for us to use Grub Hub to get our brands easier access to our customers.

And obviously our brands are benefitting Pizza Hut included are benefitting from the consumers embracing delivery, we’re seeing the Pizza Hut delivery business climb as a percentage of the Pizza Hut business. So, we’re excited about delivering for our Taco Bell and KFC brands and very confident in the model that we have with Pizza Hut with today being one that can benefit from this change in consumer's taste.

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

That’s not a number that we’re going to start to get into reveal other than to say it varies by deal, some deals where we have lot of development opportunities, obviously we attach a lot more commitments to it, other deals where they’re in mature market and fully penetrated you can imagine we put less in. And our experience with the development commitments is that you don’t get a 100% follow through on every single one of them. So, I don’t want to start releasing numbers and then having to revise them constantly. But it’s a sizeable amount, these isn’t just a few commitments, these are very significant commitments to building stores typically over the next three to five years.

Your next question comes from the line if Geoffrey Bernstein from Barclays. Your line is open.

Hi, this is Parekh Patel on for Jeff. Thanks for taking the question. A lot of questions have been asked about, corporate tax reforms but if I could just shift to the standpoint of the consumer, wondering if you guys had done any research or analysis in the past in instances where consumers saw a significant increase to disposable income, be it from past tax rate benefits or maybe the lower gas prices we saw a couple of years ago or maybe, just any color you might have would be helpful? Thanks.

Yes, we haven’t done any specific research around the tax reform but I think as you said in the past with lower gas prices the people have more disposable income in their pockets. They tend to spend it, so I think anything that ends up with people having more money in their pockets is a good thing.

Your last question comes from the line of Jason West from Credit Suisse. Your line is open.

Okay, sorry. Yeah, just going back to the guidance, it sounds like excluding the revenue rec changes that are 2 to 3% increase in EBIT embedded which is a little lower than the guide for ’17. Just want to clarify I mean is that primarily because like you said that the brands that are being refranchised or is there anything else kind of changing in your view in terms of the ’18 growth rate in the business.

Well I’ll walk you through the guidance again on operating profit. The refranchising headwinds are about six to seven points, revenue recognition is hitting us for 2 to 3 points, so that together those things are 8 to 10 points of headwinds. We actually get a little bit of a benefit from lapping the Pizza Hut and KFC transformation agreements year-over-year '17 to '18. So, you can see how that 8 to 10 effectively ends up being high-single digits with what we've been very consistent on for the transformed Yum1 growth model.

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

Exactly, that's fair. Exactly.

Okay. and then the last thing.

Just to clarify, we outlined the headwinds from refranchising dilution in our 2017 guidance. And we've talked about that as in terms of percentage points, and that was 1 to 2 points of headwinds. So that should give you the walk. 1 to 2 in '17 versus the 6 to 7 in '18.

Okay that make sense. And then just for our knowledge, can you explain again the tax issue with the intangibles that you mentioned and how that sort of holds back you're the downside I guess on your tax rate. And is that a cash issue or is that really a non-cash type item?

It is a cash issue. And obviously it's a part of the tax cut that's fairly complex. And some people have talked about a little bit. but essentially, it's designed for income that you have offshore that is not coming from tangible assets, it's coming from intangible assets. And it's an offset to the benefits we get from the territorial tax system. We're obviously digging into all of this trying to better understand and as I mentioned it will have delayed applicability to us because a lot of our international entity tax years. so, we'll have more to share on that as we go forward.

Alright. Thank you very much everyone for joining us, and with that I'll turn it back over to Greg.

Yeah thanks Dave. So, thank you all for joining us on the call today, I appreciate it. I think in summary, I'd say that Q4 was a solid finish of the strong year. We've made great progress on our transformation. I think the keys of the underlying growth remains strong in the business. We're obviously very excited about our strategic partnership with Grubhub. And that's all to ensure that we are distinct, relevant and easy. Thanks for joining us everybody.

This concludes today's conference call. You may now disconnect.